The Philanthropic and Societal Value of Corporations

One interesting aspect of the Google.org set-up is that it's not structured as a tax-exempt non-profit. Yes, it's a philanthropy, but it's also free to make for-profit investments if it's so inclined: the two are not mutually exclusive. Google.org might not be aiming to make lots of money in the logistics of renewable energy, but if it were then that's not necessarily a bad thing.

Indeed, the likes of Robert Barro, writing in the WSJ yesterday, go one further. Never mind Bill Gates's personal philanthropy, he says, the real good that Gates has done for the world comes from his for-profit venture, Microsoft.

Here is a sketch of a simple model of Microsoft's social value. The market value of the company's stock recently hit $287 billion. In 2006, its revenue was $44 billion, with earnings of $13 billion. This money was generated by creating something consumers value. Only Microsoft's competitors could believe that this much market value, revenue and earnings would have been created by delivering products that have little value to society...
A conservative estimate, in a model where software serves as a new variety of productive input, is that the social benefit of Microsoft's software is at least the $44 billion Microsoft pulls in each year. When capitalized with the same ratio (22) that the market applies to earnings, this flow corresponds to a valuation of $970 billion. Thus, through Microsoft's future operations, Mr. Gates is creating a benefit to the rest of society of about one trillion dollars -- or more than 10 times his planned donations. And this counts only the likely future benefits, giving no weight to the past.

Um, what? If you push me, I might admit to the possibility that Windows has some social value. But the social value of Windows is surely not proportional to Microsoft's monopolistic profits. Yet by Barro's calculations, if Microsoft were to double its prices, then the societal value of Windows would go up too. Here's Mark Thoma:

Another calculation that can be carried out, but wasn't, is how much society has lost from Microsoft exploiting its market power.

And here's Brad DeLong, on great form:

In the absence of Microsoft, people would not sit in front of dark screens and do all calculations and sorts by hand...
Whether the net social value of Bill Gates is positive or negative depends on his impact in creating and shaping Microsoft: relative to its competitors and to its alternative paths of development, did he make it more of a lockin-breaking innovator or a death zone-creating predator? Did he do more to make Microsoft a company that takes advantage of economies of scale or more to make Microsoft a company that raises profit margins? I'm on the side that thinks that Microsoft has been a considerable net plus. But others I respect see it is a net minus. And my judgment that the net social value of Bill Gates is large and positive is not because I attribute the total producer plus consumer surplus in the industry to him and him alone: I am not that naive, and not that slow-witted.

I spend a lot of time at my computer, and I almost never use any Microsoft products. Once in a blue moon I use Office because people send me documents in that format, but even there I'm likely to switch to some other suite pretty soon. I have no love for Microsoft products in general (although Word 5.1 for the Mac was great), and I'm actually likely to come down on the side of people who say that Microsoft has done more harm than good.

Bill Gates's personal philanthropy, on the other hand, is unambiguously a good thing, Barro's sniping notwithstanding.

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