The EFM Feature

In light of Charles’ post re: Gov. Romney’s business background, perhaps folks who like to criticize “big” business and “big” businessmen ought to read Harvard professor Robert Barro’s recent op-ed in the Wall Street Journal (subscription required). Barro took on Bill Gates for his recent speech to Harvard’s graduating class. While Barro ultimately goes a bit far in his recomendation for how Gates should spend his money, he is right to argue that business can be, in and of itself, a social good. Here’s a little bit of what he had to say:

In collecting his degree, Mr. Gates delivered a commencement address that focused not on the information age, the rise of personal computers or the relentless efficiency his software has brought to nearly every industry. Instead, he focused on his own personal philanthropy. His implicit theme was that so far what he has accomplished may have been good for him and Microsoft shareholders, but it has been no great contribution to society. He suggested that with a personal fortune of about $90 billion (including what he has transferred to his foundation) it is time for him to give something back.
I find this perspective hard to understand. By any reasonable calculation Microsoft has been a boon for society and the value of its software greatly exceeds the likely value of Mr. Gates’s philanthropic efforts.
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.
Suppose that a copy of a new version of Windows sells for $50 (and is typically charged as part of the price of a personal computer). Microsoft’s revenue from Windows would then equal $50 multiplied by the number of copies consumers snap up. Microsoft’s earnings are the revenue less production and development expenses. But that’s not the social value. That comes from the increase in productivity created when businesses and households use the software. The social benefit equals the value of the extra product, less the total paid for the software. Almost by definition, the benefit has to be positive. Otherwise, why would consumers willingly pay for Windows?
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.

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