Warren Buffet Swats the Invisible Hand

Warren Buffett has been in the news twice recently: yesterday for having announced he’s giving $31 billion to Bill Gates’s foundation, and several weeks ago for buying an Israeli tool company.

The Israeli stock market surged on the news that the Oracle of Omaha had bought one of their own companies — a welcome vote of confidence in a remarkable but besieged economy.

The $31 billion gift will make a lot more noise, and for a lot longer. Surely everyone in the non-profit world is wondering how this will reshape things. Politicians too.

But I was particularly captured by one sentence that Buffett said last night on The Charlie Rose Show. He was explaining why he wanted to give so much money to a foundation that mainly tries to alleviate poverty. “A market system has not worked in terms of poor people,” Buffett said.

Coming from Buffett, this statement isn’t much of a shock. But it certainly is an indictment — of the free-market system that has made so many people like Buffett very, very rich (though not as rich as him), of the system that so many economists and businesspeople and politicians and journalists believe in on so many dimensions, including its ability to help poor people stop being poor. Note that Buffett didn’t say that the government hasn’t worked for poor people (although I am guessing he wouldn’t disagree with that statement either). It was the market system directly, even with Adam Smith’s wonderful invisible hand, which is meant to correct, to police, occasionally to lift someone up.

I am wondering how conservative politicians and economists and journalists in particular will repond, if at all, to Buffett’s comment.


mikeKP

Hard to judge a remark like that out of context, but it sounds like a remarkedly short-sighted view from an investor famous for taking a long view. (Of course, in the investing world 5 or 10 years is a long time. Assessing the relative merits of economic systems probably would require an even longer perspective.)

Trogdor

Funny you should mention politicians. I've often been convinced that every time anything of any value changes hands, the politicians (via taxes via the gov't) try to take a share of it. Income tax, sales tax. Death tax.

I give my car to my kid, and there'll be a tax. I give my kid an apple from the fridge, and there's no tax, but that's probably only because the politicos haven't found a good way to tax it yet.

If more people put solar power on their houses, they'll get more energy for "free" and pay less taxes on their electric bills ... therefore I predict the gov't will want to tax sunshine when that time comes.

So when I heard that Warren Buffet was giving $31,000,000,000 away ... I knew that the politicians are positively drooling over how big of a wet bite they want to take out of it for themselves.

To be honest, I'd like to see what happens to this $31 B that's going from Warren Buffet to the B&MG Foundation. How will it be taxed? How much of it will go to taxes? I simply don't believe that it *won't* be taxed ... I don't think it's possible to move that kind of money without some taxes being invented for the sake of taking some of it ...

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mjbigelow

"including its ability to help poor people stop being poor"

I'm not exactly sure what part of free market theory indicates that poor people are going to stop being poor. Free market theory depends on people being physically and intellectually mobile in order to avoid poverty. The model predicts poverty for people that can't do that, so I'm not sure why Buffet is saying it's not working correctly.

jborneman

mjbigelow: "Free market theory depends on people being physically and intellectually mobile in order to avoid poverty."

The old "people are poor because they are lazy/stupid" canard.

How can someone be "physically mobile" when they can barely afford their beater that breaks down every other week? How can someone be "intellectually mobile" when public schools in the poorest areas are crumbling, furthering the cycle?

True, many aren't physically or intellectually mobile. But both the market and government has failed to create anything to help fix that problem.

Now we can argue if it's really a problem or not. I see a large and growing underclass with little hope for upward mobility as a problem.

quetranza

The statement refutes itself. A market system is the only thing that has ever worked "in terms of poor people." Market economies are the only societies that have succesfully moved people from poverty into the middle class and into the Buffett-class. As usual, the critic of capitalism offers no better alternative. To paraphrase Churchill, markets are the worst economic system, except for every other.

Measure

This is ridiculous. How can he say the free market has failed poor people while he just acted in the free market to decide to donate 30 billion dollars to the poor?

Sounds like the free market working to me. If it was broken, seems like this donation would be impossible.

Jane Shevtsov

Measure: if the free market was working, he wouldn't HAVE to donate $30 billion to the poor. Tne necessity of this kind of philanthropy (as opposed to, say, starting a university) shows that the system doesn't work.

Jborneman: poverty for some people may well be a prediction of free market economics. The point isn't that the theory works; it's that what happens is socially undesirable.

rarelyright

In context, Buffett was referring very specifically to the fact that diseases that have been eradicated or are easily treated in the developed world have been left to devastate undeveloped countries. His point is that the free market has not made disease treatments available to poor undeveloped countries because there is no end user who is able to pay for these available treatments.

My understanding is that one of the goals of the Gates Foundation is to make poor countries more viable as customers of the companies that can easily make many of the treatments that would help alleviate the suffering of poor countries.

I did not take Buffett's comments as a criticism of capitalism. Even taken at the extreme his comment may be considered a critique of one aspect of free markets. Anyone who has followed Buffett over time knows he is a deep believer in capitalism. His comment was merely an observation of the situation.

My sense is he would suggest that, ultimately, capitalism will be part of the solution for poor countries - even though it hasn't provided the answer yet.

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Measure

Jane Shevtsov:

What are you arguing, that the free market only works for the poor if there are no poor? That's a logical impossibility.

Clearly, Buffet's donation is a prime example of the free market working for the poor. It's not like there was zero money going to help the poor in the first place. Buffet is merely joining the effort to help the poor get into better living conditions. This is why his comments seem very odd to me.

I restate, that if the free market was truly failing the poor, there would be nobody at all trying to help them.

mathking

If you follow Buffett's writing and statements on this subject, he is probably talking (mostly) about the developing world, but more broadly than just medicine/health care. Buffett has numerous times made a point that "market" and "free market" are not the same thing. And that the natural tendency of most markets is toward monopoly/oligopoly.

I will take just one example of his view of markets from a speech I heard Buffett give a couple years ago. He was talking about why people in so many poor countries can't feed themselves. Buffett pointed out that the World Bank and others force countries to accept market reforms, while European and North American (and Japan, Australia,...) countries maintain huge agricultural subsidies. Furthermore, multinational agribusinesses have used what could charitably be described as questionable practices to obtain land and operational rights in many developing countries. As a consequence, people who should be able to both feed themselves and export their crops for cash are unable to do either. They end up as single crop cultivators getting by on subsistence payments. Because the markets are rigged against them and they don't have the power to change that fact.

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quetranza

> if the free market was working, he wouldn't HAVE to donate $30 billion to the poor. Tne necessity of this kind of philanthropy (as opposed to, say, starting a university) shows that the system doesn't work.

Circular logic is a beautiful thing.

elym

I'm with Mathking. I think that the free market has worked, at the expense of certain exploited regions of the world. As our economy has evolved more globally, we are seeing poorer countries become victims of either their natural resources or their inexpensive labor. The large multinational companies have both the political intelligence and sheer resources to stack the deck in their favor. Oil companies have been successful at exploiting some oil rich countries, and, as he points out, the large agribusinesses have also done it. Electronics companies have created toxic environments to build their products as cheaply as possible, many times, at the expense of the locals in that area.

I think the good news is that, with solid governments in those poorer countries, their economies can build off the investments of these large companies. India and China are both examples of how having a government that invests in it's infrastructure and educational systems, can take advantage of being the "hot" nation that everyone is sourcing their production/engineering to.

I admit, that I've often wondered what would happen to our planet if all these nations became consumers of all the goods of the current wealthy nations. I think we'd deplete all of our natural resources in a very short amount of time

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zbicyclist

According to the quote above, "A market system has not worked..." Not every market system in every conceivable parallel universe, but "A market system".

The market system we have in the west could best be described as mixed. There are elements of capitalism, but also agricultural subsidies, licensed monopolies that limit competition, and other entities that aren't really capitalism.

I wouldn't call the American health, education, or military sectors capitalistic, for example, although together these sectors are a substantial portion of the economy. Transportation is another mixed area.

Beyond that, I'd just be repeating what rarelyright wrote above in post #8.

bozo

Warren Buffet's influence is so great that he should be more careful about making pronouncements in areas where he's ill-informed. The market system absolutely has helped poor people. I suggest that Buffet read Julian Simon's work "The State of Humanity" or "The Ultimate Resource 2." There have been astounding advances for everyone, including the poor, in just the last hundred years. In the U.S., the leading health problem among the poor today is obesity, not hunger or starvation. Perhaps Mr. Buffet has been fooled by relative measures that label the lowest 20% poor—but even that is misleading. It is misleading because of the high social mobility that free-market economies enable. I was in the lowest income quintile as a student and during my career, I have probably spent time in all quintiles. It is easy enough to search for “social mobility statistics” on Google and thereby find how readily people move among the income quintiles over time in free-market economies.
The world can be crudely divided into free-market economies and dysfunctional economies. The vast majority of the world's poor live in countries with dysfunctional economies. The truly poor are not poor because market economies don't work; they are poor because their governments don't support rule of law, property rights, and free markets.

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nutsticks

"Buffett pointed out that the World Bank and others force countries to accept market reforms, while European and North American (and Japan, Australia,...) countries maintain huge agricultural subsidies."

And this is a prime example of people, via government, distorting and manipulating the market. Government power is a large part of the problem. Markets aren't allowed to work.

david

Levitt doesn't understand economics.

synapticmisfires

The fact of the matter is that we Americans are a lot better off than we were in the so-called "Gilded Age" in the late 19th century. But there was considerably less economic government regulation back then. I scoff at the notion that a completely unregulated market would keep everyone fed. That doesn't mean that Buffet is advocating communism, he just believes that the richest can sacrifice a little bit more to help the poorest. I am astounded that this could shock anyone this much. How can someone be so out of touch that they think the poor aren't harmed by the absence of regulations.

JGUNS

Not surprised at all...Buffet is a big liberal. The United States is the BEST example of the free market system we have (although that is changing over time). All objective evidence points to his statement being completely WRONG. Poor people in the US do better then anywhere in the world. The United States is one of the few countries where 2nd and 3rd generation immigrants do BETTER then their prececessors. Then again, Warren Buffet is not exactly a conservative either and people should know that. People assume that just because someone is a rich person they are a conservative, which is absolutely not true. The richest people in America are in fact liberals. From Hollywood to Bill Gates, to Buffet. They are liberals...because they can afford to be.
So I am really not surprised.

mathking

The poor in the U.S. never had starvation as their big problem, so that's a bad example.

The poor in large parts of the developing world are measurably worse off now than they were 100 or 200 years ago in many ways. Certainly there have been improvements, but to argue that capitalism is largely responsible for the improvements (as opposed to government) is not going to stand up to scrutiny of the record.

It is certainly difficult to get completely accurate statistics, even today let alone from a century ago, but there is data. I am going to limit my discussion to Central America, because that is the area with which I am most familiar.

The reason for much of the exploitation of natural, land and labor resources in the developing world by multinational corporations is a combination of hegemony and corruption. In Central America, U.S. agribusiness conglomerates used bribery and coercion to get deals from various governments. It was also not uncommon for governments perceived as unfriendly to U.S. business interests to be toppled, often by direct U.S. military intervention. (Most Americans have no idea how many 20th century invasions the U.S. staged in Latin America.)

In the end, most of the countries ended up with governments dominated by a wealthy elite who either bought off by corporations, puppets of the U.S. or both. The multinationals were able to get well below market value land prices, cheap labor and guarantees against competition. This meant both that other companies would not be allowed in to compete and that local competition would be stifled. Part of this stifling was to prevent broad infrastructure development.

This lead the societies in most Central American countries to change from agricultural societies which could support themselves to societies totally dependent on the multinationals in which a tiny wealthy elite class typically controlled almost all of the wealth.

The improvements in the life of the poor in Central America that have largely come through concerted government action in areas such as education and health care. So I do not think it is in any way misleading for Warren Buffett to asset that markets haven't always been good for the poor.

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mathking

Also, poor people in the United States most definitely do not do better than poor people everywhere else. The poorest in Western Europe, Canada, Japan and other industrialized nations are measurably better off than the poor in the United States by almost any statistical measure: life span, general health, purchasing power, political participation...