It’s a pity that in the effort to grab attention, Ms. Kamenetz crossed the line from an attention-grabbing headline to misrepresenting the position of her story’s protagonist, Dean Karlan, author of More than Good Intentions. Dean’s not saying it’s a crock, he’s saying we haven’t done rigorous analysis yet. For example, Dean says in his book:
The social entrepreneurship world is in a weird spot, to be honest with you. It’s a world full of rhetoric about impact investing, yet I have very rarely seen an investor actually take that seriously. When you look at the actual analysis it lacks rigor.
Let’s be very clear: saying the analysis lacks rigor and saying the sector is “a crock” are wildly different things. Indeed the analysis mostly does lack the kind of rigor Dean is looking for, specifically because, as Dean rightly points out, “If you want to put a million dollars into a business, are you going to put 33% of that into an impact study?” The answer is often “no,” except when a funder wants to put up grant money to fund that study (which some are, and more should.)
More interesting, to me, than laying in to the lame title of this article is to think a bit about randomized control trials (RCTs) – the gold standard in the development space – and their application in the social investment space. I don’t know the answer here, but I’d like to throw out a question to kick off a conversation:
What would Dean Karlan say about the “evidence” around the cellphone?
Meaning, cellphones are an “intervention” (a product, really) that clearly provide benefit to customers. How much benefit is open to debate, of course, but the question is interesting because the cellphone is the first really new product to achieve mass penetration for low-income consumers (there are now 4.5 billion cellphones globally).
It feels to me that no one would bother asking in a serious way to do an RCT on cellphones, because it’s no longer anyone’s business to ask that question – because the market has taken over. The product is appealing enough, consumers have spoken, we can all agree that the ability to communicate via a cellphone creates positive externalities – some economic, some social – and since we’re not using up grant money to pay for it, it stops being the purview of development economists to fret about this.
I bring up this example because, put in the simplest terms, what social impact investors (at least the ones who really care about social impact) are trying to do is:
- Identify products and services that make a material positive impact on the lives of poor people
- Create business models that make the cost of providing each incremental product go down to zero…and beyond (meaning, you make a profit).
Without getting into all of the real complexities of profit maximization versus a “sustainable” rate of return at the firm level; of what to do about all the people who, no matter how cheap the product, won’t be able to pay the full cost; about the role of subsidy; etc; I’d like to posit that there is something fundamentally different about this construct and the construct of analyzing a purely philanthropic intervention.
No matter what scale a pure philanthropic intervention reaches, the total marginal cost of delivering the nth “thing” (any intervention) is always positive, so you’re in the business of figuring out how the impact relates to that cost and how the impact relates to other similar interventions. Not so if you find the “next cellphone” – except it’s not a cellphone, it’s safe drinking water or a bio-mass powered light on a mini-grid or a safe and affordable place for a mother to give birth.
What if we get to the point when it becomes pointless to ask if an intervention “works” because, like the cellphone, it will be ubiquitous, so the question will feel purely [sic] academic?
What do y’all think? Am I off my rocker here, or is it possible that creating a scalable businesses that serves the poor is fundamentally different than traditional charity?