What Money Can’t Buy

Harvard Professor Michael Sandel’s recent book, What Money Can’t Buy, is a critical look at the commoditization (economification?) of everything in our society.  We’ve gone from a world with first class and coach tickets (which, to Sandel, apparently was mostly OK) to a world where people pay for blood, pay second graders to read, pay homeless people to stand in line to hold spots for public congressional hearings, and pay people to tattoo advertisements on their foreheads.

The book is long on questions and short on answers – the central question being whether the potential utilitarian improvements that result from market transactions (both sides participate, so both parties must be better off) is corrupting to society as a whole.  As Sandel puts it, “In deciding whether to commodify a good, we must therefore consider more than efficiency and distributive justice.  We must also ask whether market norms will crowd out nonmarket norms, and if so, whether this represents a loss worth caring about.”

Sandel argues forcefully that in order to resolve these questions we need to get comfortable having normative discussions about the kind of society we wish to create and live in – and I was longing for a last third of the book that would equip me as a reader with tools to have those conversations.  That critique notwithstanding, it’s impossible to read the book and not start to notice how everything (everything!) seems to be for sale, and the prevailing wisdom is that this has to be a good thing.

The counterargument is that putting a price on things crowds out civic behavior.  The moment you offer $50 to people to give blood is the moment people stop showing up to donate blood out of a sense of duty and generosity to their fellow man.  As a wise friend of mine once said, “I’ve considered donating a kidney, but I’d never consider donating a kidney and getting paid $500 for my troubles.”

With this as context, I wonder if part of my interest in generosity was a backlash against everything being monetized and maximized – a desire to create a space in my life, connected to a sense of service, where market norms don’t prevail, where I act from a sense of duty first.

Duty means you don’t get to ask clever questions…you just act.  And these days, just acting is a welcome respite from the Chase review of line calls at the U.S. Open, the football games at Invesco Field, people buying the future income streams of young people instead of just finding great people and giving them our support.

Even in impact investing there’s a quiet whisper (getting louder every day) that if it something has a market-based solution then it HAS to be better.

Maxims are nice because they make the world simple and they ask little in the way of judgment and nuance.  But let’s just be clear: markets are great at efficiency, markets instill discipline, and markets give us quick feedback.  But the premise never was that markets alone have all the answers, and if we as a sector are going to make large-scale change, we need to learn the lessons of history – today’s (read: 2008 crisis) as well as yesterday (the building of the U.S. interstate system) – of where markets have worked and where they haven’t; what are their strengths and what are their limitations; where markets empower and where they marginalize.

The lines aren’t bright, but there are important lessons out there, and most of them weren’t written by Milton Friedman.  As our sector grows up, we will all have to start becoming better students of history, and becoming more versed in talking about where markets work, where they don’t work, and why.

Two markets

I’ve just finished reading Michael Lewis’ The Big Short.  I’m a big Michael Lewis fan so I’m not surprised at how much I enjoyed it (though Lewis’ Moneyball is still at the top of the list for me, especially for anyone who’s interested in using data to make high-stakes decisions – I know you’re out there!!).  If you care about markets and the workings of the global economy, I’d say you should run out and read both The Big Short and Too Big to Fail by Andrew Ross Sorkin.  Yes, both tell like soap operas, but I know I wouldn’t have slogged through all the subprime bond arcana without a good story and a healthy crop of heroes and villains.

The dispiriting picture Lewis paints is one of huge firms who make the rules by which they make money, and nearly impotent oversight bodies (the ratings agencies) who abdicated responsibility.  So, for example, in the run-up to the subprime mortgage crisis, the ratings agencies knew much less than Wall Street (whose main players, in turn, knew much less than they should have) when rating subprime paper; Wall Street firms primed the pump with stories of “low-risk” and “uncorrelated” assets (CDOs) that, as we all now know, were incredibly risky and incredibly correlated; and for many years, Wall Street firms seemed to have enough power over information and prices to create fictitious profits that led to real bonuses the likes of which we’ve never seen.

And of course I’m reading this all a week after the initial public offering by  SKS, the first IPO for a microfinance organization in India, about which debate raged online last week.

What has struck me as I follow the SKS debate and then end my days reading about synthetic subprime mortgage bond-backed CDOs, is this: if we are going to forge a new kind of capitalism, one that helps create a world beyond poverty and one that leverages markets but is not beholden to them, the we are going to have to become exceptionally adept at understanding two highly sophisticated, often opaque markets:

  1. The economy of the poor (rural and urban both), who manage money and risk and make sophisticated tradeoffs every day about the simple act of survival (for which Portfolios of the Poor is in my mind the right starting point, but then we need to spend real time in these markets to really understand much of anything);
  2. The economy of the rich, not just to understand how capital moves (though that’s important), but also to understand what “real markets”, the most sophisticated markets in the world, really look like.

More often than not, I think we fall into the trap of grossly oversimplifying both of these markets – we paint the same pictures that were drawn for us in Microeconomic textbooks and imagine stylized, efficient markets with the greater good, magically and invisibly, created for all.  Yet the more I understand how the most sophisticated markets function, the less convinced I am by stories that end with “and then market actors will come in and scale and efficiency will follow.”

I don’t know what the SKS IPO means.  No doubt it is an important and potentially very positive step.  We want people to be competing for the business of poor borrowers (and, hopefully, eventually savers).  We want competition to bring prices down and we want the best organizations to have the capital on hand to scale.  But it also could be that microfinance is the next subprime mortgage crisis, an edifice built on the backs of a different set of poor people (this time in the developing world).  If that is the case then one possible outcome is that some people will get very rich and others – the most vulnerable – will end up holding the bag.  Most likely the answer is somewhere in between, and I believe to steer us towards the most positive outcomes we need to sharpen our pencils and bring more sophistication to how we characterize markets for the very rich and the very poor, since increasingly these two will intersect in the coming years and become increasingly interconnected.

My ultimate dream is that, armed with a clear-eyed, sophisticated understanding of how both of these markets really work, we will find a way to bring in capital with a purpose from a class of investors that sees economic return as part of a larger set of returns that they create with their capital.  (This may and probably will involve lower economic return that incorporates higher social return).  It’s going to need to be both/and (social/economic), not either/or.

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A new world economic order?

Lately I’ve been hearing a lot of conversation about whether the current economic meltdown represents the end of capitalism.  I think the short answer is ‘no,’ but I do think an era is over — one in which the total free, unfettered markets are seen to have all of the answers.

So we will see more regulation and oversight, which I hope will prove to be effective, but you never know.

More interesting to me is the idea that a new meme might emerge, one in which there is an understanding that a nuanced approach to markets is the answer. At Acumen Fund where I work, nearly all our investments exist in that middle space between philanthropy and a fully functioning market.  Because of all the challenges and complexities of building new markets for the poor where they do not exist, these enterprises do not generate a return commensurate with their risk.  Often we get challenged because we don’t fit neatly into any one bucket: we’re not pure charity (-100% financial return) and we’re not a private equity shop shooting for 30% returns.

I think the starting point for this new conversation is the recognition that markets are fragile, and that they don’t spring up fully formed and creating optimal results.  Borrowing a little economics lingo, there are multiple equilibria, and not all of them are stable.  And the optimal one may not be the one with the highest financial returns.