The risks of economizing generosity

Another surprising revelation from Sandel’s book was hearing how some prominent economists think about generosity and civic action.

In Chapter 3 of What Money Can’t Buy, Sandel talks about Richart Titmuss’ The Gift Relationship, published in 1970, in which Titmuss compared the US and British blood collection system.  The British system is entirely voluntary and the U.S. system is part voluntary and part paid.  According to Sandel, “Titmuss presented a wealth of data showing that, in economic and practical terms alone, the British blood collection system works better than the American one.  Despite the supposed efficiency of markets, he argued, the American system leads to chronic shortages, wasted blood, higher costs, and a greater risk of contaminated blood.”

Titmuss goes further, arguing not just against the inefficiency of the U.S. system but its morality.  Paying for blood, he argues, is unfair and corrupting.  It preys upon those not in a position to strike a fair bargain (the poor) when deciding whether to give something as vital and inviolable as their own blood.

Famed economist Kennith Arrow’s retort was striking – all the more so because Arrow was known for his work on market imperfections. He was no free market purist.   Nevertheless, Arrow stated that Titmuss’ argument was flawed on two fronts.  First, Arrow didn’t believe that creation of a market would have negative spillover effects on the voluntary market (my take here is that, for blood, it probably depends on how the two systems are set up, and the impacts could be studied empirically).  More surprising was Arrow’s argument about the risks of a voluntary market, and his claim that if something could be solved by a market mechanism it should, so that ethical behavior could be economized.

In Arrow’s words, “I do not want to rely too heavily on substituting ethics for self-interest.  I think it best on the whole that the requirement of ethical behavior be confined to those circumstances where the price system breaks down….We do not wish to use up recklessly the scarce resources of altruistic motivation.”

To paraphrase Bill Clinton, “this is important, so I’m gonna repeat it.”

“We do not wish to use up…the scarce resources of altruistic motivation.”

Amazing that Arrow could actually write this, and that anyone could take it seriously as a model of human behavior.  Generosity is generative, altruism is an orientation towards the world and a pattern of behavior that creates more kind action, both by the actor and by others.  Sure, it’s not limitless – everything must remain in balance – but one of my biggest revelations is that that shifting my own attitude about generosity didn’t exhaust some small, limited supply, it cracked open a door to a whole different way of being (and no, sadly, I don’t live it every day, it’s a lifetime project).  Generosity isn’t scarce and finite.  Indeed, in its earliest forms, newfound generosity is delicate and prone to being easily cowed.  Generosity can only grow if properly nurtured and cultivated, but if it is nurtured, it blossoms, it doesn’t run out.

Taking a big step back, and thinking about the commodified world we live in, I think that Titmuss has it right.  The risk we run, in Sandel’s words, is that “the declining spirit of giving made for an impoverished moral and social life” and that, as Titmuss continues, “It is likely that a decline in the spirit of altruism in one sphere of human activities will be accompanied by similar changes in attitudes, motives and relationships in other spheres” and that ultimately we might undermine altruism and a sense of community.

As Titmuss concludes:

The ways in which society organizes and structures its social institutions – and particularly its health and welfare systems – can encourage or discourage the altruistic in man; such systems can foster integration or alienation; they can allow the ‘theme of the gift’ – of generosity towards strangers – to spread among and between social groups and generations.

What does a society look like that encourages the altruist in all of us, that fosters integration?  Certainly it is one with strong communities and groups, a sense of connection and of shared responsibility.

Harder still, how does one measure and track the supply of altruism, of generosity, in a society, and is there a risk that as market efficiencies populate every corner of our economic and social interactions, that the notion that one would do anything for anyone “for free” would become such an alien concept that it would erode the very fabric of society and the underpinning of strong communities?

(BONUS:  the nice folks at Macmillan Audio reached out after yesterday’s post to let me know that there’s an audio version of What Money Can’t Buy.  Here’s a clip.)

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.

Dowser 2011 Year in Review interview

[This interview first appeared on]

This is the 1st part of our Year in Review Series, in which we reconnect with our group of experts about the trends they forecasted for social entrepreneurship in 2011 and look forward to the year ahead. As the Chief Innovation Officer at Acumen Fund, Sasha Dichter is constantly keeping abreast of significant developments in the social enterprise sector. Acumen Fund, which recently marked its 10th anniversary, has a decade of experience investing in solutions to poverty, and as a result, Dichter has first-hand knowledge of the strength of the investing market. Here he discusses the progress made this year in building a funding pipeline, and what it will take to get more capital flowing to the sector. #

Dowser: In our interview earlier this year, you said there’s been a gap between the people talking about impact investing  and the amount of investing actually happening.  What is your assessment now?

Dichter: What’s clear is that more funds are being raised. However, the general theory about what’s going on is that there’s still a lag cycle from talking about it and actually doing it. Anecdotally, we know that more funds have been raised, both in this country and globally, and as expected, people are starting to follow through on this excitement. I would be confident in saying that there have been changes in the investing environment in several countries. There’s a lot of enthusiasm for sure, but it’s still hard to get a benchmark on the volume of investing that’s happening on the ground. #

In general, would you say that investing in social enterprises has become more commonplace in the past year?
I think the level of interest is high, but how that’s translating into what people are doing still remains to be seen. The mainstream investors are increasingly aware that the sector exists and are expressing interest and curiosity about it. Ideally what they want is a story that involves little to no tradeoff on the financial returns. The story that people are hoping to be told is that you can invest in this space and do quite well financially, but there is a gap between that hope and the underlying reality of doing this investing. The opportunity and challenge for the sector is to understand and communicate what the real economics of solving social problems are; there is a way to deploy investment funds to solve social problems, but there is no reason to assume that the rewards and risks would be good because these are really tough problems that we’re solving.

So, how can the sector seize that opportunity?
I hope we can develop a more nuanced vocabulary around the problems we are trying to fund, for example, communicating to investors what would it really look like to get water to this village in Africa? And, asking them, ‘How would you feel if you could make that happen, and then, What if you got your money back?’ More and more we can tell the story of the success of solving very big problems and sharing the complexities of actually doing this. We are able to say, ‘Here is what we’ve accomplished in the world in terms of changing people’s lives, and by the way, we got you your money back.’ Approaching it from an impact perspective rather than focusing on what types of returns you are getting, will increase action among traditional investors.

How do you think the funding pipeline for social enterprises has evolved over this year?
I think the world is still digesting the JP Morgan report [about impact investing as a new asset class], and that has been quite influential for what the sector can look like. At Acumen Fund, we are doing some research with the Montitor Group to try to better understand our portfolio and the different stages of organizational development in funding. The goal is to really understand the types and stages of capital that are needed to create social enterprises, all the way from grant makers, and the public sector players providing smart subsidies, to patient capital and the more mainstream investors. Some of that research has already shown us that there are four stages of funding development for social enterprises. Typically they start with some seed capital and there is a good amount in grant money, and then there is growth capital, and finally the business is at the stage where they can take on a big investment. However, there’s a gap when it comes to Stage 2 and Stage 3 funding for social enterprises.

One of the questions we need to be asking ourselves is how do we as a sector build a pipeline of Stage 4-ready companies and think about the availability of funding along those stages. There aren’t as many players in the market that have the flexibility and risk appetite to really step in there. When you look at the microfinance sector, $20 billion of philanthropy went into it before it entered the phase where the majority of capital going into the market was investment capital.  So, for social enterprises, where is that philanthropic capital going to come to play? It could be deployed as low return investment capital for example, or there’s a lot of ways to handle it. But what seems to be the case when we talk about the maturity of investment capital out there, that it’s not the stage that investors want to play because it doesn’t align with returns they are looking to get. I think we are still trying to figure out who is going to fill that gap and how.

Acumen Fund just celebrated its 10-year anniversary, and in our last interview you mentioned this was going to be the year to assess how much impact the organization has had. What have you learned about your progress?
It’s been a humbling process to reflect on the past 10 years for Acumen Fund. We have $73 million in cumulative investments, and we are seeing capital get returned to us. Ten years ago, this was just an idea to invest in solutions to poverty and now we have this robust sector where we’re talking about the specifics of those investments. We are in a drastically different place in the world now. We still have a long way to go and a lot to do, but we know that patient capital is working and it’s changing people’s lives. The practice of philanthropy looks radically different than it did 10 years ago, not just in the investing sector, but also more widely. The idea that we can use capital in this productive way and we can control it without having it control us to create the outcomes we want is really exciting. The sector offers a certain sense of hope that we can make massive progress in a short time and solve massive problems in very creative ways. It still feels like we are just getting started.

The best birthday card ever?

A few years ago a good friend of mine started a greeting card business with all sorts of quirky cards for very specific events – buying a new Xbox; embarrassing faux-pas at the office holiday party; most sleepless nights in a row with a new baby….  When he took the cards to buyers, they all told him that the cards were great, but what they needed to see were more birthday cards, anniversary cards, and Valentine ’s Day cards.

The question he asked and we all need to ask today is: do I want to be in the business of trying to create the best birthday card ever?  Do I want to toil away and hope beyond hope that I’ll rise to the top – using the same tools and tactics as everyone else, but doing it just a little bit better?

You know:

Sure everyone does email campaigns, but ours is going to stand out a bit more because we’re going to tweak the headlines and up our open rates…

Sure everyone creates annual reports, but ours will be snappier, crisper, more memorable…

Sure everyone writes a quarterly email that no one reads, but this is what everyone expects, so we have to do it too…

Really?  You actually don’t need to do those things that everyone else does, and you certainly, certainly don’t need to do them in the WAY everyone does them (please!).

You don’t need to spend your organizational energy on things that “people expect.” Who are these “people” anyway?  What exactly do they expect?  Why?

Maybe these expectations are out there, and maybe they’re right, but I’d pressure test that a lot before spending organizational energy on creating another me-too thing that’s fighting for its life to be just-a-bit-above-average.

The chance that you write the world’s best, most memorable birthday card are pretty slim.  But creating the funniest “office party holiday gift card” ever – and getting that card in front of the people who buy and sell holiday gifts…well that sounds a lot more possible and a lot more fun.

Dispatch from Padrauna, India (Part 2)

[if you missed Part 1, you can read it here]

As the sun rose over the deep green rice fields around us, hundreds of people were walking along the highway and amongst the rice paddies, starting their day – squatting, walking, sitting, and waking.  That’s one aspect of India that feels different from nearly everywhere:  no matter where you go, it feels like there are always a lot of people going about their business.

1 in 6 people in the world lives in India, so any social issue in India is, by definition, a big one.  The Indian state of Bihar, India’s poorest, has a population of 85 million, 80% of whom have no reliable access to electricity, 58% of whom are under the age of 25, and 85% of whom live in rural areas.  And this is just one state – with a population larger than the UK, France, Italy, Spain, or Germany – in a country of 1.1 billion people.

When people talk about what will ultimately break the back of poverty – philanthropy or market-based solutions, or some combination of the two – I’m inexorably drawn back to these sorts of numbers.  They makes me ask how anything could possibly grow to touch hundreds of millions of lives without some sort of economic engine that works.  It feels impossible.  The imperative, then, is to find a way to make markets work in service of social change in places like Bihar.

Lighting and cooking solutions are a great place to start, because villagers already spend  10-15% of their income on fuel (for dirty, unsafe kerosene lamps and for open stoves that spew noxious smoke in people’s homes), and because 1.5 million people a year die globally from respiratory conditions resulting from indoor air pollution – 50% more than from malaria.

The opportunity and the need here is huge.

Acumen Fund has two investees that are working to crack this problem: D.Light, which sells solar lights to replace kerosene lamps, and Husk power, which is bringing power directly into people’s homes.  So when six-foot-two Gyanesh Pandey, CEO of Husk Power Systems, casually rolled into the (VERY bare-bones) Skylark Hotel in Padrauna wearing shorts, a white t-shirt, and a big smile on his goateed face, I wanted to know how and why he is solving a problem that no one else has managed to tackle.

Karthik Chandrasekar (Acumen Fund) and Gyanesh Pandey (Husk Power Sysetms)

What comes across quickly in conversations with Gyanesh is that markets are working in a limited way even in Bihar:  villagers are buying kerosene, fertilizer, seed, alcohol and clothing, so even people making just a few dollars a day have some small amount of cash that they’re spending.  This means that the goal isn’t to wave a magic wand and introduce markets where they don’t exist; the goal is to understand the village-level economy – and the mindset of people living there – well enough to offer solutions that will work to improve lives.

It turns out Gyanesh, who has a BS in Electrical Engineering from IIT Varanasi and an MS in Electronics Engineering at Rensselaer Polytechnic Institute, grew up in a village in Bihar, and he’s quick say, with a twinkle in his eye, “Hey, if I don’t work on these problems, who will?”

Gyanesh started tinkering with renewable fuel solutions for the poor in 2002, and in 2007 he and his partner Ratnesh Yadav set up and funded an NGO, the Samta Samriddhi Foundation, to build one mini-system that would provide power to 2-3 surrounding villages at a price villagers could afford.  Gyanesh and Rathnesh figured that if the price were low enough and the reliability high enough, they could sell power and 1-2 lightbulbs to villagers who would be all too happy to give up their kerosene lamps.

Husk Power's systems use rice husks (that brown stuff) to generate power

In 2008, based on promising early results, Gyanesh and Ratnesh set up Husk Power as a for-profit company, and less than three years later Husk has installed and is operating more than 40 ultra-small systems that are providing power to more than 100,000 people, and Husk plans to grow to 5-10x their current size in the next few years.


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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