The Philanthropy Central blog hosted by the Center for Strategic Philanthropy & Civil Society at Duke University has quickly established itself as a must read. The most frequent reason that philanthropy leaders cite when I ask them why they don’t write a blog is that they don’t have the time. So Philanthropy Central’s unique, week long guest blog slots are an ideal solution. So far, the blog has played host to Mario Marino, Nancy Roob, Phil Buchanan, Sally Osberg and many other social sector leaders.
Today I want to turn my attention to the most recent post from Michael Edwards. Edwards is a former long time employee of the Ford Foundation and author of the philanthrocapitalism critique Just Another Emperor and the new book Small Change: Why Business Won’t Save the World.
In his post titled Why "Social Capital Markets" Could Be a Really Bad Idea, Edwards presents what I believe is an extremely limited view of social capital markets. I’ve very sympathetic to the concept that the social sector is different from the business sector and so social capital markets should not simply mimic financial markets. For instance, I particularly liked Jacob Harold’s piece in Alliance Magazine arguing that a robust social capital market might be more like a farmers’ market than Wall Street. But Edwards’ post today argues against a straw man.
The social capital market Edwards describes is a shallow, mechanical market that has little resemblance to how real markets work. For instance when Edwards suggests that social capital markets will dictate which causes are most important and writes "Who is to say that saving the rainforest deserves more support than ending gun crime or racism?" The answer is "No one". There is nothing about the concept of the social capital market that implies that certain types of social good are superior to other types.
When Edwards writes that social capital markets will force "nonprofits to compete with each other for scarce resources," what does he think that nonprofits are already doing? We certainly don’t have unlimited resources and last I checked, nonprofits were competing fiercely to convince donors to support them.
When Edwards writes "variations in… metrics may not reflect meaningful variations in performance, since two organizations may be dealing with similar issues but in totally different contexts," I would respond "Of course!" Sophisticated investors in traditional financial markets do not base investment decisions on simple mechanical rankings. In fact, financial professionals that purport to have a simple formula for producing investment returns are seen as charlatans.
Smart investors use metrics as inputs into the messy process of trying to select their investments. Markets are not driven by metrics and simplistic rankings. They attempt to absorb vast quantities of quantitative and qualitative information in order to allocate scarce resources. I’ll admit that some supporters of the social capital markets concept hope for a day where we can easily allocate resources based on standardized rankings, but that ideal has more in common with how centralized planning works (or doesn’t) than to financial markets.
It is critical that as we build robust social capital markets, that we create vibrant, human markets, not some sort of mechanical sorting machine. Readers who are interested in a more holistic view of financial markets, than the quantitative, machine-like caricature presented by Edwards might be interested in the book Investing: The Last Liberal Art by Robert Hagstrom. The book lays out the ways in which investing in financial markets requires the building of a "latticework" of information that is gathered and processed with mental tools borrowed from the fields of psychology, philosophy, biology, sociology and literature. I think the book offers a holistic, human based vision of capital markets that might shift your thinking about the potential for the social capital markets.
I’ve previously mentioned Hagstrom’s book (which is largely based on the investment philosophy of Warren Buffett’s right-hand man, Charlie Munger) when I rejected an overreliance on tools borrowed from the hard sciences in philanthropy evaluation and when I responded to Albert Ruesga’s worry that evaluation was the “math-anxiety” of philanthropy. Hagstrom is also the author of The Warren Buffett Way, which I drew on extensively last summer when I offered a “robust definition of high performance” for the nonprofit sector.
6 Comments
Sean, I offered part of my response in a comment on your previous post.
One thing that never ceases to amaze, and perhaps this is why Michael Edwards thinks as he does, is that nobody wants to confront a reasoned argument for social capitalism, though many refer to its conclusions.
It began for us with a critique of conventional capitalism with the theoretical model of a more inclusive paradigm, to make the point that an economic system which renders people disposable is not ethical.
The argument based on ideas from philosophers – Plato and Descartes, management thinkers – Peter Drucker and Alvin Toffler and social scientist s – Maslow and Carl R Rogers.
Originally one paper, it is now a a manifesto and synopsis of the original paper.
http://www.p-ced.com/1/about/background/
http://www.p-ced.com/1/about/history/
Thanks for your response Sean, but it doesn’t change my views. “It’s not a competition” says Si Kahn, one of America’s leading community organizers. “There are twenty other organizations as good or better than us. I’m a movement person, and at a very deep level it doesn’t matter whether we get a grant or someone else does, so long as the movement has enough money to do its work.” “We are steadily losing the absolute basic insinct that collaboration and mutual support come first” is another quote from “Small Change” that readily springs to mind.
When you say that “last I checked, nonprofits were competing fiercely to convince donors to support them” you need to check again, since these quotes are not isolated exanples – they describe the reality of a large amount of voluntary citizen action, so why don’t you recognise and respect it? And if nonprofits ARE competing with each-other, have you ever paused to reflect on your own role in making that a self-fulfilling prophecy?
As I said in my first blog post on Philanthropy Central on Monday, civil society and the social economy are very different things, animated by different mechanisms, fulfilling different roles, and requiring different forms of support from philanthropy. One cannot simply ignore the trade-offs that exist between competition and cooperation as you do. nor sweep under the carpet the difficulties imposed by the fact that social ‘goods’ are not commensurable or substitutable (now there’s a mouthful!). That’s the subject of today’s blog post, so I encourage you to check it out.
A “farmers market” is still a market, and markets are places where people buy and sell. Civil society is not, and that’s why we need more “meeting grounds”, not markets.
Back in 1999, the word Philanthrocapitalism probably didn’t exist and the United States had been referred to as having a “Goldilocks Economy” while Russia in particular was experiencing almost total economic breakdown, after a 1000 fold devaluation in 1998.
The case for applying capitalism to resolve social problems, had however been made, in a theoretical paper delivered to President Clinton’s re-election committee of 1996, by an honorary researcher. A businessman who’d also been active as a non-profit leader.
Visiting Russia to research in 1999, he invested in a 4 month study and strategic recommendations for a development initiative which would provide emergency relief and a community bank. It was to persuade the US State department to tag on as the 4th location in an existing initiative and became the Tomsk Regional Initiative.
http://www.p-ced.com/1/projects/russia/
The bank was to pioneer the application of ‘moral collateral’ microfinance in Russia which led on to the foundation of the Russian Microfinance Centre in 2002.
Over the duration of the project, with FINCA operating the bank, around 14,000 loans were dispensed to create 10,000 new “private entrepreneurs” in a city of 600,000 population. An investment of $6 million having been repaid.by the time P-CED launched in the UK and the following interview was given.
http://www.iccrimea.org/scholarly/economicdev.html
For comparison with a nonprofiit approach, we may examine the efforts of Oxfam who entered microfinance in Russia in 2003. In the next 5 years, they were able to assist 4,000 people in creating new businesses.
http://www.oxfam.org.uk/resources/countries/russia.html
The P-CED project had invested around $4000 to source the Tomsk initiative and had proposed measures to enhance development of civil society and fight corruption, not replace it with business. Likewise, investing since 2004 in Ukraine has influenced government to improve payments to those who adopt orphans and agree to construction of 400+ rehab centres for disabled children.
http://people-centered.net/About.aspx
Clearly this is not big business in any way and illustrates that even the smallest of entities can invest in and achieve social objectives. Tomsk 1999 was proof of concept.
Michael,
I have watched nonprofit organizations literally try to destroy one another as they compete for funding. I have seen seven-figure revenue streams destroyed over egoic turf wars. When you don’t pay people with money, they compete for sainthood, and the results are far more savage, in my experience.
And the reason this horrible admin/program ratio has proliferated so disastrously is primarily because of nonprofit organizations all trying to beat one another to the lowest “price” in a war for donors. It is the antithesis of collaboration to promote a measure that brings great harm to the entire sector simply because your manipulation of it can bring big donations to you. And it gets manipulated on a big scale. The Nonprofit Overhead Cost Study looked at 125,000 IRS Form 990s and found that one third of the organizations with revenues of $5 million or more were reporting zero percent fundraising costs. Competition for sanctimony and donor dollars is what lies at the root of it. And this is a huge sample.
The competition and vitriol I have seen in the nonprofit sector is worse than anything I’ve personally encountered in the for-profit sector, where the competition is transparent and it is simply over money.
There’s nothing worse than “a war among saints,” as Thomas Merton wrote.
tks Dan, nice to hear from you again, but you need to get out more! Once you get beyond the first or second ring of ‘competing’ non-profits you’ll find that collaboration is the natural way of life among citizens and their associations. As I keep telling people, you shouldn’t confuse civil society with the social economy. My first blog post on Philanthropy Central explains why.
I reckon you’ve described the problem well Dan, Business may reach a point of non returnable investment but charity knows no such bounds.
Also, out in the field we’ve observed money laundering activities supported by microfinance, right under the noses of detached foundations who are oblivious to crime.
We also see foundations set up to serve concealed interests of business and politicians who least of all want transparency.
It’s not just about what they pay out to who, but whose interest they serve and who they obstruct in the pursuit of human rights, which needs shining a flashlight on.