While my post on Friday about the “stickiness” of Kiva.org was generally well received, some people felt that any attempt to make an opportunity attractive is a sort of slick salesmanship. Personally, I think that good presentation does not belittle authentic, high impact work. Instead, I think authentic, high impact work deserves to be presented well.
But interestingly, reader Tony Wang questioned my post from a different angle. Tony actually wondered if it would really be a good thing if an additional $150 billion a year was given to charity! At first glance, it seems like a given that more money to charity is a good thing. But Tony is a really smart guy and his comment challenges us to think.
While I’ve been blogging off and on at Blueprint about this question of “What Capital When?”, one thing that’s struck me is how little we know about the Big Picture. There is a lot of talk about the benefits of giving and the benefits of social investing, and some discussion of when to use specific instruments at a micro level, but no one has stepped up to the plate to articulate how much grantmaking is ideal at the macro level.
Perhaps it’s a bit academic of me, but I find this really problematic for my inner economist. If we’re going to talk about increasing charitable giving, we have to recognize the decrease in available financial capital in the traditional markets that corresponds with an increase in charitable giving. When you ask “What if giving went to 4%?” I wonder whether that’s actually an improvement and what sort of empirical evidence we could find for advocating giving as a higher percentage of GDP (or at the very least, some sort of theory). And without the kind of nuanced analysis that would lead us to some sort of ideal percentage, it seems one could argue any arbitrary number – why not 10%? 20%? 100%?
By taking increased giving to a logical extreme (would it be good if people gave 100% of income to charity? Clearly not.) Tony demonstrates that we can’t assume that an increase in giving is a good thing. However, I disagree that additional giving requires a decrease in capital available to traditional markets. Most giving is treated as part of people spending habits, not investing habits. We can see in the data that giving fluctuations with GDP and income, not the level of financial markets. So it seems to me that increased giving results in less capital available for consumption, not investment. However, as impact investing and other blended value approaches to investing take hold, Tony’s point resonates even more.
The percent of income that should go to charity is generally viewed as a moral question. But Tony points out that it is also an economic optimization problem.
From a moral perspective, more giving is generally always seen as a good thing. For instance, Bolder Givers commit to giving 50% of their income to charity. But if we take a rationalistic approach, can you make an argument for any specific level of giving? If not, what information might be needed to advance a compelling argument for any specific level?
So glad you reposted Tony’s comment.
No specific answers to the exact percent we should give, but I think your connection to consumerism is on target.
During the economic crisis (are we allowed to speak of it in the past tense yet?) I saw a big tension between the macroeconomic problem that people weren’t spending and thereby helping the economy versus the microeconomic problem each person had that they didn’t want to keep personally spending in the way that they had been during boom times. To make the personal choice to cut back, some might argue the MORAL choice to cut back, was fine on the micro level… but if everyone made this moral choice, the macro impact on the economy would be dismal.
I wondered then and now if the way to act morally on the micro/personal level without (in the aggregate) having a negative impact on the macro level was to shift from consumption spending to giving spending.
Would love to know of any actual studies in this area, all I’m aware of are theoretical possibilities.
And many thanks again to Tony for his perspective.
Interesting to discover Bolder Givers. The social business model we’ve operated in the UK for the last 6 years derives from our white paper on social capitalism which prescribed a commitment of at least 50% of profit to social purpose, rather than charity,
Working as we do in Eastern Europe, in support of childcare reform, we’re aware that around 80% funds intended for children in institutions is siphoned by organised crime. Such a big elephant in the room that CSR, social enterprise and charitable foundations seem to prefer not to contemplate it.
The original argument for this 50% + commitment was that if a minority of companies adopted it to invest in their community , it could co-exist without treading on the toes of free market capitalism and create economic opportunity that had previously been denied.
The argument for that level of giving may be found in the synopsis of that white paper.
Sean, I’m delighted to have you mention Bolder Giving. Thank you! I want to clear up a misperception and explain how it relates to todays provocative blog post.
Bolder Giving promotes four different ways to be bold (See survey, “Are You a Bolder Giver? http://boldergiving.org/site/index.php/bolder-giving-challenge/quiz/). We do not believe a “one size fits all” giving level exists. We encourage all of us to give at our full potential, whatever that may be — and “full potential” includes qualitative aspects such as giving effectively and being fulfilled. More giving can be good for charity… but only if it’s wise giving.
Yes, our site features over 100 stories from people who have given at least 50% of their income, net worth, or business profits. (http://boldergiving.org/inspiring_stories/) — but that 50% level is there just to open eyes to how much is possible.
Thanks again for all the insightful discussions you provoke. Warmly,
Anne Ellinger, founder
Bolder Giving in Extraordinary Times
Thanks for the clarification Anne. I associate Bolder Giving with the 50% League, but I appreciate you pointing out the distinction.
Do you have any thoughts on how someone who wanted to set their giving level on an “economic optimization” basis rather than a moral basis could approach the issue?
Ann, I’m glad you make that point about giving to full potential. I have a story for you. Terry Hallman the founder whose work I describe above has for example endured being homeless twice. He’d used all his funds to research ans leverage a microfinance initiative in Russia for example.
Since returning to Ukraine in 2004 our relatively small funding has again been used in leverage, to create impacts which include for example a 40% increase in domestic adoption. In his activism he’s had to put himself at great risk. The social impact created is detailed here in links that relate project milestones.
Not sure what you mean by setting one’s giving level by an “economic optimization” basis. Many Bolder Givers give not out of moral compulsion, but because they wish to maximize their impact. (See, for example, Allen Andersson who is deploying about 99% of his fortune, http://boldergiving.org/inspiring_stories/profile.php?id=108) And many Bolder Givers are combining philanthropy with social investment for greater impact (See, for example, PlayBIG’s founder Carol Newell story, http://boldergiving.org/inspiring_stories/profile.php?id=14)
I agree with you that most people give out of their personal spending budget, not their investing budget, so increasing U.S. average giving by, say, 1% would provide billions more for nonprofits and not affect capital markets.
Tell me more what “economic optimization” means and I could respond more clearly. Thanks!
Jeff, I’d love to feature your business and that study on our site! Send me an email, OK? firstname.lastname@example.org
Economics concerns the allocation of scarce resources to enhance public welfare. If I understand you, Sean, economic optimization would focus on how philanthropy gets divided up among nonprofits based on the social benefits they produce, rather than the aggregate amount of giving. So I think Anne has a point that economic optimization would require donors to think about maximizing the impact per dollar of their contributions in addition to the amount.
Anne, what I’m trying to get at is from a moral perspective, giving as high a level of income as possible is probably good. But Tony asks in today’s post how we might figure out what the “best” level of giving is from an economic analysis perspective. If everyone gave 100% of income to charity, the system wouldn’t work. So how might we think about the “optimal” level of giving rather than the morally correct level of giving?
Steve, I think what Tony was getting at is whether going from 2-3% of GDP for charity would be a good thing. Since 100% would not be a good thing, there must be an optimal level of GDP that goes to charity between 0-100%. So how do we think about what the optimal level of giving would be?
From an economic perspective, the optimal percentage would maximize the marginal social benefit produced, the same way that a business maximizes output until it minimizes marginal cost. But I’m not sure that’s the right way to think about philanthropy, since many people would want to continue to help needy people and communities even past the point of maximum efficiency.
Thanks everyone for joining the discussion. I’m glad to see my comment hasn’t fallen on deaf ears and has also sparked some interesting commentary. Some thoughts to keep the discussion going:
I think intuitively it makes sense that the opportunity cost of charity is additional consumption, not investment. When I give to charity, I’m probably consuming less and keeping the amount I contribute to my investment portfolio fixed. However, what the data shows I’m not exactly sure. Even though the data shows that charitable giving is correlated with GDP, I’m not sure what the data says about charitable giving among individuals. It’s entirely possible that if we control for similar incomes, individuals who give more may invest less and that consumption may stay relatively constant. Or that individuals who give more may both consume and invest less. Or that, as you both observe, people who give more only consume less This is mainly an empirical question, one I’m not sure we have the data to answer (it would require knowing the percentage of each individual’s allocation of assets towards investments and charitable giving, whereas most of the data we have separates the two).
But the descriptive question of how people have historically considered the opportunity cost of charitable giving is slightly different than the normative question of how people should be considering the opportunity cost of charitable giving. The fact is, instead of giving to charity, you could be investing more, consuming more, or, as absurd as it may sound, voluntarily give more money to the government. Once we have an Ideal Asset Allocation for society in mind, determining what we ought to do as individuals is I think fairly straightforward – we should contribute our dollars to help move the current societal allocation towards the ideal. So if society’s portfolio is overweighted among investments and underweighted among charitable giving, we should increase charitable giving. But if it’s the reverse, in order to maximize the social impact of our dollars, we would do better by increasing the total amount available for investing.
I’ve often wondered the same thing and I think it’s hard to generalize whether Consumption Spending vs. Giving Spending is better. Take for example the following hypothetical. Let’s say I’m choosing to spend $100 on a computer or a $100 on a charitable donation to a food bank. When I’ve spent $100 on a computer, I’ve benefited all the people who have helped create that computer, from the original people who mined the raw materials to the executives of the computer company. When I’ve spent $100 on a charitable donation to a food bank, I’ve benefited all the people who operate the food bank and the people who receive the actual food at the food bank. Which one’s better for society? To be honest, I think there’s too many variables to compare, and it becomes infinitely more complicated when we try to compare Consumption Spending vs. Giving Spending more generally. Perhaps that’s why, in my own mind, I minimize Consumption Spending (I personally don’t think consumerism, with its environmental impacts, is particularly beneficial) and compare Giving Spending vs. Investment. Whatever the Ideal Asset Allocation might be, I just don’t think increasing personal consumption helps us move towards the ideal.
I think that it’s great the donors involved in the Bolder Giving movement feel compelled to donate large percentages of their assets to charitable causes and that it doesn’t offset their current allocation of investments. But I suppose the question I would have for each of these donors is: do you think society needs more charitable dollars or more investment dollars? If it’s more charitable dollars, then every one of these donors is doing what they think is right. But if they’re personally giving more to charitable causes when what society needs in its Ideal Asset Allocation is more investment dollars, then it’s important that we reexamine the way we think about our individual capital allocation.
There’s a couple of nuances to your argument I want to address before I respond with my own comments. There is a distinction between optimizing grant capital to nonprofits and optimizing societal capital construed more broadly. Optimizing grant capital is historically what most people who work in philanthropy talk about – how do you select the most effective nonprofits and what are some ideas for reshaping how we select different nonprofits. The discussions around Philanthropedia, GiveWell, and social stock exchanges are all variants of this question of how do we optimize grant capital. But if we take a step back and look at the macro level, we can ask ourselves how much money should be going to nonprofits in the first place. Is it 2-3% of GDP, less, or more?
When we look at this macro level, the question of marginal social benefit is about allocating capital until we reach an equilibrium where the marginal social benefit per dollar is equal among all assets under consideration. The social benefit per dollar that I invest should be the same as the social benefit per dollar the I give to charity and the same as the social benefit per dollar that I give in taxes. If one is greater than the other, we have an inefficient allocation of resources. Your contention that there is some point of “maximum efficiency” that would prevent people in helping needy people is fallacious – there is always an opportunity to allocate resources; the question is how to allocate all of my resources and not how much of my resources can I allocate.
To offer an example of investing vs charitable donation, the project I refer to above in Russia was an up front private investment of $4000 to leverage $6 million funding and 10,000 new businesess.
Oxfam arrived in 2003 and within an equivalent period helped create 4000 new businesses. They don’t say how much it cost in donations,, but given the scale of their operation and UK salary costs, it would be unlikely to be on the same scale.
Having argued the case for targeted microeconomic development to create wealth flows in impoverished communities and demonstrated proof of concept, mainstream economists like CK Prahalad add their support.
In the same time frame however, the last two decades,, anti-social business is doing a lot better. Misha Glenny estimates a figure of 15% global GDP or 100 trillion dollars.
It would seem reasonable to propose spending on a similar scale to counter the damage being done.
Sean, Tony, and all – thanks for a great discussion. I have three (I hope related) thoughts.
1. In proposing that we get “academic” there is a suggestion we talk about efficient asset allocation strategy. But to do this, we need to be maximizing and minimizing variables. But what are maximizing and minimizing in this discussion? Have we set the terms of the game?
Are we trying to minimize damage to the earth’s resources? Minimize the number of people who die from preventable diseases? Minimize the number of people who die from hunger? Minimize some combination of these and other noble aims?
In Tony’s question (“I wonder whether that’s actually an improvement”) – what are we improving? Are we trying to maximize equality of opportunity for the most people? Maximize overall well-being? Maximize something we might call “overall utility” or something called “social progress”? Maximize economic growth?
2. And once we have decided what we are trying maximize and minimize – we need to figure out how we are going to measure these things! Joe Stiglitz and Amartya Sen are two economics who are working with the French government’s Commission on the Measurement of Economic Performance and Social Progress (see here: http://www.stiglitz-sen-fitoussi.fr/en/index.htm) to understand some of these issues. As Stiglitz frequently notes, “What we measure affects what we do. If we have the wrong metrics, we will strive for the wrong things.”
3. Lastly this discussion makes me think of how these variables are related and where is the causation.
We sometimes assume that a rise in charitable giving is a good thing for the world and the world will get better for this increase in money, but maybe it is just a reaction to the world getting “worse” off (however we define worse). We give more b/c more money is needed to solve our growing problems. Or maybe a drop in charitable giving means the world is “better” off (however we define better) and we need less money to solve our problems.
A rise in charitable giving may also be a reaction to government no longer providing basic goods and services for people. A drop in charitable giving may be a reaction to government moving in to provide these services.
A rise in charitable giving may come when the financial markets do a poor job of promoting a just, prosperous, and equitable world. They may fall when markets incorporate measurements of sustainability and social justice.
Yes, this conversation can quickly spiral into chaos. I guess from my perspective, I’m interested in holding all else constant and getting a sense of the intellectual framework you would use to arrive at a level of “optimal” charitable giving expressed as a percentage of GDP.
RE: Jacob and Sean
I agree – it’s very easy to lose focus and branch out into other topics that the sector has dealt with in the past (everything from developing and measuring SROI indicators to proving causation and effectiveness).
To Sean’s point about an intellectual framework for optimal giving, something I’ve been thinking about is a sector-based model instead of a GDP-based model. While you could compare different countries and try to draw some correlation between percentage of GDP towards giving and other indicators, like happiness per capita or health outcomes or whatever else you might care about (Jacob’s 1st point is relevant here), I don’t think it would be very intuitive or useful. After all, it’s a big jump to analyze the data, find that a certain percentage of charitable giving has been found in optimal societies, and argue that other societies who also adopt the Ideal Percentage will also achieve similar outcomes (this is a basic explication of the Correlation/Causation fallacy).
However, I could see an analysis of optimal charitable giving be performed on a sector-by-sector basis. Take for example microfinance. We might be able to make some argument about how we would ideally structure the relationships between different institutions in the field, what the ideal quantity would be for different types of activities, and what would be the ideal division of nonprofit and for-profit activities. Maybe all lending should be funded in the form of investment, all advocacy in the form of charitable giving, and all credit education also in the form of charitable giving. We could even come up with a ratio of how much charitable giving there should be for every dollar invested in microfinance. Once we do this kind of analysis for all sectors, we could then aggregate the charitable giving dollars to come up with an aggregate ratio for GDP, but the “optimal” charitable giving expressed as a percentage of GDP is not something I think we can determine a priori without the sector-by-sector analysis.
One particular area I’m interested in applying this kind of analysis is to education, one of my personal fields of interest. You could analyze capital flows from the government, from foundations, from private industry, and create an alternative vision of how the education industry would function in an optimal world. And I think one of the challenges we have in moving forward with any kind of substantive progress in many fields, from education to health care to international development, is that no one provides a convincing Roadmap for the field. But if we could determine with some degree of reason a good estimate of optimal asset allocation (that includes charitable giving as one component) within each sector and a better formulation of how different sectors work with each other in what amounts to a coordinated waltz (instead of an awkward middle school dance) that would be a big step forward for the field.
p.s. Sean, I just realized your comments field doesn’t have an option for people who haven’t commented to receive followup comments via e-mail. IDM at Createquity has a nice “Subscribe without commenting” feature that may be of interest to you.
There are quite a few economic misunderstandings speckled throughout multiple posters responses. I would relish the opportunity to correct some of them, but…
In short it all boils down to the question of optimality. What is optimal. Stiglitz and Sen will define optimal in their work, but that will simply be what they define as optimal. Optimality is not an objective function. What is optimal in this time and place is not optimal as time and place are changed. This is true for a single person. Now add in billions of people and convince me of what is optimal!
Each of you should read the economic works of people such as Ostrom, Williamson, Hayek and Mises. Three are Nobel winners and the last is one of the greatest economic thinkers of all times. Each of them attacks the hubris of centralized planning and “optimization”. It is doomed to fail! Getting out more information on what and how individual charities operate and on issues themselves makes the market operate more efficiently – this is incontrovertible. Trying to direct resources that are not yours cannot lead to “optimality” except by pure chance.
Kevin, if I may, I would like to present a counterargument and see what you think. I believe that optimality can be an objective function. Indeed, we make decisions to avert war, prevent famine, and promote the pursuit of happiness because we have made normative judgments that these are outcomes are more optimal than their opposite. Just because optimality depends on time and place doesn’t prevent it from being defined functionally; time and place are simply variables in the optimality function you allude to.
I don’t think anyone here is making an argument for centralized planning. What I am advocating for is that we as individual actors adopt a type of macro analysis that traditional investors consider. Instead of investing in individual organizations on the basis of their performance data alone, we would do well to analyze the macro context in which these organizations operate and make sure our individual contributions in charitable dollars does indeed contribute to our conceptions of society’s Ideal Asset Allocation.
Thank you for your comment and clarification. I would absolutely agree with you that as individuals we should look at the bigger picture and how organizations we donate/invest in fit within its context. Performance data is but a small (though important) indicator of value in a nonprofit enterprise.
The socially ideal asset allocation is the sum of all “rational” individual economic actors asset allocations. If we do not think about what we donate/invest in we are not acting as rational economic actors. Greater access to information and analysis will help each of us allocate optimally at the individual level.
I seem to see consumption and giving as the losers in a zero sum game; does giving get consumption dollars, or does consumption get giving dollars. Applying business thinking to this discussion might say in what way does consumption and giving work with investing in order to increase resources through eliminating costs, wastes, poverty, sickness, etc. you can frame it who gets what slice or you can say how can they be combined in a systemic flow to increase optimality for every participant in a complex system.
an approach something like watershed management applied to economic thinking across the philanthropic, investing, consumption, and public sectors. some of my smart friends talk about design thinking linked with business thinking, which i think is something like this.
Rather than examining the allocation of finite resources, what if the approach was what can be collectively and collaboratively built?
Any smart business is already figuring out how to use philanthropy as a reliable input. People giving your for profit business stuff, money and their time. Philanthropy is a more reliable input than oil for any business that’s built to last and to grow over time and make more money and more margin. Maximizing the philanthropic input will become something any good business will want to learn to do. It will mean embedding mission focused assets within the company that people will want to give you time, money and stuff in order to grow. People will give to good businesses to help them grow. I am investing in businesses that do that already.
Kevin, As “profit for purpose” social enterprise, we see the business approach somewhat differently. Rather than for example in initiatives like Product Red, to raise imput from philanthropic customers, for us the intention is to generate profit and apply that profit and our own time to leveraging further social investment.
That concept was first applied in 1999 in a Russian city to source a microfinance initiative for USAID and Finca,. .
This is a matter of maximising impact from whatever surplus is available. rather than distributing to shareholders. It’s not a “do good” product approach but a question of of providing a quality service and taking the concept of good business further.
As our founding paper states:
“Clearly, profits can be used very effectively in ways other than traditional investment and profit outcomes. Moreover, this is not charity, it is business–good business.”
Kevin, thanks for continuing the discussion. I can certainly see the value in focusing on the outcomes (“what can be collectively and collaboratively built”) rather than inputs (“how much and where should investment and philanthropic dollars go?”). And I think that’s the logical first step in analyzing any field – if we’re trying to invest in technology/education, we should be asking what kinds of organizations and institutions we need – and determine what kind of and how much funding we should be providing to best support those organizations and institutions.
I’m also glad you pointed out how “philanthropy” is becoming a reliable input in good business models – it’s a very interesting concept that I hope will play a major role in fields where for-benefit corporations could lead major reform (like education and health care).
Lots of interesting ideas – much to think about.
Thanks Tony, while i agree that makes sense, somehow that analysis seems a little static to me, or maybe like we know more than we do and plan toward a linear future. I was pushing for more cocreation across sectors towards ends that are not always clear at the start, just as an approach to consider.
what I’m trying to say is that it’s more normal for non profits to focus on how to cut the pie, whereas business people focus on growing the pie. at least that’s a perspective from one business guy. and giving if it is going to integrated into a resource allocation framework has to work with sectors that don’t work from a zero sum mentality. I hope I’m not seeming to be dismissive when i say it that way., but I think the framework is different.
That’s a fair assessment of the basic difference between non-profit and traditional business Kevin. Where I’m coming from however isn’t traditional business,
It begins with a call to redefine business without a zero sum mentality, Not a business making token social contribution, but one focussed on a primary social objective. One in which the shareholder agree that is the very purpose of doing business and modify the company charter to reflect this position.
It’s reflected a decade later in the creation of the CIC business model in the UK and B-Corps in the US.
It’s about more than that in proposing that capitalism can and should be modified for the benefit of people. Zero sum creates a position where immense wealth accumulates in the hands of a minority with the consequence of disenfranchising multitudes.
This is not charity in hand outs that are spent and gone, but good business which invests in resolving social problems and creating wealth in impoverished communities. which continues to circulate, a concept which more recently has been described as social impact investing.
This is the synopsis of the 1996 white paper describing the concept of making people the central focus of business and economics: