Do the Evolution
Incredibly rich article on “Redefining Capitalism” in Democracy: A Journal of Ideas. I’ll be unpacking this one for a while. Let’s get started.
The authors’ entry point is coming up with a better measure for prosperity than GDP, of which there have been several attempts, but their end point is, as the title implies, far beyond that question of measurement. They redefine capitalism as an “evolutionary, problem-solving system”:
A capitalist economy is best understood as an evolutionary system, constantly creating and trying out new solutions to problems in a similar way to how evolution works in nature. […]
[T]he entrepreneur’s principal contribution to the prosperity of a society is an idea that solves a problem. These ideas are then turned into the products and services that we consume, and the sum of those solutions ultimately represents the prosperity of that society. […]
Capitalism’s great power in creating prosperity comes from the evolutionary way in which it encourages individuals to explore the almost infinite space of potential solutions to human problems, and then scale up and propagate ideas that work, and scale down or discard those that don’t. Understanding prosperity as solutions, and capitalism as an evolutionary problem-solving system, clarifies why it is the most effective social technology ever devised for creating rising standards of living.
The orthodox economic view holds that capitalism works because it isefficient. But viewing the economy as an evolving complex system shows that capitalism works because it is effective. In fact, capitalism’s great strength is its creativity, and interestingly, it is this creativity that by necessity makes it a hugely inefficient and wasteful evolutionary process. Near one of our houses is a site where each year, someone would open a restaurant only to see it fail a few months later. Each time, builders would come in, strip out the old furniture and decor, and put in something new. Then finally an entrepreneur discovered the right formula and the restaurant became a big hit, which it is to this day. Finding the solution to the problem of what the local residents wanted to eat wasn’t easy and took several tries. Capitalism is highly effective at finding and implementing solutions but it inevitably involves trial and error that is rarely efficient.
There’s so much here with regard to philanthropy and the nonprofit sector, I hardly know where to begin. An initial map of the terrain might be:
- Social entrepreneurs: How does the second paragraph quoted about change if you put the word “social” in front of “entrepreneur”? Does this redefinition of capitalism mean that all entrepreneurs are social entrepreneurs? This would certainly fit with the idea that the way companies have social impact is by doing a really good job at delivering on their bottom line. Or perhaps instead, does it mean that there are certain kinds of problems that “social” entrepreneurs are particularly likely or able to take on?
- The role of foundations as labs for innovation: One of the most frequently cited raisons d’être for foundations is that they have the ability to foster small-scale innovation, that they can be risk capital in areas the market won’t go and the public sector is too slow to find. The redefining-capitalism lens suggests that this function is essential to philanthropy’s role in the capitalist system. By focusing on specific problems and promoting creative solutions to them, foundations play their part in helping capitalism function more effectively. Which depending on your point of view, may not necessarily be a good thing. But this redefining perspective certainly makes it sound more palatable.
- The “overhead myth”: A recent, laudable campaign seeks to disabuse funders – and especially individual donors – of the notion that overhead (the ratio of administrative and fundraising expenses to total expenses) is the single most important metric for gauging a nonprofit’s performance. The campaign makes the (valid) argument that investment in a nonprofit’s administration often helps performance, and that organizations with overhead ratios that are too low will actually do worse. This is in essence an argument about the balance of efficiency and effectiveness. The redefining-capitalism lens takes that analysis to the level of the overall economy. And the unit of analysis is not the individual organization, but the problem (or solution). High levels of surface inefficiency (it took several tries to find the right restaurant for that location) mask an ultimate focus on effectiveness – a good solution to that particular problem was ultimately found. This is the overhead myth at the level of the sector or local economy, rather than at the level of the organization. Does the analysis still hold? And what does it mean for place-based funders, who have the longer time-horizon that multiple attempts at starting a business would require?
- The connection between small business and place-based economic development: Relatedly, the restaurant example puts me in mind of the role of foundations as investors in place-based economic development that I highlighted in a prior post. Defining a problem in a very specific geographic space and deploying a range of tools over a long period of time seems like a meaningful way for a foundation to make a difference.
- The value of long-term general operating support: Another way in which foundations express long time horizons is by making long-term grants. The redefining-capitalism suggests that it is critical for the effectiveness of economic activity for economic actors to be allowed to try, fail, and try again until a solution is reached. Translated to the funding world, this argues for long-term general operating support to give organizations the space to experiment, innovate, and iterate.
- Strategic “vs.” responsive approaches: The language of problems and solutions is native to “strategic philanthropy” as framed by the Hewlett Foundation and others. In a reflection on a decade of practice, former Hewlett Foundation president Paul Brest identifies “problem-solving philanthropy” as one of the two principal modes of strategic philanthropy. This would suggest a close connection with the redefining-capitalism approach. However, those authors identify as one of capitalism’s key strength its ability to foster a wide variety of potential solutions, arguing that “it is not how hard we try to solve a problem that is critical, but rather […] it is the diversity of ideas and approaches that matters most in problem-solving effectiveness.” This suggests a link with responsive approaches to philanthropy, which are about letting a thousand flowers bloom. So perhaps the redefining-capitalism lens shows strategic vs. responsive to be a false dichotomy.
- The concept of “social impact solutions”: The redefining-capitalism lens views prosperity as a volume and pace of solutions to social problems. This suggests that the greatest value the nonprofit sector can provide to society is to generate “social impact solutions” – products or services that address a social need not being addressed by market actors. From this lens, nonprofits should be explicitly solutions-oriented, and funders should seek opportunities to foster the iterative, long-term development of viable solutions. Stated like that, this sounds like what should be business as usual, but as we know, it’s not. Does “social impact solutions” provide an organizing principle for understanding the work of companies, foundations, nonprofits, and government?
- Potential filters for impact investing: The authors recommend measuring prosperity in terms of access to solutions, and judging the social worth of business activity by the extent to which it creates meaningful solutions or simply generates more problems. It seems easy to imagine translating such an approach to impact investing. How does this lens relate to existing socially-responsible screens for investment portfolios?
Lots more there, but this is a first pass. What grabs you about this article or the ideas I’ve shared?