Posts Tagged ‘markets’

Shanghai Surprise

Tuesday, January 25th, 2011

Was at a philanthropy conference today, and one of the panels was about trends in the financial markets and their implications for foundation investment management. Unfortunately, the second part of that topic wasn’t really touched upon, but the three old white guys they had talking about the first part were pretty interesting. Half the conversation was about China: how long it’s going to rule the world, what that’ll be like. Turns out China has been the leading economic power in the world 17 of the last 20 centuries, so according to one guy, there’s a feeling of, “oh, we’re just reclaiming our rightful place.”

But the part that most caught my attention was the discussion of how China has managed to achieve spectacular economic growth in the last 30 years, not in spite of an authoritarian government, but because of it. I appreciated that one of the panelists pointed out that authoritarian governments may be good at the early stages of economic growth, but have a harder time with the more complex dynamics of the global economy. I’ve also seen the argument that China’s growth is not sustainable because the environmental shortcuts they’re taking will catch up with them sooner rather than later. I’d like to think these will be sufficient incentives to democratize, but I kind of doubt it.

I’ve written a fair amount on here about varieties of capitalism, and the types of innovation that different types of economies are good at. But I haven’t considered the Chinese model – particularly in the light of Gates and Buffett’s challenges bringing the Giving Pledge to China. Sounds like the start of another series…..


On the Road Again

Tuesday, January 18th, 2011

Too easy on the title of the post. Traveling for work this week, staying with a friend in DC. Enjoyed a great meal, fun company, and stimulating conversation.

One of the topics we discussed was the political power of shaping public sentiment. I think one of the things that the right has been most successful at doing in recent decades has been normalizing a pretty heartless version of market thinking. If some people are poor, too bad; not everyone is going to get ahead. It’s interesting, by which I mean terrible, how inequality of endowments (some people are more capable than others) has been equated with inequality of outcomes (the poor will always be with us). Can philanthropy overcome this kind of thinking when it’s so rooted in inequality of outcomes (the rich set aside funds they don’t need for charity)?

Mercedes-Benz and nonprofit evaluation

Wednesday, December 15th, 2010

Last week I talked about intentionality and coordination, and expressed my dissatisfaction at market-based metaphors that would make it difficult for philanthropy to proceed in terms of “coordinated voluntary participation.”

Well, it turns out I’ve written a fair amount about coordination in the context of “varieties of capitalism,” the idea that the U.S. mode of doing business is not the only effective one. In addition to the “liberal market economies” of the U.S. and England, there are “coordinated market economies,” like Germany and Japan, where there is more intentional coordination, and the pieces of the employment/jobs system fit together more: vocational training fits with trade unions that have strong, long-term relationships with employers, who are willing to take risks on high-quality, labor-intensive products (think Mercedes-Benz) because they’ll have a supply of high-quality workers and relative labor peace.

I’ve also said that philanthropy and the nonprofit sector in the U.S. have a weird hybrid model of LME labor relations and CME finance. What would a fully-CME enclave, perhaps at a state level, look like in the U.S. nonprofit/philanthropic sector?

It would have to involve institutions working together to enable mutual risk-taking, on a path toward higher-quality, more labor-intensive outputs. Like, say, more attention to measuring results. What the German economy has to teach us is that all the parts need to fit together and assume some of the risk. (That means you, philanthropy). Firms (nonprofits) will produce higher-quality goods (better evaluation) if they can be assured that capital and labor will play nice; that is, that capital will be patient, and that labor will be high-quality enough to make high-quality goods. Foundations need to be patient with capital for evaluation, and be willing to pay for it, AND there need to be incentives for labor (in this case, the clients or nonprofit workers who provide the data for evaluation) to participate in this. German unions go along to get along because they’re more or less guaranteed job security and a steady flow of trained young people from the vocational system. That’s what’s missing in the U.S., the equivalent of the German-labor side of the equation. Where’s the incentive for nonprofit staff or clients to collaborate in the gathering of high-quality evaluation data? We haven’t made that connection (or rather, most orgs haven’t), and so the coordination breaks down.

What might those incentives look like? To be continued….

The comfort of strangers (freedom isn’t free, part 3)

Thursday, November 11th, 2010

Continuing from yesterday on my ambivalence about the marketization of everyday life: how this relates to philanthropy is the professionalization of charity. This has two dimensions: people helping strangers through direct service, and people giving to strangers.

I’m coming from the assumption, probably false, that the default position for most human communities throughout most of history was that you help people that you know, directly. Charity, to the extent that it functioned, functioned in this way. Potlatch, mutual aid, etc. For that to evolve into the kind of philanthropy we know, two things had to happen: groups had to be set up for the express and sole purpose of helping others, and people had to become willing to give to those groups even when they wouldn’t know the beneficiaries.

Religious institutions long had charitable components, but as part of a larger mission. I’m talking about equivalents of our modern nonprofits – groups set up with only the charitable component, the direct service element, in mind. But that’s not sufficient: people had to be willing to give those, separate from their giving (tithing, service, etc.) to religious institutions.

What I’m after here is that philanthropy is emblematic of a depersonalization of charity, of turning something that was originally a very human, face-to-face, community-based relationship into something that, at the extreme, is automatic, arm’s-length, and principle-based. Like a monthly donation via checking-account withdrawal to an NGO that supports international development.

Again, I’m not saying this is a bad thing, necessarily, just observing that it is part of a broader trend of marketizing the relationships of daily life, and that there is reason to be profoundly ambivalent about that trend.

Freedom isn’t free (part 2)

Wednesday, November 10th, 2010

Well, that was certainly an election. One of the things about the current political climate that’s most frustrating to me and I think ultimately most dangerous for the health of our democracy is the meme of free-market fundamentalism. I generally think of “meme” as kind of a lame term, and I’m leery of metaphors that equate ideas with viruses or diseases, but I think it’s fair to say that there’s a strain of free-market fundamentalism circulating in the body politics that certain groups, politicians, and parties are more or less susceptible to at different times and in different circumstances.

Only the latest example is kind of a silly one, but symptomatic. A group of Tea Party supporters in Fountain Hills, Arizona are upset about a proposed new method of municipal trash collection because it goes against free-market principles. Not because it costs too much, not because it’s inefficient, not because users weren’t consulted before the change was made (if any of those is even the case) – but on principle, because it consolidates from several carriers to one, and that smacks of “collectivism” or “socialism.” Again, kind of a silly example, but one that’s symptomatic of a broader tendency to view government vs. markets in simple, dichotomous, asymmetric terms, as essentially good vs. evil.

Now there are two things that always get my goat about this. One won’t surprise you given the content of this blog, the other may. The one is, governments and markets are not a dichotomy, they’re symbiotic. Markets need governments to establish and enforce the ground rules, including property rights, terms of trade, and a legal system. What’s more, governments often help markets get going by limiting the initial terms of competition and establishing a playing field in which market actors emerge. A view of the world in which “the market” is a timeless, placeless, yet omnipresent and naturally occurring phenomenon obscures the fact – the fact – that markets are made.

OK, that’s not too surprising given what I’ve been writing on this blog. But the other thought that these topics recurrently provoke for me is the way a form of market thinking can actually be liberating in its depersonalizing of conflict. The arm’s-length, transactional approach to human relations enacted in markets can sometimes be a corrective to the tribalist, hyper-personalized approach embodied in many traditional cultures and ways of life. This is the flip side of one of the undertheorized elements of market relations – how they corrode traditional customs and ways of life.

I say “undertheorized” because we have plenty of examples, so it’s not an understudied phenomenon – locavorism emerges as a reaction to the corporatization of agriculture, for instance. But we don’t often make the connection that it’s a way of viewing the world – in which markets are everywhere, and everyone is acting as a market actor, in every sphere of their lives, even personal life – that undermines many of the things we love most – loyalty, community, family, etc.

But what I’m getting at is one step beyond that: an ambivalence about that undermining, a gut feeling that in many contexts, it can actually be a good thing, because it liberates you from orthodoxy, from doing things a certain way because that’s the way we’ve always done them. And in particular, that depersonalizing conflict by putting it in market-actor terms – rather than nationalistic or tribalistic terms – may actually be a step toward resolution.

I’ll need to unpack these ideas further, but this is a start at laying out some thoughts that are ultimately closely connected to my two questions: what is the role of philanthropy in a democratic society, and what would it mean to democratize philanthropy?

Why does the New Yorker want me to stop trying to improve the world?

Tuesday, October 19th, 2010

Two interesting articles over the past few weeks about the difficulty of intentional action to improve the world. (And yes, I’m aware that I’m relying on them too much for material, but some things just cry out for comment.)

Philip Gourevitch on humanitarian aid and conflict. Does the presence of an international humanitarian aid “industry” incentivize actors in a conflict to increase their level of brutality so as to garner international aid, which ultimately benefits both sides because of the avowed neutrality of such sides?

Adam Gopnik on a new biography of Adam Smith. I learned from Jeff Weintraub back in the day that Smith was more complicated than the invisible hand, but now I’m sorry I never read Smith’s other masterpiece, “The Theory of Moral Sentiments.” The way Smith tends to get interpreted is that the invisible hand of the market orients social outcomes in a positive direction without anyone actually trying to make that happen: pursue your individual self-interest, and through the operation of the market, social welfare will be improved.

The upshot of these two pieces seems to be, “be very, very careful, oh ye who would improve the world through intentional action.” But Gopnik’s piece adds useful nuance to the conventional view of Smith, who didn’t say the invisible hand would always lead to better outcomes (direct quote of Smith below, emphasis added):

“Every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, not knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only is own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which has no part in his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”

If we accept this point of view (which is still debatable), what surely needs figuring out is when intentional action to promote the common good is and is not preferable to the pursuit of self-interest. It’s this consideration of incentives, particularly political and military ones, that may be useful to the humanitarian aid groups that Gourevitch writes about.

Don’t stop trying to improve the world, just be very, very aware of what kinds of ripples the stone you drop into the pond may cause.

Stones in the river (conclusion…?)

Thursday, October 14th, 2010

A lot of my series of posts have been open-ended; I’ll try closing off a multi-post arc.

Continuing about the potential lessons for philanthropy from China’s economic development: Justin Lin, chief economist for the World Bank, says for developing countries, “markets are indispensable but government is also indispensable.”

If we accept that both governments and markets are indispensable for economic development, how do we think about the role of foundations – not just with respect to economic development, but more broadly?

Governments set the rules for markets, enforce property rights and security, and can through “industrial policy,” pick “winners” and provide support to bring them to scale.

Markets generate new ideas through competition. Some organizations succeed and others fail; a few are able to reach scale and most either stay at a small level or don’t survive.

Philanthropy can do two things, it can be the source of finance for nonprofit “firms” that operate within the third sector, and it can generate ideas that can be applied by government in the public sector. Foundations can be the engine of industrial policy at two different levels: within the public sector, by picking winners among nonprofits and bringing them to the attention of government; and within the nonprofit sector, by picking winners among nonprofits and signaling to individual donors that they should support them.

It’ll be worth investigating what we’ve learned about industrial policy in different contexts, and thinking about how it applies to nonprofit finance. So much for a closed-ended arc. Closed for the moment, I suppose….

Stones in the river (continued)

Wednesday, October 13th, 2010

Completely fascinated by this New Yorker article about the Chinese economist who’s the head economist at the World Bank. A central tenet of the varieties of capitalism approach I’ve written about extensively on this blog is that there is more than one way to achieve US/European levels of prosperity, and that at least one of those ways involves much more coordination among firms and with government than we see in the US/UK model.

Continental Europe and Japan offer alternative modes (varieties) of capitalist development. For Japan, and the other East Asian “tigers” like South Korea and Singapore, the timing of their development is very important. After World War II, the U.S. continued to have a strong military presence in the region, essentially providing a basis of security. As a result, these countries focused on economic development, and did so in a relatively egalitarian way, involving the countryside in the process (unlike in Latin America, where development has exacerbated existing inequality, particularly in the absence of land reform in most countries).

In this context, China’s development in the last 30 years is interesting, because it happened not with the U.S. de facto providing security through its presence in the region, but through a complex and destructive internal history including the horror of the Great Leap Forward (between 30 and 45 million people died in the attending famine) and the gradual economic (not political) opening under Deng Xiaoping, against the backdrop of Cold War US-Russian rivalry. And the approach, as I focused on yesterday, was “tinkering gradualist,” as Justin Lin, the economist, puts in the article.

Crucially for the varieties of capitalism approach, the government played a key role in promoting development. Lin

“favors a kind of ‘soft’ industrial policy, in which a clamorous free market produces new industries and firms, and the government spots the best prospects and helps them grow by giving them tax breaks and building infrastructure like ports and highways…to rise out of poverty…markets are ‘indispensable’ but government is ‘equally indispensable.'”

Two things there: 1) Wow, that first part sounds a lot like the Social Innovation Fund. Industrial policy for the nonprofit sector? 2) The last phrase is a perfect summary, to me, of the basic varieties of capitalism argument. And it’s a perspective that’s very much needed in current political debates about the role of government.

The question is how philanthropy fits in to all of this. It’s traditionally been seen as part of the third sector between government and business. If we apply a Lin-style developmental/varieties-of-capitalism view, where does philanthropy fit in? To be continued….

This is scandalous

Tuesday, September 21st, 2010

From Henry via Marginal Revolution (emphasis added):

Hence, while Hacker and Pierson show that political science can get us a large part of the way [toward understanding the political causes of economic inequality], it cannot get us as far as they would like us to go, for the simple reason that political science is not well developed enough yet. We can identify the causal mechanisms intervening between some specific political decisions and non-decisions and observed outcomes in the economy. We cannot yet provide a really satisfactory account of how these particular mechanisms work across a wider variety of settings and hence produce the general forms of inequality that they point to. Nor do we yet have a really good account of the precise interactions between these mechanisms and other mechanisms (see here for more on this).

“Political economy” is the study of how politics and political institutions shape economic policy, systems, and outcomes. Hacker and Pierson’s point is that rising levels of economic inequality in the U.S. are not just an outcome of the functioning of free markets, but that the conditions for this phenomenon were created by politics and policy. Classic political economy. The “varieties of capitalism” work that I’ve written about here is, to me, one of the more valuable contributions of political science, and it’s all about political economy.

Especially in today’s virulently anti-government political climate, it’s important to remember that markets need government, not just to be in the background and serve as the night watchman, but to actively create the conditions that allow markets to emerge and function in the first place. The “varieties of capitalism” research gives us a useful account of how this works in other developed countries, and the work of Hal Wilensky takes this to a deep historical level. If Hacker and Pierson are right, to be missing that kind of depth for the U.S. case is just scandalous.

Local knowledge (part 1)

Wednesday, September 15th, 2010

As I’ve been saying, I think the privileging of local knowledge is a bipartisan issue, or a cross-cutting cleavage, one that elements of left and right can agree on.

From the right: lefty-liberal plans for social engineering are based on the fallacy that human nature is perfectable, and subject to rational planning and persuasion. But the truth is man is flawed by nature (or by original sin), and top-down approaches don’t take into account local realities. “Unintended consequences” are the inevitable byproduct of social engineering, and can be avoided by greater reliance on market dynamics. It’s hubris and folly for a central government to try to plan an economy, much less dictate cultural norms that have developed idiosyncratically over time in local communities. As Ronald Reagan said, “The ten most dangerous words in the English language are, ‘Hi, I’m from the government, and I’m here to help.'” (Quote from this New Yorker article, toward the end.)

From the left: the corporatization of culture, food, and everyday life are a homogenizing force that threaten to erase the diversity that make our communities and nation great. “Grassroots community organizing” is a way to empower everyday people to make their voices heard and have a positive impact on the conditions of their lives through obtaining changes in policy, whether local, state, or federal. To be a locavore is to reject the evils of factory farming, which is an environmental disaster, an animal-welfare nightmare, and a public-health time-bomb. Eat local, know your farmer, avoid GMOs, celebrate the diversity of a specific place.

What they agree on: Top-down solutions are bad, bottom-up initiatives are morally and practically preferable.

What they disagree on: When to go against these principles (or preferences). For many on the left, federal enforcement of rights trumps local practices. For some on the right, the sphere of government action should be absolutely minimal, and there might not be a time when local norms (states’ rights?) should be abrogated – except perhaps in the protection of private property.

The upshot for philanthropy: Foundation grantmaking has an almost inherently top-down tendency. Many on the right and the left would be in favor of promoting greater involvement of local stakeholders in the learning, and maybe even decision-making, processes of foundations. Community foundations, with their collection of individual donor-advised funds that let a thousand flowers bloom, might appeal to the right, while funding collaboratives, where individual donors try to overcome collective-action problems to coordinate and amplify their grantmaking, might appeal to the left. The question becomes, when if ever should central oversight trump local norms. (Hint: it starts with a “D,” ends with a “y,” and rhymes with “Shmaversity.”)