Posts Tagged ‘varieties of capitalism’

Do the Evolution

Thursday, December 19th, 2013

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?

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The Shop Around the Corner

Thursday, September 26th, 2013

My blog post from the Council on Foundations community foundations conference in San Diego, about how community foundations might consider differently how to work with private business.

Read it here on RE: Philanthropy.

Change in My Pocket

Thursday, August 1st, 2013

I got a letter from my health insurance company today saying that my employer and I would be getting a rebate because under Obamacare, insurers are required to spend at least 85% of premiums on hospitals and health care services, and no more than 15% on “administrative costs such as salaries, sales, and advertising.”

The overhead ratio has come to healthcare, just as nonprofit leaders are calling for it to be transcended in the social sector.

The kicker: just for New York State, the amount of customer premiums for this one insurer in this one year is $2.2 billion. That would have put it at number 27 in the list of top 50 foundations by assets in 2011. So 0.7% of those premiums is about one-seventh of what that hypothetical foundation’s payout would be – call it one grant program. $15 million, give or take. (Now whether I as a policyholder ever see a dime of that rebate is an open question: my employer subsidizes my premiums, so they may decide to use whatever we get toward defraying those costs.)

I bring that up just as another reminder of the scale of philanthropy relative to other parts of the economy. And to observe that in the aggregate, even relatively small-seeming instances of inefficiency (missing the target by less than 1%!) can conceal some serious dollars.

But the larger issue is, do we want an overhead ratio in healthcare, is that actually a useful thing? For once, the nonprofit sector may be ahead of the game relative to other sectors. I worry we may have to really evangelize some of this thinking beyond our own sector – where it’s hard enough to get the word around. And it’s a tough sell in healthcare – hard to argue that we need more hospital marking. It’ll be interesting to monitor how this “Medical Loss Ratio”, aka the “85/15 rule”, plays out in practice. God, I hope the authors of the healthcare bill didn’t get that number from nonprofit overhead ratios….

Oh, and like everyone in philanthropy, I read and thought and talked about Peter Buffett’s blog on the “Charitable-Industrial Complex.” For me the definitive word on this is from Zack Exley here. The upshot: the unglamorous way to reduce poverty quickly is aggressive state-led development. Viva varieties of capitalism!

Take the Bait

Thursday, April 18th, 2013

I’m pretty sure that it’s a spam account, but one of my Twitter followers seems to exist to spew out random questions about fundraising and the nonprofit sector, and solicit people to contribute answers. At the risk of further spam, I’ll take the bait and answer a question that showed up in my feed and piqued my interest:

“What if every company were non-profit including Wal-mart?”

My favorite kind of question, one that invites consideration of an alternate reality, in a way that questions the premises of our current reality. Lot of good sci-fi out of that conceit. (RIP Fringe, so good until the last season.)

There are different ways to answer this, but I’ll choose this approach: what if every company, instead of returning value to shareholders, were obligated to reinvest surplus in the mission?

To start with, would all companies be private? Would there be any reason to take a company public? There would if you thought that other people might like to share the risk of ownership with you because they believe in the mission. They might risk losing their money if the business goes belly-up. But wait – how is that any different from receiving donations from individuals? They don’t expect to get a financial return – in essence, they’re sacrificing that money, in return for the hope of social impact. (See last week’s post on the three returns and “third heat” of impact investing.)

Are we just talking about membership organizations, where people pay a certain amount to belong to an institution, like a film society or a museum? No, they’re not assuming any risk for anything other than their own money. Someone has to be accountable for the assets of the organization.

So a public non-profit company would be…just a regular non-profit. What would a private non-profit company be? A foundation? No, those have particular obligations to pay out 5% of their assets. And they’re insulated from market pressures other than on their endowments. A private non-profit company would have owners who would directly assume the risk of failure if expenses exceed revenues to the point where all assets are depleted.  It would have beneficiaries, and purchasers of its services, but only a relatively small number of owners assuming the risk. And they would do so without expecting value returned to them from a surplus.

So this seems to come down to ownership and risk. What’s different about a world where all companies are non-profits is that, at first blush, it’s not clear why anyone would start a company, or try to grow it. But I suspect if we look beyond the profit motive, there would be other reasons to do so. For another post….

Does Anybody Really Know what Time it Is?

Thursday, April 11th, 2013

Which is the title of a classic song from the band Chicago. I’m just back from there, having spent several days at the Council on Foundations conference. I tweeted up a storm, met some great people, and wrote a couple of posts for the conference blog:

Welcome to the (Global) Accountability Class
About self-motivated accountability in philanthropy

Learning: The “Third Heat” of Impact Investing—and All Grantmaking?
About the idea of a “learning return” in impact investing, and how it may apply to all of grantmaking

Money Money Money

Thursday, November 10th, 2011

I had a friend in college whom I met again while about to enter grad school. He’s one of the book-smartest people I’ve ever met, just brilliant at making connections among all sorts of diverse intellectual traditions and disciplines: computer science, philosophy, literary theory, evolutionary biology – it was all one big playground for his mind. And he said the darnedest thing to me when I described my nascent career in philanthropy. This was more than ten years ago, so I have to paraphrase, but the gist was, “I thought about being a professional do-gooder, but then I realized, much better to get rich and then direct the funding to what I think is important.” Of course, that imperative to donor-directed giving is all the range now, but what struck me was the sequencing: smart, progressive people should get rich, and then use that power to do good.

I think about that conversation often, because it’s becoming clear in the current 99%/1% discussion that progressives have a real ambivalence about getting rich. Not being rich, getting rich. Put another way, what is the progressive theory of wealth accumulation? (Separate discussion needed about tech wealth and the cult of Steve Jobs.)

The libertarian economist Tyler Cowen responds to progressive blogger Matt Yglesias’s post on this topic, and the comments on Cowen’s post are well worth browsing – much more light than heat than is usually the case in comments sections.

For me, what it’s about is this: under the current, rigged set of rules, those who succeed the most are rewarded inordinately, all out of proportion to their level of achievement. It didn’t always used to be this way: the ratio of pay between CEO and worker didn’t used to be so absurdly high. (There was a very interesting piece in New York magazine a few weeks back about how Mitt Romney is to a degree behind this change, from his management consulting days.) But these days, if you hit the jackpot, the multiplier effect is astronomical. That’s wealth that could have been distributed differently, more broadly. And it used to be, under good old red-blooded American capitalism. But the game is rigged in a way that rewards the 1%, kind of whether they want it or not. Don’t hate the player, hate the game? I dunno.

To me, this starts to get at the heart of the discussion, and opens up some space to think about the role of philanthropy in helping to promote certain framings and certain incentives. Not sure what that looks like yet, but I picture a small flame in a room full of gusts of hot air, and the need to cup your hand around it so it doesn’t get snuffed out. What does a positive, progressive theory of wealth accumulation look like, and where does philanthropy fit in the picture?

Get Out the Map

Thursday, May 5th, 2011

Brief post today to flag a couple of comments I made on the always-essential Tactical Philanthropy blog about the concept of a “Philanthropy Compass” that helps donors map out their values:

The Value of Mapping Philanthropic Beliefs

The Philanthropy Compass Version One

One topic I’d like to tease out on this blog is from the second comment, about how a Philanthropy Compass might relate to the varieties-of-capitalism/varieties-of-philanthropy concept I’ve written about at various points here.

Time After Time

Friday, April 29th, 2011

So it’s been a year since I started blogging. I read over my posts from that past year last night, and thought about threads I’d like to continue in the coming year, and those that I’d like to summarize and try to say something more definitive on.

To continue:

To summarize:

To possibly begin exploring:

  • The role of philanthropy in a democratic society based on prior international experiences like Eastern Europe and Latin America, amid the lessons they hold for the Middle East.

And there’ll be more in the last category, for sure….

Sounds like a plan!

Dancing in the Dark

Tuesday, March 29th, 2011

Hopefully it’s not too disrespectful to begin back up with song-title-as-blog-post-title when writing about Japan. My friend Scott Kuhagen points out a fascinating NYT article about the challenges of post-disaster communication in a conflict-averse culture: http://www.nytimes.com/2011/03/17/world/asia/17tokyo.html

But as is often the case with cultural explanations (of which I have in the past been a fan, or at least not an automatic opponent), there are institutional factors close at hand. In this case, it’s a “leadership vacuum” created by a recent change in the ruling party after 50 years of LDP rule. The Times article is worth quoting at length, as there’s a lot of substance in the analysis:

“The close links between politicians and business executives have further complicated the management of the nuclear crisis. Powerful bureaucrats retire to better-paid jobs in the very industries they once oversaw, in a practice known as “amakudari.”…Postwar Japan flourished under a system in which political leaders left much of the nation’s foreign policy to the United States and domestic affairs to powerful bureaucrats…. But over the past decade or so, the bureaucrats’ authority has been greatly reduced…. Yet no strong political class has emerged to take their place. Four prime ministers have come and gone in less than four years; most political analysts had already written off the fifth, Mr. Kan, even before the earthquake, tsunami and nuclear disaster. Two years ago, Mr. Kan’s Japan Democratic Party swept out the virtual one-party rule of the Liberal Democratic Party, which had dominated Japanese political life for 50 years. But the lack of continuity and inexperience in governing have hobbled Mr. Kan’s party. The only long-serving group within the government is the bureaucracy, which has been, at a minimum, mistrustful of the party. “It’s not in their DNA to work with anybody other than the Liberal Democrats,” said Noriko Hama, an economist at Doshisha University.”

There’s so much going on here that as a political scientist I don’t know where to start: the parallels to 70 years of PRI one-party rule in Mexico and it’s relationship with the civil service, the analogies to the revolving door between Congress and K Street in the US – and above all (and I think that’s where I’ll start), the question of Japan’s political economy and the idea of “varieties of capitalism” that I’ve written on extensively on this blog.

Coordinated market economies are good at generating high-quality, well-engineered products through a system that features close coordination between labor, capital, and education. In the Japanese version, they feature cozy relationships between companies, particularly in finance, with lots of overlapping board seats and other forms of governance that would look odd in the context of the US, a liberal market economy.

And here we see a dark side of that coordination – a lack of willingness to point the finger of blame, to name a problem and respond nimbly in the moment. And this has to do with the flow of information.

So when we’re thinking about “varieties of philanthropy” analogous to varieties of capitalism, an important piece to look at is the flow of information, and how different institutional arrangements incentivize different information flows. Given what problems philanthropy has with good public information flow, this question seems particularly relevant.

A Face in the Crowd

Wednesday, January 26th, 2011

Continuing from yesterday on China, I’m wondering about the types of innovation that China’s economy will be good at. In the varieties of capitalism framework, coordinated market economies like Germany and Japan are good at incremental innovation, while liberal market economies like the U.S. and Britain are good at radical innovation. So what kind of innovation would a hybrid state-led Chinese model be good at?

I’m sure there are comparative political economists who have good answers to this, but I naively wonder if it isn’t mass-based innovation, the kind driven by sheer numbers of people. I think this recalling the opening ceremony of the Beijing Olympics. The film director Zhang Yimou put together a multi-multi-million-dollar ceremony of amazing scope and grandeur. And one of its central features was the coordinated action of all…those…people!

It was breathtakingly innovative, leveraging a vast and seemingly malleable labor pool to achieve effects that can’t be achieved any other way. Talk about scale!

So I’m thinking Chinese innovation – in the varieties of capitalism sense – is about offline crowdsourcing: throw a bunch of people at the problem. Or rather, think of problems that require tons of people acting in concert to solve, and go solve those.

Tomorrow I’ll explore the implications of this approach for philanthropy and the social sector.