Four years after the beginning of the financial crisis, economic growth is still anemic and the rate of unemployment remains high. Since 2008, many people have become disillusioned by the brand of free market capitalism that was being practiced prior to the crisis. Many thinkers and commentators have sought to reimagine capitalism along moral and ethical lines.
One scholar of capitalism is Michael Sandel, a political philosopher from Harvard and the author of What Money Can’t Buy: The Moral Limits of Markets. Sandel has sought to use public debate to reinvigorate the age-old question of the role of markets in generating the common good.
At the same time, another group of entrepreneurs, innovators, and academics has focused on harnessing market mechanisms to address social and environmental problems. This field has been termed social impact, with two of the main themes being social entrepreneurship and impact investing.
In this piece, I will pose the following question: What are the ethics of market-based solutions like impact investing to fight poverty and address other social issues?
Sandel believes that although a market system is an efficient way of allocating scarce resources to generate prosperity and employment, this system is not benign, and can generate values that crowd out judgments and decisions based on moral principles. The scholar sees two main justifications for markets: Firstly, markets are the expression of free choice, free will, and consent; and secondly, because market transactions require the consent of both parties, they make all parties better off.
On the other hand, the power of markets can be objected to on two premises. In a context of poverty, an individual may be forced to enter a transaction that he or she would not otherwise make, as is the case for poor surrogate mothers in India or prostitutes. Additionally, one can argue that particular values, norms, and social institutions should supersede market values.
On the latter point, Sandel asserts that when we treat particular goods as commodities to be bought and sold for profit, it is degrading to the inherent value of the goods in question. For example, we have abolished slavery because as a society we decided that human beings should be valued as persons worthy of dignity and respect, not as commodities to be exchanged. While near universal consensus has been reached on the immorality of slavery, Sandel believes that we need to use public debate to answer whether or not various goods and services that have become commodities during the past few decades without public discussion should remain so.
For example, as Sandel asks, should markets be used to allocate “health, education, public safety, national security, criminal justice, environmental protection, recreation, procreation, and other social goods” that have traditionally existed outside the purview of the market?
While I like Sandel’s focus on the need for democratic debate, in certain cases the desire to achieve a socially desirable end may justify using market transactions. He cites the example of a program in Texas that pays children $2 per book they read, and states that this could distort their understanding of reading and learning from an inherently valuable activity to a financial transaction.
Consider another case within the field of education: conditional cash transfers (CCT). In CCTs, the government pays a relatively small sum to a household that is predicated upon their child’s school attendance and regular medical clinic visits. Should we argue that reducing attendance to a market transaction decreases the intrinsic value parents should have in their children’s health and education? Or, alternatively, should we focus on the fact that CCTs have been an extremely important tool for increasing school and clinic attendance? I would argue that, in this case, providing children with basic reading and arithmetic capabilities and health would trump the fact that a market transaction may debase the intrinsic value of education and health care.
What about the relatively new industry of impact investing? Impact investors place capital in market-driven organizations that provide essential goods and services, such as water, education, and health care, normally to underserved communities.
In theory, impact investing is supposed to allow investors to invest using a more holistic definition of return and value. Rather than merely generating a financial return, investors also get a sense of satisfaction from knowing that their capital is being deployed to create social value. Impact investing fulfills the same altruistic drives that compel people to give, and therefore rejects the traditional bifurcation of profit maximization and creating social good.
Although a rosy future in which decisions are made according to projected triple bottom line returns (financial, social, environmental) may emerge, it seems highly unlikely. Impact investing will most likely continue to be a niche asset class, in which philanthropists allocate a portion of their giving portfolio, and investors diversify their portfolio, as social enterprise performance often does not follow the fluctuations of the traditional market. Since impact investing is likely to form part of a larger giving or investing strategy, it will likely be evaluated through these lenses.
Most would argue that giving is an intrinsically, or even spiritually, valuable activity, as it is often part of one’s religious duty. This act is celebrated for the altruism of the giver, as well as for its ability to produce socially desirable outcomes. However, if an individual is earning a return on a portion of his or her giving portfolio, then can it be considered altruistic? How much does the level of return matter?
In a survey conducted by JP Morgan, 60% of impact investors answered that they thought impact investments could earn market returns while generating social benefits. If there is no tradeoff between financial return and social impact, then can impact investing really be seen as altruistic? In the same vein, economic theory tells us that investors will seek the highest risk-adjusted returns. Should impact investing as part of a larger investment strategy be honored as a form of conscious capitalism? Alternatively, how much weight should we give to these moral and ethical questions?
The philanthropist could argue that this type of giving is more sustainable than traditional giving, as it allows the principal and the return to be reinvested to create more social impact. Meanwhile, both philanthropists and investors could brush aside the questions of corrupting the intrinsic value of giving by focusing on the fact that they are helping social enterprises scale up and reach more people. Given the nascence of the impact investing industry, these are precisely the types of question for which we should use democratic debate to help shape the path the sector takes.
Although market-based solutions to poverty are seemingly antithetical to Sandel’s position on the corrupting influence of markets, there are cases in which the practical realities and evidence point towards these kinds of models. In particular, when a market solution has been shown to provide a drastic improvement over current conditions, it should not be discounted on the grounds that it merely requires a market transaction. With that being said, the basic premise of what is a socially desirable outcome should arise through democratic debate, as Sandel states. Public discourse can help determine the limits of the traditional market, while helping to guide the emergence of these market-based solutions to poverty.