Of Profits and Philanthropy

In the good old days, when he used to write engaging articles about economics, the Nobel Prize winning economist Paul Krugman took on the urgent and pressing issue of how food in England got so bad and why it had suddenly got better. The problem, as he described it, was that the English had industrialised and urbanised early, before innovations in refrigeration and preservation, so had lost touch with traditional peasant cuisine. Over time they had become accustomed to sub-standard dining on things like the tasteless, almost meatless, English sausage, or ‘banger’, as it is known. As Krugman put it in economics speak, “the history of English food suggests that even on so basic a matter as eating, a free-market economy can get trapped for an extended period in a bad equilibrium in which good things are not demanded because they have never been supplied, and are not supplied because not enough people demand them.”

This image of John Bulls turning up their noses at ‘foreign muck’ and calling for a plate of bangers came to mind when we read (fellow Englishman) Felix Salmon’s sideswipe at philanthrocapitalism in his counterblast against a new paper by Dalberg’s Daniel Altman (a former colleague of Matthew) and Jonathan Berman that tries to take forward the question of how businesses can get involved in ‘doing good’ as part of their commercial strategies for ‘doing well’.

Such ideas are as shocking as a plate of mahi mahi and maitake mushroom salad in a soy-yuzu broth for a traditionalist like Felix. He trumpets that “Philanthropy isn’t for profit” before, like all good bigots, simply declaring that it is not to his taste. “The good news here is that these attempts by Altman and Bishop to elide the distinction between capitalism and philanthropy — to make rapacious executives feel good about being greedy — are such transparent failures that with any luck they’ll mark the turning point at which people do good to do good, rather than simply declaring that the best way they can do good is to chase profit as zealously as possible.” God bless the equilibrium in which business is simply about nasty profit-making and doing good only happens when people are explicitly trying to do it.

Sadly, this ignores two things we have learned about capitalism in the past 20 years or so. The first is the growing realisation that business does have the capacity to create as well as destroy social value. Jed Emerson called this ‘blended value’ more than a decade ago. One-time corporate social responsibility sceptic Michael Porter christened it ‘shared value’ earlier this year. Getting business to think about how to be net positive and see the benefits of seeking out this nonfinancial value is a key part of what we call philanthrocapitalism.

This is too idealistic, say our critics. Yet the second big thing that we have learned about capitalism is that chasing financial value, if measured exclusively by short-term profits, is bad capitalism. Maybe Felix has forgotten about the financial crisis. But, as we argue in ‘The Road From Ruin’, rethinking what is real economic value at the corporate and country level and focusing on delivering the long term sort is essential if we are to build an economy better than it was before.

Figuring out how to do this is not easy. Indeed, we share some of Felix’s scepticism about Dan and Jonathan’s idea that social and environmental value can simply be captured in the “single bottom line” of profit. They may have a case in theory, but they note the chronic short-termism of today’s stock market capitalism only as an afterthought, whereas we believe it is at the heart of our problems; we think the growing discussion of CSR, corporate citizenship, corporate philanthropy and sustainability is useful precisely because it tends to encourage companies to focus less on the short-term and more on the potential for long-term profits. In that sense, we need more of it, not less, though certainly it would be useful to have more real-world examples of how taking these issues seriously leads to higher long-term profitability.

(Felix also takes aim – “profoundly silly” – at an article by Matthew in the latest Economist, in which he compares the social impact of IBM and the Carnegie Corporation as they each celebrate their 100th birthday. The article argues that a company can do considerable social good, especially when it understands it has a responsibility to society and is not obsessed with short-term profits at all cost; it also shows that philanthropy – genuine giving, not the for-profit kind – can do abundant
social good, but that philanthropies (like companies) can lose their way as the years go by, which seems to have been the case to some extent at the Carnegie Corporation, though it still does important work under its admirable current president, Vartan Gregorian. Felix thinks that Matthew is too hard on Carnegie, wrongly concluding that the article favours IBM, but otherwise seems to enjoy the thought experiment – maybe “silly” is a word of praise in his dictionary?)

As we have argued in our article, “A Capital Curve for A Better World“, this is a moment of great opportunity for philanthropy and the profit motive to connect in a socially useful way. But getting the relationship between the two forces right will not be easy, and needs serious thought rather than sneering. Debates are needed urgently about how philanthropy can harness the profit motive to good effect, and how to ensure that profit really does work for the poor in products such as microfinance. There are big challenges ahead if ‘impact investing’, the new asset class championed by JP Morgan as a way to combine making money and solving social problems, is to live up to its potential. Yet just because these ideas are unfamiliar and need to be worked on should not mean that they should be rejected out of hand – unless we want to keep eating forever the same old bangers of the short-termist, ‘greed is good’ version of capitalism.

The inspiring idea in Krugman’s analysis of English food is that somehow, perhaps through foreign travel, enough of the English started demanding better food that they achieved a critical mass that, eventually, flipped the system. The same needs to happen in our economy. We won’t get a better capitalism if we don’t demand it or if, like banger-loving Felix, we simply turn our noses up at anything new or different.