Why "Social Capital Markets" Could Be a Really Bad Idea

January 26, 2010

A common assumption of the "new philanthropy" is that "social capital markets" will separate effective from ineffective organizations by forcing nonprofits to compete with each other for scarce resources, allocated according to standardized criteria. I think it’s much more likely that important work in civil society will be marginalized, leading to less social change, not more. How come?
First, there are no reliable measures of the "social return on investment," only estimates of the financial value of those aspects of social change that can be quantified, which are relatively few.
That’s because social impact is so complicated, unpredictable, and lengthy that it can’t be captured in a set of numbers.
Second, even if such numbers did exist, how would one apply them across so many different issues, strategies, and contexts? Who is to say that saving the rainforest deserves more support than ending gun crime or racism? Should we direct more money to apples instead of oranges because some of us prefer their taste?
Social goods are incommensurable—meaning  that they have no common measure of social value, so decisions in philanthropy are always based on different views about priorities, like school reform and climate change, or strategies to reach them, like community organizing and the delivery of services. There are no data that can remove these differences, because democracy is animated by struggles and debates about what constitutes the "good."
Third, what is counted as a cost may actually be a benefit, such as the time invested in messy and more democratic processes of decision making and accountability, which have been shown to be important in the success of social movements. What seems expensive now may prove to be cost effective over time, and what produces short-term gains may prove costly in the future.
If our goal is reducing poverty, there are lots of different ways to achieve it, including changing law and policy through advocacy, building capacity in communities so that they can fight for their rights, and scaling up the direct provision of services like microcredit, but there is no possible way of deciding which of these approaches is "best" across all contexts. The complex assemblages of factors that underlie success can’t be transported from Chicago to Mississippi on a magic carpet, even within the same field of grant-making during the same period in time, let alone as circumstances change.
Fourth, rankings imply attribution, which is impossible in the world of social change because results are never driven by one project or organization acting on its own, so who exactly is being rewarded, and is that fair?
And fifth, variations in the same metrics may not reflect meaningful variations in performance, since two organizations may be dealing with similar issues but in totally different contexts, one much more difficult than the other.
If only a limited range of organizations, strategies, and types of social impact can be measured, then social capital markets will inevitably push resources to a subsector of nonprofits regardless of their real contribution to society. The overall result may be the rewarding of donors for superficial results and the penalization of those whose work is most important to long-term social change.
So what’s the alternative? One would be a version of what we have now—an "anything goes" approach in philanthropy that maximizes the freedom of the giver. That’s probably not the best approach, even for a skeptic like me, since it wouldn’t address the resource gaps that plague so many groups, especially the smaller, more community-based nonprofits that lack access to national funders.
More promising, I think, are "meeting grounds, not markets," as I put it in Small Change—"safe spaces," both real and virtual, where nonprofits and their supporters can forge long-term relationships with one another, discuss and experiment with different ideas about impact measurement and performance, and generate diverse revenue streams without incurring the costs of overcompetition. Guidestar, GiveWell, Charity Navigator, Great Nonprofits, and New Philanthropy Capital go some way towards this vision, but are too oriented towards the donors, too narrow in their assessments of nonprofits, and too concerned with ranking who is "best," a nonsensical approach to civil society because of the problems identified above.
Is there anyone out there who wants to invest in something new?
Monday's post: Should Civil Society Be Reduced to a Subset of the Market?
Tomorrow: Welcome to Philanthropy’s "Pandora"

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Michael Edwards


Oct 05

Rip Rapson
President and CEO
The Kresge Foundation