Has ‘Philanthrocapitalism’ Met Its Promise?

Something genuinely important and exciting is stirring in the world of philanthropy. There is justifiable excitement about the possibilities for progress in global health, agriculture, and poverty-fighting efforts in developing countries that have been stimulated by huge investments from the Bill & Melinda Gates Foundation, the Clinton Global Initiative, and others. Those efforts are part of a movement to harness the power of business and the market to the goals of social change, what Matthew Bishop, a reporter for The Economist, calls “philanthrocapitalism.”

Philanthrocapitalism should certainly help to extend access to useful goods and services, and it has a positive role to play in strengthening important areas of nonprofit management. But the hype surrounding philanthrocapitalism could divert attention away from the deeper changes that are required to transform society, reduce decisions to an inappropriate bottom line, and lead us to ignore the costs and trade-offs involved in extending business principles into the world of civil society and social change.

So, what exactly is philanthrocapitalism? It’s a mouthful, that’s for sure, connected to but not the same as social enterprise and social entrepreneurship, venture philanthropy, and corporate social responsibility. It has three distinguishing features:

• Very large sums of money committed to philanthropy, mainly the result of the remarkable profits earned by a small number of people in the information-technology and finance industries during the 1990s and 2000s.
• A belief that methods drawn from business can solve social problems and are superior to the other methods in use within the government and the nonprofit world.
• Faith that such methods can achieve the transformation of society, rather than increased access to socially beneficial goods and services — most commonly expressed in terms of “saving” or “changing the world.”

But to truly accomplish those kinds of changes requires a radical redistribution of power and resources, deep changes in our economic and political systems, and the reaffirmation of social values rooted in love, solidarity, and sharing.

To look at whether philanthrocapitalism lives up to its promise, take the example of microfinance — efforts to provide small loans to very poor people so they can start or expand businesses. It is clear that increasing poor people’s access to loans, savings, and other financial services is a good thing — it strengthens their resilience and reduces the need to sell precious assets in times of trouble. But it doesn’t move people out of poverty on its own.

That requires other and more complicated measures to help people develop a sustainable livelihood and create more well-paying jobs through large scale, labor-intensive agroindustrialization; to deal with the deeper issues of disempowerment that keep certain people poor — land rights, for example, or patriarchal social structures; and to get governments to redistribute resources on the necessary scale through health, social welfare, public works, and education.

Microfinance institutions also need continued subsidies to reach the very poor, questioning the philanthrocapitalist assumption that market methods, social goals, and financial sustainability are mutually supportive.

Microfinance can have a positive impact on the factors that lead to social transformation — women’s empowerment, for example, and building small group skills — but those advances have not translated into significant shifts in social and political dynamics, even in Bangladesh, the one place where these programs have reached significant numbers of people. In every other place where poverty has been reduced, microfinance has been insignificant.

The evidence shows that while it is perfectly possible to use the market to extend access to useful goods and services, few of these efforts have any substantial impact on social transformation. The reason is pretty obvious: Systemic change involves social movements, politics, and government, which these experiments generally ignore.

The other problem with philanthrocapitalism is scale. Fair trade is estimated to reach a mere five million producers across the developing world, while social enterprises earned revenue of only $500-million in the United States in 2005. That doesn’t render this movement insignificant (after all, it’s in its early days), but it does raise questions about the claims that philanthrocapitalism is changing the world. Compared with the great mass of civil-society activism, this is quite a small movement.

Philanthrocapitalists believe strongly that they can improve the finances and management of nonprofit organizations, often proclaiming that they are “results based” or “high performance,” implying that everyone else is uninterested in outcomes.

Sure, there are mediocre citizens’ groups, just as there are mediocre businesses, venture philanthropists, social entrepreneurs, and government departments, so “why import the practices of mediocrity into the social sectors,” as Jim Collins, author of Good to Great, asks in a recent pamphlet on applying his ideas to the nonprofit world.

When one examines the evidence, one finds that what separates the good and bad performers is not whether they come from business or civil society, but whether they have a clear focus to their work, strong learning and accountability mechanisms that keep them heading in the right direction, and the ability to motivate their staff members or volunteers to reach the highest collective levels of performance.

It is easy to identify quick fixes in terms of business criteria, only to find that what seemed inefficient turns out to be essential for civil society’s social and political impact — like maintaining local chapters of a movement when it would be cheaper to the central office to combine them. And although sustainable solutions obviously have to work economically, this doesn’t necessarily imply the raising of commercial revenue.

Philanthrocapitalists sometimes paint reliance on donations, grants, and membership contributions as a weakness for nonprofit groups, but it can be a strength because it connects them to their constituencies and the public — so long as their revenue streams are sufficiently diverse to weather the inevitable storms along the way.

History shows that systemic change was achieved in relation to the environment, civil rights, women’s rights, and disability rights through the work of social movements that did not rely only on heroic individuals, and involved politics and government as well as civil society and business.

In the ever-growing outpouring of books, newspaper stories, and conference reports on philanthrocapitalism, you will find plenty of attention to finance and the market, but scarcely a mention of power, politics, and social relations — the things that really drive social transformation.

Would philanthrocapitalism have helped to finance the civil-rights movement in the United States? I hope so, but it wasn’t “data driven,” it didn’t operate through competition, it couldn’t generate much revenue, and it didn’t measure its impact in terms of the numbers of people who were served each day, yet it changed the world forever.

In business, the pressure to quickly expand is natural, even imperative, since that is how unit costs decline and profit margins grow, but social transformation moves at a slower pace because it is so complex and conflicted. The philanthrocapitalists are not in the mood to wait around for their results, and the measurements they use to evaluate success focus on short-term material gains and not on long-term structural shifts in values, relationships, and power.

The philanthrocapitalists want to extend competitive principles into the world of civil society, on the assumption that what works for the market should work for citizen action, too. Some scholars call this the creation of a “social capital market,” in which nonprofit groups compete with one another for resources, allocated by investors according to common measures of efficiency and impact, but competition might retard progress by pushing nonprofit groups to eschew the most complicated and expensive issues and communities.

Would local voluntary groups compete to host the children’s Christmas party? Would there be increasing competition among groups dealing with different issues like HIV and schools, and who would really benefit?

In any case, organizations are not easily “substitutable” in civil society because affiliations are based on loyalty, identity, and familiarity, not on the price and quality of services provided. It is unlikely that members of the NAACP will cross over to the Puerto Rican Legal Defense and Education Fund if they feel dissatisfied with their leaders.

It’s because of those problems that collaboration among strong but separate organizations may be the best approach.

It preserves the difference and independence required to bring about real change in markets, not just extend their social reach. It also supports the transition to more radical approaches that might deliver the deeper changes that we need, like new business models built around “the commons,” such as open-source software and other forms of “nonproprietary production,” or community economics and worker-owned firms, which increase citizen control over the production and distribution of the economic surplus that businesses create.

The problem is that these approaches are absent from the philanthrocapitalist menu, perhaps because they would transform the economic system completely and lead to a radically different distribution of its benefits and costs.

The best philanthropy does deliver tangible results like jobs, health care, and houses, but more importantly it changes the social and political dynamics of places in ways that enable whole communities to share in the fruits of innovation and success.

Key to these successes has been the determination to change power relations and the ownership of assets, and to put poor and other marginalized people firmly in the driving seat, and that’s no accident. The world needs more civil-society influence on business, not the other way around — more cooperation, not competition; more collective action, not individualism; and a greater willingness to work together to change the fundamental structures that keep most people poor, so that all of us can live more-fulfilling lives.

Philanthrocapitalism is a symptom of a profoundly unequal world. It hasn’t yet demonstrated that it provides the cure.

Michael Edwards has written numerous books and articles on the global role of civil society. This article is excerpted from his new book, Just Another Emperor? The Myths and Realities of Philanthrocapitalism, which was published by Demos and the Young Foundation last month. He is director of governance and civil society at the Ford Foundation, but writes here entirely in a personal capacity. The views expressed in this article should not be taken to represent the opinions or policies of the Ford Foundation.