Category Archives: Uncategorized

Putting the Benefit Back in B Corporations

Go MasterCard! Congrats to Fellow Shareholders!
Image by Taekwonweirdo via Flickr

We’ve taken issue with B Corporations before, mostly criticizing the conceit that formalizing good notions will render much positive effect. And I think, in general, it’s fair to say that they  in this, as in some much else, cash is best. But Matt Yglesias, in a roundabout way, does suggest one way that B Corporations could really do some good:

[T]here might be a niche out there for something along the lines of “charitable entrepreneurship.” Bill Gates and Warren Buffett are trying to urge billionaires around the world to give half their money to charity. That would be great. But maybe what we really need some super-rich charitably inclined businessmen to do is finance some new ventures in these quasi-utility markets like charge cards, cell phones, mortgage origination, etc. based on a “don’t screw the customer over” business model. The striking thing about the credit card universe, after all, is that there’s very little competition and no meaningful difference in business practices between Visa and MasterCard.

There are two main problems with B Corporations. One is that, as currently structured, their incentive structure is too flimsy to really enforce doing good. And the second is that they work with vague terms like “stakeholders” to support – ending up tossing money in fifty different altruistic directions.  Great businesses specialize, and great B Corporations should too. Here are two solutions to these problems:

1. Have direct, tangible benchmarks for progress and rely on them stringently. If you’re an energy company, make sure that you have a clear cap on emissions. If you’re a diamond company, try to keep the diamonds from supporting bloody armed conflict.

2. Certain companies, like those highlighted by Yglesias, are suited to be B Corporations – and others not. A credit card company could exploit a current problem in credit card companies – namely, that often their system hurts a lot of people through complex financial mechanisms or seducing some into debt, even if on balance they’re a good thing – and thereby specialize in that important task. Don’t partner with a dozen local charities, don’t go to Bangladesh and the Congo, don’t name a wing of a museum. Rather, specialize in one task that you can really use to help people’s lives.

Advertisements

Leave a comment

Filed under Uncategorized

A Hayekian Challenge For Charities

Debris in the streets of the Port-au-Prince ne...
Image via Wikipedia

One of the most famous works by the economist Friedrich Hayek is his short essay, The Use of Knowledge in Society. In it he explains that an economy exists not merely to solve a known problem of scarcity, slotting x number of pegs into y number of holes, but rather as an enormously complex machine for transmitting knowledge from distant individuals. The problem that any economy exists to solve, then, is created because

the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess…it is a problem of the utilization of knowledge which is not given to anyone in its totality.

This problem, of course, exists in all economies. But, as this recent disaster in Haiti has shown, the dangers of complexity are hardly restricted to the private sector:

The earthquake in Haiti sparked one of the biggest international aid efforts the world has seen, but the sheer number of charities involved caused problems with communication and coordination…With dozens of charities operating all over Haiti, there was a risk of their work overlapping. The UN operated a cluster system based around areas of need – for example, water or shelter – so that charities could share information, collaborate and set common standards on, say, the cost of materials. But the clusters have brought their own problems.

Hayek’s solution to this problem for economies is the price system, a set of numbers continuously in flux and decided by millions if not billions of bidders, changes in demand, the ease of manufacture and many other factors. But while this may work for the incentivized capitalists of the private sector, the more convoluted incentives and operations of the public sector make this a difficult trick to pull off. So, what are some practical ways to make charities do a better job coordinating?

1. Have the UN devote more resources to making communication efficient, and inclusive. The common supposition that low overhead is a good sign when choosing charities is misplaced; often the reverse it true. So invest in efficient communication and incentivize participation – say, give $5000 to charities over a certain size which join.

2. Learn from some similar examples. For instance, the US military currently has a problem coordinating drone strikes: there’s just too much data. But they’re coping with this using some relatively simple social networking tools and wikis. Now, I don’t think anyone is of the opinion that the UN is as efficient an organization as the US military – but they could certainly pivot off these ideas by trying to improve coordination with these technologies.

3. Look to technologies down the line. This is definitely a little utopian, but with enough information flowing in, organizations may in the future be able to take advantage of IBM’s question-answering computer. This machine, known as Watson, is good enough to go toe-to-toe with Jeopardy! greats, and is being considered for use in extreme scenarios like answering split-second medical questions in an emergency room. Why not have it collate information during disaster relief? For instance, if one group is currently working on freeing earthquake victims in one sector of Port-au-Prince, they could let Watson know with a GPS and time stamp, along with a status line. Then if another group is looking for the best place to find people, Watson could at least narrow the field. Again, this solution is fraught with problems. But it might be the best of a bad set of options.

Now, I realize the irony of these answers – they’re totally anti-Hayek. They’re centralized, bureaucratic, and try to deal with the problem of knowledge by consolidating it in one place. I just think streamlining a centralized database may be our only choice. But, just in case, here are two answers Hayek may have liked better:

4. Create cash prizes to distribute for verifiable goals. As with many free market ideas, many people will strongly dislike this one. It seems to make mercenaries out of altruists, and it may indeed open the door for fraud. Still, creating incentives for verifiable goals like people with access to potable water, vaccines given, people in acceptable housing, etc. may be extremely useful to push aid organizations on. This has numerous dangers like those mentioned above as well as possibly leaving non-incentivized goals under-pursued. Nevertheless, on a limited scale this may drive organizations to better work.

5. Create prediction markets to establish answers to pertinent aid questions. When will those five wells be dug? When can permanent housing be expected to be finished in this quadrant? Should we fund nutrition packs or local farmers in the coming month? As Robin Hanson argues, prediction markets – forums where parties can place bets on certain outcomes – can be very effective in situations like these, because these are exactly the sort of questions that make interset groups fight for their organization over the greater good. Making the choosers have clear, definable upside if they are correct and downside if they’re wrong makes the choice more trustworthy.

I’m sure there are many more ways to help coordinate in these difficult situations. But by applying some of these lessons we may hope to avoid tragedies like this and move more in this direction, of incremental improvements in very tragic circumstances.

Hat tip: Good Intentions are Not Enough, Matt Yglesias, Marginal Revolution

Leave a comment

Filed under Uncategorized

Rich Countries Have Been Sending Aid to Poor Countries for 60 Years

…and yet poverty is still rampant in many of those countries.

Don’t believe me?

Read this policy analysis from 1986. Or this article from a newspaper in Ottowa in 2006. Or just ask William Easterly.

Simply giving to desperately poor countries will not fix them. It is becoming all too obvious that to truly implement change, members of affluent societies (such as myself) must rethink traditional methods of charity.

One intriguing idea that’s been popping up all over surrounds cell phones. We’ve covered the phenomenon before, and I just saw a great TED talk by Iqbal Quadir, a Bangladeshi social entrepreneur who will convince you that cell phones are doing more for Bangladesh than foreign aid ever has.

If you have 15 minutes to spare, I highly recommend watching:

Leave a comment

Filed under Uncategorized

Bribery, Cntd.

1. Sometimes, bribery is actually helpful:
India has outlawed cattle exports, but that hasn’t prevented well-organized traffickers from herding millions of the unlucky beasts each year onto trains and trucks, injecting them with drugs on arrival so they walk faster, then forcing them to ford rivers and lumber into slaughterhouses immediately across the border…. “The border guards are in on it, both in India and Bangladesh, and take bribes to look the other way,” said Yasin Mullah, 55, a Murshidabad shopkeeper and cow owner. “Smuggling is rampant these days with all the money and growing population.”
As Matt Yglesias points out (in, admittedly, a less extreme example), the sheer number of inefficient laws should make us think twice when wishing that enforcement was stronger across the board.  Dozens of useless laws lie fallow on the books, and sometimes having guards bribed is better than having the laws be cracked down on.
[HT: Marginal Revolution]
2. And sometimes it’s part of the bad government trap which Paul Collier has described in The Bottom Billion:
At least $300m (£200m) is paid in bribes at checkpoints in Ivory Coast each year… the total amount may be up to $600m… that would be more than 2% of the country’s economy.
The bribes are taken at roadblocks, where merchants are stopped and shaken down for roadside “fines”. As the article says, the Ivory Coast used to dominate the West of Africa economically. But it has fallen into a series of interlocking traps which hold down its growth. Basically, despite widespread intuitions that wars can ultimately promote economies by stimulating demand, the wars of the Ivory coast have decimated its economy. Clearly, not only is there damage to the actual goods of the society, but the divided areas of the country, the uncertainty of the rule of law and the huge number of armed young men roaming leaves the country in a trap that is very difficult to alleviate.

1 Comment

Filed under Uncategorized

Some Links

1. The whole controversy about the 1 Million T-shirts campaign is of course being dealt with by the gods of the development blogosphere. As we’ve said before, gifts in kind are often more about making the donor feel good than helping the recipient. So sell the t-shirt and give the money because cash is best.

2. Tyler Cowen deals with an idea for a hedge fund working to maximize good. . He suggests that a Hayekian would simply say to maximize profits. Well, how about a middle position? Maximize profits and then donate those profits to efficient charities? Oh wait. I think there is someone like that

Leave a comment

Filed under Uncategorized

Diamonds from Sierra Leone

No, I’m not talking about Kanye West. I’m talking about the guys who toil in the hot sun to find the precious stone. There are a lot of them in Sierra Leone, where the annual diamond production is estimated at $250-300 million.

Guess how much of that goes to the diggers. Martin Rapaport, a diamond industry giant, went to find out.

Reblog this post [with Zemanta]

Leave a comment

Filed under Uncategorized

Bribery and the Tragedy of the Commons… or Rent Seeking as a Problem of the Anti-Commons

Red Square, Moscow, Russia
Image via Wikipedia

We’ve talked before about the problems of corruption, and of nonprofit innovative solutions to the problem – specifically, an Indian group’s spreading of a Zero denomination Rupee to be handed to bribe-asking officials. Recently, corporations are trying to do their part, pledging to boycott bribery:

Dozens of international firms doing business in Russia have pledged not to offer bribes, in a move aimed at fighting corruption collectively. The accord, signed at an official ceremony in Moscow, was initiated by the companies, not the Kremlin, said the Russian-German Chamber of Commerce.

According to the article, about $300 billion is extracted every year in bribes. Of course, this doesn’t count all the inefficiencies introduced into the system by firms being chosen over competitors for reason of bribe rather than superiority.

Now, this does seem to be a nice little pact, and we can all snap some pictures and shake hands and go home. But as far as I can see through a number of news stories there’s nothing enforceable or transparent about this pact; it’s just some words. In fact, the head of Transparency International in Russia admitted:

any company working in Russia could find itself in a situation when it did not want to give bribes but was forced to do so if it wanted to carry on doing business. The agreement would not solve situations such as these, she said.

I believe the main problem of bribery and incentives is one of the commons. The tragedy of the commons is a well known economic problem. Essentially, when a rent producing commodity, such as a lake or the air, is unowned there is little incentive to preserve it because all actors know that their effect is small and their incentives to gain the short term big. This leads to overfishing, air pollution etc. Typically this can be solved by adding property rights; if someone owns the lake they’ll fish at a constant and conservative rate in order to maintain the long term population of fish. Giving property rights works: observe the massive success of the cap and trade system in stopping acid rain.

How does this relate to bribery? Consider corporations as partakers of the government; they are fisherman in the lake of government. As each of them interacts with government, many of them lose money as a result of bribery. But because of the small effect it has on each of them individually – though its effect may be large in the aggregate – it isn’t worth it for them to create enforceable, binding pacts against it. And in fact, some of them gain from the system, as HP seems to have when it essentially bribed itself into a contract. Because there isn’t any ownership of the long run management of the government, rent-seeking firms can manipulate it to their advantage and others have to simply pay to play. Their stake in the game isn’t valuable enough to risk bucking the system.

Alternatively, one could see this as a problem of the anti-commons. These are instances of the opposite problem: over-ownership. As Michael Heller discusses in his new book, when a property is too subdivided it can cause massive gridlock in a system. For example, if a new type of rice is created mixing a couple genes, it may be impossible to bring to market because each of those genes may be separately patented. Apparently, in the creation of online banking over 10,000 patents were involved. Ownership can spur innovation, but over-ownership cuts it down.

This would relate to bribery so: if there were a very small number of firms who were tied tightly into the bribery scheme, it might make sense for all them to collude and boycott bribery. However, as the number of firms explodes it makes sense for those firms with current contracts gained through bribes to avoid binding pacts against bribery because on an individual level it helps those firms using it to maintain their positions. However, in the aggregate this rent-seeking simply harms the economy.

Of course, there is a pact. But due to its lack of transparency or enforceability, it’s hard to see how its rules won’t be bent.

Still: both these explanations, I think, cannot be right. There can’t be too much and too little ownership. So which is it?

Reblog this post [with Zemanta]

1 Comment

Filed under Uncategorized