Thursday, November 13, 2008

The Economist's Matthew Bishop: Demand for "Philanthrocapitalism" Now Greater than Ever

Matthew Bishop, New York bureau chief of The Economist and co-author of Philanthrocapitalism: How the Rich Can Save the World, argues that in recent years, rapid wealth creation, particularly on Wall Street, has resulted in a surge not just in giving, but in a new, businesslike approach to giving that he calls “philanthrocapitalism.” Now, people are asking whether the recent struggles of some of capitalism’s biggest winners, and the growing suspicion of some of capitalism’s core methods, including Wall Street’s use of leverage, mean that philanthrocapitalism is in trouble, too.

Mr. Bishop predicts that there is reason to think that the need for philanthrocapitalism will be greater than ever, and that leverage will be one of the main reasons. Philanthrocapitalists have developed a new vocabulary to describe their approach to charity, which borrows enthusiastically from the business lexicon. They call themselves “social investors” or “venture philanthropists,” and try to make donations that are “high performance” and “strategic.” Above all, they love to “leverage” their money.

Though leading philanthrocapitalists are giving away unprecedented amounts of money — Bill Gates and Warren Buffett are together handing out about $3.5 billion a year through the Bill & Melinda Gates Foundation — they are quick to recognize that even those sums are dwarfed by government and big business budgets. (The New York City schools budget is about $17 billion a year, by comparison.) To make a real difference, philanthropists have to find ways to use their money that have an outsize impact, typically by using donations to change how others spend their money. This kind of leverage — using a relatively small donation to enlist others in a cause — is very different from the Wall Street kind, which by multiplying the size of traders’ bets sometimes has blown extra air into financial bubbles. Expect philanthropic leverage to become more important in tough economic times as social demands increase and government budgets get tighter — the need to get the maximum bang for the increasingly sought-after philanthropic buck should become even more critical.

The Gates Foundation, for example, has tried to “leverage” the research and development budgets of the big pharmaceutical companies by giving incentives to encourage them to spend more of their research budgets on discovering, say, a vaccine for malaria (which kills millions) rather than a cure for baldness (which hurts only vanity). Another leveraging strategy has been to encourage research that combines a variety of inexpensive drugs to cure a different disease.

Also, there is the most tempting pool of money — government spending, much of which is already directed at solving social problems. Leveraging those budgets has become a core strategy for many of today’s leading philanthrocapitalists, including Mr. Gates and Michael Bloomberg, whose use of his own money to get elected mayor of New York, one could argue, is the clearest example yet of philanthrocapitalistic leverage.

Mr. Bishop argues that an obvious opportunity for leverage during the economic downturn will be for philanthrocapitalists to bring about mergers and acquisitions in the nonprofit sector, which currently has far too many organizations doing essentially the same thing. When raising money was easy, those nonprofits could resist demands to get together. Now philanthrocapitalists who want to finance bigger, more efficient organizations may find a new willingness to accept their terms. However, Bishop points out, the opportunity to leverage philanthropic dollars may be even greater abroad than at home. The initiatives by the Bush administration in overseas aid and development to help poor people threatened with diseases like AIDS and malaria have often worked in partnership with philanthropists.

Bishop claims that the potential to change a society, in the way that only a government can, holds out a high return that increasingly appeals to philanthrocapitalists. He argues that it will not escape the attention of today’s leading philanthrocapitalists that there may never be a better opportunity for them to leverage government spending in directions they want than at the start of a new administration explicitly committed to change.

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