Thanks for the link Dan, but I would like to clarify my comments to move forward the debate - I'm actually in agreement with much of what you criticize the sector for (undercompensation, lack of resources) but think that it's less about executive pay and more about non-executive pay.

Furthermore, there are a lot of people who don't think that Apple, Google, or other large corporations are the place to be to see real dramatic change - which is why I know a person from Bain who left to work for a social impact reporting & evaluation firm and a person from Monitor who left to help implement digital study halls in India. I'm not saying that Apple or Google don't do great things, I have friends who work there who are having a blast and probably think they're doing good things for the world (more realistically, most of them see it as a stepping stone and most of them don't kid themselves in feeling good because they're changing the world) - but many of us in the sector now believe that the profit motive by large corporations trying to sell things to people in the developing world doesn't address the root issues of inequality and will leave despite the salary cut. Another person I know left his job at Microsoft, high pay and all, because he didn't really feel like he was making an impact and is now working to raise awareness on issues of poverty.

Sure, there are some who leave the sector because of the low pay and we lose out on their talent (my housemate left the Hewlett Foundation to work at Morgan Stanley). But there are lots of people already in the sector who continue to work for less than what the for-profit sector pays them - and we really don't need to attract more with higher salaries (many nonprofits get quality job applicants despite their below-market wages).

From the standpoint of philanthropic efficiency, what we should focus on is restructuring how we think about compensation - providing more performance-based pay - and providing the tools and resources for the talent within the nonprofit sector to succeed (personally, it's the small things - I would be happy just to have Excel 2007 and a budget for professional development courses and visualization software).

Tony,

I am wondering why for profit companies can't create dramatic change? Or change the world?

Can you please provide a definition of what it means to change the world? I read on your blog you are trained as an economist, thus taking an economic view of the world I would state that to have a positive impact on the world when one would have increase the welfare of a citizen of the earth. For example a pareto improvement would be improving the world, correct?

I just am reading your comments and there is a lot of vagueness that fails to explain why for profit companies can not offer the same benefits to the world or their workers as the nonprofit sector. Furthermore the antidotal evidence is really weak, it just isn't reliable enough to generalize from.

(BTW you are the first person Ive seen who is trained in philosophy & economics as well)

Cheers,

Chris

Hi Chris,

Thanks for responding to my comment. I'm not saying that for-profit companies can't create dramatic change - they often do, as Google, Apple, Cisco, and a whole host of other companies have demonstrated. I also believe that philanthropy's role could expand to support more for-profit companies as a means to improving the poor. But as far as economic development goes, the traditional corporation has done little to dramatically improve the position of the least well off.

Your question goes to the heart of what philanthropy's role is as distinct from the for-profit sector, which I would argue is the act of giving without expecting anything in return. In the for-profit sector, every investment you make is supposed to generate financial return, and with the views of Adam Smith and Milton Friedman tacked on, the purpose of the for-profit company is to maximize financial return. So the provision of public goods (which suffer from free rider problems) and other goods that have positive externalities are often underproduced. How do you support refugees if you expect to make a financial return on your investment? You just don't - something I realized in my conversations with Kjerstin Erickson over at FORGE. And for-profit companies really don't offer significant benefits to the poorest of the poor - philanthropy targets those that the market has failed.

For-profit companies do provide pareto improvements to the world (though many companies are also notorious for making some people more well off at the expense of others - see the example of Shell in the Niger River Delta, covered in more detail in my honors thesis), but don't target the position of the least well off. That's why many of us have switched from the for-profit sector to the nonprofit sector so that we can address these issues more directly where there is market failure - using whatever tools (charity, mission investing, microfinance, community organizing) we have available. For a good overview of the history of foundation activity, I recommend The Foundation by Joel Fleishman.

Just to be clear though, I'm not saying that nonprofits are necessarily the best way to effect change - in fact, for poverty alleviation, I think that for-profit models will be critical. However, in order for for-profit models to succeed, the role of philanthropy is often needed to help build the market conditions necessary for progress - and when for-profit companies offer attractive salaries and are not focused on social issues directly, but only tangentially so when it affects their bottom line, those who are willing to work for less in the philanthropic sector, whose role is to provide public goods, play what I think is a much more direct role in changing the world.

Cheers,
Tony

p.s. I've only met a few people who studied both Philosophy & Economics, but there are a few of us out there.

Tony,

There's a major inaccuracy in your argument that you need to think about. You write that, "Your question goes to the heart of what philanthropy's role is as distinct from the for-profit sector, which I would argue is the act of giving without expecting anything in return." This is not true. Philanthropists expect a lot in return for their donation - their name on the top of a building, on a professorship, etc. They also believe they are "purchasing" the services of the nonprofit. What you are overlooking, as do most people, in assuming a lack of for-profit incentive to help the poor, who have no money with which to buy for-profit services is this: the market for altruism. That market sells to the wealthy, and people who are not poor, and to sell to that market you can transfer all of the tools that you use to sell them movies, spiritual books, ice cream, and everything else. Properly unleashed to use the tools of capitalism, the nonprofit sector can be a HUGE re-distributor of wealth by selling altruism.

Tony,

I always appreciate a lively discussion and your thoughtful response but I do take issue with some of your comments.

"the traditional corporation has done little to dramatically improve the position of the least well off."

I think this is an over generalization and would apply to individuals who have had zero interaction with any company. From a donkey-drawn carriage selling food to slum residents in Honduras to small pharmacies in Lesotho that are run from a local mother who obtained the financing from a microloan, for profit endeavors improve all segments of society.

"Your question goes to the heart of what philanthropy's role is as distinct from the for-profit sector, which I would argue is the act of giving without expecting anything in return"

Id follow with Dan's line of thought that it is very rare for a philanthropist to give money away and not receive anything in return. If individuals did not expect any return from their money they would randomly give it away something we don't see. Instead they systematically give their money away and expect to receive joy from believing they are making a difference, joy I would argue is very similar to the job I receive from purchasing a product from a for profit company.

"though many companies are also notorious for making some people more well off at the expense of others - see the example of Shell in the Niger River Delta, covered in more detail in my honors thesis),"

Id blame the problems of Shell on the lack of government regulation, we see the same thing in America with Madoff, or the home loaning companies, poor regulation has facilitated these companies from harming individuals.

I will try to follow up tomorrow, got to teach a class. Thanks again!

Hi Chris,

Quick comments here:

1) My experiences in China make me believe that while corporations and capitalism has dramatically helped large populations of people, those at the very bottom have not accrued much of the benefit. Many people have been left behind and traditional profit maximization has not benefited them. Also, some argue that happiness maybe based more on status and position within society as opposed to a definition based on absolute terms. If true, then inequality actually harms those at the bottom.

2) I'm hoping Dan publishes my earlier comment on this topic in response to his post, but my argument here would be that cognitively, people don't necessarily think of themselves when they're thinking of their charity. And "joy" nor "utility" may not be the accurate way of describing what the donor receives. What if a donor received less joy but donated out of a feeling of obligation. While he doesn't give it arbitrarily, it's difficult to say that he does it out of joy. The language of economics doesn't capture the intuition very well. But for the sake of advancing my earlier argument, I'm willing to say that the key difference between philanthropy and the for-profit sector is the expectation of financial return (grants and provision of public goods are not recoverable from a financial perspective whereas loans and equity are).

3) I won't go into detail here, but I would implore you to take a deeper look at my honors thesis. You can blame issues of corporate malfeasance on lack of government regulation, but its akin to saying that murder is ok because the cops aren't enforcing it. I would argue that the problems of Shell, Madoff, and home loans were also problems of ethics and the design of the corporation from a philosophical standpoint. The corporation, as a profit maximizing machine, is destined to harm society unless we allow it to deviate from its maxim of profit for the sake of societal utility. But working for a corporation doesn't really change that (since they're already defined by their self-interest). Hence, why some of us work in other sectors at below-market rates in the hopes of effecting change.

"Also, some argue that happiness maybe based more on status and position within society as opposed to a definition based on absolute terms. If true, then inequality actually harms those at the bottom."

-Interesting I've never thought about status mattering, you are right it does. I've always thought the question of inequality to be irrelevant, always thinking if we improve the quality of life of the poor then it doesn't matter how much more the wealthy have. Meaning if we can increase HDIs (Education, health, etc) thats all that should matter, thanks for bringing this additional point. But I forgot to point out in my original response the corporate model doesn't only benefit the poor through buying goods but also through employment, even if it is collecting recycling bottles for 70 cents a day. While these jobs are not optimal I follow Paul Krugman (http://www.slate.com/id/1918), Jeff Sachs, and Nicholas Kristof (http://www.nytimes.com/2009/01/15/opinion/15kristof.html?_r=1) believe that jobs, any jobs provide real improvements to individuals in the developing world. As you have seen in China the quality of life has dramatically improved because of the influx of industry and we see the same thing in the history of America, and I think we under emphasize the improvement of life across the board because of capitalism.

"people don't necessarily think of themselves when they're thinking of their charity. And "joy" nor "utility" may not be the accurate way of describing what the donor receives. What if a donor received less joy but donated out of a feeling of obligation. While he doesn't give it arbitrarily, it's difficult to say that he does it out of joy."

-For our discussion it is irrelevant if a donor gives out of joy or a sense of obligation. Individuals are expected utility maximizers, and they allocate their resources including finances in a manner that would provide them with the most happiness. I can spend 20-dollars on a lunch that I don't get much joy out of, but feel an obligation to because my boss is inviting me and it is a great opportunity for me, and thus the best use of my funds. The logic is the same for donating money, even when I donate money out of obligation I am doing so because I believe the costs of not donating are so incredibly high that I would be worse off by not donating, thus giving money is the most effective use of those funds. Thus we have to see donating money as just purchasing a good.

"You can blame issues of corporate malfeasance on lack of government regulation, but its akin to saying that murder is ok because the cops aren't enforcing it. I would argue that the problems of Shell, Madoff, and home loans were also problems of ethics and the design of the corporation from a philosophical standpoint. The corporation, as a profit maximizing machine, is destined to harm society unless we allow it to deviate from its maxim of profit for the sake of societal utility. But working for a corporation doesn't really change that (since they're already defined by their self-interest)."

- There is a complete difference between normative and positive analysis. I describe corporate actions mirroring human behavior in the absence of government, which as Hobbes described as the state of nature "solitary, poor, nasty, brutish, and short". We paint this picture of corporations needing the government to regulate their behavior, but as you know we need government to regulate our own behavior, businesses and regulate itself. Madison describes this in Federalist # 51 when he remarks "But what is government itself, but the greatest of all reflections on human nature? If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself." we have to get away from corporations as being naughty and individuals or nonprofits as being saints, because all composed of humans and all engage in the same behavior in the absence of government involvement.

1) I agree with Kristof that anti-free trade sentiment can harm the poor - but we can do better than providing factory jobs. What we really should be doing is help provide better education, here and around the world, so that people can earn more than just $2 a day. But because many companies don't view this as a particularly profitable opportunity, capitalism has yet to correct itself to fix the inequalities that it has generated. I am optimistic however that mission investing and venture capital will be able to help solve this problem.

2) I still don't think the language is accurate. Do we say the person who jumps on a grenade to sacrifice himself for others or the mother who chooses to die to save her child does so out of utility? I don't even think hyperbolic utility discounting provides a suitable explanation for human behavior - economics is terrible at describing human behavior accurately and neuroeconomics will probably show why current assumptions of human behavior as "utility maximizing" are incorrect.

3) I'm not suggesting we have no government - I'm suggesting that corporations who say it is the responsibility of the government to regulate and not their own ignore the fact that they have an individual responsibility to not harm society beyond their legal obligations from an ethical standpoint. Should normative claims mean we not reform government? Of course not - I'm all for regulatory mechanisms. But I believe companies are deluding themselves if they think from an ethical standpoint, the responsibility of a company is to always maximize profit.

I feel like I'm repeating myself a lot here - please read my honors thesis at http://tonyjwang.files.wordpress.com/2008/09/ethics-and-enterprise.pdf and I'd be happy to talk about this more elsewhere.