Feudal Aspects of the Social Capital Market
'My experience of Social Capital market is that it is a very skewed market today, which reminds me of feudalism:
- on one side you have foundations, with a few managers in charge money from people who live from their investments and have assigned some of that money to social causes. These managers are the lucky few who can make a living from Social Capital markets, and the investors are people who can afford to do what they do regardless of what revenue it will generate for them because they have other sources of revenue.
- on the other side you have legions of volunteers or underpaid workers who are happy to do what they do because it is for the greater good of humanity, pick your own cause. And they all have this dream that one day they will be making a better leaving because their hard work and motivation will be recognized by these people with the money. I am always amazed to see some of these non-profit workers agree to jobs without medical coverage. They are barely better off than the people they try to help (which is probably good enough for them, even though not a good idea). And the odds are against them, they live in a competitive economy.
So the value generated is already the result of some level of exploitation, even if it is self-imposed. Ideas are free, work is almost free, with the ones at the very top are showing example, they work on these projects for free, except that they can afford it because their revenue comes from somewhere else.
If you add to this the concept of making money while making good, then you allow investors to extract some of the value created for their own benefit from an already exploited ecosystem. Which is not really good, even if they agree to take less than they would in a normal environment. And that's assuming they behave, which is not always the case as we have seen with the issues that emerged in the world of Microfinance.
The people in charge (the guys with the money) have been trained in the world of shrewd capitalism, where they built their own financial independence, and even though they mean well, they reproduce the same behaviors in this new ecosystem as what made them successful in the first place. So yes there is a market today but I do not think it is healthy or sustainable over time as it is today. I have seen several direct examples of this type of dynamics.
Muhammad Yunus promotes the concept of hybrid structures, and I think this is one good way to resolve this issue. The revenue generated by the social enterprise goes back to the community. The for-profit is own by a non-profit, or maybe you create a for-profit with all the tool of the corporation (including lobbyism) but with a clear focus of re-investing all profits into their social purpose.
There have also been models used in the past that have proven to be working very well. I have studied Mutual Guarantee funds (used in Europe, starting 1917) and Ethnic lending and I believe this is the type of system we need to finance social enterprises. Entrepreneur Commons (entreco.org) is an attempt at doing this.
Instead of spending money on economic development as it is done today, which has a lot of inefficiencies, it would be easy and much better to setup matching contributions to mutual guarantee fund, allowing (social?) entrepreneurs to work together, identify the best opportunities, fund them and use the returns to finance the next wave. The key is that the returns should go back to the community of stakeholders, so that it is truly social capital. There has also been a lot of work done on cooperatives and how this type of structure can allow social enterprise to get started and grow without the risk of falling into feudalism.
Having said this, yes, once you have a healthy base of projects and communities, it is easy to bring more capital by packaging the loans into bigger chunks that can be sold on the financial markets, so we could probably get a lot of leverage once momentum has been established. Mutual guarantee funds are doing this already, with 1 to 8 leverage provided by governments. We need more of this.
Long answer, sorry, but this what I get from my own experience: I think that you are right that derivatives would be a good instrument, however the current base is not healthy enough that it is what we should focus on now." (email Jan 2012)