The (Next) American Experiment

Posted by on 03/20/14 in America, Ethics, History, Markets

The European settlement of America embodied a two-pronged experiment. For some, America represented a place where oppressed peoples could create a new social reality in alignment with the early settlers’ values. The early colonies generally tolerated a degree of political and religious freedom unusual at that time. Hence, America began as an Experiment in Social Good.

Concurrently, these colonies eventually enabled many settlers to become land-owners, merchants, and tradesmen in a manner not available in 17th and 18th century England, Denmark, France, or Germany. In America, settlers who were not enslaved were able to build a politically-engaged, egalitarian mercantile class that began to weave America’s economic fabric. Thus, America began as an Experiment in Economic Opportunity.

These two experiments have driven America ever since. The creation and abolition of the National Bank; the Civil War and Reconstruction; westward expansion; the slaughter and forced removals of native cultures; slavery, sharecropping, and their eventual elimination; the Industrial Revolution, the Depression; the building of canals, railroads, and highways; the rise of unions; foreign policy in Latin America, the Middle East, and Europe: all of these represent tensions between the parallel quests for Economic Opportunity and Social Good.

We find ourselves in 2014 still deeply immersed in the passions of these two experiments, with heated arguments about immigration, the Federal Reserve, taxation, social inequity, health care, foreign engagement, trade policy, employment, and economic growth. We remain a country striving to work out our complex relationships with Social Good and Economic Opportunity.

This tension manifests not only in our media and politics, but also in the unfiltered forum of the investment markets. There, investors “vote” with their capital to impact…well, many things. Participants engage the markets with diverse objectives, both economic and social. Understanding this continuum can help us better understand ourselves as a society.

The Economic Opportunity Market
At one end of continuum—the “Economic Opportunity Market”—investors seek to make as much money as possible for the appropriate level of risk. For these investors, the markets are a wealth creation and protection tool, with the result of their investments being more important than the processes through which their investments create wealth. Profitability, appreciation, and income are paramount. For these investors, the ends justify the means.

Economic Opportunity investors identify those investments that they think have the greatest likelihood of meeting their financial interests. The investor generally disregards the social cost of those investments. Some approach the markets this way because they earnestly believe that capital markets are the best arbiters of society, allocating capital to deserving investments, removing it from the undeserving, and thereby maximizing society’s total wealth creation, which in turn theoretically benefits everyone. Other investors concentrate purely on economic opportunity to meet financial obligations such as pension benefits, foundation spending, or simply covering their cost of living. Still others hope to maximize wealth without a clear conscious motive.

Critics of America as Economic Opportunity represent a wide range of views, the most common being a critique of the impersonal nature of pure capitalism, the way it can create tumult in job markets, disrupt familiar economic patterns, negatively impact the environment, and—like all other economic systems –foster great differences in wealth. The critics argue that focusing on investing for Economic Opportunity actually undermines Economic Opportunity.

The Social Good Market
At the other end of the continuum—the “Social Good Market”—investors strive to use the markets to impact society as much as possible for the appropriate level of risk. Investors with this mindset might make investments defined as “SRI” (Socially Responsible Investments), “MRI” (Mission Related Investments), “PRI” (Program Related Investments), or “ESG” (Environment, Social, Governance) driven. They might divest from “sin stocks” such as tobacco and alcohol or invest proactively in US-based natural gas or renewable energy. They might avoid investment in Iran or invest in micro-finance in rural India.

These investors must find investments that they believe have the greatest likelihood of meeting their strict social criteria. Investors at this extreme might pursue their strategy because they earnestly wish to fulfill their social goals by supporting mission-aligned companies and punishing those companies that conflict with their values. And just as the Economic Opportunity Market includes some investors driven exclusively by greed, there are some Social Good investors at this end of the continuum who do not believe in capitalism or already have acquired or inherited so much wealth that they do not need the economic opportunity provided by the markets.

Critics of America as Social Good are diverse. They generally express concern that a purely social focus rewards laziness and inefficiency, impedes innovation, creates a culture of dependency, and diminishes economic opportunity. The critics contend that investing for Social Good actually diminishes Social Good.

The Great Middle
Like most things in American life that appear as stark choices between extremes, the investment markets in reality are more nuanced. They serve as a place where investors come to experiment in both Economic Opportunity and Social Good. Increasingly, investors—both individual and institutional—seek to better understand how their values and their investments can be more aligned. Most investors exploring this question are doing so with fairly reasonable expectations. They are not naïve about the challenges of seeking investments that represent both Economic Opportunity and Social Good, yet nor are they so cynical that they assume no such intersection exists.

Finding the Social Good in Economic Opportunity
Many people actively and effectively fighting poverty around the world come to recognize that the most sustainable and impactful interventions involve strengthening the legal, financial, educational, and cultural framework that enables communities to cultivate broad-based economic vitality. Short-term aid in the form of cash, food, medicine, and shelter have a place in humanitarian relief; however, such aid does not profoundly impact the long-term ability of people to create economically viable communities.

While Economic Opportunity creates Social Goods such as employment, innovation, increased standards of living, better health care, and stronger government and philanthropic resources, some refuse to acknowledge the social contributions inherent in ordinary economic activity. For example, in the quest to rely upon more environmentally sustainable energy sources, some people forget that being able to consistently heat and light our homes is socially worthwhile. Whether we use coal, natural gas, or solar to get there is important; however, the concern represents a choice only available to an economically advanced society.

Finding Economic Opportunity in Social Good
Some investors seek to create and benefit from Economic Opportunities while explicitly driving Social Good. Rather than viewing Social Good as an ancillary benefit of economic activity, these investors consider the potential social benefit of an investment to be as important as its potential financial benefit. Long a staple in the faith-based community, such a “double bottom-line” objective is becoming more prevalent amongst secular investors with strong values.

As interest in investments that link Social Good and Economic Opportunity grows, we continue to see increased creativity with respect to investment structures. Traditional legal structures remain viable for many economic ventures with a social focus. In addition, new structures such as B-Corps and Social Impact Bonds create opportunities to attract and potentially reward capital providers differently. As with any innovation, new capital structures take awhile to work out and there will be both successes and failures along the way. And as with any innovation, those successes and failures will inform the marketplace, improve it, and ultimately lead to more effective structures with—hopefully—better social and financial outcomes.

The American Experiment remains defined by both Economic Opportunity and Social Good. And while our country faces tremendous financial pressure to keep our Experiment moving forward, we have more social problem-solving tools at our disposal than ever before. We will not solve our societal problems through tax revenues alone no matter how much we tax; nor will our social problems simply be solved by free markets and the soothing balm of capital. There is, however, a middle path that respects the power of Economic Opportunity to impact Social Good, and the reciprocal power of Social Good to drive Economic Opportunity.

Those who have come before us have given us this chance to effectively bind Social Good and Economic Opportunity. Those who come after us need our experiment to be successful.