Should there be limits to the realm of markets?

Martin Brookes

My financial adviser rang me last week to offer me the chance to invest in a new bond issued by the British children’s charity Barnardo’s. The charity is raising money to fund its work helping teenage girls escape sexual exploitation. Apparently I can make an annual return on the bond of as much as 12 per cent. I agree to put £10,000 into the bond.

On further investigation, it seems I can make a higher return – 15 per cent or even more – from investing in other bonds that fund charities helping young people get into work. I think I should put my £10,000 there so as to get a higher return, so I withdraw my agreed investment in Barnardo’s.

The call from my adviser reminded me that I make a monthly donation to Barnardo’s. Suddenly, this doesn’t make sense – why donate when I can invest in a bond to support their work and get a return at the same time? I make a mental note to think of Barnardo’s in future as part of my investment, not my charity, portfolio. Maybe I should extend that thinking to other charities too? After all, my financial adviser tells me that returns on charity investments like social impact bonds are uncorrelated with the rest of my portfolio, which is a very good thing if markets take a dive.

None of this story is true. But it could be. There are many smart people across a number of countries trying to turn elements of it into a reality. Huge efforts are under way to make real the promise of social investment – the availability of capital as loans or equity to support social activities. That promise is genuine but there are ethical questions that the field of social investment needs to tackle and the social sector needs to articulate more clearly. This article seeks to point out some of these challenges.

Barnardo’s work on child sexual exploitation is measurably effective, saving the British taxpayer large amounts of money. An independent team of economists at the Bank of England crunched Barnardo’s data and showed the financial return on this work – the savings that accrue to society – outweighs the costs by a staggering 6:1.[1] With the right technical support, Barnardo’s could turn this arithmetic into a social impact bond and raise money to support their work, and the beginning of my story could come true. (Pictured: In 2013-14 Barnardo’s worked directly with 2,592 exploited or at-risk children in the UK.) Use image 50 Barnardos near here

I worry, though, whether this might make the rest of the story to come true, too. I am in favour of supporting and extending Barnardo’s work, but I am anxious about the other elements of the story.

Financial considerations edging out social ones
First, I have no qualms about making money from providing services that help people. If this is the way to mobilize capital for social ends, that is fine. My first concrete concern is about the allocation of capital on the basis of the financial returns implied by widespread use of social impact bonds and social investment more broadly.

In the hypothetical story above, I shift my planned investment from Barnardo’s because I deem the financial return too low. Social return no longer figures in the way I allocate my funding.

Some proponents of social investment argue that the field will mature and realize its potential only when the financial returns are in line with mainstream investment opportunities. Implicit within this is the notion that financial return must be accorded primary status if the market is to develop fully. That might be the best way to encourage capital into charitable activity. I question whether it is the best way to allocate capital within the charitable sector. Financial return is often correlated with social return, but it need not be, and a system based on the former may well not be socially optimal.

I might decide to move my charitable donation from Barnardo’s to another charity for some arbitrary reason unconnected with social value; there is nothing to prevent this. Such arbitrariness is common in the way people give to charities, not least because of the absence of a clear social metric with which to make comparisons. But social investment raises the spectre of a clear alternative guide – self-interest based on financial return.

Where the market should not venture
In one sense, this is simply a technical matter about the allocation of capital. In another, it raises ethical questions about the trade-offs between financial and social returns and the right way to allocate funding for social goals. As such, it highlights a broader point about the alternative frame of reference that social investment represents.

Social investment comes from and is grounded in a belief in the power of market mechanisms. The methods, much of the language, and most of the people working in social investment have backgrounds in commercial (most commonly, financial) markets. It is easy to see it as the extension of market-based practices into the social sphere.

The Stanford-based academic philosopher Debra Satz argues that there should be some limits to the realm of markets. She laments that: ‘Economic theory is inherently imperialist about the scope of the market … There are no theoretically set limits for the scope of the market.’[2] Satz’s fellow philosopher Michael Sandel has also fretted about desirable limits to markets.[3] He points out the potential for markets to distort behaviour and corrode values. This is a potential problem for social investment.

At the start of the story above I regard Barnardo’s as a charity, an organization to which I donate money. This changes after I am offered the chance to invest in a Barnardo’s bond. There are several examples in research by economists and others of such changes in the way people regard organizations. The trigger for a change is often the role of incentives. As one group of academic economists wrote in a survey of the literature on this subject: ‘Moving from no incentive to a positive incentive can dramatically change the framing of the interaction and shift the individual’s decision from social to monetary.’[4]

The classic study here is an Israeli childcare centre which introduced a system of fines to encourage parents not to be late when collecting their children. The fines had the opposite effect: parents turned up later rather than earlier as they now viewed their relationship with the nursery as transactional.

More money – but going where?
In the story above, there is little incentive to donate to Barnardo’s but considerable incentive to invest in a bond. My frame for Barnardo’s changes: the charity becomes an investment option. It is possible in such circumstances that I would reduce my donations as in the story above. The truth is that no one knows. We are introducing a market-based frame into a social realm. A non-market transaction – a gift in the form of a donation – becomes a market investment. This seems to have been largely overlooked by enthusiasts for social investment.

Such enthusiasts trumpet the idea that incentives will attract more and better-targeted money: more money, that is, assuming that donations are not ‘crowded out’ as in the story above. It is possible that incentives will mean more money, perhaps simply because the volume of available investment capital is so large, but it is not a given and we should be more aware of the potential trade-offs. The idea that the money will be better targeted rests on the assumption that money will more accurately be tied to returns. But, as noted here, those returns are financial not social; that does not guarantee that the money is better allocated.

The undiscussed ethical questions
Alongside technical questions about the efficiency of social investment are broader ethical concerns about the role and limits of the markets in the social sector. Economics struggles to incorporate ethical questions; financial markets do too, and it is not a surprise that the emerging field of social investment has so far largely ignored questions around ethics given that most of its protagonists come from these backgrounds.

The issues raised in this article have ethical dimensions – about the realm of the market and the way people think about charitable donations. Social investment has considerable potential to increase funding for charities and other social enterprises. It also offers promise in terms of better and more effective performance management, as it demands measurement and data. But it represents the introduction of the values and frames of the market into a field that deliberately and consciously marches to a different tune. That might be riskier than is often acknowledged.

1 Pro Bono Economics An assessment of the potential savings from Barnardo’s interventions for young people who have been sexually exploited
2 D Satz (2012) Why some things should not be for sale: The moral limits of markets (Oxford University Press).
3 M Sandel (2012) What money can’t buy: The moral limits of markets (Allen Lane).
4 U Gneezy, S Meier and P Rey-Biel (2011) ‘When and why incentives (don’t) work to modify behavior’, Journal of Economic Perspectives 25.4: 1-21.

Martin Brookes is director of the Paul Hamlyn Foundation. He is writing in a personal capacity. Email

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