A new world economic order?

Lately I’ve been hearing a lot of conversation about whether the current economic meltdown represents the end of capitalism.  I think the short answer is ‘no,’ but I do think an era is over — one in which the total free, unfettered markets are seen to have all of the answers.

So we will see more regulation and oversight, which I hope will prove to be effective, but you never know.

More interesting to me is the idea that a new meme might emerge, one in which there is an understanding that a nuanced approach to markets is the answer. At Acumen Fund where I work, nearly all our investments exist in that middle space between philanthropy and a fully functioning market.  Because of all the challenges and complexities of building new markets for the poor where they do not exist, these enterprises do not generate a return commensurate with their risk.  Often we get challenged because we don’t fit neatly into any one bucket: we’re not pure charity (-100% financial return) and we’re not a private equity shop shooting for 30% returns.

I think the starting point for this new conversation is the recognition that markets are fragile, and that they don’t spring up fully formed and creating optimal results.  Borrowing a little economics lingo, there are multiple equilibria, and not all of them are stable.  And the optimal one may not be the one with the highest financial returns.

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4 Responses to A new world economic order?

  1. Karen says:

    I am not an economist. But I worked as a secretary at the FDIC in the 80s. We were shutting down banks and S&Ls like crazy. The markets crashed. Real estate prices plummeted; no one could sell their homes and many lost them. Deficits were at an all-time high. Did things change after that period? No — in fact, social memory is practically nonexistent about these facts. Many glorify Reagan as one of the greatest presidents ever, when in fact many suffered economically during this time, and many others gained untold wealth during the preceding boom. Nothing changed then, and nothing will change now. The fat cats know how to manipulate the system to create more and more wealth. There aren’t enough people who think as you (we) do — that money isn’t everything. Mark your calendars 20 yrs ahead and trust me on this one.

  2. Pete Burden says:

    Hi Sasha – I’d be interested to hear your (and perhaps Acumen’s) view of “social business” as defined by Muhammud Yunus
    (http://peteburden.wordpress.com/2008/10/05/serving-humanity/).

    Is social business right for the “space between philanthropy and a fully functioning market”.

    Thanks
    Pete

  3. Sasha says:

    Hi Pete,

    Thanks so much for your comment. At Acumen Fund we don’t spend as much time on the definition and the difference between a social business and a social enterprise, but I would say that at Acumen Fund we focus on organizations that meet the definition of ‘social businesses’ that you describe, namely:

    “Social businesses differ from ordinary businesses in that rather than having the primary objective of making a return to shareholders, the primary objective of a social business is solving social or environmental problems.”

    We are interested in providing capital, knowledge and talent to innovative enterprises that directly provide health, water, housing, energy and agriculture to the 4 billion people than make less than $4 a day. So we find entrepreneurial businesses that need growth capital and invest in them with goal of helping them scale to reach a million customers or more in a sustainable manner.

    Hope this helps and if you need more information check out http://www.acumenfund.org

  4. David Andersen says:

    “…but I do think an era is over — one in which the total free, unfettered markets are seen to have all of the answers.”

    None of these failed markets (and in reality only parts of them have failed(and only temporarily)) have ever been totally free and unfettered. In fact part of the problem was promotion of bad practices by the government! So much for the watchdog, eh?

    Conclusions:

    1. Let’s have real free markets before we start claiming they don’t work.
    2. Let’s define what it means for a market to work.
    3. Real free markets are not going to lack failure. Markets can never be failure free because they are the creation of humans.
    4. It’s a mistake to think that regulation will ever make for failure free markets either. It’s never worked yet.
    5. Every ounce of regulation added to the mix is a subtraction of at least as much freedom, perhaps more. At some level this is far more detrimental that beneficial.

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