THE CONNECTION BETWEEN money and well-being is simple (as in, the more money we have, the better off we think we are) but also horribly, irreducibly complex. You don’t need more money to improve your well-being; you can just be smarter about how it’s put to use. Instead of buying stock in an arms manufacturer or a tobacco company, for instance, maybe an investor could help to indemnify a group of small biotechnology companies against the failure of their clinical trials. The investor’s return would come from sharing in the upside if the trials succeeded. Or maybe a philanthropist could give money directly to poor Kenyans, rather than simply adding to the multibillion-dollar endowment of a grand Ivy League university.
Such intuitions lie at the heart of two new books. Andrew Palmer’s Smart Money looks at the world of financial technology; Nick Cooney’s How to Be Great at Doing Good considers the world of philanthropy. Both of them see all manner of opportunities to shake up a bloated, inefficient, and often downright harmful system.
Palmer, a journalist at The Economist, has written the more careful and sensible of the two books. As someone who was thrown into the deep end of business reporting at the onset of the global financial crisis, he is acutely aware of just how dangerous finance can be. Yet he’s convinced that the good can and should be looked at separately from the bad, and that it makes sense to celebrate hopeful developments while bemoaning past excesses.
This is not a particularly persuasive rhetorical device. The financial innovations of the past thirty years or so were, on balance, a bad thing, and, as Palmer explains quite clearly, those that take off and grow quickly are often the most ruinous. There have always been good ideas in finance—innovations that, provided everything had gone as their inventors hoped, would have made the world a better place. Generally, one of two things has happened to those good ideas. They have either failed to get any traction or turned out to have very nasty unintended consequences. The big weakness of Palmer’s book is that he fails to demonstrate that this time things could be different.
Indeed, many of the good ideas that Palmer talks about have already gone nowhere. For instance, catastrophe bonds—a way to move the financial risk of things like earthquakes and hurricanes from the insurance sector to the much bigger global bond market—have been talked up (not least by The Economist) for most of this century, but the projected growth in the market never seems to materialize. Or take social-impact bonds, in which investors bet that social interventions, like attempts to reduce recidivism, will end up saving money for the government. If they do, the investor makes money. The problem is that the earliest such instruments—the only ones that have been around long enough for the market to determine whether they work—have generally failed, sometimes with associated multimillion-dollar losses for their philanthropic backers. Other “innovations” Palmer endorses, such as reverse mortgages, have been around for quite a long time, and they, too, have failed to attract significant support. Most financial products are sold rather than bought, and if a financial product makes the world a better place, there’s generally not much profit in selling it. So it ends up languishing, unloved by anybody except its theorists.
As a result, Palmer’s resolutely upbeat book has a paradox at its heart: He has serious problems with the very institutions that are necessary for his rose-tinted vision to come to life. “There are big banks,” he writes in his conclusion, “but there are also visionary entrepreneurs.” And while he is happy to demonize the former, he is altogether smitten when it comes to the latter: Anybody who has ever worked at Google, it seems, or who has taken venture-capital funding, can do no wrong. (And if you ever worked at Google, you can be quite sure that Palmer will mention that fact in this book.) Why are greedy venture capitalists good and greedy bankers bad? That is never explained. Palmer says nice things about predatory start-ups, like Britain’s Wonga, even as he praises almost nothing coming out of more-mainstream financial institutions. And yet the structure of global finance is such that no financial innovation is going to have a visible effect on the world economy unless and until it is embraced by precisely the institutions Palmer so clearly mistrusts. Indeed, for all the time Palmer spends expounding on the “financial innovation” part of his subtitle, he doesn’t remotely deliver on the “high-stakes” part: Add up everything he talks about and it’s still just a minuscule fraction of the broader financial system.
In this book, the more exciting the idea, the further it is from reality. Christopher Shepard’s Structured Bioequity—that biotechnology investment idea—sounds amazing but as of yet is nothing but vaporware. At the other end of the spectrum, Robert Merton’s SmartNest tool for retirement funds is a thing that really exists. But it’s buried inside Dimensional, a big Texan fund-management company, where it prompts retirees to do things like sell call options on stock indices. Is it possible that involving individuals in options markets is a good idea? Yes. Is it likely? No.
Palmer’s aversion to established finance companies might help explain why he never really mentions the single biggest positive financial innovation of the past thirty years or so: passive investing. Dimensional is part of that trend, but it is dominated by much bigger companies such as Vanguard and iShares. Millions of individuals have been convinced that they shouldn’t try to outperform the market, and that they should just buy some kind of low-fee index fund or exchange-traded fund instead. And that innovation has made those investors many billions of dollars richer than they would otherwise have been.
Perhaps the conspicuous omission of passive investing from Smart Money’s honor roll of innovation stems from another, also unspoken motivation. The rise of passive investing, after all, is deeply entwined with a much less positive financial development: the move from defined-benefit pension plans, where workers had real certainty about retirement security, to defined-contribution 401(k) plans, in which individuals are left to their own devices and often come up woefully short. Passive investing is all well and good, but it’s ultimately a means to mitigate the harm done by financial innovation rather than a great leap forward.
Still, there are good ideas in Palmer’s book, especially in his examination of promising instruments such as social-impact bonds. In addition to saving money for the state, he argues, these bonds can help nonprofits lock in their budgets, allowing them to concentrate more on their mission-related activities and less on perpetual fund-raising.
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Would Nick Cooney advocate for social-impact bonds? As a supporter of effective altruism, the movement promoted by Princeton moral philosopher Peter Singer, he probably should, you’d think. But then again, Cooney has some very odd ideas, so it’s hard to tell.
For instance: Cooney is really big on saving lives. If you donate money to a charity and then that charity pays doctors to save lives, he thinks, you’re doing something really wonderful. On the other hand, he’s surprisingly blasé about the actual thing that the doctors are doing, the act of saving lives itself. “Sure, teachers can change lives and doctors can save lives,” he writes. “But how much additional good would actually be brought about in the world if we personally took one of those jobs? They are paid positions, so if we don’t do the work someone else will.”
Cooney likes to think of philanthropy very narrowly, as “the small sliver of our lives that we call charity.” You donate some amount of money and time to charitable causes, on a selfless basis; this is the “particular slice of our lives that we devote to doing good.” Everything else, he says, is “personal needs, wants, goals, and enjoyments.” If you invested some of your savings in a social-impact bond, that would not be part of the charity sliver, since the whole point of charitable giving is that you give your money away and don’t get it back. So, for all the good they might do, it’s hard to see how social-impact bonds might meet with Cooney’s approval.
The same argument could be deployed about anything else that makes the world a better place without being a direct donation of money or time to charity, whether it’s founding Google, writing the novels of Judy Blume, or even working for a do-gooding nonprofit, if doing so pays you anything close to a market wage. Cooney’s admiration for check-writers is mirrored by his disdain for the people cashing those checks and doing the actual work: “Most non-profit staffers are not choosing the path that leads to the greatest good,” he writes. Cooney even manages to conclude, at one point, that raising lots of money to publicize theatrical productions might lead to “more children who suffer from debilitating diseases, more people who remain blind,” based on his bananas theory that “charity is a zero-sum game.” (Needless to say, Cooney adduces no actual evidence for this theory, which seems self-evidently false. Indeed, rather than a zero-sum game, charitable giving more closely resembles a virtuous circle: The more you give to one charity, the more you’re likely to give to another.)
As for the actual recipients of charity and the idea that they might like some kind of say in how they’re treated—this never seems to occur to Cooney. His book appears to be set in a parallel universe in which philanthropists, just by dint of spending money, magically induce positive change elsewhere in the world. “Writing the name of one charity on a check instead of the name of another charity on a check,” he writes, “could have such huge real-world consequences as ten children being stricken with a debilitating disease, one hundred middle-aged women living the remainder of their lives in blindness, or one thousand animals having to undergo a lifetime of torment.” In Cooney’s book, it all comes down to writing a check; everything else follows from the ironclad rules of cause and effect.
This idea, which Singer’s Princeton colleague Angus Deaton has memorably criticized as the “illusion that lives can be bought like cars,” is both unrealistic (“The evidence is nearly always in dispute,” Deaton says) and inherently offensive. The world’s marginalized have often organized under the slogan “Nothing About Us Without Us”; they quite rightly demand a stake in how they’re treated. But if they react with anything less than unbridled gratitude to the money flowing from Cooney’s generosity—if they start messing with his efficiency metrics and deciding that they might know better than Cooney how they can best be helped—then he’s perfectly happy to move on to a group of recipients who by their nature are incapable of lèse-majesté.
That group, it turns out, is animals. Cooney, just like Singer, is a big proponent of animal rights, and nonhuman lives are a principal focus of his theorizing. In this, Cooney breaks ranks with charity monitor GiveWell, the flagship organization for effective altruism. GiveWell’s cofounder Holden Karnofsky has dutifully blurbed the book, but Cooney doesn’t love the way GiveWell places special value on human life: “Unavoidably, the recommendations GiveWell makes reflect the organization’s own ethics. Its recommendations suggest that its founders prioritize saving human beings from dying (mainly of disease) and trying to reduce extreme global poverty. You or I may have different priorities.” This is where the book starts losing its slender grip on internal consistency. If Cooney has different priorities, which center on nonhuman life, then that’s fine. But if other people have different priorities, then they’re simply empirically wrong.
Cooney is clear about this: The best thing the Make-A-Wish Foundation can do with its money, he says, is to stop spending it and instead simply regift whatever it can to, say, the Schistosomiasis Control Initiative. (Yes, that’s the example he gives.) Similarly, Cooney writes at inordinate length about how no one should ever donate to (or even volunteer for) the Theatre Communications Group (TCG) when they could give to (or work for) something called the Seva Foundation instead. Cooney carefully quantifies this calculation, explaining why the Seva Foundation, which performs eye surgeries in developing countries, is “probably over a thousand times more successful” than the TCG. There are “hard facts,” he says, which we have to be “willing to face,” and “succeeding at charity requires making calculated decisions about who to help and who to ignore.” So much for “you or I might have different priorities.”
Cooney’s priorities are not always as compassionate as you might think. Although he never says so explicitly, his straitened vision of charity as a zero-sum game is a recipe for the systematic neglect of the neediest. If you’re trying to help the greatest number of people at the lowest cost, you’re going to target your interventions in cities rather than in difficult-to-reach rural areas. What’s more, you’re going to spend relatively little effort trying to reach the weak, or disabled, or discriminated-against—because if you’re operating under a tyrannical mandate to maximize efficiency, you’re always better off going for the low-hanging fruit.
Indeed, when it comes to implementing the particular axioms of effective philanthropy, Cooney’s thinking can be extremely muddled. He is, for instance, very keen that charities concentrate on their “bottom line”—not the amount of money they raise but rather the aggregate good they can achieve in the world. At Habitat for Humanity, he writes, “the main bottom line is pretty clear: to provide decent housing to as many people as possible.” The charity is failing in this quest, he concludes, because it’s building too many homes in the US; it should be building much more overseas, even if that results in a drop in domestic donations. So long as the number of houses built goes up, the amount of money raised doesn’t matter.
That’s a good example for Cooney, because it happens to align with his obsession with efficiency. If you reduce the number of dollars you’re spending and increase the number of houses you’re building, you’re going to see a huge decrease in dollars spent per house built. But what if the bottom line is not aligned with efficiency? What happens if Habitat for Humanity is building lots of houses abroad, and then a US donor comes along with a very large check and tells it that she wants the money used only to build houses in the United States? Bottom-line Cooney would tell the nonprofit to take the money, since it would increase the total number of houses built. But efficiency Cooney would cringe, since the average cost of a house would soar. Cooney can’t decide whether charities’ goals should be absolute or whether they should be based on what he calls “cost per good done.” He never wrestles with the question of how a charity is supposed to function in the far-from-implausible scenario in which doing more good means that its marginal costs start going up.
Most profoundly, however, Cooney misses the meaning of money. That’s a very dangerous thing to do if you’re inclined, as he is, to reduce absolutely everything to money terms. Money isn’t a means to an end; it’s much more than that. It’s the way in which we assign value and express our desires; it’s a way for us to ratify personal relationships. Let’s say you go on vacation to Turkey. There you meet a man who is reintroducing pigeons to the Cappadocia region, so that the local farmers can go back to fertilizing their fields with pigeon guano, which is much more environmentally friendly than trucking in chemicals. Inspired, you help him out with some money. This kind of action is hard for Cooney to categorize. He wants people to be friendly and empathetic—but then the minute their actions veer into the financial sphere, he wants those same people to become robots. It’s OK to give money to the Cappadocian farmer, he seems to be saying, only if that gift is not charity. If it is charity, then you should spend the money elsewhere. It’s an entirely arbitrary and unhelpful distinction, one that I suspect exists only because of the special treatment that charitable donations are afforded in the tax code.
But the fact is that most Americans don’t itemize their charitable donations, and all of us spend money in ways designed to improve the lives of others, even when we’re just, say, buying fair-trade coffee. Charitable impulses are threaded through all our spending, which is why it’s so weird for Cooney to get upset about donations to arts organizations (rather than, say, wasteful expenditures on luxury handbags) when he has no evidence whatsoever that those donations would otherwise have gone to a charity he admires more.
Writing books that center on money is hard, because the subject goes on forever, in all directions. Everything is about money, in one way or another. So authors like Palmer and Cooney need to narrow things down a bit. Palmer has concentrated on financial-sector start-ups; Cooney has concentrated on evidence-based philanthropy.
That’s fine. Both subjects are very interesting. But problems arise when the authors try to draw excessively broad conclusions from their narrow investigations. It’s edifying to look at what financial start-ups aspire to do, but that exercise tells us very little about financial innovation in general. Similarly, doing a bit of homework before donating to charity is definitely a good idea. You just can’t stretch that practical bit of due diligence to the point that you’re telling most of America, including people who work for nonprofits, that they’re literally killing people if they fail to follow your advice. Some things can be reduced to such simplistic tenets. But money? It’s far too complicated.
Felix Salmon is a senior editor at Fusion.
