Robert Litan - Former Director, Economic Studies, Brookings Institution
Ella Bell Smith - Professor of Business Administration, Tuck School of Business at Dartmouth
Matthew Slaughter - Paul Danos Dean of the Tuck School of Business at Dartmouth
Robert Lawrence - Albert L Williams Professor of International Trade and Investment, Harvard Kennedy School and Non-Resident Senior Fellow, The Peterson Institute for International Economicsl
The thoughts expressed in this Guest Opinion are those of the writer and do not necessarily reflect the views of S&P Global.
Published: October 21, 2021
This is the fourth chapter in a series of content related to Entrepreneurial Leadership Must Help Meet America’s 21st Century Challenges in a Post-Pandemic World
Chapter Two: The Power and Limits of Federal Policy
Chapter Three: Entrepreneurial Leaders at Work
Chapter Five: Reducing Barriers to Effective Social Policy and Policy Entrepreneurship
Chapter Six: Changing Mindsets
Join S&P Global Sustainable1 for the next episode in our ‘Beyond ESG’ series as we sit down with the authors of the report. Register here to join the discussion or receive the on-demand replay
As effective as multiple changes across all non-federal sectors of society have been in helping to address the major challenges that confront all of us, each of these sectors also face a different set of barriers or limits.
Unlike for-profit businesses, which can scale rapidly in response to growing demand if currently profitable or if the capital markets confidently project the firms will be profitable, the activities, goods and services provided by state and local government and non-profit activities are subject to much tighter fiscal constraints even where there is substantial unmet demand. Those constraints are not as binding at the federal level, where the government can legally run deficits, which also can effectively by monetized by the creation of money by the Federal Reserve, working through the banking system.
The private sector still has imperfections, with various frictions common across many economies, that can inhibit less productive firms from rapidly catching up to those at the “technological frontier,” where the fastest productivity growth is taking place [Bahar]. Likewise, U.S. capital markets, especially for new companies, can be short-sighted and fail to assure adequate investment in technologies that may be best for the economy and society over the long run. Still, for economies like the U.S. that are operating at the technological frontier, history shows that markets are most conducive to economic growth, though they are essentially oblivious to how the rewards from growth are distributed.
There are several reasons, beyond the availability of financing, why the diffusion or rapid scaling of the most effective societal interventions – aimed at correcting market failures and addressing a wide range of social challenges – can be and often are limited compared to the for-profit sector.
Information is the lifeblood of the private sector. Prices signal to consumers what to buy, consistent with their budgets, and to firms what to make and invest in [Hayek]. Firms use brands as a shorthand way to signal quality and service ratings provided by widely respected consumer publications, such as Consumer Reports, and consumer ratings systems (such as TripAdvisor, Airbnb, Uber) provide information about quality, which has similar impacts.
Information plays other essential roles. The relative importance of inside knowledge about the strengths and weaknesses of employees, technologies and the internal workings of an organization helps explain why some activities are conducted within firms rather than outside them, through markets in episodic transactions [Coase]. Information about prices and volumes is essential for investors in financial markets, where many kinds of financial instruments and derivatives are traded. Information-related businesses have grown around these markets that assemble and deliver information to market makers and institutional investors, such as Bloomberg and Reuters, ratings agencies, and firms providing equity analyses. Credit scores for individuals and firms heavily influence access to and the price of credit.
Ironically, the not-for-profit sector is not, in the main, lacking for information. In this digital age, there is much information available without an apparent cost almost instantaneously by using a search engine (though not everything yet is available on the Internet, and some of it only is there behind a paywall). [i] The problem instead is that there is so much information that is not peer reviewed or verified that it can be costly for non-profits and governments to ascertain its quality, or worse, risk acting on inaccurate information. Moreover, non-profits and governments lack the equivalent of a Consumer Reports that scores or ranks the studies or evaluations of the range of policy interventions in which they have an interest – in education, criminal justice, reducing homelessness, and so on – or an FDA equivalent that provides a “pass-fail” screen on which interventions are both “safe” and “effective” to apply. These difficulties mean that cost-effective policies do not optimally diffuse throughout society, while interventions that do not work or cause harm remain in place and can even be inappropriately scaled.
Markets signal to firms and the capital markets about which privately supplied goods and services should be scaled. As just discussed above, effectiveness signals are more muddled for social interventions aimed at influencing behaviors, and financing truly effective programs worth scaling outside private capital markets can be difficult. In some cases, financing can be perverse, in the case of established government programs that are financed on a formulaic basis – for example by population – year after year. During this time, beneficiaries of these funds can easily turn into interest groups that have a vested interest in persuading political powers not to end the financial support, even if their programs have received no or even negative evaluations.
Funding in the non-profit world also is often plagued with uncertainty. Foundations often provide time-limited grants, ostensibly to give grantees incentives to find alternative funding sources, ideally by providing some marketable services. This may not always be possible, so even worthy endeavors must live under a financial cloud, while spending time and money seeking grant funds from other philanthropic sources.
Crowd-funding sites on the Internet can meet fund-raising demands for certain endeavors, but this funding, too, may be possible only for very specific projects over well-defined time periods with a single fund-raising goal. Crowd funding is generally not well-suited for financing ongoing programs or interventions.
Finally, financing the scaling of even proven successful programs – namely, those that are meeting a need and doing so cost-effectively, as established by rigorous evaluations – can be slowed or even halted by a “not invented here” syndrome, or by the desire of foundations, and state and local government officials to launch their own initiatives for branding or other purposes.
Entrepreneurship can be a lonely experience. Outside of family and friends, entrepreneurs – for-profit and social – often have little other support.
That has changed in recent decades in the for-profit world with the formation and growth of various “accelerator” programs, which are typically highly competitive – at least for the most successful ones like Y-Combinator in Silicon Valley and the Tech Stars multi-city network. These accelerators provide promising entrepreneurs with initial funding, mentors and networks for talent and capital. Likewise, “angel groups” throughout the country also provide funding and advice, as do various entrepreneurial mentoring organizations. Less formally, but just as important, “startup communities” often host regular meetings that connect entrepreneurs to each other, to potential suppliers, employees and professionals who can help them [Feld and Hathaway]. One of the most successful entrepreneurial programs of this genre is the 1Million Cups network, launched by the Kauffman Foundation, which can now be found in over 160 cities across the country.
State and local governments have trade associations, as do foundations, where promising ideas are routinely exchanged, but these organizations do not provide the kind of extensive, in- depth support that can be found in the for-profit world. Though various universities have educational programs for current and future non-profit leaders, there are, to our knowledge, no standing organizations that can bring the most effective social entrepreneurs together on a regular basis to learn from each other, let alone to cultivate and mentor future social leaders.
Some interventions may not be easily replicable because their success hinges on an especially dynamic, charismatic, entrepreneurial leader. In those situations, even a successful evaluation points to the success of that individual or his or her leadership team rather than the program itself.
A lesser, but related barrier, relates to the difficulties that even successful non-profits face in attracting just the right leaders. Each successful organization has its unique culture, yet without access to capital and thus the ability to compensate new talent not only with salaries but also stock or stock options, it can be difficult finding just the right people who fit into the culture and who share the vision of the founder and the leadership team.
[i] There is a hidden price for searching the Internet: the value of one’s search history that enables targeted advertising, which users currently provide for free.