Editors’ note: This article is an excerpt of a pamphlet released in March 2008 and published by Demos and the Young Foundation.

Anew movement is afoot that promises to save the world by revolutionizing philanthropy, making nonprofit organizations operate like business, and creating new markets for goods and services that benefit society. Nick-named “philanthrocapitalism” for short, its supporters believe that business principles can be successfully combined with the search for social transformation. There’s no doubt that this is an important phenomenon, and although there are no exact definitions, I think there is a distinctive heart of philanthrocapitalism that is characterized by three distinguishing features:

  • very large sums of money committed to philanthropy, mainly the result of the remarkable profits earned by a small number of individuals in the IT and finance sectors during the 1990s and 2000s;
  • a belief that methods drawn from business can solve social problems and are superior to the other methods in use in the public sector and civil society; and
  • a claim that these methods can achieve the transformation of society rather than increased access to socially beneficial goods and services.

What does the evidence tell us about these claims? It isn’t possible to “prove” or ”disprove” the claims of the philanthrocapitalists, since the evidence simply isn’t there. This is a very young field, so this is not surprising. There are some serious studies of social enterprise, but by and large the literature is anecdotal or written by evangelists more interested in publicity than rigor. This is not a field where self-criticism or humility will win you any plaudits.

One clear subtext of the debate is the philanthrocapitalists’ disappointment in the achievements of groups in civil society, which are criticized as “amateurish” and “riddled with inefficiencies,” always in contrast to the operations of business.1 There’s also a tendency to make a fetish of certain kinds of “innovation” that privilege business thinking rather than to look at the impact that civil society makes on its own terms. The bedrock of citizen action may be effective but not especially “new”: for example, the day-to-day work of solidarity and caring wins no plaudits, but it is incredibly important in holding societies together. Philanthrocapitalists love handing out new prizes—for building private spaceships and electric cars, for sequencing the human genome, and for ending global warming—but not for the Ladies Auxiliary or for reviving New Orleans.2

At the macro-level—that is, at the level of national social and economic performance—there’s no evidence to suggest that increasing marketization in the social sectors brings better results than public or “pure” civil-society provision. The privatization of utilities and pensions has turned out to both inefficient and socially divisive, and during the 2000s, its failings helped push Latin America to the left.3 Worldwide research by United Nations Research Institute for Social Development shows that countries with longer life expectancy and lower under-five mortality spend a significantly higher proportion of their gross domestic product on government health care, not private or social enterprise.4 As Laurie Garrett has shown, the one thing necessary to address global health pandemics like HIV/AIDS is a strong public-health infrastructure, not a patchwork quilt of private and social provision.5 Sustained health progress requires that technological advances be integrated with the redistribution of political power and broad-based participation in the economy.6

Both recent history and contemporary experience suggest that the best results in raising economic growth rates while simultaneously reducing poverty and inequality come when markets are subordinated to the public interest, as expressed through government and civil society.7 Public and private interests must be separated so that governments have the autonomy they need to oversee development. This was true in East Asia after 1945, when the so-called Asian tigers transformed themselves from a GDP equivalent to that of Chad, Pakistan, and Haiti to a level that rivals parts of Western Europe; it was true in other successful experiences of international development, such as Chile and Botswana during the 1980s and 1990s, and it is true of China and Vietnam today.8 Some would say it was even true of the United States in the nineteenth century.9 In all these countries, business was encouraged to “do its thing,” but in service to long-term goals that favored redistribution and social stability by “governing the market,” in the words of a famous book by Robert Wade.10

Today, countries that practice similar policies score high on their social indicators (think Sweden, the Netherlands and Canada), while those like the United States, which have strayed from this path, remain more violent and unequal, though they can still enjoy high rates of productivity growth in their economies. The United States has become one of the Western world’s less socially mobile societies and over the past 30 years has delivered stagnant incomes to a large minority. Meanwhile, the share of national income accounted for by the top 1 percent of earners has reached its highest level since 1928, at almost 22 percent.11 Over the past 20 years, in terms of the latest global rankings of life expectancy, America has dropped from 11th to 42nd place.12 Things look better on the Environmental Performance Index composed annually by Yale University (the United States is number 28), but now the Economist has devised an index that pushes the United States so far down the ranks that even Yemen scores higher (the reasons are: America’s huge prison population, easy access to firearms, and burgeoning military budget.)13 If author Oliver James is to be believed, “selfish capitalism” has already produced a measurable decline in our emotional well-being, “crippling personal agency despite the avowals of individual choice.”14

Let’s take the analysis down a few levels and look at the two areas in which philanthrocapitalists are already very active.

Strengthening the Capacity of Civil-Society Organizations

The first area where one would expect an impact to be made lies in improving the financial and management capacities of civil-society organizations.

I’ve always been confused by the way in which social entrepreneurs and venture philanthropists differentiate themselves from the rest of civil society on the grounds that they are “results based” or “high performance,” implying that everyone else is uninterested in outcomes. Sure, there are mediocre citizens groups, just as there are mediocre businesses, venture philanthropists, social entrepreneurs, and government departments. So “why import the practices of mediocrity into the social sectors,” as Jim Collins, author of Good to Great, asks in his pamphlet on nonprofit management?15 What separates the good and bad performers is not whether they come from business or civil society but whether they have a clear focus to their work, strong learning and accountability mechanisms that keep them heading in the right direction, and the ability to motivate their staff or volunteers to reach the highest collective levels of performance.

In some areas, civil-society managers have just as much, if not more, to offer, because they can also see things in significantly different ways: mobilizing teams through more democratic structures, for example, using reflective and contemplative practices to improve their performance, developing accountability mechanisms that bring in all their stakeholders, and finding innovative ways of measuring their impact on both short and long-term goals. A recent study published in the Nonprofit Quarterly found that nonprofit leaders were actually more effective than their for-profit counterparts on 14 out of 17 dimensions of leadership practice, including risk taking, persuasiveness, and vision.16

Civil-society organizations need lots of advice, but as much from social science (which the philanthrocapitalists often ignore) as from consultants in management and finance. This doesn’t mean that companies like the Bridgespan Group and McKinsey & Company are irrelevant to civil society. They are increasingly active in the not-for-profit world (funded in particular by venture philanthropy), and the services they offer are often very good. In his “Report from the Front Lines,” Eric Schwarz, the founder of Citizen Schools Inc. (a U.S. social enterprise) accepts that the substance of what they bring has helped his organization considerably but rejects the implication that this proves private-sector superiority as “flawed and highly offensive.”17

“Solutions that work have to work economically” is a mantra of this movement, but this doesn’t necessarily imply the raising of commercial revenue. Philanthrocapitalists sometimes paint reliance on donations, grants, and membership contributions as a weakness for nonprofits, but it can be a real strength, because it connects them to their constituencies and the public—so long as their revenue streams are sufficiently diverse to weather the inevitable storms along the way. In that respect, more needs to be done to reduce the transaction costs of dealing with foundations and to address the “fashion consciousness” that is the curse of foundation funding: old, new, and all stops in between. In many cases, this would be a safer bet than pulling in more revenue from commercial capital providers, with all the risks that that entails.

“Nonprofits must understand that the desire to earn income and the desire to use business practices to promote social change are two different and almost entirely incompatible objectives. . . . Don’t mix your models,” is the warning of at least two cautionary tales from the field.18 These tradeoffs are not inevitable (especially if commercial revenue generation is separated from advocacy and community mobilization, inside or in a different organization completely), but they are real.19 Introducing the different logics of civil society and the market into the same organization can have a negative effect by confusing