Over at this blog, Albert Wenger has been arguing that private capital is no longer scarce.
This means that global investable capital exceeds by 2x the capital required to operate the economy. In fact working capital needs have been declining substantially due to just in time manufacturing, faster electronic payments and better working capital management (eg. through C2FO). If you can reduce the working capital needs of firms by 25% you would move investable capital to close to 3x of required operating capital for the economy.
That means we have massive amounts of capital available to invest in new endeavors. It explains why interest rates are low and there is fairly little that central banks can do about it unless they figure out a way to dramatically reduce investable capital – they can certainly shorten their balance sheets but even that impact is likely to relatively small in the overall scheme of things (eg US Fed about $3 Trillion).
Another way to think it about it is this: we have an oversupply of money and an undersupply of good ideas to invest in.
I’ve been in philanthropy for a year now, and Albert’s thesis led me to reflect on philanthropy.
Broadly speaking, philanthropy can be used to either (1) directly alleviate suffering or (2) help solve complex problems.
For the foreseeable future, there will not be an oversupply of capital to directly alleviate suffering.
If a philanthropist wants to save lives and reduce suffering, there is plenty to invest in; and there is always the option of simply giving cash to people living in poverty.
Many philanthropists, however, also desire to support efforts to solve complex social problems; i.e, to try and create better education, health, and criminal justice systems – or to invest directly in technological solutions in areas such as energy.
The goal here is to reduce future suffering rather than simply alleviate current suffering.
It is not easy to solve such problems. In my work, my days are not chalk full of meetings with people pitching tested, operationally scalable, and financially sustainable interventions that will lead to major improvements in our country’s educational system.
Working in areas such as education, criminal justice, and health is extremely difficult, and scalable solutions are hard to find.
So perhaps Albert’s thesis, in some form, is beginning to hold true for philanthropy.
For this second part of philanthropy’s mission – working to solve complex social problems – it is unclear to me that capital is scarce.
If this is true, it has numerous implications for philanthropists, non-profits, and government.
If I’m able to wrap my head around these implications and organize them in a thoughtful manner, I’ll write a follow-up post.