Feedback

I have had several conversations with a person who manages an enormous amount of money for one of the country’s wealthiest families. Along with his money management role he is involved with the family’s philanthropic efforts.

He would like to know if I would be interested in a management role in an effort that they are putting together through the family’s charitable foundation to address one of our nation’s biggest and most complex social/economic/structural problems. Or perhaps I should have written ‘sets of problems’ since, in fact, the problem they intend to address is a spaghetti of differing issues and interests, winding through many industry segments and demographics.

I like the people behind the effort, respect the resources that they intend to put into it and have genuine interest in the problems to be solved, so I haven’t said ‘no’, but I worry both about a lack of clarity about exactly which of the innumerable interrelated problems that they see should/will take priority and that since their effort is to be undertaken through their foundation on a not-for-profit basis, it may suffer from a lack of clarity about quantifiable results.

My instinct is that any changes as massive as the ones they hope to achieve would have to be sustained by an enterprise powered by the profit motive rather the generosity of some donor – no matter how fabulously wealthy he or she might be. The accountability inherent to business enterprises provides continuous feedback – which acts as a spur to ongoing innovation – that not for profits often lack.

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Coincidentally, I have recently begun what I expect will be an extended dialog – possibly leading to an actionable business opportunity – with a woman who is a leader in one of the fields to be urgently addressed by my philanthropic friends. She has a deep background of leadership positions in the field, some of it working for businesses, some for not for profits. Presently she is running a not for profit. In our conversations it quickly emerged that she agrees with my view that for any solution relating to her field of expertise to both spread rapidly and take root in a sustainable manner, it would have to be undertaken by a for profit enterprise.

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Entirely apart from the question of whether any of these conversations will lead to something that I think it makes sense for me to dive into, they have caused me to spend some time pondering the differences between various kinds of enterprises – not for profits, businesses and governments – trying to figure out which ones are better suited to different purposes, and why.

In organizational affairs the crux of the matter is always feedback. What behavior is rewarded, and what punished?

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I should probably begin by noting for those who are not longtime Civil Horizon readers that I am a big believer that charitably motivated and funded organizations can do great things. I have given innumerable hours of labor and considerable sums to the not for profits of which I am a happy supporter. In each such case, I am more than convinced that those organizations are doing great jobs and accomplishing things that are important and wouldn’t otherwise be done at all.

What are these important not for profit organizations (not only the ones I support, but also the ones that garner lots of support from others) and why aren’t government or market-based organizations doing what they do? In some cases – e.g., houses of worship – they do things that government eschews; in some – e.g., the independent school that I have devoted much of my support to – they do things (like educate bright, underprivileged inner-city children) that government does badly; in others – e.g., supporting cancer research – they reflect donors’ interests in doing more than the government is doing in a particular field of common interest. None of these fields offers businesses much in the way of a near-term profit motive.

Not for profits succeed when they appeal to donors by addressing clear, narrowly defined needs; they are ultimately answerable to their donors. If they cease to meet needs that donors are willing to support with their voluntary contributions, presumably they fade away. Their only ‘market’ feedback is donor support.

(Not so coincidentally, one of the concerns I have about our great universities is that I believe that they have grown so wealthy that they are effectively immune to donor feedback. Princeton, where I went to college, has a $22 billion endowment – about $4 million per undergraduate. They don’t need my support and they know it; if they consider themselves answerable to – or in a symbiotic relationship with – anybody, it’s the government. And we wonder why our great universities have become such state-solution-oriented organizations).

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Businesses must satisfy the needs of customers, employees, suppliers and owners better than others; they will fail if (when, actually) the needs of any one of these groups is not satisfied on a long term basis. Customers are satisfied if they get (desired) products that are better than or as good as and cheaper than what competitors offer; employees are satisfied if the pay, benefits and working environment is better than they can get from others; suppliers are satisfied if the company reliably pays agreed prices and owners are satisfied if the business provides adequate returns for the risks undertaken.

Every one of these decisions is mutually voluntary. At every level, competition reigns and feedback is clear. That competition drives risk-taking and innovation – the company that rests on its laurels will quickly be crushed by competitors that imitate its successes and go on from there. This constant battle is Schumpeter’s creative destruction, and it explains both why most of the last generation’s biggest corporations have fallen away and why new and better products are always on offer: for business, the feedback loop is always short.

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Governments do things, always ostensibly and sometimes in fact, for the common good. Only a government can do things – like provide for national defense, build roads and maintain law and order – that benefit everybody.

Government has a monopoly on jails and the legitimate use of deadly force – otherwise, it couldn’t force everybody (well, all designated taxpayers, that is) to help pay for the essential – and the nonessential, but supported by a majority of voters or commanded by the elites – services that it provides. Once the relevant decisions have been made, government motivates us to live with or support its ‘products’ through blunt force rather than consumer choice. Almost no decisions made by government are implemented in a voluntary manner; governments rely on coercion.

In many forms of government – absolute monarchies like North Korea, dictatorships like Venezuela, and religion-based tyrannies like Iran – decisions are made by self-designated elites answerable only to themselves. Other countries – like Russia – are dictatorships/oligarchies that dress themselves in not-very-convincing democratic clothes to make their decisions look less self-serving. In such countries there is no citizen-feedback loop at all – and, if you look at it, very little innovation of any kind.

Democracy’s defining characteristic is that it allows voters to cast determining judgments on the people who make the rules. If we the people don’t like the rules (or the rule-makers), we can throw the rascals out. In other words, democracy creates a relatively direct – if somewhat delayed – feedback loop for elected officials. Only in true democracies do most of the important laws reflect the preferences of most of the citizens – and even in democracies, lesser laws, often cast as interpretations of vaguely worded laws passed by legislators, are frequently put in place by bureaucrats and judges who are effectively immune from adverse feedback. For the most part, the guy at the EPA or the DOE doesn’t care what you think; I’m not convinced that Justice Kennedy does, either. The feedback loops that many government officials, even in democracies, face are so attenuated as to be almost nonexistent.

All of which explains Winston Churchill’s famous aphorism that: “Democracy is the worst form of government except for all the others.”

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In most of the fields that touch us every day – like food, housing, consumer goods, technology and medical care – the constant feedback of our freely made choices is a prerequisite to the innovation that gives us ever-better products. Many things need to be tried for some to succeed; successes are rewarded and failures punished by the market much more directly than by other kinds of organizations.

Consequently we should only ask our government to do things that must, but wouldn’t be – done by those in business. We can fill in the cracks of those things that should, but wouldn’t be done by supporting not for profits that address those clearly defined needs in quantifiable ways. The rest is better left to the private sector.

 

M.H. Johnston

3 comments to Feedback

  • Jeff  says:

    It strikes me that trying to address “one of our nation’s biggest and most complex social/economic/structural problems” through a single non-profit is unreasonable at best and, more likely, a fool’s errand. Especially since the problem is really sets of problems. Issues of this magnitude are rarely solved by throwing money at them. Look at the failures in public education and the wars on drugs and poverty where trillions of dollars have been expended. Granted, they involved government solutions, but even when philanthropists with the resources of the Gates or Buffets are involved, problems of massive scale are not readily solved. Perhaps a more focused initiative on one of the problem sets in a specific area with definable goals over a set period of time would be a better way to start.

    • M Johnston  says:

      Agreed. My instincts to the same effect motivated the thinking behind this post.

  • John Primm  says:

    Agree with Jeff.

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