[original post: Does Capitalism Beat Charity?]

1: Comments Where I Want To Reiterate That I’m In Near Mode
2: Comments Directly Arguing Against My Main Point, Thank You
3: Comments Promoting Specific Interesting Capitalist Charities
4: Other Interesting Comments
5: Updates And Conclusions

1. Comments That Make Me Want To Reiterate That I’m In Near Mode

Seen on Twitter:

Something like this was one of the most frequent comments and, imho, misses the point of the post.

I’m not running a Moral Worth Tournament where I match concepts against each other and decide which deserves more credit for good things. I’m discussing the Near Mode situation where some specific person (eg you) has some specific amount of money (eg $1,000) and wants to use it to improve human welfare.

Real people in my real comments section have argued that you shouldn’t spend it on charity, you should spend it on satisfying your daily needs (or invest it) because capitalism always works better than charity. I’m arguing that’s not the right way to think about this specific problem.

If you’re holding a Moral Worth Tournament and want to argue that Capitalism wins because it creates the preconditions that make everything else possible, fine, that’s outside the scope of this post. “Which is better, Capitalism or a double cheeseburger?” Even granting that capitalism is better in the cosmic sense, and that capitalism is a precondition for abundant food, and that Capitalism beats cheeseburgers in the Moral Worth Tournament happening inside your head - I’m arguing that if you’re hungry right now you should go to Burger King, not the New York Stock Exchange.

Bob Frank (blog) writes:

The value of capitalism isn't the "second order effects" so much as the cascading-indefinitely effects. It's the "give a man to fish" vs. "teach a man to fish" principle. While I in no way wish to denigrate the value of saving lives with better water... once you do that, then what? You have people who are alive, and still in the same situation they were in before.

The value of capitalism is that it elevates entire civilizations to a higher state of living. There's a reason why stuff like water dispensers to save lives are going to developing countries with no market economy: *in capitalist nations, there is no need for such things in the first place.* The equivalent work was baked into our basic infrastructure long ago.

Seems to me that one of the best places to invest, then, would be in research to figure out why the "charities that send economists (or other professionals) to developing countries and advise them on how to do more capitalism" were ineffective and how to do it better.

This is true, but I want to repeat exactly how Near Mode and specific my problem is: I have real money I want to spend on this.

It’s all nice and well to say “it would be good if someone could research why development charity doesn’t work so well”, but 1. This is a field called Development Economics 2. Like all academic fields, it’s full of a bunch of squabbling factions 3. You can definitely fund grad students to do PhDs in this, but they’ll come up with some theory about elite capture very slightly different from all the other factions’ theories, and then what?

Maybe you have an answer for this, but if it involves “Spend the rest of your life creating this hard-to-create institution from the ground up”, then I, personally, am not going to do this. I would prefer something more like a Bitcoin address I can send money to.

(if you actually give me a Bitcoin address then I’ll assume you’re trying to scam me and won’t send anything there, sorry.)

2. Comments Directly Arguing Against My Main Point, Thank You

VelveteenAmbush writes:

He never really addresses why plugging the cash into an index like the S&P 500 isn't a better use of funds than GiveWell's recommended charity. He chooses Instacart as his exemplar of capitalism, but then concludes that investing $1M in Instacart means "you can give 2,000 people a great deal on grocery delivery." But the whole point of investing is that it isn't one-and-done, that instead it grows exponentially over the long term, building wealth in the form of new and better companies which provide products, services, innovation and technology that are responsible for basically all of the good things you see on Steven Pinker's up-and-to-the-right charts illustrating the improvement of the human condition over time. These are the things that, if all goes well, will eventually lift humanity to the heavens, slay the demons (disease, death, etc.) that have haunted us forever, and awaken the dead matter of the cosmos into flourishing sentience.

Over the long term, investing your money is a better use of capital than donating it to charity if and only if investing it results in a greater exponential progression in wealth for humanity than donating it to charity. The historic annualized average return of the S&P 500 since its 1957 inception through the end of 2023 is 10.3%. That is a floor on the humanistic benefits created by investment, because it includes only the direct returns to the money invested, and it excludes the positive externalities the companies generate for society but do not capture directly. Since the earnings that companies generate are generally the product of voluntary trade, one should assume that the counterparties to each trade are also benefitting.

So: if you donate $1M to GiveWell's Dispensers For Safe Water charity today, will that end up creating more than $134M of value in 50 years? If not, it's a loser in terms of long-term opportunity cost. If so, then we can get into the more subjective exercise of trying to tabulate the positive externalities of investing.

To put my cards on the table, I don't like EA style giving because it focuses on the cheapest cost to save a life worldwide. But lives worldwide vary greatly in the extent to which they build wealth for humanity as a whole. In my opinion, looking for the lives that are cheapest to save worldwide is going to select for those least likely to contribute to the technological and commercial progress of mankind.

As an analogy, imagine there were a nursing home with 10,000 elderly residents. Suppose that nursing home were drastically underfunded such that their residents were dying left and right of eminently treatable conditions. You could save a lot of lives by donating money to supply better medical treatments to those residents. Perhaps that would be a kind thing to do. It would make a big difference to its residents. You could claim to have saved up to 10,000 lives. But it would not build wealth. Those residents are going to remain dependent and unproductive whether they die today, tomorrow, or in twenty years. Thus, from the longterm perspective of humanity, that donation is consumption, not investment, even though it happens to be other people (the nursing home residents) who do the consuming. Over the long term, investment is what will make us all wealthier and eventually uplift our species and awaken the cosmos.

My criticism of GiveWell style EA is that its causes are systematically akin to donating to underfunded nursing homes. If you view uses of funds as on a spectrum, with pure consumption one end of the spectrum and pure investment on the other, my position is that EA is more like consumption than putting your money into the S&P 500.

You can disagree with that, and it's fair to do so. I think it would actually be a healthy debate to have. I would love to see Scott go deep on this debate specifically, if he thinks he can thread the needle around certain delicate topics regarding human capital in doing so. But the form that the argument should take is over the expected long-term rate of return to humanity's wealth of the investment, not number of lives saved. Number of lives saved is the wrong metric entirely. Long-term ROI is the right metric.

I’m signal-boosting this because Velveteen is the kind of person my post is trying to argue against. Lots of people responded with “you’re responding to a straw man, which is just a distraction from [argument I like better]”. No, I’m responding to people like Velveteen. I appreciate their willingness to respond to my argument on its own terms instead of trying to deflect it to something else.

We talk a bit more in this comment subthread, but I have three main objections. First, at some point all of this has to bottom out in consumption. It’s great if I can turn money into more money, but this is the equivalent of getting a genie and wishing for more wishes - sure, do it, but at some point someone has to use at least some wishes or the whole thing is pointless. So this reduces to whether you should consume (either personally or charitably) now, vs. invest, turn your money into more money, and then consume it at some unspecified point in the future. This is a good and important question, and not one I have strong opinions about - see here and here for more.

Second, I care a lot about marginal utility of money. I think a (consumption) dollar goes much further in the developing world than the developed world. If you invest in high-growth companies, it may create more total wealth, but most of that wealth stays in the developed world. If you donate to charity, you will create less numerical wealth, but it will go to people who need it more. Which matters more? This is what the Instacart vs. clean water example was meant to provide intuitions for.

Third, how does company wealth compound vs. philanthropic “wealth”? If you give your money to a company, they’ll expand operations and grow at some rate (on average the market rate of return). If you spend your money curing tropical diseases, then some people will survive, and those people will build wealth / do labor / grow the economy (also you’ll save money that would otherwise have been spent treating those diseases). As I said on the subreddit, whatever else is bad about an 18 year old dying, you've lost ~50 years worth of productive labor that you invested eighteen years building up. Once you consider how much human effort it took raise and educate 2,000 eighteen-year-olds, and how much you can get done with a 2,000-person labor force, then letting those 2,000 people die starts to feel like a giant economic waste even in addition to the humanitarian cost (not to mention the amount of money saved by not building hospitals to treat the diseases that would otherwise have killed them). Probably those 2,000 people don't create more compounding wealth than an investment of the same amount of money into Instacart would, but I think the diminishing marginal utility of money case makes it likely that they produce more utility-adjusted wealth.

Velveteen protests that I haven’t proven this and don’t even have a model showing it’s a sane order-of-magnitude estimate. I accept this. I don’t think anyone has proven the opposite either. I’m going entirely off total guesses. It would be worthwhile for someone to try to calculate this but it would be a very big project, and a half-baked version would be worse than the total guesses.

3. Comments Promoting Specific Interesting Capitalist Charities

Michael Strong writes:

I was glad to see the EA Intervention Report on Charter Cities but it was limited by the fact that it was written by non-expert outsiders. Mark Lutter's response is much better informed than was their write up.

Regarding the widely varying success of SEZs - Read Lotta Moberg's, "The Political Economy of Special Economic Zones." Tl;dr privately financed zones are more likely to be successful than are crony capitalist, politically-motivated government financed zones, plus a lot more nuance worth reading for serious SEZ students. Moberg and Lutter are two of a handful of scholars who have done dissertations on zone related issues. The EA report was not informed by Moberg's research, thus they did not understand the political economy dynamics of different types of zones.

Insofar as one of the core conclusions of the "Intervention Report" was "economic development and reform zones," the actual work done by Charter Cities Institute and others in this domain do, in fact, work on a variety of zone-based reforms. The Romer-esque version of a "Charter City" was to some extent a straw man for what should have been a deeper dive into the global movement of zones with distinctive law and governance.

Thus several of their conclusions were sensible - but should have led you to increase your support of the Charter Cities Institute (CCI) rather than question it:

"Charter cities are expensive to build and take a long time to come to fruition, so if your focus was on the value of information, it seems likely that you could more cheaply and quickly generate this by focusing on alternatives which do not require you to build a new city, such as economic development and reform zones."

Hello? Much of CCI's work is towards what are de facto reform zones rather than grandiose Romer-esque Charter Cities - and that is the way they should be working.

There is a global movement towards zones with distinctive law and governance (precisely because it is widely recognized that bad institutions limit economic development). The Charter Cities Institute is indeed a leader in this movement, and should be supported, but the issue of better law and governance in zones is broader than their work alone. The most successful example is the Dubai International Financial Centre, where a common law legal system was placed in a 110 acre zone within UAE sharia law. It led to Dubai becoming a top global financial center in twenty years.

Zone based reforms are a hack around the public choice challenges of nation-state reforms. Bob Haywood, former director of the World Economic Processing Zones Association, makes the case that zones address Doug North's "natural state" of oligarchy preventing liberalization because export zones don't immediately threaten the rent-seeking structures. In his experience, usually zones were adovcated by the peripheral elites - not the core elites, but the son-in-law, cousin, younger brothers, etc. who had access to elites but were not currently benefiting from rent-seeking themselves. Without zone solutions, however irregular their success, most nations tend to be stuck in the "natural state" of oligarchic rent-seeking. Haywood makes the case that zones led to broader economic liberalization in Mexico, China, Mauritius, Ireland, and elsewhere. If the benefits of zone-based reforms includes broader economic liberalization then the returns are much greater.

The most important work being done by CCI is not necessarily creating Charter Cities - Prospera alone has a much more sophisticated platform than anything CCI has. But they play a crucial role in mainstreaming these ideas so that development economists, multi-lateral institutions, media, and well-intentioned Westerners pay more attention and are more likely to support reform zones. Prospera's technology is ready to replicate - we need this greater mainstream support to close the deals.

I've been involved in selling these ideas in multiple nations, and being able to point to the growing mainstream credibility achieved by CCI is definitely a factor leaning towards adoption. Conversely, without CCI's leadership, developing world government "reforms" are driven by a combination of venality, corruption, populist or leftist ideologies, World Bank banalities, and the occasional McKinsey analysis. CCI is a big positive step in the direction of concrete, actionable reform zones that are likely to improve institutions incrementally. If we can get to the point at which zones with their own law and governance become a routine technology of economic development, then the value of these institutional experiments is likely to become high.

Most people have no idea how much harder it is to do legal business in developing nations. The upside of making Prospera-quality law and adjutication available in zones in Africa will be significant over time. My wife, Magatte Wade, is working to bring Prospera to Africa because of this. She also writes and speaks about the ridiculous over-regulation of business in Africa that makes it necessary - she has first hand experience of what it is like to do business in the US vs. in Senegal. The fact that African nations are ranked at the bottom of the Doing Business index is not an artifact of measurement.

So by all means support CCI. The work it does is much more important than the EA Intervention Report acknowledges.

Michael is a big player in the charter cities world and I appreciate his input.

Like Michael, I think the theoretical case for charter cities and SEZs is strong. Rethink Priorities tried to supplement that with an empirical case, but it fell flat because most of them are poorly designed half-efforts that don’t work, and the empirical results reflected that. The natural next step would be to come up with some objective criteria for “well-done charter city / SEZ”, do a report-level amount of work demonstrating that these do work, and then argue that whatever we’re debating (eg CCI) fits the criteria for a well-done CC/SEZ and so its expected return should be in the group we’ve now proven to be good, not the other group Rethink Priorities proved to be bad. This would be a big effort, and AFAIK nobody has done it yet. So I continue to classify good CC/SEZs in the bin of “theoretically strong case, not super-strong empirical evidence yet”.

What you do with this bin is a value judgment, but my heuristic is that lots of things in it - the kind of things that are brilliant and well-intentioned and really should work and do work in flashy cases everyone knows about - then somehow fail to work when you try to scale them up. So although I’m (relatively) optimistic about CCs/SEZs and support them, I don’t yet think they’ve obviously proven their utility as the best form of charity.

The Effective Altruist Forum now has a post on Economic Growth - Donation Suggestions And Ideas, listing suspected top charities for helping countries develop. These include ACX Grants winner Growth Teams, the Charter Cities Institute, GiveDirectly, and Overseas Development Institute.

I say “suspected top charities” because these are just kind of thrown out there, and not given the really thorough EA treatment that eg GiveWell gives eg malaria charities. I understand why this is - it’s easy to do RCTs on whether malaria treatment works, and hard to do RCTs on the effects of spending ten years quietly lobbying Madagascar to have slightly different economic policy (or whatever).

Still, this is the main reason I don’t donate more to these kinds of charities. I assume most charities aren’t very good, and I only update this once someone (ideally a group of experts willing to devote a lot of time) analyzes them, gives one a seal of approval, and says it works better than whatever other charity I’m considering. This is hard to do in development work.

One of the charities listed on the Forum post is one I have specific reason to think isn’t very effective (I’m not going to publicly accuse it, because it’s a pretty weak reason, it would take hours to formulate a case strong enough that I didn’t feel like it was vibe-based-slander, and I don’t want to get in a fight). It’s just coincidence that I happen to know that. How many other ones on that list have serious flaws that I just haven’t yet run into evidence of? I don’t know!

The four I named above all seem good to me, although I’m not an expert and haven’t spent too much time evaluating them.

Mark Roulo writes:

> "Do something like donating to charity, but the donation should go to charities that promote capitalism somehow, or be an investment in companies doing charitable things (impact investing)"

One interpretation of this is that donating to the Grameen Bank is better than donating to the Heifer International.

Several people brought up Grameen Bank (Nobel winner Mohammed Yunus’ microfinance project) and other charities that loan poor people money to help them start small businesses. They thought these seemed like ideal ways to harness the power of capitalism for charitable ends.

I also used to think this, but articles like https://voxdev.org/topic/methods-measurement/understanding-average-effect-microcredit have convinced me that most studies show this doesn’t work in real life. I find this a surprising and counterintuitive result, and it’s part of why I seem so paranoid here and am demanding so much evidence before supporting charities in this field.

Laure X Cast writes:

I don't know about supporting capitalist charities (and I don't think I feel quite as bullish on capitalism for various reasons) but I think a different strategy to consider is 'investing' in (or donating to) charities that also operate in the market economy. Nonprofits make up 6% or so of GDP and there are many interesting nonprofits that have sustainable revenue, allowing them to re-invest in more work 'for good.'

I agree this is a potentially promising strategy. It’s good insofar as it forces the charity to be doing some useful thing someone wants (since they won’t make money if they don’t) and maintain some contact with reality (insofar as sales and prices keep them honest).

The counterargument is Nassim Taleb’s “barbell” idea (related: Purchase Fuzzies and Utilons Separately). If you’re trying to optimize two different goals (eg make money and do good), you’re better off doing half one and half the other, rather than putting all your chips in one fuzzy combination of both.

That is: why isn’t there a regular company, without a social mission, filling this need? Probably because it’s not very profitable. Why not? Probably some combination of “it’s not that useful” and “the intended recipients really need it, but don’t have enough money to pay for it / aren’t educated enough to know they need it”. If it’s not that useful, the charity’s not doing good work. If the intended recipients don’t have enough money or don’t understand enough to choose it on the open market, then a charity that charges them money will fail to serve a lot of the population.

I’m not saying a clever entrepreneur can’t thread this needle and make something that works here, this is just one reason I don’t think this solves the entire problem and obviously beats normal companies / normal charities.

Erusian writes:

This fails to engage with the actual argument of the social enterprise movement. The argument is that there is an irrational aversion to profitable activity among people who seek to do social good. Largely, in my opinion, due to ideological anti-capitalism. It is not that maximizing returns is the best use of money at all times or that we need to go around preaching the gospel of capitalism.

To give you a simple example, Foodhini is a for profit company that takes various refugees and has them make their regional cuisines then sells them in an Instacart or Uber Eats like model. It's a profitable company but it also does significant work to help these people get on their feet. Whether that's services to make sure the work is legal or helping them set up restaurants (which in turn profits Foodhini in various ways).

The argument is this is better than just giving them money or funding classes to help them integrate and that you should direct money toward this type of cause rather than charities that rely on constantly receiving a stream of donations. The model of constantly asking for money or grants to sustain the charitable activity is (according to the argument) supposed to be a last resort, not a first resort.

If that's not third world enough for you there's companies that help deploy limited resources to repair potholes in Central Asian roads (which the government is happy to pay for because it saves money), a company that makes water purifiers that it sells in Africa (while donating a significant number to poorer villages), a company that provides cheap industrial milling into certified gluten free flour for poor farmers, and so on. You also have non-profits that are 'profitable' in the sense they make enough money from standard business to operate like Ten Thousand Villages.

These are often not strictly the most profitable thing that people could be doing with their time but they both serve a social good AND they're profitable and therefore self-sustaining, able to raise investment, and don't need to spend nearly as much time asking for funds. That's the argument.

To be honest, I haven't heard a good counterargument. Which is one of the main reasons I'm backing this horse instead of EA.

Sorry I failed to engage with a completely different argument about something else.

I’m interested in hearing which of these things people think is best, and whether there’s any evidence supporting them.

Josh writes:

The charitable version of capitalism is GiveDirectly. It's just like buying things for yourself but the first person to spend the money is someone else.

For those of you who don’t know, GiveDirectly is a charity that gives your money directly to poor people in developing countries, and then they can spent it on whatever they want. They’re doing some cool stuff!

But precisely because they’re so good and so easy to quantify, they’ve become the bar that EA organizations rate other charities against, and some of those ratings find the other charities to be better. For example, GiveWell says the charities they fund are usually between 5x and 8x more effective than GiveDirectly.

I haven’t investigated these estimates and I don’t know what assumptions go into them, I don’t want to be taken as an authority here, just to relay what I’ve heard from other people who have thought about this more.

4. Other Interesting Comments

Michael Druggan (blog) writes:

I think this argument is nonsensical because money donated to charity eventually ends up back in the capitalist economy anyway the difference is what gets consumed along the way. If I donate $1 million dollars to the charity that builds wells that charity will then spend that on things like the materials to build wells, the capacity to ship those materials to the locations they need them, paying the people who build the wells etc. all the supposed second order benefits you would get from the money being spent in the capitalist economy would still happen since its still getting spent.

I originally thought this was claiming a sort of infinite free money pump that can’t exist.

Suppose that eg the US government decided to give everyone free health care by taxing people and spending it on health care. It seems like this should have tradeoffs or hurt the economy somehow. But you could argue that the health care money just goes to doctors and nurses and so on, who would then spend it on normal economy stuff, so the non-health-care economy is just as big as always.

But if I understand Michael’s response, he’s saying - the charity has to build the wells somehow, and that involves spending money on capitalist companies. Let’s say they hire Amalgamated Kenyan Wells. Then the money ends up in Amalgamated Kenyan Wells, presumably a profitable and successful company in the Third World, and this is no worse than donating to the company directly. So if your alternative was to give the money to a profitable and successful company in the Third World, the donation is better, because you do this and you get some free wells out of it!

Now I’m really not sure how to think about this. I think the answer is something like - the company has a certain profit margin (let’s say 10%), so you’re donating 10% of the money directly to Amalgamated Kenyan Wells, and the rest is going into the ground to become wells. So I agree that there’s some aspect of supporting capitalism here - maybe even one that’s better than giving to the company directly because it forces the company to demonstrate usefulness - but I think you could still argue that investing directly in the company has more effect.

rmostag1 writes:

Instacart's service isn't free after the $100 subscription - while you may no longer pay a per-order delivery fee, they continue to extract value through upcharging you on the cost of the groceries themselves (an item which costs $2 in-store costs $2.10 or $2.50 on Instacart), charging a percentage of the revenue to the retailer itself (so even if the price is equivalent in-store and on Instacart, Instacart charges a few percentage points of revenue to the retailer for the customer traffic), charging the retailer directly for providing services (most notably with smaller retailers, where Instacart may pick the products from the shelves, provide the back-end of the ecommerce platform, etc), or some combination of all of the above.

In all cases, the value extracted by Instacart far exceeds the stated fee that they charge you (either per-order or as a subscription), and you end up bearing it in one form or another at the end of the day. It's an interesting experiment to buy the same basket in-store and on Instacart at a retailer where the prices are NOT equivalent - often you'd surprised at the premium they're charging you for convenience. Certainly worth it for a segment of the population and a segment of retailers, but there's a reason that most retailers of scale are moving towards bringing the services formerly provided by Instacart in-house and figuring out ways to monetize it themselves - it's a frighteningly expensive proposition when you lay out all the costs end-to-end.

Thanks, this amply explains the part of their business model I found mysterious.

5. Updates And Conclusions

My biggest update is that I learned what Instacart’s business model actually is. Otherwise, not much, sorry.

If you want to change my mind, the most useful thing you can do is either:

1. Propose a specific capitalist development charity for me to donate to (not a vague gesture at a type of charity, but a specific website with a donation page), and show me an analysis for how many dollars per QALY you get from it which finds it’s better than existing EA charities. Preferably this should be peer-reviewed or at least written by a good economist.
   
   (The only capitalist development charity I’ve seen try this was Charter Cities Institute, their numbers were absurdly high, I think the Rethink Priorities report reasonably suggested a much lower prior, and now the ball is in CCI’s court to demonstrate that they can pick winners effectively enough that the Rethink Priorities prior is inappropriate. To be clear, I think this would be a bad use of CCI’s time because it would be really hard and nobody but me has asked for it.)

2. Give me an analysis with real numbers (even hand-wavey ones) demonstrating that capitalist charities should be so much more effective than other kinds of charities that investing in a broad basket of them outperforms other charities by such an order of magnitude that we don’t need specific numbers (even if 90% of the charities in the basket are frauds or duds or whatever).

This isn’t a gotcha or a rhetorical question, I think these could really change my mind.