November 23, 2016
Over the past decade, the financial industry has been the subject of harsh criticism — and not without cause. Disillusioned by the abuse of esoteric financial instruments and repeated examples of corporate malfeasance, large numbers of Americans have grown tired of Wall Street and what they see as the financialization of the economy. Finance, however, is only a tool, and as with any tool, it can be used for good or ill.
Georgia Levenson Keohane, executive director of the Pershing Square Foundation, professor of social enterprise at Columbia Business School, and author of Social Entrepreneurship for the 21st Century: Innovation Across the Nonprofit, Private, and Public Sectors, makes the case in her new book, Capital and the Common Good: How Innovative Finance Is Tackling the World's Most Urgent Problems, that traditional financial tools can be used to innovate solutions to some of the world's greatest social and environmental challenges and urges readers to regard finance not as an instrument of exploitation but rather as a force for good.
Central to her argument is the distinction between financial innovation — the creation of new, increasingly complex instruments of financial engineering — and innovative finance — the use of existing tools to overcome market failure and meet the needs of the poor and underserved. Divided into five thematic chapters, the book explores how innovative finance can be used to fund solutions to environmental, healthcare, financial inclusion, and disaster relief challenges around the world, as well as problems in the United States.
Revisiting Adam Smith's theory of the "invisible hand" in the context of public need, Keohane shows how financial techniques previously used in the pursuit of private interest can be adopted across sectors to benefit the common good and provide economic opportunities for those at the bottom of the wealth pyramid. "When markets fail to produce a set of broad-based and sustainable public goods," she writes, "we need a more visible hand: concerted efforts by governments, multilateral agencies, philanthropies, and, increasingly, socially minded investors to meet needs and solve problems." It is a perspective rooted in the power of agency, the core of which she describes as "aligning incentives in ways that encourage people — individuals and government leaders — to make decisions that both are in their own self-interest and benefit the society." The logical extension of this argument is that many negative externalities (e.g., CO2 emissions) can be internalized by the market with the judicious application of the right tools — for example, cap and trade — while certain failures of the market can be redressed by the deployment of hybrid incentive models such as pay-for-success bonds.