Are Profits the Best Measure of the Good?

EGG-energy is for-profit, and proud of it. In fact these days making money in the developing world is often seen as a point of pride. The idea is that if you are giving something away – whether it’s bed-nets or condoms or even drugs – there is always the worry that your organization might be simply flooding the countryside with goods that are either useless or not valued by their intended beneficiaries (and thus not used properly – witness the free textbooks that were distributed to children in a town I once lived near in a very poor area of Africa. Soon after being given out they began showing up for sale in the market, pawned by the children’s parents). The feedback loop between company and customer that is the backbone of capitalism is lacking. Whereas if you sell something for fair market price, and manage to make a profit doing it, then obviously you are providing your customers with something they need and value. They wouldn’t pay for, say, mobile phones if the phones weren’t giving them more bang for their buck than any previous alternative. Thus, if you sell something to a poor person, you are doing good. QED.

Right? Well, no. Here are four ways in which for-profit development can go wrong. We at EGG-energy hope to give them as wide a berth as possible, but these are tough, non-obvious questions that any social enterprise is going to have to struggle with at some point, and sometimes struggle hard:

1) Externalities. Both companies and people tend not to attach enough value to the damage (or sometimes good!) their decisions do to people outside the loop of buyer and seller. This can complicate, for example, the sale of antibiotics to farmers who might benefit from their use, while at the same time potentially speeding the development of resistant bacteria. The reverse problem occurs with mosquito-repellant-treated bed-nets: they not only reduce incidence of malaria in their users, but in the entire area in which they are used. But how can you charge someone for a benefit to their neighbor?

2) Discounting. People discount things – good things and bad things – that will happen in the future. They discount them a LOT. That’s why smoking exists. For many products, the present benefit is clear – but you have to ask whether there is going to be a future harm, and if so, whether consumers are taking that future harm properly into account when they buy the product. Are companies that sell cigarettes to the citizens of the developing world doing a good thing? A much more controversial version of this question can be posed to microfinance institutions. Are their customers properly discounting the pain involved in paying back their loans? And if not, can we be sure that the service provided is beneficial?

3) Human frailty. We are starting to understand a little bit about what makes people happy. One finding: people have no idea what makes themselves happy. It turns out that we are about as good at choosing courses of action that guarantee future happiness as would be a random spin of the action wheel. In a sense this is a problem for capitalism as a whole, and thus the answer might be “it might not work so great, but it’s better than the alternatives”. But if you are starting an enterprise whose goal is not only to make profits, but to make your customers better off, what do you make of the idea that your customers might have no idea whether or not buying your products actually does make them better off?

4) Agency issues. Often in life the person who makes the money doesn’t spend the money. This is particularly true in strongly patriarchal cultures in which the male head of the household might control an income derived from several wives and children. This patriarch might be great at choosing to buy products that benefit him, while not so great at buying products that benefit his family.

As these issues hopefully show, being for-profit is not a magical bullet that guarantees that an organization will necessarily accomplish the positive change it is dedicated to. Of course, they don’t show that it’s impossible either. It’s just that, like so many things in the realm of development are… it’s hard. We hope to do our best.

- Ben