Improving areas like health, education, or the environment is not only about social impact – in Capitalism 3.0, it can be profitable. We’ve talked to Dr. Nat Ware to understand how humanity can improve social impact (and capitalism) at a systems level.
Nat, do you think there’s a problem with how capitalism works now?
Good question. Well, people often view capitalism as good or bad without realizing that capitalism is what we make of it and how we design it. We can redesign capitalism and make it so that the profitable thing to do is also what is best for humanity – such as what achieves desirable outcomes in terms of health, education, and the environment. In other words, we can be innovative at a systems level and create a pragmatic utopia.
This is where people view the world in a very binary way, where social impact and financial return are entirely distinct undertakings. You have non-profits and for-profits. You’re either a philanthropist losing 100% of your money when you donate, or you’re a profit maximizer that doesn’t care about impact. You either make money or you’re doing good. People who have this binary conception of the world often have the view that the best way to have an impact is to raise money and donate money.
Whereas Capitalism 1.0 views the world in a very binary way, Capitalism 2.0 (and Social Impact 2.0) views the world in a linear way, where social impact and financial returns exist at opposite ends of a spectrum. Inherent in this conception of the world is that it’s possible to generate both a social impact and a financial return, but there’s often a tradeoff between the two.
Broadly speaking, society has progressed from viewing social/financial returns in a binary way (1.0) to a linear way (2.0). This second conception of the world recognizes that doing good isn’t just an emotional endeavour, but also an intellectual endeavour. How you approach a problem is more important than how much money they throw at it. Why? Because some approaches are literally thousands of times more effective than other approaches.
The goal here in this 2.0 stage of social impact is to better align social impact and financial returns at an organization level, so that there is the least amount of tradeoff.
By aligning social impact and financial returns, it means that social impact can be generated not only with philanthropic capital but also profit-seeking capital. This is important because the amount of philanthropic funds in the world is a tiny portion of the overall capital. If we want to have an impact, we need to tap into broader pools of capital. The reality is that the scale of the problems of our world demands solutions that philanthropy alone cannot solve.
Too often, people try to have their business do too many things at the beginning. It’s better to do one thing well, scale up, and then in the future branch out. It’s also important to balance confidence and humility – You need to be confident in your plan, but you also need to be objective and be willing to pivot when it’s needed. If you’re going to wait for the right time to do something, you’re going to be waiting forever. The risk of regret should also be considered alongside the financial risk – they often offset each other.
It takes the same principle as Capitalism 2.0 (trying to align social and financial return at an organization level) but applies it to the systems level. It’s all about how we align social and financial returns within the economic systems of the world.
Why is systems thinking needed? Well, the world is more intertwined than ever. What we’re seeing, broadly speaking, is a transition from products to services. In many cases, that’s due to the fourth industrial revolution. The biological, digital, and physical are becoming increasingly linked. And as a result, companies are becoming more interlinked. We also see that more and more people are going to transition from being consumers to being designers and controllers within the world.
To have that transition, people will need new skills, so we need new education systems. For people to take that risk of being reskilled, we need new safety nets. And to have those safety nets, we need new financing mechanisms. Everything is linked.
Another reason why systems thinking is essential is technological advances. Often I hear people saying that robots are taking human jobs. That distinction is a bit of a false dichotomy. We need to create a world where hybrid combination of technology inputs and human inputs are superior to either/or.
You’ve dedicated your Ph.D. research at Oxford to systems thinking and pointed out that the current education system is unsustainable. Where do you see the most prominent problems?
Education finance is a problem in many places around the world. We can all agree that people should have access to the ladder of opportunity regardless of background. We can probably also agree that the ladder is often inaccessible. Why is this? Let’s look at the current ways we are financing education. Savings? Try that if you’re living paycheck to paycheck. Forty percent of Americans don’t have more than 400 USD in savings.
What about loans? It’s difficult if you’ve got poor credit scores, and even if you can, congrats, you’re left with decades of crippling debt in some cases. Government financing is often not possible for economic or political reasons. How about philanthropy? It’s great but too limited for the scale we’re talking about. These problems have led to more recent approaches such as social impact bonds and income share agreements, but these also have big problems and challenges.
What I invented in my Ph.D. is a new approach that formed the basis of my company Forte.
FORTE (which stands for Financing Of Return To Employment) is a way to educate at no cost to individuals and no cost to governments. You see, the cost of reskilling people is often less than the increase in future government income tax revenue caused by that training. What that means is that it’s possible to cover the cost of education with that increase in tax revenue. That’s precisely what Forte does. Given the recent mass layoffs due to the Coronavirus pandemic, this approach is needed now more than ever.
We enable individuals to effectively pay for their training with their own future tax money. It works in three simple steps. Investors, via Forte, can cover the cost of the reskilling of individuals who would otherwise be paying no or negligible tax. That training, by its nature, increases expected employment, incomes, and therefore government tax revenue. As part of the contractual arrangement, governments pass back to investors, via Forte, a percentage of the increase in income tax revenue they receive that’s attributable to training recipients for a set period of time, such as 50% for three years.
In other words, we transfer the risk from individuals and governments to investors, then grow the pie, and then split the surplus in a way that guarantees a win-win for all stakeholders.
Can you give us an example of how Forte works in reality?
Let’s take Lydia, by way of example. Suppose she’s lost her job and wants to be a programmer. Investors could pay for the training of 100 people like Lydia in return for 50 percent of the tax revenue attributable to them for three years. This is mutually beneficial. Individuals receive training at no cost – no cost now, no cost in the future. They just pay the usual tax rate. Governments get to help people, reduce unemployment and overcome skills gaps without worsening the budget. And there are mathematical ways to guarantee they never lose out. Investors get low-risk, short-term returns. They can do well and do good.
This is trickle up economics! Let’s help the most disadvantaged, and then benefits flow through the system. This mechanism is how we can scale self-sufficiency. With this approach, the profitable thing is also what’s best for humanity. In other words, social impact and financial returns are perfectly aligned at a systems level. It doesn’t matter whether investors are altruistic or not; they’re still doing something helpful. That is what I mean by systems-level innovation and aligning the social and financial returns at the systems level.
This mechanism has many applications. It can be used to finance services for refugees across Europe since governments are under political pressure to avoid spending too much taxpayer money on non-taxpayers. It could fund aging populations, particularly reskilling. Or to finance training for the 500 million mothers and fathers expected to lose their jobs due to AI, robotics, and other technological advances. It can train people for the green jobs of the future, get more women into STEM, and so much more.
Question every assumption – everything around us is an assumption. A 7-day week, the need for cars, etc. Also, look for win-win solutions. People often assume that someone wins only when someone loses… We usually look at how to divide the pie, but there are solutions to grow the pie. I would also recommend focusing on innovation at the verge. A lot of innovation occurs when you take an idea from one context and apply it in another area.
The world is also changing. We need to focus on collaboration over competition, resourcefulness over resources.
One thing I see a lot of is people not considering the counterfactual. We should all be asking “if I didn’t do X or Y, what would have happened?” Because what matters is the incremental, the marginal impact, not the absolute impact. We also tend to overweight the short-term and not care enough about the long-term. We under-invest in things that are preventative. Why? You don’t really get credit for something not occurring – like oil not being spilled or fire not happening. We need to be aware of our human biases if we’re to maximize social impact.
Who is Nat Ware?
Dr. Nat Ware is an award-winning entrepreneur, economist and speaker. At 16, he raised $100,000 to rebuild a school in Mozambique and an orphanage in Thailand. When he was 19, he founded 180 Degrees Consulting and built it into the world’s largest consultancy for non-profits and social enterprises, with over 166 branches across 38 countries. The company provided over 4 million hours of consulting services (www.180dc.org). At 21, he taught a postgraduate course on Innovation, Strategy and Global Business. And at 25, he did a PhD at Oxford on a Rhodes Scholarship where he invented a new way to finance education (FORTE), as well as new ways to measure poverty, social impact, and government performance.
Due to these inventions, which use economic approaches to redesign human systems to improve social outcomes, Nat has been described as “the father of social impact economics.” He is a Visiting Fellow at Princeton, Forbes 30 Under 30 list-maker, Australian State Young Achiever of the Year, Asia21 Fellow, Goldman Sachs Global Leader, World Economic Forum Global Shaper, winner of the Oxford Vice-Chancellor’s Social Impact Award, received the highest scoring speech at the World Debating Championships, and is only-ever Two-Time Global Winner of the St Gallen Wings of Excellence Award.
He received ‘No Corrections’ for his Oxford PhD, the Saïd Prize for Top Oxford MBA Student, the Arthur Lewis Prize for Best Performance in Development Economics at Oxford, The University Medal for Top Economics/Business Student at Sydney University, and the Convocation Medal for Best All-Rounder at Sydney University (1/33,000 students). He has also swum the English Channel with friends to raise money for charity, completed a full Ironman triathlon, and given three TEDx talks that viewers watched over a million times. Nat is currently the Founder/CEO of Forte, an innovative way to finance education and healthcare at scale at no cost to individuals or governments (see www.forteofficial.com).