The Power of Proximity

The physical proximity of talented, highly educated people has a powerful effect on innovation and economic growth. Places that bring together diverse talent accelerate the local rate of economic evolution. When large numbers of entrepreneurs, financiers, engineers, designers, and other smart, creative people are constantly bumping into one another inside and outside of work, business ideas are formed, sharpened, executed, and—if successful—expanded. The more smart people, and the denser the connections between them, the faster it all goes.

That is from a recent McKinsey study. It has much relevance for economic development in poorer countries as well as the US. There have been a number of attempts to create physical clusters of economic activity in the developing world, most of which have failed because we don't yet understand the conditions leading to cluster formation (or how to create these conditions from scratch). And while the physical dimension of clusters remains very important (I am always amazed at how much I can get done on a short visit to Silicon Valley), the Internet opens up new virtual clustering possibilities.

We are starting to see clustering behavior on GlobalGiving and are rolling out features to encourage more of this. Since no one knows exactly what works, there is a large element of trial and error, which puts a premium on our ability to experiment rapidly with new features, keeping those that work, and dropping those that don't.


(Thanks to Dana Messick for the pointer.)

[GlobalGiving]

Don't just do something, sit there?

The Boston Review has an excellent discussion forum of Paul Collier's new book that includes an essay by the author as well as comments by Bill Easterly, Nancy Birdsall, and others.  The discussion provides a meta-discussion of international development itself.

Collier makes some observations about poor countries and then draws what seem to be ineluctable conclusions about what the richer countries should do (in this case, intervene militarily). Those who read his first book, The Bottom Billion, found his arguments very compelling.  The problem was that his observations were flawed statistically, and the conclusions he drew were flawed logically, as Bill Easterly has pointed out on many occasions (including here).

There is a strong human tendency to want to do something when one sees a bad situation. It is very hard for us to just sit there and do nothing.  In some sense, the history of the World Bank is a reflection of the (admirable) instinct we have to try to make bad situations better.  The problem, as Easterly has pointed out, is that honorable intentions do not necesssarily make for effective interventions.  In fact, some interventions can make things worse, via the law of unintended consequences.  The larger the intervention, the more severe the possible negative consequences.

Nonetheless, it is unlikely that the human instinct for action will go away even in the face of ferocious debunking of effectiveness by Easterly and others.  So we need places where that human instinct can be channeled in ways that may be modestly effective and are unlikely to have catastrophic consequences.  Nancy Birdsall, the head of the Center for Global Development, provides one of the levelest heads around on this front, by acknowledging the role that Collier has played in raising the issues and suggesting some more modest interventions that are better supported by the evidence.

Which makes me wonder why Birdsall has not yet been appointed the aid czar for the US.


[GlobalGiving]

Where's the beef?

The World Bank's private sector arm, the IFC, recently backed out of a deal funding cattle ranching in Brazil after objections from the Bank's own evaluation group, which argued that the deal posed a "grave risk to the environment:"

Vinod Thomas, the IEG’s director-general, sums up the dilemma: “Climate change threatens to derail development, while business-as-usual development threatens to destabilise the climate.”

The job of the World Bank and other aid agencies is not to promote business as usual. It is to promote innovation - new ways to grow, and to do so in a way that helps rather than harms the environment. The Economist magazine and others dwell on the costs of fighting climate change, but they rely too much on a static mind-set. With the right signals and incentives, great creativity will be brought to bear, and the problems will be addresses at far lower cost than we think.

Many of the solutions (especially energy efficiency measures) will generate net benefits, even with existing technologies, according to McKinsey. The others will be harder to tackle, but they can be tackled. To do so, however, will require extreme ingenuity and persistence - meaning that the next depression may be a psychological one rather than an economic one.

[GlobalGiving]
[image credit: Jelle at Flickr under a Creative Commons license]

"The work is grueling, but at least the pay is bad!"

Dr Nesse believes that persistence is a reason for the exceptional level of clinical depression in America—the country that has the highest depression rate in the world.

That is from an interesting article on Economist.com. Some recent research indicates that mild depression may be nature's way of discouraging people from trying to achieve unattainable goals.  One of the researchers notes that that the dynamism of the US comes from lots of people pursuing unreasonable goals.  On the one hand, entrepreneurial spirit makes the US the engine of innovation in the world.  On the other hand, the costs in terms of mental health are significant.

All of this research is still at the speculative stage.  But this article does provide a useful caution against overly romanticizing entrepreneurship.  Someone asked me the other day what I thought the most useful thing was that they could do to promote social entpreneurship.  "Create a nice place for social entrepreneurs to get together, blow off steam, and decompress," I told him. 

Maybe we should do the same for the project leaders on GlobalGiving, many of whom are out there every day straining to achieve the impossible.  As one of them told me a while back, "The work is grueling, but at least the pay is bad!" 

[GlobalGiving]

Invest in girls to fight global warming

Key to innovation and problem solving is looking at things from a different angle. Last year I did a post about how modestly changing your diet can not only improve your health -- it can also reduce carbon emissions as much as buying a hybrid:

Trimming the amount of meat Americans eat would not only help the planet — a mere 20 percent reduction is the equivalent of switching from a Camry to a Prius — but would also be likely to reduce obesity, cancer and heart disease.

Few people look at problems from a different angle better than David Wheeler, a former colleague at the World Bank who is now at the Center for Global Development. David was among the first to note that fighting global warming will require major efforts in developing countries, who are now the major - and fastest growing - source of carbon emissions (more here.)

Now my colleague Bill Brower reports on a talk David gave recently. According to Bill:

David calculated that investing in methods to slow population growth (educating girls and family planning) in developing countries could lead to greenhouse gas savings on the order of switching all coal-fired power plants to wind power—at a far lower cost.

There is no paper yet on this; I will post it when available. In the meantime, if you want to "green" your giving, consider supporting a "Girl Effect" project.


[GlobalGiving]

Bullets, Ladders, and Circles

Earlier I did a post about Silver Bullets. Silver Bullets are ideas or interventions that we get infatuated with, and we start thinking, "If only we could do X...then it would work [or I would be happy!]" In my post, I fessed up to many of the international development Silver Bullets I have become infatuated with over time. I noted that, alas, real Silver Bullets are rare, and that economic growth and opportunity usually require a lot of different things that reinforce and promote each other.

This reminded me of a graphic that Legatum has put together called the Legatum Prosperity Ladder. It is a nice attempt to show how different financial instruments are important at different stages of a country's development. Grant funding is needed when countries are really poor, followed by microfinance at the next stage of development, then private equity, and finally public capital markets for the most developed economies. This Ladder is a nice antidote to those who think that any one form of financing is a Silver Bullet for economic development.

As I reflect on Legatum's ladder, I realize that it can also be applied to the different life stages of regular people -- even in rich countries. Many of us have ascended this ladder in our lives.

By all measures, I am among the best off people in the world. I was born in the most affluent country, grew up with positive role models, and went to some of the best schools. And I have worked at some of the best organizations and companies. But it could have been different. Here is my own story:

My success is due in no small part to hard work and determination--but also to an incredible amount of luck and assistance from others. My family ended up living below the poverty line for several years when I was in grade school and junior high. Luckily, there were grant-funded programs that enabled my siblings and me to be productive in school nonetheless. For instance, we ate free and reduced-price school lunches. My family was also eligible for food stamps (though we were usually too proud to accept them).

When her last child entered first grade, my mom, who was a single parent with five kids at home and few job skills, was trained and temporarily employed by a public jobs program. This program provided provide temporary income and then a stepping stone to regular employment for her. Some of us older siblings were able to get work as well - delivering papers, waitressing, etc. Our household income rose, so we were able to depend less and less on food subsidies and more on our own resources.

But we had few extra resources for education. I was able to get an extraordinary education, even though my various odd jobs could only pay for books and modest other fees. My public education was free, and then I received scholarships to a high-quality prep school, university, and graduate school. That schooling in turn enabled me to get an excellent job.

It was only when I was twenty-five that I began my full-time professional work life. Finally I was able to pay my way and take advantage of private financing markets through borrowing for a mortgage and equity ownership. After fifteen years working at my first job, I had, at age forty, accumulated enough experience and wealth to help launch my own organization.

Everyone starts out life grant funded (usually through a combination of family, public, and sometimes other private support). If things go right, we leverage this early stage "investment" in our productivity to get good jobs and/or start businesses and become largely self-sufficient. And then, as we age, many of us come to depend again on a form of grant funding through Social Security, Medicare, Medicaid, and other forms of assistance for the elderly.

All of this leads me to think that, in developed economies at least, the Prosperity Ladder is actually a Prosperity Circle.

[GlobalGiving]

To innovate, connect.

"Successful innovation depends less on how smart you are than how connected you are."

That is the finding of a new study from University College London. They find that the sharpest bursts of innovation in history occurred when population density and migration reached a certain critical level. The advent of the internet and social networking tools to some extent enables a form of virtual density that can partial substitute for physical density.

Recommended reading.

Photo: iStock Photo via Science Magazine.

[GlobalGiving]

The limits of selflessness?

New Philanthropy Capital (NPC) in the UK has just published a brave attempt to make the case for more mergers and acquisitions among non-profits. In general, I agree that more mergers are likely to be beneficial, but it is surprisingly difficult to make a compelling case for this conclusion. And it is maybe even more difficult to come up with an effective framework that would provide the right incentives.

First, there are problems making the case ex-ante that more mergers are needed. The report notes that, among large non-profits, the "rate of merger was just one-tenth of that among for-profit companies." So that seems to be a reasonable basis on which to presume more mergers among non-profits would be useful. The problem is that the value of any merger can generally only be determined ex-post. And in that context, it is important to keep in mind that an estimated 50-80% of mergers in the business world fail. So it's far from clear that the comparison with the for-profit sector is compelling.

The second issue is the incentive framework. There are two big reasons that make non-profit mergers much rarer than those in the for-profit sector:

i) There are no returns to non-profit shareholders. In the for-profit sector, the firm taking over the other generally offers a price higher than that prevailing in the market for the shares of the other firm. This provides an incentive for shareholders to sell - and it provides a healthy reward for the shareholders when it happens.

ii) In many cases, managers of the acquiring and acquired firms get bonus payments for concluding a merger. It is typical for the managers in the acquired company to get buy-outs. Sometimes these payments are even large enough for managers to put pressures on the shareholders to buy or sell by painting a rosy picture of the potential value created by a merged entity. By contrast, mergers in the non-profit sector generally mean that some managers lose not only their jobs and source of income, but their identities and status as well.

As I said, I agree with NPC and others that more mergers and acquisitions would probably help the non-profit sector realize efficiencies and sometimes create additional new value. But more data, more awareness of trustees, and more urging by commentators are unlikely to provide the incentives needed for that to happen. Something more catalytic is needed.

[GlobalGiving]

Photo: creative commons/flickr/ by aturkus

Sticks and Stones...

Sticks and stones can break your bones, but words can never hurt you. Or at least that's what I learned when I was young.

But I was wrong. The power of words is everywhere. Some of the most powerful words in history are the following:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government.

But words can also do terrible harm, as Isaiah Berlin reminds us in this lecture (note: link opens in iTunes) he gave about Jean-Jacques Rousseau at Oxford fifty-seven years ago. Berlin describes the evolution of Rousseau's ideas, and how Rousseau's inability to overcome internal contradictions in his thinking led him to a delusional philosophy that laid the groundwork for fascism and communism. In dissecting the harm done by Rousseau's words, Berlin's own words provide a strong innoculation against all forms of totalitarianism.

What a pleasure to be able to sit in and listen to this lecture as if one were a student at Oxford in 1952. Berlin is one of the best philosophers of the last century, and I am always surprised at how nontechnical and straightforward his writings are. There are four Berlin lectures available at iTunes, which deserves credit for making the spoken words of this extraordinary man available to us all.

(Thanks for the pointer, April!)
[GlobalGiving]

Should'a eaten that spinach

This paper by my old professor Angus Deaton, and Raksha Arora, finds a strong positive correlation between height and income/well-being.  Very interesting findings and conjectures about what is at work:

[GlobalGiving]

Coral Reefs for Development?

Mario Morino posted a nice piece recently about the need to nurture "coral reefs" for innovation in the US. I like his metaphor very much. He notes we don't know how to create reefs from scratch. Silicon Valley and other innovation centers such as the Research Triangle in NC, the Boston/Cambridge area, and the Seattle/Richmond area have grown organically, without a lot of top-down planning or intervention. The key, Mario notes, is to make sure that conditions are favorable for these reefs to grow, and to avoid disturbing or destroying them when they emerge.

Though Mario is making the case for innovation in the broader sense, it is particularly relevant to developing countries. Per capita income throughout the world was more or less the same from the beginning of recorded history to the early 1800s. People struggled to produce enough to survive. In the early 1800s, a variety of technological and institutional innovations drove an incredible increase in per capita income. These innovations increased output beyond what was needed for immediate consumption, and the surplus could be re-invested to produce even more output in the future. Continued innovation meant that the returns to each unit of invested surplus (ie productivity growth) kept increasing as well.

Few of us realize the extent to which we live in a period of unprecedented affluence. But the picture looks very different for people who live in what we call developing countries. Here is a comparison of growth in per capita for developed vs. developing countries (click to enlarge):

The astounding gap between growth in developed vs developing countries is hard to explain. There have been many schools of thought over the years, but most have turned out to provide few useful insights about how to spur faster growth in developing countries.

The whole international aid field is built on the notion that the developed countries can invest additional capital into the developing countries to accelerate the latters' rate of growth. Unfortunately, the returns to the $2 trillion in aid spent over the last 50 years have been disappointing. Some studies show zero return, while other studies show a positive, but small return. No one questions the fact that there has been little or no productivity growth in the returns to the aid spent.

The low or zero productivity growth for aid reflects the lack of innovation in the field, which resembles the world economy pre-1800. But there is hope: when Mari and I did the first Innovation and Development Marketplaces at the World Bank ten years ago, we accidentally tapped into an exceptional well of innovation that the current aid system is ignoring.

The prescription here is clear: "Physician, heal thyself." The top challenge for the aid system is to infuse innovation into its own DNA. GlobalGiving is a first step in that direction, and we are planning many new features in the year ahead. There have been other admirable new approaches arising out there as well. But much more needs to be done to bring the aid business into the modern era.

[GlobalGiving]

The paradox of the silver bullet

On Monday, I spent an hour with an Ivy League professor who is considered to be a contender for a Nobel Prize.  He has an idea that he is sure - absolutely sure - can revolutionize the field of development and economic growth.*  As I listened, my right brain could not help but be taken in by his enthusiasm, and I told him to let me know what I could do to help out.

My left brain, however, was flashing a yellow light: his idea has been tried many times before, though in somewhat different incarnations. Based on my long experience, he is unlikely to achieve what he is hoping (though he may well make a solid contribution).

I realized I was listening to was a guy in thrall to a silver bullet.  After thinking long and hard about a problem, he had come up with what he was SURE was going to be the breakthrough answer.

After our conversation, I began to think about the last 25 years of my career in the field, and about the  silver bullets that I had become enthusiastic about over those years.  Here is a partial list, starting in 1983:

- population control through family planning
- rural off-farm employment
- agricultural productivity
- smallholder tree crop farming
- housing reform
 -household energy retrofits
- girls' education
- microcredit
- SMEs (and credit for SMEs)
- better rule of law, especially property rights
- more open trade
- financial sector reform

In many cases, I got as enthusiastic about my latest silver bullet as the professor.  And in most of the cases, I made some progress and hopefully some positive impact - although never to the extent I had feverishly dreamed.  After so many silver bullets, you would think I would have learned.

The paradox here is that, on the one hand, there *is* no silver bullet; but on the other hand, you almost have to believe in your particular silver bullet to expend the energy and make the sacrifice to make progress.  Many of the projects I did in my "official" development career required levels of effort and commitment that were irrational when the personal costs and benefits were tallied.  And lord only knows what an irrational labor of love GlobalGiving has been.

Today someone sent me a link to a spirited discussion on SocialEdge about Kiva.  One of the commenters pointed out that microcredit is not a silver bullet for poverty alleviation.  He is right.  But the folks at Kiva have done an exceptional job in advancing the popular understanding of the role that credit can play as part of a package of things that can raise people out of poverty.  And in doing so, they have sacrificed much personally.  For that, we owe them (and the Ivy League professor) thanks.

----------
* The professor asked me not to identify him or the idea until he reveals it later this summer.

[GlobalGiving]

Facing down a fear

Recently I decided to tackle one of my demons head on.  I went to New York for a drawing course that lasted all day for five days.

Previously, my drawing ability had been close to, or maybe less than, zero.  In the 1960s, when my grade school teacher saw that I was unable to stay within the lines while coloring, she gently recommended that I focus on reading and writing rather than pursue art.  A couple decades later, a former girlfriend used to roll in the aisles when I tried to play Pictionary (a game that requires you to "draw" clues).

To make matters worse, my older brother and uncle are excellent artists who can conjure beautifully rendered objects seemingly from thin air.

Some friends encouraged me to take a weekly 2-hour class at a local art school or gallery.  But I knew that I would not stick with that.  So I signed up for a sort of voluntary incarceration with Brian Bomseiler.  It was very difficult mentally and emotionally for many of us in the class.  Brian said one day when we were struggling with drawing faces: "Now you understand why van Gogh cut off one of his ears!"

I am happy to report that, in the end, we all made huge progress.  Brian taught us some straightforward but effective techniques.  More powerfully, I think, was learning to see differently - especially shadows and light and texture.  That new way of seeing has broad implications in life, I expect.

I would never in a million years normally do the following.  But fully vanquishing my fear of drawing (and of my grade school teacher) requires me to put two ofmy drawings out there.  The first is my "before" self-portrait, done on the first day.  The second is my "after" drawing from Day 5.

Day 1

Day 5

I am in no danger of being asked to exhibit at the National Portrait Gallery any time soon.  But I am happy with my progress nonetheless.  (You can see other students' progress here.)


[GlobalGiving]

He can have whatever he wants

I met this woman early one morning last summer at the Starbucks near our office.  She walked up with her huge, hobbling dog, handed me the leash, went inside, came back out a few minutes later, and fed him a maple scone.  She told me that he is seventeen years old and loves scones, so she gets him one every day.  "At his age, he can have whatever he wants," she told me.  I have not seen her recently and wonder whether her dog has died.

[GlobalGiving]

Substance over Form

Only small NGOs it seems are able to actually get out in the field and get their hands dirty making things happen. Past a certain size (what is that size?) the demands for official looking papers, reports, audits and the like overshadow the demand to actually provide aid. Large donors are just too caught up in the appearance of good business and good government. Form without substance.

That is by Scott MacLennan over on Bill Easterly's Aid Watch blog.  Read his short post - it captures well the underlying rationale for GlobalGiving.


[GlobalGiving]

As goes the NY Times, so goes the World Bank?

That is what real revolutions are like. The old stuff gets broken faster than the new stuff is put in its place. The importance of any given experiment isn't apparent at the moment it appears; big changes stall, small changes spread. Even the revolutionaries can't predict what will happen. Agreements on all sides that core institutions must be protected are rendered meaningless by the very people doing the agreeing. 

In this piece, Clay Shirky discusses Elizabeth Eisenstein's The Printing Press as an Agent of Change and draws parallels with the revolution facing the newspaper industry.  But he could just as well have been talking about the revolution facing the international development industry.  Is he also talking about your industry?

[GlobalGiving]

Farmers' Markets and Philanthropy

It goes without saying that the financial services sector also has a lot to learn from a community farmers’ market. Mortgage-backed securities were far from transparent; the credit default swaps market was dominated by speculation, not value creation; and, of course, the Bernard Madoff scandal offers a case of outright fraud.

That is from Jacob Harold of the Hewlett Foundation writing in Alliance Magazine.  He notes that the financial crisis arose because of a failure to have well functioning markets - not because of their excesses.  He argues that philanthropy needs more, not less market dynamics: " In fact, the financial crisis makes it all the more urgent to build a smarter, more open infrastructure that enables donors to make good philanthropic choices."

I agree, and I urge you to read this nice article. 

Two features about markets I emphasize these days are learning and innovation.  Each farmer watches and listens and tries over time to adapt to what the market wants.  Some farmers will continue their “labors of love” (the new or unusual heirloom vegetable) that no one wants at the beginning and that is a money loser, but then one shopper will say to another the next week “Hey, you should try this strange thing; it goes really well with tomatoes.”  Demand builds beyond the farmer’s capacity to meet it, and he thinks to himself “I’ve got to find a way to produce more of these at a cheaper price.”  Meanwhile, other farmers start producing the same vegetable.  This dynamic process enhances quality, introduces a stream of valuable variations, and keeps a focus on efficiency.

The economic and environmental crises we are facing cannot be addressed with marginal changes or more of the same.  They require fundamental innovations and leaps forward in efficiency and cost.  These come from a well-tuned, properly functioning market system like the one Jacob describes.

[GlobalGiving]

A new economics is being born

In my next life, I hope I will write an article like "Time and symmetry in models of economic markets."

Alas, in this life, I am no Lee Smolin.

This paper is about the need for a new framework for economics that acknowledges its "complex and dynamical emergent phenomena." In other words, economic systems are in dynamic states rather than equilibria.

This is a fundamental re-framing that is critical to understanding the nature of economic growth and development.

From the introduction:

"Economics is a unique subject in that it is about nothing but human behavior, but it is also highly mathematical. The economic theory that appears to be most widely in use by experts, called neoclassical economics or general equilibrium, is remarkably like physics, in that it is based on a few simple principles, which lead to a rigorous mathematical formulation.

This mathematical formulation leads to some basic theorems, which are taken to be a rough or approximate description of a well functioning economy. A large body of results and models is built up around this theory, and there is a community of experts that express confidence in its basic correctness.

At the very least, the neoclassical theory of general equilibrium establishes that eco- nomics is one of the mathematical sciences...

But if the evolution of the other mathematical sciences is any guide, one cannot expect that the first successful theory in a domain is the last word. Precisely because of its suc- cess, we should expect that sooner or later any mathematical theory of real phenomena is replaced by a deeper and even more successful theory.

There are reasons to think that the present is a perspicuous moment for seeking to improve economic theory..."

Thanks to my brother Patrick for pointing me to this paper after I told him I was reading Wolfram. And to Stuart Kauffman for giving me a grounding in autocatalytic systems ten years ago.

[GlobalGiving]

Bingeing at the Information Buffet

My friend Jeff Koeze (who also makes the world's best peanut butter) sent me a link to a talk by Barry Schwartz at the TED conference. In his talk , Barry notes the exceptional abundance of intelligence and knowledge among those present at the conference. But he argues that good judgment, not intelligence, is the binding constraint these days.

I agree with Barry that raw intelligence and wisdom are not necessarily correlated. In fact, my own experience is that the variance in wisdom around the mean grows as raw IQ rises. Really smart people can have insights that can be breathtakingly innovative - or completely disastrous.

So I wonder about the effect of the huge increase in knowledge coming from a particular dimension of the web. I am not talking about Facebook. I am talking about sites such as TED Talks, which makes available hundreds of riveting talks by leading (and often photogenic) scientists and intellectuals. Or Edge (my favorite) , a website that publishes short papers, interviews, and debates with some of the smartest (but often less camera-ready) people in the world. Or Marginal Revolution, a blog written mainly by the super-human Tyler Cowen, who each day spews forth an alarming volume of links and his own strong opinions on everything from the economic crisis to Mexican painting to the best cheap restaurants in Northern Virginia.

I partake of these sites like I used to partake of all-you-can-eat buffets when I was in college: I cram in a huge array of different appetizers, meat, fish, and pasta courses, followed by a brownie, a piece of apple pie, and a blackberry cobbler to finish it all off. Then I stagger home, completely bloated and feeling queasy, swearing off the buffet forever. But the next week I am back, bingeing again.

We have made big strides in computing capacity - both hardware and software. Gmail went down the other day for a few hours, and it made news, because these days it is rare that even large, highly networked websites crash. Such websites can process information that is growing at an exponential rate, with nary a hiccup.

But have we made similar strides in either the hardware or software of the human brain? Ray Kurzweil argues we will augment human cognition with machine intelligence at an accelerating pace. But few would argue that the human brain's capacity is growing as fast as in the increase in information available to it.

So the question is this: how will we process all this knowledge that is available to us? The good news is that much innovation comes from the recombination of existing technologies and approaches, so the increase in knowledge about these can in principle lead to accelerating innovation. And heaven knows we are in dire need of to address the economic crisis and challenges such as climate change. I also believe in the power of the Wisdom of Crowds in many contexts; that is one of the principles on which GlobalGiving is founded.

But what can we do to both increase the mean and reduce the variance of the wisdom emanating from all this knowledge? Sometimes I wonder whether the sheer quantity of new information we now "consume" will increase the variance in our judgement and wisdom, leading to unforeseen consequences.

[GlobalGiving]

Pascal's tennis game

THE COMPUTATIONAL METHOD at the heart of Pascal’s work was actually discovered by a Chinese mathematician named Jia Xian around 1050, published by another Chinese mathematician, Zhu Shijie, in 1303, discussed in a work by Cardano in 1570, and plugged into the greater whole of probability theory by Pascal, who ended up getting most of the credit. But the prior work didn’t bother Pascal. “Let no one say I have said nothing new,” Pascal argued in his autobiography. “The arrangement of the subject is new. When we play tennis, we both play with the same ball, but one of us places it better.”

That is from The Drunkard's Walk: How Randomness Rules Our Lives by Leonard Mlodinow, an excellent book and an easy read. This passage should remind of us two things:

1) Sometimes astonishing insights can lie around for hundreds of years (in this case six centuries!) before they are widely recognized and applied.

2) Real innovation often comes about through the novel combination of existing ideas or approaches. We tend to dismiss the power of existing ideas as "old hat" or "already known." Instead, we believe that addressing our challenges or problems requires entirely new insights (preferably by lonely geniuses). That is a big mistake: combining, tweaking, and applying existing ideas or approaches is what causes most real breakthroughs.

(Thanks to Bill Easterly for recommending this book.)

[GlobalGiving]

Settle down, boys

On the web you best build an audience by organising a claque and stroking its prejudices. Extend elaborate courtesy to people you agree with and boorish contempt to those who do not get it...

That is Clive Crook in the FT calling Paul Krugman and Robert Barro on the carpet for their recent columns in the NYT and WSJ.  He goes on to say:

Economics outside the academy has become the continuation of politics by other means...Mr Krugman gives liberals the economics they want. Mr Barro gives conservatives the same service. They narrow or deny the common ground.

Krugman and Barro both responded to Clive indignantly here, and the tone of their responses only proves Clive's point. 

ButI don't agree with Clive that people like Krugman and Barro act differently inside the academy.  My own experience is that the petulance on display at academic conferences often meets or exceeds that on display in the NYT and WSJ.  It makes me wonder why so many very smart people have such fragile egos.   Sadly, those egos serve to obscure rather than advance our understanding of the world.

[GlobalGiving]

Power to the people.

Here are some slides from a presentation I gave at a conference a hosted by Bill Easterly at NYU last week. The topic was Accountability in Development Aid.  I spoke about how decentralized systems like GlobalGiving enable much more open access to the aid process - and how they offer the potential for greater accountability to the people that aid is supposed to help in the first place. We are still in the early stages, but the possibilities are great.

Accountability in Decentralized Systems

Publish at Scribd or explore others: Academic Work GlobalGiving

[GlobalGiving]

Easterly 2.0

Bill Easterly has just started a blog called "Aid Watch." And although Bill has bad judgement with respect to sports teams, you should subscribe to his blog if you want clear thinking about how to fix the international aid system.  Judging by the large number of comments on his first two posts, this blog is going to be very popular, and for good reason.

Bill is a former colleague at the World Bank.  More importantly, he is the author of The Elusive Quest for Growth and White Man's Burden, two must-reads for people who want to get a quick (and entertaining) overview of the history of international aid, why it has underperformed, and what must be done to re-orient it.

Bill is also the editor, more recently, of Reinventing Foreign Aid, a collection of essays by some of the leading thinkers and doers in the field.  Get that book, read the executive summary first, and then dip into selected chapters that are of particular interest.  (Full disclosure:  Mari Kuraishi and I also wrote a chapter called "Competing with Central Planning" in that book, and GlobalGiving is mentioned in White Man's Burden.)

One of the reasons Mari and I left the World Bank to start GlobalGiving is that people were not satisfied with the once-a-year physical Development Marketplaces we started there.  One woman from South Africa asked us: "Why can't you also start a secondary marketplace that operates 24/7 365 days a year?"

Think of Bill's blog as his own 24/7 marketplace of ideas.  I hear rumors from an inside source that he is now thinking about writing his next book.   If so, you can get a heads up on his new ideas - and even participate in debating and honing them - through his blog.  

[GlobalGiving]

5 elements of a new aid system

The race for who will head the large US aid agencies is heating up. Everyone seems to agree that changes to the system are needed. But are we up for real change, or will we settle for  marginal shifts in emphases and organization? I fear that the changes will be marginal, when we need something more fundamental.

Earlier I proposed the 2/3 : 1/3 rule. Under this rule, 2/3 of all aid money would be allocated through bottom-up, market-based mechanisms, and only 1/3 would be allocated via top-down, centrally planned mechanisms. Today the ratio is reversed, which is one reason the productivity of aid is so low.

"Market mechanism" does not necessarily mean "private sector," although it does mean that the private sector and community/civic groups would have equal standing with official aid agencies and large non-profits.

Market mechanism means that the best qualified people and organizations - from any arena - are eligible to carry out the five core elements of any aid (or philanthropy) program:

1. Decide on what problems need to be addressed
2. Decide what the best approaches or solutions to these problems are
3. Fund the initiatives or projects that embody these solutions
4. Implement and supervise the projects on the ground
5. Evaluate the impact of the projects, and how that evaluation is used

The key is to open-source the above elements, and then reward success.  Big official agencies either provide most of these elements in-house, or they rely on a small group of "beltway bandits" to do the work.  And the rewards for success and failure are very muted. 

That may have made sense at one time, when the pool of money and expertise was very limited.  But the world has changed radically in the last fifty years, and now it is time for the aid system to change as well.

[GlobalGiving]

The 2/3 : 1/3 Rule

With the new administration coming to power in the US, there is a flurry of new proposals on how to reform the aid system. However, few of them propose real change. Instead, there are proposals to increase aid to such and such issue or country. Or to strengthen such and such agency - or to appoint a strong new leader.

Few of these proposals get at the root of the problem. As Bill Easterly has pointed out, we have spent more than $2 trillion in aid over the past fifty years with not enough to show for it.

The problem is the centrally planned, expert-driven, top-down nature of the current aid system. Just like under the Soviet regime, this approach does get things done. But the quality is bad, shortages are common, and the people have little say in what gets produced.

So let me propose the 2/3 : 1/3 rule. Henceforth, 2/3 of all aid resources will be allocated through an open-access, bottom-up, market mechanism, while 1/3 of the resources will be allocated through existing top-down approaches.

I will write more about how the marketplace system would work in coming posts and columns.

[GlobalGiving]