Why “Compassionate Capitalism” is kind of a scam.

Imagine a store in your neighborhood that sells toilet paper for a dollar a roll. Each roll costs sixty cents to manufacture and sell, generating forty cents net profit. You typically buy ten rolls a month, generating a total of four dollars profit for the store’s proprietor.

Now imagine that an entrepreneur, Henry Hygiene, has an epiphany: toilet paper is a massive, unrealized lifestyle branding opportunity! Everyone needs it but no one loves it. What if a new brand spoke to the consumer’s unique personal style, home decor, and ethos? Henry sets out to start this brand, “Flush,” and opens a store next to the old one, offering rolls in hundreds of different stylish prints. In order to make the switch a no-brainer for the consumer, Flush sells its rolls for a dollar, too. And then Henry adds the coup de grace. He announces that for every roll he sells, he’ll donate a nickel to a new charity that provides toilet paper to orphans in Bangladesh. For each roll sold, then, the company will net thirty-five cents, less than its competitor, but a perfectly fine profit. Of course, Flush will heavily promote its charitable business model to consumers. They will learn that buying Flush means buying style and justice.

Some people call this “compassionate capitalism.”

The new store is an unqualified hit! You and every other customer of the old store switch to Flush. And the company opens an online channel and twenty retail locations around America. Your monthly ten rolls now land Henry Hygiene $3.50 and Bangladeshi orphans fifty cents in toilet paper. Profits roll in. Altogether, Hygiene takes home a cool million personally, and gives away $143,000 to the orphans.

After five years of this, a major paper company buys Flush for $20 Million, all of which goes to Hygiene since he owns the entire business. This triumph of compassionate capitalism appears to be an unqualified victory for everyone involved: the consumer, Henry Hygiene, and especially the bottoms of those poor orphans, who received almost a million dollars worth of free TP during Flush’s independent life.

This sort of hybrid business model has understandably become extremely popular over the past few years. Particularly for folks in my generation (I’m 30), it seemingly reconciles the selfishness of pure capitalism and the selflessness of charity. My age cohort has grown up with a wider, more integrated view of the world than our predecessors. International tragedies hit our mobile devices in high resolution video mere moments after they appear. And 2008's crash arrested us with the consequences of unfettered capitalist excess. Elites among us have plumbed the shallows of the finance industries directly and emerged wanting more, wanting meaning. And our less-privileged peers have suffered a job market weakened by systemic deleveraging and structural transformations. These experiences have made us long for an economy that does good as it does well.

Unfortunately, I don’t believe that “compassionate capitalism” is the solution. And I’m not alone.

Slavoj Zizek. Photo by Mariusz Kubik (creative commons).

The philosopher Slavoj Zizek and others have persuasively critiqued these partially-charitable business models for falsely exonerating consumers from their participation in global inequality.On this argument, something like Flush is effectively selling customers toilet paper and a modern-day indulgence (the old school Christian type), without substantively intervening in the actual problem (in this case, the absence of modern sanitation in Bangladesh). There is some truth to this, but it seems to me a slippery slope into a less tenable argument: that charity is inevitably immoral by falling short of the revolution that we truly need.We surely want people trying their best to do good in the world, and of course most of this effort won’t produce wholesale solutions to enormous global challenges.

What’s less acceptable to me is that models of “compassionate capitalism”very likely produce more value by selling the suffering of their ostensible beneficiaries than the value they pass on to them. And that strikes me as unethical.

Returning to our Flush example, it’s clear that Henry Hygiene is offering consumers at least two good reasons to buy his product: 1) it’s stylish and 2) five cents of each sale go to poor kids. The problem is that it’s hard to sayexactly how much of his business should be attributed to each of these differentiators. If we consider all of the revenue that Hygiene generates to be incremental (relative to his starting position, which is no revenue), I think it’s safe to assume that the “poor kids pitch” is driving at least some percentage of this incremental value, however genuine it may be. Say it’s driving ten percent of customers’ decisions, then I think its only fair that ten percent of net profit ought to go to the poor kids. And ten percent of the company’s enterprise value ought to go to those kids, too!

Right?

The general principle I’d like to propose, then, is:

A hundred percent of all incremental value created for a business by charitable business models should be donated. This includes incremental enterprise value realized at the time of a liquidation event (sale, IPO, etc).

“Compassionate capitalist” businesses not following this principle are, I’d contend, expropriating value from the communities they claim to benefit. And that’s wrong.

I can already anticipate your objection: Isn’t any good better than no good? Imagine that Flush gave no money away. Who could argue that this would be better for the world? If entrepreneurs are going to graciously donate some of their profits to just causes, why hairsplit about their procedures for doing so?

My rejoinder can be summed up in a single question: what if Mother Teresa drove a Ferrari? You’d be bothered, right? Clearly this is bothersome because we’d feel she’d be misallocating money that people gave her in order to serve the poor, not to buy luxury cars. We’d recognize that she needs to use some of the money in order to support an effective operation and modest lifestyle, but to a limit. We’d expect her to optimize for maximum deployment of money to her community.

In the compassionate capitalist model, this logic is muddled, again, by theinability to ascertain exactly how much incremental value is being generated by charitable appeals. Did the misery of poor kids buy Henry Hygiene’s Ferrari, or did his clever branding? It’s impossible to know, and this uncertainty exposes a moral weakness.

There is a simple solution for compassionate capitalists: don’t advertise a charitable model. Sell products and services on their own merits, like any other business, and at the end of the day, either give away some portion of your profits as a company, or give away your share of those profits personally.

This specific critique relates to the broader indictment of Silicon Valley entrepreneurs today who have turned “making the world a better place” into a cliche. Obviously no one should object to that goal; in fact, everyone should aspire to it. But I think people have become frustrated with the extent to which commercial projects co-opt the language of charity. No one wants to be a rapacious business person today; the aesthetic even looks tired on Jay-Z, who previously developed the most aspirational version ever of greed and self-aggrandizement.

Is it possible that we actually need to create more cultural space for business to become cool again in its own right so that people who want to get rich don’t need to relentlessly depict themselves as altruists? There’s something appealing about the clarity of baldly ambitious capitalists when compared with confused philanthro-entrepreneurs. Might we prefer a culture in which there are multiple modes of respectability and cool, commensurate with different important social roles?

As communication, computation, labor and capital finally become truly global, I sense that these questions will become ever more important. We are in the process of on-boarding the majority of humans to global society, and the culture that this process activates ought to validate a great diversity of commercial and non-commercial activities. “Compassionate capitalism,” I suspect, is a revealing, and not particularly attractive, artifact of our present attempts to sort out this future.