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This essay was submitted to Open Philanthropy's Cause Exploration Prizes contest.
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Development of a network of companies that operate according to an effective altruistic economic model (EAEM), combined with the financial funding of meaningful business ideas by people living in poverty, to reduce poverty and unequal income and wealth distribution.
1. Goals of the idea put forward here
1.1 Development of an effective altruistic economic model
The development and promotion of an effective altruistic economic model (EAEM) is intended to encourage already successful companies to evaluate their economic model and replace it with a variant of the EAEM discussed below. The aim is to build up a network of effective altruistic companies that are willing to give away part of their economic success as start-up capital to sensible business ideas that are also willing to operate according to the EAEM. In the hope that the network or the global EAEM family will grow and more and more people will be absorbed by this network or find a job in it.
1.2 Launching a competition to promote entrepreneurship among people living in poverty
The competition described below is intended to motivate people living in poverty to develop business ideas that serve the well-being of sentient beings and to share them publicly. This is in the hope that their idea will find sponsors who will donate the necessary start-up capital under the condition that they are willing to operate according to the EAEM. If financially successful, this would mean that the new EAEM company could also provide funding as start-up capital for other business ideas.
2. The problem and its importance
2.1 Poverty
Poverty reduction is the first goal of the UN Sustainable Development Goals, which were adopted in the ‘Agenda 2030’ in 2015. There is a good reason for this. On the one hand, because very many people are affected by it, and on the other hand, because poverty has very many and serious negative consequences for those affected. According to the UN, the number of people living in extreme poverty (< 1.90 dollar/day) could be reduced from 36% in 1990 (1900 million people) to 10% (739 million people) in 2015. However, the COVID pandemic is now expected to increase the number of people living in extreme poverty for the first time since 1998. Thus, more than 700 million people, or almost 10% of the world's population, still have to live in extreme poverty today and struggle to meet the most basic needs such as health, education and access to water and sanitation, to name just a few (1).
2.2 Unequal distribution of wages and wealth
The tenth goal of the UN sustainable development goals represents a universal call to "reduce inequality within and among countries", with target 10.1 focusing on "reducing income inequality". Income inequality, that is, the extent to which economic output is unequally distributed among populations, has increased in almost all regions of the world since the turn of the century. In the academic literature, income inequality has long been considered a socio-economic problem associated with a variety of negative consequences. Rising income inequality is seen as detrimental to economic growth and sustainable development. For example, unequal income distribution can lead to higher crime rates and even motivate terrorist acts. Greater income inequality has also been found to be closely linked to deteriorating health, limited access to education, continued social discrimination, growing discontent in the working class and the emergence of anti-globalisation sentiment (2).
3. How could an effective altruistic economic model look like
Usually, I consider competition to be something meaningful. In sport as well as in most other areas, it seems to me to make sense to compete and strive for improvement. Not primarily to be better than one's competitors, but to advance oneself and to achieve improvements in various areas together. In any competition, however, there should be a few rules that ensure fair competition, and the rules that currently prevail worldwide often do not seem to me to be set in a sensible way if our goal through our economic actions is to promote the well-being of as many people and other sentient beings as possible. In my opinion the central goal, that we should generally pursue with our actions. At present, it seems to me that economic profit and maximum wealth are the desired goals of many companies and societies.
J. E. Stiglitz also asks the question in 2019: “What kind of economic system is most conducive to human wellbeing?“ And he comes to the following interim conclusion: „After neoliberalism - For the past 40 years, the United States and other advanced economies have been pursuing a free-market agenda of low taxes, deregulation, and cuts to social programs. There can no longer be any doubt that this approach has failed spectacularly; the only question is what will – and should – come next.” (3).
Some of these grievances are highlighted for example in the Global Wage Report 2020-21, which notes that 266 million wage earners are paid less than the minimum wage. Women, young workers, workers with less education, workers in rural areas and workers with dependent children are particularly affected. The report also notes that minimum wages are not always at an adequate level and are not regularly adjusted (4). The wealth of some (I guess me included as Swiss citizen), in other words, is partly made possible by the cheap labour of others.
Or a study by WHO and ILO 2021 notes that in 2016, approximately 488 million people or 8.9% of the world's population were exposed to long working weeks (≥55 hours/week). This resulted in an estimated 745,000 deaths and 23 million disability-adjusted life years from ischaemic heart disease and stroke (5).
Income inequality has increased in almost all regions of the world in recent decades, according to the 2018 Global Inequality Report. The authors believe that growing inequality can lead to various political, economic and social disasters (6). Or in other words, the wealthy seem to benefit more from the current rules than the poorer. Shouldn't it be the other way round?
In my opinion, we should address these grievances by designing a more sensible and nevertheless competitive model, which I hope will then also prevail due to its sensible nature and displace less regulated models designed for maximum wealth. So, what might such a model look like?
3.1 Model 1 of an effective altruistic economic model
A relatively easy-to-implement EAEM for companies already exists in part with the "Companies pledge" (7). In it, a company commits to donating at least 10% of its profits to charity. It is quite possible that there are other similar initiatives. What they have in common is the strategy to support the most effective charities with a fixed percentage of their profits. In my opinion, this is an excellent model and I thank all entrepreneurs who participate in it, and I hope, that there will be many more.
The approach proposed here differs in that it would not donate the profits (only) to the most effective aid organisations, but (at least a part of them) to the most promising business ideas of people living in poverty who want to operate according to the same economic model. If we manage to build meaningful, self-sustaining companies, we will create jobs and enable the people working in them to stand on their own two feet. As the number of companies involved increases, the profits to be distributed would also increase steadily, thereby increasing the number of people reached.
The first EAEM thus requires a company to donate a certain percentage of its profits as seed capital for meaningful business ideas of people living in poverty who are willing to operate according to the same EAEM.
The simplicity of this model is what I see as its great advantage.
3.2 Model 2 of an effective altruistic economic model
The first EAEM however is still not strongly enough regulated for me, and so I propose a few additional guidelines for what a second EAEM could look like. In principle however I think the effective altruism community or other interested people should develop a sensible EAEM, which should always remain open to adjustments and can perhaps also take on different forms depending on the country or situation.
I consider the following principles to be useful:
- The promotion of well-being in the company, for all fellow human beings and other sentient beings, and thus the avoidance of as much suffering as possible, is the highest goal of a meaningful business idea or business actions.
- The wages paid to all employees should enable them to live in dignity (minimum wage), but at the same time be capped (maximum wage). This would prevent exploitation and reduce the wage gap.
- Companies that make profits give away a considerable part of their profits to start-ups that want to operate according to the same economic model and have a sensible business idea but cannot raise the necessary start-up capital (preferably to people living in poverty).
- The finances (wages, income, expenses) and the business partners are to be made public to ensure the highest possible transparency.
Possible specifications:
- The company's income is used at the beginning as follows: Repay external debts (the donation of the EAEM company is not part of this). Then repay privately contributed assets of company founders. Once all debts have been paid off, the income is divided equally (according to job percentage) among all employees until each employee receives the national median wage (minimum wage) (may have to be adjusted depending on the country).
- The profits accruing over and above this are first used to pay employees for hours not paid at the minimum wage rate during the start-up phase of the company. Employees involved in the establishment of a company, who make their labour available for idealistic reasons, should be reimbursed for their work as soon as the company can operate profitably.
- Once all debts have been paid off and the hours worked since the company was founded have been remunerated, and each employee can be paid the national median wage, the additional profit is divided by two. 50% of this money, after deduction of corporate taxes, is donated as seed capital for start-ups that want to operate according to the same model. The remaining 50% of the profit is used for investments in the company, provisions and/or as bonus payments to the employees. The maximum wage of each employee including the company management is four times the median wage of the richest country (this value can also be adjusted, of course). In the long run, this would probably lead to an equalisation of wages worldwide.
- Companies that receive start-up capital in this form commit to operate according to the same model. If they want to leave this economic model, which must be allowed, they are obliged to pay back at least the seed capital they received to their donor, who will give the money to other ideas. If a company goes bankrupt, however, they have no debt to the EAEM company's donation.
- The company property remains in the company ownership, should the management step down. The new management is appointed by the retiring management or, if desired by the retiring management or in the event of premature death, democratically elected by the employees. This should not result in the accumulation of private wealth through inheritance. This would lead to a reduction in the unequal distribution of wealth.
These are the central ideas of how I could imagine a meaningful EAEM. Unfortunately, I cannot assess whether this is feasible in this way and would be pleased to receive input and suggestions for improvement from you.
4. Competition to promote entrepreneurship among people living in poverty
4.1 Procedure of the competition
I suggest that you could launch a competition with a funding amount determined by you and the following specifications: We are looking for meaningful business ideas that try to promote the well-being of people and/or other sentient beings. Primarily people living in poverty may apply. They must present their idea via video message on a worldwide public video portal. The following content must be included: 1. name and country, 2. business idea, 3. reasons why this idea increases the well-being of people or other sentient beings in their opinion, 4. required start-up capital and reasons for its use and time horizon, 5. reasons why they cannot raise the start-up capital themselves (description of their financial situation), 6. contact data.
4.2 Why primarily support ideas of people in poverty
People in poverty primarily lack money with which to satisfy their basic needs. However, people in poverty do not lack ideas any more or less than people with enough money. The lack of money prevents potential entrepreneurs from putting their ideas into practice. Only the lack of money is responsible for their powerlessness, not their personal abilities. This is where we (people with enough money) should start and spread the realistic idea and hope in the circles of people living in poverty that there is a chance that we will support them financially if they can present a meaningful business idea for the benefit of sentient beings. People in poverty will thus have the opportunity to no longer be perceived as passive needy or to feel accordingly, but to become idea generators and visionaries and part of a movement that wants to do business for the benefit of sentient beings.
If a sponsored entrepreneur manages to achieve economic success, I assume that she*he will be more willing to pass on part of his*her economic success to people living in poverty, because she*he knows from personal experience how the other person feels.
4.3 Why apply publicly
My hope is that not only the initiators of this competition will look for meaningful business ideas, but also many other people or institutions who are in the fortunate position of being able to afford financial support and would like to become part of this movement. If we manage to spread this idea worldwide and people living in poverty free themselves from their anonymity and show themselves with meaningful business ideas, then I am confident that more and more people with sufficient financial resources will see themselves as part of a global family that no longer accepts that parts of their family starve, have no access to medical care or education and much more.
4.4 Why present personally
Entrepreneurs are leaders who manage to generate value. On the one hand, through the product or the service, which hopefully serves the well-being of sentient beings, and on the other hand through the jobs they create, which offer other people a livelihood, provided that the employment conditions are set in a humane way. An entrepreneur takes responsibility and is the face of a company. When a potential entrepreneur living in poverty steps in front of the camera, she*he also takes responsibility for her*his idea, steps out of anonymity, and gives poverty a face with which we can connect more easily. We also give people living in poverty the chance to contribute to the good of us all, because an idea is free and anyone can have it.
4.5 Why with an effective altruistic economic model
Like a flower that scatters its seeds in its environment in the hope that they will grow to continue the spread of its species, I think we should also build a meaningful EAEM. The aim of this model should be that every person who wants to do so will one day find a job in it. I hope that we will be able to build profitable businesses, or convince already existing ones, to operate according to an EAEM that includes distributing part of its profits like seeds to meaningful business ideas that will hopefully one day stand on their own feet and help to spread this EAEM. Through this system, I believe we could slowly but steadily reach more and more people all over the world from the bottom up and hopefully reduce poverty and economic inequality.
5. Illustration of the idea and the goal
6. Videographic illustration of the idea and the goal
I have tried to realise this idea presented here independently in 2021 and have announced a competition with a funding amount of 21’000 USD. You are welcome to watch the video (8) to see the idea and the goal I have just presented in a more visual language. However, my appeal was unsuccessful, and I could not find a single submitted business idea, so I donated the money to GiveDirectly.org as promised. However, I hope that if a better networked and more outwardly credible organisation like yours runs such a competition, it will start the movement I was hoping for.
7. Resources required
I would be very pleased if you would tender an amount defined by you as a competition, if you find this sensible, and your cost-benefit calculation legitimises this.
Other costs that would be generated:
- Time/labour costs to develop a meaningful EAEM.
- Time/labour costs to review the applications received.
- Time/labour costs for contacting/checking and handing over/transferring the money.
8. Cost-Benefit Ratio
I do not currently consider myself in a position to make a meaningful cost-benefit calculation and hope that you will do so, if you find the idea put forward here at all sensible.
What I can offer you are the following thoughts:
8.1 Thoughts on cost-benefit ratio of the EAEM
If we manage to develop and spread a meaningful EAEM and convince already existing companies to pass on part of their profits, then I suspect that the cost-benefit calculation will turn out very well. With each new company, the amount of money to be distributed would increase and the level of awareness would rise.
8.2 Thoughts on the cost-benefit ratio of the competition
The charity GiveDirectly.org does quite well in research (9) when it comes to its cost-benefit record, as it is still ranked among the top charities by GiveWell.org (10). By giving people in poverty a certain amount of money, which they can use freely, they ensure that the money is put to good use. As far as I know, the approach presented here differs in that people in poverty are not chosen 'at random', but they already show with their business ideas what they will use the money for and deliver a promise that one day, if they are financially successful, they will be willing to pass on part of it. In this way, I hope that this approach will have an even better cost-benefit balance in the long term than GiveDirectly currently achieves.
For the cost-benefit calculation to work out, I suspect that we should rather support business ideas with little required start-up capital than ideas that require a lot of start-up capital. By spreading the ideas widely, it is more likely that some of the ideas will also bear seeds and thus the model will spread over time, and more money can be distributed.
Another effect could be that people living in poverty are encouraged by this competition to develop meaningful business ideas, which they would not have sought without the competition. Even if (which I hope is not the case) they do not receive external financial support, they may one day manage to save the necessary start-up capital themselves and use it to build up a sustainable business that provides them and their employees with a livelihood.
Point 4.3 above could also have a positive effect I suspect, if it does not reduce people's willingness to donate to other meaningful projects that have a better cost-benefit balance.
9. Tractability and open questions
I think this proposal is implementable. A competition in this form is relatively easy to announce and hopefully easier to spread with your network. As preliminary work, an expert group of people with ethical and economic knowledge must agree on which EAEM should be used to announce the competition (model 1, model 2 or alternative model). I am convinced that in the circles of Open Philanthropy you would have exactly the people who can do this.
Then it is a case of waiting and seeing whether applications are received. For the entries to be found, a hashtag can be chosen, for example, which must be listed in the title of the application video. Examples could be: #OpenPhilanthropyBusinessIdeaCompetition, #OpenPhilantrophyTeamHuman or others.
One difficulty I suspect is that we can distinguish eligible applications from people living in poverty from those who could raise the seed money themselves. In the longer term, I hope that we will have some companies in each country that can operate on this model and take some control. Or perhaps in the longer term there will be a responsible group/organisation in each country that can take a closer look on the ground.
There is also the danger that sensible business ideas are put forward, which for example have been 'copied' from another person, but there is no intention to put this idea into practice and simply get the money. To reduce this danger, one could transfer the money in tranches when one sees that the person is trying to implement her or his idea.
The search for meaningful business ideas could prove to be difficult or time-consuming. Giving money to people living in poverty could also prove difficult without wasting too much money on contacting and transferring money. Are there possible low-cost payment systems worldwide to which people living in poverty also have access? Are there perhaps organisations that could coordinate the distribution of money?
10. Neglectedness
The problem of poverty and the unequal distribution of wealth is well known and is being addressed by many organisations in different ways. However, the proposal presented here of combining the promotion of entrepreneurship through donations (and not micro-credits) for people living in poverty, combined with an EAEM is not known to me so far and I therefore hope that it is new and may even turn out to be a useful way to reduce poverty and the wage and wealth inequality after you have examined it.
11. Acknowledgement
Many thanks to Open Philanthropy for offering this competition and giving people like me the opportunity to share their ideas. I hope that many meaningful ideas will come in and that as many of them as possible will one day be turned into reality. There is unfortunately still so much suffering on our planet, but I am confident that we humans will find ways to reduce this in the foreseeable future. Thank you for making a very valuable contribution to this.
I wish you every success in all your projects.
Sincerely, Thomas Schwendener
Sources:
- UN sustainable development goals: https://www.un.org/sustainabledevelopment/poverty/
- Gu Yanfeng & Wang Zhongyuan (2021): Income Inequality and Global Political Polarization: The Economic Origin of Political Polarization in the World: https://link.springer.com/article/10.1007/s11366-021-09772-1
- Stiglitz Joseph E. (2019): After neoliberalism: https://www.economics.utoronto.ca/gindart/2019-05-30%20-%20After%20neoliberalism.pdf
- International Labour Organization (2020): Global Wage Report 2020-21: https://www.ilo.org/wcmsp5/groups/public/---dgreports/---dcomm/---publ/documents/publication/wcms_762534.pdf
- Pega F. et al. (2021) : Global, regional, and national burdens of ischemic heart disease and stroke attributable to exposure to long working hours for 194 countries, 2000–2016: A systematic analysis from the WHO/ILO Joint Estimates of the Work-related Burden of Disease and Injury: https://reader.elsevier.com/reader/sd/pii/S0160412021002208?token=453772D9C8420C78AE01E6368EF080F5C9369A9417358E9EB3FF755DE1DDBA164B12DB2B2310921F2745342BBCCCD52E&originRegion=eu-west-1&originCreation=20220723071320
- World Inequality LAB (2018): Bericht zur weltweiten Ungleichheit: (https://wir2018.wid.world/files/download/wir2018-summary-german.pdf
- Giving What We Can: Blog Post (2020): Companies pledge at least 10% of profits to effective charities: https://www.givingwhatwecan.org/blog/companies-pledge-10-percent-of-profits-to-effective-charities
- LUTTAI Experiment 2021: https://www.youtube.com/watch?v=gfoObRVO6Cg
- Egger D. et al. (2019) General equilibrium effects of cash transfers: experimental evidence from Kenya: https://www.givedirectly.org/wp-content/uploads/2019/11/General-Equilibrium-Effects-of-Cash-Transfers.pdf
- GiveWell: Our Top Charities (November 2021): https://www.givewell.org/charities/top-charities
