Social investments: The kind-hearted soul of capitalism?

By Frank Mattheis GovInn Senior Fellow

As the eyes of the British political elite are all on Scotland this week the report of the Social Impact Investment Taskforce, initiated by Mr Cameron last year, became second-tier news at best.

Yet, so-called social investments are the biggest trend among experts and practitioners trying to polish the dented reputation of capitalism. The Taskforce’s chair, venture capitalist Sir Ronald Cohen talks of uncovering the “invisible heart of the market”. The trick is to reconcile greed and ethics by creating more profits for capital being invested to resolve social problems. The Taskforce thus recommends all sorts of regulatory changes to financially reward those doing good for society. But simply, governments need to define the costs of undesired social phenomena. They then can create social impact bonds to offer investors appealing yields if the problem is solved with their money. If the measures of the bonds succeed in a given goal – e.g. preventing ex-convicts from reoffending – the state pays out returns from the spared social spending.

The idea seems brilliant because it is so simple. But there is a fine line between simple and simplistic. The core mechanism of social investment is to transforming reduction in national spending into private revenues.

Consequently, the ‘new paradigm’ presented in the report translates into an entire re-definition of public goods. The most urgent social problems are not identified by the society itself but according to how much of a drain they represent to public budgets. How much attention illiteracy or domestic violence receives would be determined by the yield assessment of investors.