Welcome back to the show, everyone. I am Corn, and I am joined as always by my brother, the man who has spent the last forty-eight hours reading white papers on social finance until his eyes turned the color of a Bloomberg Terminal.
Herman Poppleberry here, and you are not wrong, Corn. I have been deep in the weeds on this one. My desk is currently buried under impact reports, outcome-based contract templates, and at least three empty coffee mugs. Today's prompt from Daniel is about impact investing, and it is a topic that sits right at the intersection of high finance, moral philosophy, and what some might call social engineering.
It is a fascinating space, but as Daniel pointed out in his message, it is also a space that deserves a massive amount of scrutiny. We have touched on this before, especially when we looked at sustainability bonds in episode five hundred and thirteen, but Daniel wants us to go much deeper into the skeptical side of things. He is asking if this is a genuine way to reduce inequality or if it is just, as he put it, the dying gasp of a system trying to justify its own existence in an era of massive wealth disparity.
It is a heavy question, and honestly, it is the right question to be asking in twenty-six. To set the stage for everyone, we should probably define what we are actually talking about when we say impact investing. By now, most people have heard of ESG, which stands for Environmental, Social, and Governance. But there is a key difference that often gets lost in the marketing gloss. ESG is usually about risk mitigation. It is a defensive crouch. It is a company saying, we will not invest in tobacco because it is a PR nightmare, or we will make sure our board is diverse so we do not get sued for discrimination. It is largely passive.
Right, whereas the mantra Daniel mentioned was do good and do well. The idea is that you are not just avoiding the bad stuff; you are intentionally directing capital toward projects that solve a specific problem, like recidivism or homelessness or clean water access, with the explicit expectation that you will get your initial investment back plus a healthy profit. It is the commodification of compassion.
And the vehicle that really put this on the map over the last decade is the Social Impact Bond, or what is now more commonly called Pay for Success. The logic is pure technocracy. It says that the government is often inefficient at solving social problems because it pays for inputs—like the number of beds in a shelter—rather than outcomes—like the number of people who actually find permanent housing. So, you bring in private investors to fund a social service provider. If that provider hits certain pre-agreed benchmarks, the government pays the investors back with interest.
And the theory there is that the government only pays for what works. If the program fails to meet the goal, the taxpayers are not on the hook. The private investors take the risk. On paper, it sounds like a win-win, which is probably why it has become the darling of the Davos crowd and the billionaire set. It turns a social crisis into a de-risked asset class.
It sounds perfect in a PowerPoint presentation, but that is where Daniel's skepticism comes in, and I think he is hitting on something very profound. He points out that this whole field is entrenched in a culture where capitalism is a sacred cow. We are trying to edit the system to be more virtuous instead of asking if the system itself is the fundamental cause of the problems we are trying to solve. It is like trying to fix a leaky boat by selling shares in the bucket you are using to bail out the water.
That is a great way to put it. If you are using the same mechanisms that create wealth inequality—private equity, high-interest returns, and market-driven metrics—to try and solve wealth inequality, are you really doing anything other than moving numbers around on a spreadsheet? Are you actually changing the power dynamics, or are you just reinforcing them?
Well, that is the core of the financialization critique. When you turn a social outcome, like a person not going back to prison, into a financial asset, you change the nature of the service. You are essentially creating a market for human misery where the goal is to extract a return from the process of fixing it. Think about the Rikers Island Social Impact Bond back in twenty-thirteen. Goldman Sachs put up nine point six million dollars to fund a program for incarcerated youth. The goal was to reduce recidivism. But the program failed to meet its targets, and it was eventually shut down. While the taxpayers didn't pay out the success fee, the question remains: why was a giant investment bank the one designing the social intervention for vulnerable kids in the first place?
And that leads to the issue of who is actually in the room making these decisions. Daniel mentioned the massive disconnect between the wealthy people designing these systems and the poor people who are the supposed beneficiaries. It is a top-down, colonial approach to philanthropy. You have a fund manager in Manhattan or London or Zurich deciding how a community in a completely different part of the world should manage its social services based on what can be measured by an auditor.
It is the ultimate technocratic dream. It assumes that every social problem is just a data problem that can be solved with the right incentive structure. But as we know, social problems are messy. They are deeply rooted in history, culture, and systemic failures. You cannot always boil them down to a binary outcome that triggers a payment. This leads to what we call the quantification of care. If you can't measure it in a way that satisfies a contract lawyer, it doesn't exist.
I want to talk about that binary nature for a second. In a Pay for Success model, you have to have a very clear, measurable metric to decide if the investors get paid. Let us take the recidivism example Daniel mentioned, the one from the United Kingdom in Peterborough. If the goal is simply to reduce the number of people who go back to prison within one year, that sounds great. But what if the easiest way to hit that metric is to just provide services to the people who are already the most likely to succeed?
That is called cherry-picking, or in the finance world, it is sometimes called skimming. If I am an investor and my return depends on a specific outcome, I am going to push the service provider to focus on the easy cases—the people who just need a little nudge. The people with the most complex needs, the ones with severe mental health issues or long-term trauma, might get left behind because they represent a higher risk to the investment. They are the toxic assets of the social world in this model.
So the people who need the help the most are the ones who are least likely to receive it under this model because they are bad for the internal rate of return. That is a massive flaw. It is essentially the opposite of what a public service is supposed to be. A government program is supposed to be a safety net for everyone, especially the most vulnerable. But a financialized social service is a performance-driven machine that prioritizes efficiency over equity.
And let us look at the evidence. Daniel mentioned that the evidence for the effectiveness of these programs is often meager. While some pilots show success, many others struggle to scale. There was a famous case in Utah involving a social impact bond for early childhood education. The investors claimed a huge success because fewer kids ended up in special education. But critics pointed out that the criteria for what counted as needing special education were incredibly murky. Was the program actually better, or did they just change how they categorized the kids to trigger the payout?
That is the danger of letting the private sector grade its own homework. Is it possible that the complexity of setting up these bonds actually eats up all the potential savings? I have read that the legal and administrative costs of these deals are enormous. You have lawyers, consultants, evaluators, and intermediaries like Social Finance US or the Global Impact Investing Network all taking a cut before a single cent reaches the person in need.
Oh, absolutely. The transaction costs are a huge issue. You are adding multiple layers of bureaucracy to a process that is already complicated. In some cases, the amount of money spent on setting up the bond, auditing the results, and paying the intermediaries is almost as much as the actual investment in the social service itself. It makes you wonder if it wouldn't be more efficient for the government to just give that money directly to the non-profits or community organizations without the middleman in the expensive suit.
But that doesn't allow for the do well part of the equation. If the government just funds a program, there is no profit for the private sector. And that brings us back to Daniel's point about this being a way of implementing policy through the back door. It is a form of privatization that is disguised as innovation. It frames the government as inherently incompetent and the market as inherently efficient.
It really is. It shifts the power of policy-making from elected officials to private investors and intermediaries. If a government starts relying on these bonds to fund social services, they are effectively letting the market decide which social issues are worth solving based on their potential for a financial return. It is a quiet coup of the public interest.
That is a terrifying thought. Imagine a world where we only fund programs for homelessness if we can prove they save the government money in emergency room visits. What happens to the social issues that do not have a clear financial upside? What happens to the arts, or to programs for the elderly that might not result in a direct cost saving but are essential for a dignified life?
They get ignored. They fall out of the system because they are not bankable. This is what critics mean when they talk about the financialization of the social sector. We are training ourselves to only value the things that can be measured and monetized. We are losing the language of the common good and replacing it with the language of the balance sheet.
It also creates a weird incentive for the government to not fix the underlying problems. If a government is saving money because a private investor is funding a recidivism program, the government has less incentive to look at why so many people are going to prison in the first place. They are just managing the symptoms through a third party. It turns systemic failure into a sustainable business model.
Right, it entrenches the status quo. It makes the current system more efficient instead of challenging its foundations. If you can make a five percent return on a social impact bond that helps people navigate a broken housing market, you have a financial incentive for that housing market to stay broken. You need the problem to exist so you can profit from the solution. It is the ultimate conflict of interest.
That is the most cynical interpretation, but it is one that we have to take seriously. It reminds me of what we talked about in episode six hundred and thirty-nine regarding the future of labor and the social safety net. If we are just using AI and high finance to manage poverty, we are not actually moving toward a world without poverty. We are just making poverty more manageable for the people who aren't poor.
And there is also the issue of accountability. If a government-run program fails, there is a clear line of accountability to the voters. You can fire the person in charge or vote out the administration. But if a private social impact bond fails, who do you hold accountable? The investors lost their money, but the people who were supposed to receive the services are the ones who truly suffer, and they have no recourse. They are just a failed experiment in someone's portfolio.
It feels like we are creating a two-tiered system of governance. One for the things that are profitable and one for the things that are not. And the people at the bottom are the ones who get pushed into the profitable tier, where their lives are treated as data points for a hedge fund's quarterly report. Their survival becomes a derivative.
It is a profound shift in how we think about the social contract. We are moving away from the idea of shared responsibility and toward a model of individual outcomes that are managed by private capital. It is the final frontier of neoliberalism—the privatization of the soul of the state.
I also think about the psychological impact on the people working in these social service organizations. If your funding is tied to a specific metric, your entire focus changes. You are no longer focused on the holistic well-being of the person in front of you. You are focused on the one thing that will trigger the payout. It has to be demoralizing for people who went into social work to actually help people, not to hit a KPI for an investment bank.
I have talked to people in that sector, and that is a very real concern. They feel like they are being turned into data entry clerks for the finance industry. The pressure to hit targets can lead to all sorts of unintended consequences, like teaching to the test in schools. You get the result you measured, but you might lose the actual goal in the process. You might reduce recidivism for one year, but did you actually help that person build a stable, meaningful life?
It is the ultimate example of Goodhart's Law. When a measure becomes a target, it ceases to be a good measure. If the target is a specific outcome, people will find the shortest, most efficient way to hit that target, even if it means cutting corners on the things that actually matter.
Precisely. We see this in all sorts of fields, but when it is applied to human lives and social stability, the stakes are so much higher. We are gambling with the fabric of society.
Let us take a quick break here. I want to digest some of this. When we come back, I want to look at some of the alternatives. If impact investing is as flawed as we are saying, what should we be doing instead? Is there a way to use capital that doesn't involve this kind of financialization?
That is a great question, and I have some thoughts on...
Dorothy: Herman? Herman, are you there? Bubbeleh, I think I clicked the wrong thing on the computer.
Mum? Mum, I am on the show right now. We are recording.
Dorothy: Oh, hello Corn! Herman, I am so sorry to interrupt, but I just wanted to remind you that you have that dentist appointment tomorrow morning. You know how you are with your teeth, you cannot let them go. And did you see the soup I left by your door? It is the mushroom one you like.
Yes, Mum, I saw the soup. Thank you. But I really have to get back to the show. We are in the middle of a very serious discussion about the financialization of social services.
Dorothy: That sounds lovely, dear. Very important. Just don't forget the dentist. And bring back my Tupperware from last week, the red lid one is missing. Okay, I will let you get back to your radio. Bye-bye!
Hi Dorothy! Thanks for the soup!
Oh boy. I am so sorry about that. She still hasn't quite figured out how the recording software works on the shared family account.
Don't apologize, Herman. I think we all needed a little reminder about the real world. Mushroom soup and dentist appointments are a good grounding for a discussion about abstract financial structures. It reminds us that at the end of the day, we are talking about real people with real needs, not just data points.
Right. Well, back to the abstract financial structures. Before the interruption, we were talking about the flaws. But I do think it is worth asking if there is any version of this that works. Is it all bad? Or is there a way to harness the discipline of the market without the predatory nature of it?
That is the big question. Proponents would argue that even if it is flawed, it is better than nothing. They would say that government budgets are shrinking and philanthropy isn't enough to solve the world's problems. They see private capital as the only force big enough to move the needle on things like climate change or global poverty.
But that assumes that the money has to come from the private sector. It ignores the fact that governments can choose where to allocate their resources. If we are living in a world where we can afford to subsidize massive corporations and maintain astronomical military budgets, we can afford to fund social services directly. The idea that we are broke is a political choice, not a financial reality.
I think that is a key point. Impact investing often acts as a cover for austerity. It says, we don't have the money to help you, but we found some nice investors who might do it if there is a profit in it for them. It shifts the burden of care from the collective to the market. It makes the survival of the poor dependent on the whims of the wealthy.
And it also creates a situation where the most successful programs are the ones that are most likely to be privatized. If a social impact bond proves that a certain intervention works, the government should take it over and fund it as a public service. But instead, what often happens is that it just becomes a permanent part of the private market. The profit motive becomes baked into the solution.
We saw this with the discussion on the global safety net in episode four hundred and forty-eight. When you move toward these private-public partnerships, you often lose the public part over time. The private partner becomes the one with all the expertise and the infrastructure, and the government becomes just a check-writer with no actual control over the service. It is a slow-motion hollowing out of the state.
It is a slow erosion of state capacity. And that leads to Daniel's point about this being a movement of wealthy people suggesting how to run the world for the benefit of the poor. It is a form of philanthropic colonialism. It assumes that the people at the top have the answers and the people at the bottom are just passive recipients of their wisdom and capital. It ignores the agency of the communities themselves.
What would a more democratic version look like? Daniel asked if this is a movement that truly seeks to empower. If it were about empowerment, wouldn't the beneficiaries be the ones designing the programs? Wouldn't they be the ones who decide what the metrics for success should be?
There is a concept called participatory budgeting where communities get to decide how public money is spent. That is the exact opposite of the impact investing model. It starts from the ground up. It assumes that the people living with the problems are the ones best equipped to solve them. It values local knowledge over financial modeling.
But you can't easily turn participatory budgeting into a tradable financial asset. You can't put a five percent return on community empowerment. And that is why the wealthy elite aren't interested in it. It doesn't fit their worldview, which requires everything to be scalable, measurable, and profitable.
It also doesn't allow them to maintain their position of power. Impact investing allows the wealthy to feel good about themselves while keeping the system that made them wealthy perfectly intact. It is a way of buying social peace without actually giving up any power or resources. It is what Anand Giridharadas calls the elite charade of changing the world.
It reminds me of that famous quote about the person who wants to help the poor, but doesn't want to ask why they are poor. Impact investing is the ultimate expression of that. It is a way of managing the symptoms of inequality without ever touching the causes. It treats poverty like a technical glitch rather than a structural feature of our current economic system.
I want to push back on one thing though. Is there any value in the data collection side of this? One thing impact investing does is force organizations to actually measure what they are doing. In the past, a lot of non-profits would just do things because they felt good, without any evidence that they were actually working. Is there a middle ground where we use the rigor of data without the profit motive?
That is a fair point. Rigorous evaluation is important. We should know if the programs we fund are actually helping people. But you don't need a complex financial bond to do evaluation. You can just fund evaluation as part of a government grant. You can hire independent researchers to look at the outcomes. The idea that you need a profit motive to care about results is a very narrow and frankly insulting view of human nature.
It really is. Most people who work in the social sector care deeply about results. They want their work to matter. They are often working for low pay in difficult conditions because they believe in the mission. They don't need a hedge fund manager looking over their shoulder to tell them that they should be helping people more efficiently.
So if we look at Daniel's final question, is this a dying gasp of capitalism or a genuine attempt to reduce inequality? I think the answer is that it is an attempt to save capitalism from itself by making it look more compassionate. It is a rebranding exercise. But in doing so, it actually makes the system more rigid and more resistant to real change because it ties our social well-being to the health of the market.
I agree. It is a way of co-opting the language of social justice and using it to reinforce market logic. It takes the radical idea that we should solve social problems and turns it into a business opportunity. It turns a protest into a prospectus.
And that is the most dangerous part. If we accept the idea that everything has to be profitable to be worthwhile, we lose the ability to imagine a world that isn't defined by the market. We lose the ability to think about things like human rights, dignity, and solidarity as values that exist outside of a price tag. We become consumers of social change rather than citizens of a democracy.
It is a narrowing of our moral imagination. We are being told that the only way to do good is to do well, which implies that if you can't do well—if you can't make a profit—you shouldn't bother doing good. It leaves the most difficult and most important problems completely unaddressed.
That is a very dark place to end up. But I think it is where the logic of impact investing leads if you follow it to its conclusion. It leads to a world where the only people who get helped are the ones who can generate a return for an investor.
So what is the alternative? If someone listening wants to make an impact with their money, what should they do?
Well, there is the old-fashioned way. You can give it away. Direct philanthropy, especially to organizations that are led by the communities they serve, is still a very powerful tool. You don't need a return on your investment to make a difference. In fact, the most impactful thing you can do is often to give up control of the money entirely and let the people on the ground decide how to use it. Look at the movement for trust-based philanthropy. It is the literal opposite of the impact investing model.
And on a systemic level, we need to push for stronger public services and a more robust social safety net. We need to stop looking for clever financial tricks to solve political problems. If we want to reduce recidivism, we should look at sentencing reform, education in prisons, and support for people when they come out. We don't need a bond for that; we need the political will to fund it through fair taxation.
It comes back to governance, which is what we talked about in episode five hundred and eighty-three. We have to stop thinking that the market is the only way to organize society. We have other tools, like democracy and collective action, which are much better suited to handling the complexities of human life. We need to reinvest in our public institutions rather than outsourcing them to the highest bidder.
I think Daniel's prompt has really highlighted the tension between these two worldviews. On one hand, you have the belief that the market can solve everything if we just tweak the incentives. On the other hand, you have the belief that some things are too important to be left to the market. Some things are sacred.
And I think we know where we stand on that. Impact investing might have some small-scale successes, but as a global strategy for reducing inequality, it is fundamentally flawed because it refuses to address the root causes of that inequality. It is trying to solve the problem with the same tools that created it.
It is like trying to fix a sinking ship by selling tickets to the lifeboats. You might save a few people who can afford the ticket, but you are not doing anything about the hole in the hull. And eventually, the whole ship goes down anyway.
That is one of your two analogies for the day, Herman. And it is a good one. A bit grim, but accurate.
I will take it. I think the key takeaway for our listeners is to be skeptical whenever you hear a financial solution for a social problem. Ask who is making the profit, who is taking the risk, and most importantly, who is being left out of the conversation. If the people being helped aren't the ones in charge, it isn't empowerment; it is management.
And don't forget to check out the work of people who are actually on the ground. The people who are doing the work because they believe in it, not because they are trying to hit a benchmark for an investor. There are thousands of grassroots organizations that are doing incredible work with very little resources because they aren't bankable.
There is so much incredible work being done in the non-profit and public sectors that never gets the headlines because it isn't a sexy new financial product. Those are the people we should be supporting. We should be investing in people, not in products.
Well, I think we have given Daniel plenty to chew on. This was a deep dive, but a necessary one. Impact investing is only going to grow as a trend, especially as more wealth transfers to a younger generation that wants to feel like they are doing good. We need to have these conversations now before the entire social sector is financialized beyond recognition.
Definitely. And I should probably go check on my teeth. My mum is never going to let me hear the end of it if I miss that appointment. She has a sixth sense for dental neglect.
And don't forget the red-lidded Tupperware! That is a high-stakes mission right there.
Oh, I won't. I will be scouring the kitchen tonight. I might need to hire a private investigator for that one.
Alright everyone, thank you so much for listening. This has been a really important discussion for us, and we hope it gave you some new perspectives on a very complex topic. If you are interested in hearing more about our thoughts on the intersection of finance and society, I highly recommend checking out episode four hundred and thirty-nine, where we looked at the new rules of impact investing from a slightly different angle. It provides a good companion to today's skeptical take.
Yes, that is a great one. And if you have been enjoying My Weird Prompts, we would really appreciate it if you could leave us a review on your podcast app or on Spotify. It genuinely helps the show reach more people who are interested in these kinds of deep dives into the weird world of prompts.
It really does. You can find us on Spotify, Apple Podcasts, and wherever you listen to your favorite shows. Our website is myweirdprompts.com, where you can find our full archive and a contact form if you want to send us a prompt like Daniel did. We read every single one of them.
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It really does. Alright, Herman Poppleberry here, signing off and heading to the dentist.
And I am Corn. Thanks for listening to My Weird Prompts. We will see you next time.
Goodbye everyone!
