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janda and kurtz

Accounting ledger.

The new philanthropy asks social entrepreneurs to make the business case for public goods. Its premise is simple: Governments face overwhelming pressure to control debt and lower taxes, while social and environmental challenges are mounting. Thus, corporate and individual gifts must take up the slack.

Britain's Big Society initiatives exemplify this new regime: Rather than fund public programs directly, the state will incentivize private investment in public outcomes. After all, since markets are inadequate to meet public needs and create many "externalities" – unpaid social costs – the exchange market for private goods should be corrected by a kind of gift market for public goods.

But this formula exposes a deeper problem with our existing economy: It has no clear signal for valuing public goods. Public goods are those we share. Private goods are those we keep for ourselves. Yet, public goods enable private goods. The "market" itself is an example. Without shared access to the market, there would be no market economy.

What the new philanthropy still lacks is generalized accountability for the production and depletion of public goods. True, it generates "performance indicators," but it's still at a stage analogous to systems of accounting before double-entry bookkeeping. The new philanthropists try to keep a single ledger of what's paid for and received. But the economy, which tracks the exchange of private goods so closely, fails to track how each transaction depletes or contributes to public goods.

What would a generalized system of private good/public good debits and credits look like? Imagine that indicators of social impact were applied automatically throughout the supply chain to all transactions. Imagine that each transaction had a social impact score. Imagine that every company and every individual carried their own social score resulting from the aggregate of their transactions. Rather than using charitable tax credits to channel philanthropic behaviour, the tax system could become a more general system of accounting for public goods.

Consumption tax, for example, could be scaled upward for negative social impact and downward for positive impact. Social score would thus become a systematic signal of impact on public goods. And social entrepreneurship could be oriented toward flowing resources to positive social scores. The tax system would then seek to guarantee that the combination of public finance and social entrepreneurship provided public goods.

Emerging efforts to put a price on ecosystem services presage a general social score. The problem with such efforts is they're often based on internalizing the costs of public goods within the price of a transaction without having an independent signal for public good impacts themselves. And some public goods can't simply be traded against private goods. There's no quantity of widgets to exchange for a healthy climate.

Oscar Wilde offered a biting critique of the old philanthropy when he proclaimed that "the people who do most harm are the people who try to do most good." For the new philanthropy to escape this critique would require a systematic change making us all accountable for the social impact of our choices. The new philanthropy should point toward a philanthropic economy in which the gift market is balanced against the exchange market in every transaction. Such a dramatic transformation, unthinkable even a decade ago, is becoming possible through Web technologies.

Richard Janda is a law professor at McGill University. Shy Kurtz is a tax consultant on social entrepreneurship and philanthropy.