Measuring Your Money's Impact

05/09/2011 06:04 pm ET | Updated Jul 09, 2011

I have doubts that social scientists, scholars, foundation executives, impact investors and government managers are ever going to be happy. Their latest angst shows up in a myriad of projects and books which purport to meaningfully measure social investing in the developing world.

As repeatedly extolled, it seems that private sector investors are demanding that social investments not only make money, but also (really, no kidding) actually do good as well. The dream is that buckets of new money to finance the end of poverty will be forthcoming, if social investors could track their good deeds with the same ease that they track their deeds of trust.

Market capitalists measure success simplistically -- by financial returns, market share and stock price. If products or services incidentally advance the public welfare, all the better; if not, oh well. For investors, the metric that matters is in profit margins, not social missions.

Social entrepreneurs, however, evaluate performance across a nuanced set of metrics. They serve multiple stakeholders, all motivated by complex standards of community justice and ideals about the human condition. They lead us towards what we should measure, not what we can measure.

Consider a neighborhood newspaper anywhere in the world. Computing the value of a newspaper based on its circulation and advertising revenue produces its valuation, not its full value. A newspaper is a commercial venture, but also a social asset with a vital role in advancing free speech and fostering community cohesion. If we could measure the impact of free speech, and a particular newspaper came up short on our free speech analytics, what is the remedy? Defunding it?

A more immediate example is microfinance. Some celebrity academics have concluded that microfinance is not working as well as promised. With 190 million impoverished micro-borrowers voting with their wallets by renewing microloans every day, donors and social investors are understandably scratching their heads. Microcredit borrower's personal loan ledger (photo credit: Jonathan C. Lewis):

Microfinance has been horrendously oversold. Nearly all charitable fundraising (and corporate ad campaigns) over-promise -- it happens.

The pain of poverty is no less real, so the ethical challenge for every global citizen is, "What are the pragmatic, actionable choices?"

For starters, we can accept, without cynicism, that the poor, like you and I, are irrational economic actors who sometimes make short-term decisions to their long-term detriment. The difference is, only the poor are likely to get defunded for it by discouraged donors and social investors.

Let's avoid allowing the measurement mafia, even when motivated by good intent, to inflict a kind of hegemony over social change. We should insist the microfinance researchers conduct a randomized controlled trial (the presumed gold standard of social science) to tell us if poor women are better off without any opportunity to earn money for themselves.

We should evaluate the evaluations. Are the studies flawless and worthy of academic tenure or are they themselves over-promising? Can we rely on them for social investment decisions? Economic development and scholarly research alike deserves scrutiny.

Let's not target our dollars at only what we can document, instead of what we can dream.