Where’s Our Bubble?

In Pop!: Why Bubbles are Great for the Economy, Daniel Gross presents the counterintuitive thesis that overoptimistic or “irrationally exuberant” investing is philanthropic: When a bubble bursts, it leaves behind capital that entrepreneurs then use to broadly benefit society.  Sure, a great number of investors with poor timing take a bath, but their losses can be viewed as donations to the economic pool. 

Gross points to the telecom bubble, symbolized by the WorldCom and Global Crossing flameouts, as one example of the good kind of bubble.  For however much their executives manipulated their stock prices or booked phantom profits, when these and other telecom companies imploded, they left behind an oversupply of broadband capacity, which paved the way for startups like MySpace and YouTube, the near ubiquity of Wi-Fi, and other goods.  The same may be true for the apparent bursting of the housing bubble, which should leave behind a much needed supply of housing units in many regions, infrastructure like zillow.com and other resources, changed attitudes to mortgage debt, and more.  Obviously, Gross’s thesis only holds for the kind of bubbles that actually have some underlying tangible good, and not ones based solely on paper profits, such as the bubble that was energy trading as Enron sold it.  (For a concise discussion of Gross’s book see Brad DeLong’s blog. (Be warned, the high level of knowledge of economics and mathematics may be quite bewildering and humbling to lay readers like me. But sitting in on debates by some of the world’s top thinkers is one of the wonders of the blogosphere—perhaps its highest and best use.)

Gross’s thesis may lead some of us in the social sector to wonder, Where are our bubbles? And what will they leave behind?  As susceptible as the philanthropic world is to animal spirits, I unfortunately can’t recall any bubbles.

To many observers, social enterprise and venture philanthropy may have seemed like fads—the emperor’s new clothes, or the recycling of older ideas without attribution—when they first started.  While both “industries” are still going strong, I would argue that actual investment hasn’t reached bubble-level.  The same is true for most other recent trends, like capacity building, leadership development (a perennial favorite), community development, and so on .  I have to admit my bias, however. In my view, even in the best cases, investment in the most promising ideas and the highest performing nonprofits lags well behind their true value, and we leave a ton of return on the table.

If we were to have a bubble, what kind of capital would it leave behind? To my quite limited mind, it seems that most of the value in our sector is, as my dad would have said, “on the hoof.” It is in our people, not physical assets, and it’s not just their brains and talent, but their passion, commitment, and resilience.  Indeed, isn’t this what all the worry about the impending loss of Baby Boomer leadership is about. (That boom may have been one bubble to our account.)  It’s intriguing to think about what boons we might produce if we actually tried to over-invest in people currently in the social sector and in the pipeline of people to come.  How would we do that? What if we offered 100 percent student loan forgiveness to people who worked for a certain period in the nonprofit sector?  As profligate as this might sound, it would be one targeted way of investing more human capital in the social sector. What others might we try?  Where is the capital market that will whip itself into a frenzy over social innovation?

Peter Manzo is the director of strategic initiatives for the Advancement Project, a civil rights advocacy organization, and a senior research fellow with the Center for Civil Society in the UCLA School of Public Affairs. Previously, he was the executive director and general counsel of the Center for Nonprofit Management. 

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