Wednesday, December 2, 2009

Non-profit Profiteering

You have to be a little nuts to try to start a new business, considering that most attempts fail after consuming the savings of the entrepreneur’s family. But to start a new non-profit you must be downright insane, in the way of young idealists hopelessly in love, if not with a lover then with a people, or with a mission. What else but the insanity of love can sustain one through grueling, often dangerous work in difficult and remote locations, interrupted by the constant need to desperately beg for cash? A start-up non-profit without strong political connections must achieve more than a large NGO on a tiny fraction of the budget, and continue performing this miracle for years, in order to eventually break through the door to respectable grants. Most never make it, but a small fraction survive, and eventually get that first sizable grant from a foundation or government agency. By this stage the founders might be well into their 30s. Kids come along, and spouses grow weary of idealism as they develop a budding interest in material wellbeing. The big grant becomes far easier to renew than it was to get in the first place, and the 2nd and 3rd grants soon follow. The milestones against which progress is measured are carefully tweaked by the insiders themselves each year, and eventually the money begins to really roll in. Then it’s not long before the salaries creep up and away, and a thoroughly political, inefficient, and resistant-to-change middle management layer becomes entrenched. While measured effectiveness keeps climbing to justify the climbing revenues, actual effectives drops off, as only the most inexperienced, na├»ve, and still idealistic and severely underpaid kids in their early 20’s do any serious work. The older mentors on the board begin to retire, as loyal friends of the founders gradually take their place. The organization keeps growing until it becomes a venerable institution, with its own immobile bureaucracy, treacherous politics, and a vast chasm separating the young volunteers doing the actual work from the cynical and inapproachable ruling classes, whose board influence and annual milestone manipulation gives them an essentially unassailable lifetime tenure at the funding teat.

Perhaps this characterization is atypical? Try entering the name of your favorite charity into the form at You might pick one for instance that does work in Africa, attempting to alleviate poverty, cure diseases, or foster democracy. Click to see their most recent IRS filings, and you might see something like this: Revenues from grants and donations: $20M. Fundraising expenses: $3M, operating expenses: $15M, annual excess: $2M, net assets: any number of millions, which grows bigger over the years. Then take a good look at the section called “5 highest paid non-director employees”. It would not be unusual to find that someone with a title like “country deputy director”, who would be an expat American or European living in an African city, making perhaps $250,000 per year, plus all kinds of expenses. Now $250,000 per year is a lot of money in the US, and it can afford one a pretty insulated lifestyle, with private schools, business class travel, nice cars, college funds, and adequate financial security for retirement. But $250,000 per year in Africa is a whole other story. Even $40,000 per year in a poor country is enough to get one a houseboy, a guard, and a cook. There has always been a name for white people in Africa living the kind of lifestyle beyond razor wire topped walls that $250,000 per year will buy in a crippled economy, a lifestyle that totally isolates people from their surroundings, a lifestyle filled with numerous servants, security, and decadence. The name that comes to mind is Colonial Masters.

A for-profit corporation is primarily tasked with generating profits for its shareholders. Though large corporate boards are also riddled with loyalists and insiders, and management pay frequently becomes absurdly high, the shareholders at least in theory have the power to replace the board if all the money is diverted to management and little makes it through to dividends. A non-profit on the other hand has no shareholders. It is organized for the purpose of fulfilling a mission, and while the ultimate recipients of the benefits may be thought of as stakeholders, only the board itself has the power to alter the future composition of the board. But after decades of ineffectiveness not only on the part of large NGOs in the developing world, but also of many of the major disease themed charities, an encouraging trend is emerging: some grant givers are beginning to put their own people onto the boards of their grant recipients, and these boards with real bite are going as far as replacing the management in the cases of the most extreme ineptitude.

This trend of director activism in the non-profit world is a positive development, but there’s another fundamental aspect of the way that non-profits operate that must also be addressed. For any large organization to maintain wealth and power, competitive barriers must be erected to prevent young start-ups from moving in too quickly and eroding the margins. Some barriers applied by the large to the small, such as price fixing or dumping goods below cost have been ruled illegal, but others have been encouraged by governments due to their social benefits. These “good” barriers include trade secrets, copyrights, patents, and proprietary software and business processes. It is arguably important to allow businesses to use these good barriers to generate disproportionate shareholder rewards, in order to encourage the innovation and risk taking that generated the intellectual property in the first place. Furthermore, a moral argument can be made that for-profit companies should be able to keep the fruits of their work as their own, and that it would amount to downright theft if society were to try to compel them to open up their proprietary software and processes to their emerging competitors.

No such moral argument can apply to non-profits. A non-profit is supposed to be driven solely by its mission. Preventing a new competitor from being more effective in the field, or from winning away a share of the available grant money can never help serve the mission, but can only help unfairly enrich the entrenched establishment. If in order to maintain their non-profit status, every bit of software developed by non-profits had to be open sourced, if every document describing the details of their internal operations, every contract, the minutes of every meeting, and the pay of every employee were to become transparently available online, the amount of competition and therefore effectiveness in the non-profit world would explode, and the young idealists with their non-profit start-ups would finally get a fighting chance at competing for grant money against the entrenched Goliaths.

Wednesday, February 25, 2009

A Critique of Israel’s Right to Exist

Most men have wives. Studies have shown married men to be happier than single men. They live longer, commit fewer crimes, and are more likely on average to actively raise their children than single men. Likewise married women are measurably happier than single women on average, and children do better when raised by two married parents, so it’s safe to say that marriage overall does society more good than harm. Yet despite the many benefits of marriage and family values, we simply do not talk about a man’s right to a wife. In a world without slavery, a right to a wife makes no sense at all; one could state with certainty that there is obviously no such thing.

It is less obvious but equally true that there’s no such thing as an absolute right to health care. You can have a right to be left alone, a right to speak your mind, a right to pray to your own god in your own language, but you can’t have a right which requires that another human being go to school for 24 years and then treat you for free. You might want free health care, you might need free health care, we as a society probably ought to provide some level of free health care to everyone, but no one can claim free health care as an unalienable right, for the simple reason that it requires the services of others who have not been born under a symmetrical obligation.

The notion of restricting the concept of human rights only to natural rights that don’t require the services of others is perhaps the biggest reason why the approach taken by Jefferson in the American Declaration of Independence has had so much more traction and political acceptance than the broader unrestricted case for entitlement proclaimed in the UN’s still unenforced Universal Declaration of Human Rights.

Some rights are arguable; some are clear. But no right is as fundamental as the right to exist. The right to life is the most clear-cut, basic right, and murder is the clearest right violation. It’s clear, that is, as long as you are talking about human beings. Extend it to fetuses, animals, or countries, and the right to exist becomes highly controversial, dependent on various details, and anything but clear-cut.

Supporters of abortion rights have long been angered by the wide adoption of the term "pro-life" to describe opposition to abortion. The notion that the right to life should be extended to fetuses and should override the mother's right to make choices concerning her body is a controversial one. Framing it into a term like "pro-life" is an old attempt to influence the narrative by linking the prohibition of abortions with the most fundamental right of all. Getting to name your own controversial position is half the battle. A widely adopted name is a crucial fulcrum in forming the perception of truth.

A similarly unreasonable extension of the right to life is made by using the concept to refer to countries. Who can oppose Israel’s right to exist if the term implies respecting the right to life of Israel’s Jewish inhabitants? The usage is particularly insidious because it implies a simple numerical aggregation: the right of Israel to exist sounds like the combined right to life of all Israelis, which is clearly even more fundamental than the right to life of any one individual. Given that Israel was created largely as a response to a relatively recent, deliberate, and partly successful attempt to murder every Jew in the world, it is particularly easy to associate Israel’s right to exist with that fundamental right to life, and to hold people who deny it in great contempt. But is it in fact a reasonable association?

Taking a closer look at the language, the right to exist of a certain country is a very different thing than the right to life of its inhabitants. Specifically, Israel’s right to exist refers to the right of the nation to call itself “Israel”, and by implication to consider itself a Jewish state. And that unfortunate framework demands that all others, particularly the large and growing Arab population of both Israel proper as well as of its occupied territories, also consider the nation they live in to be a Jewish state. Arabs may have some substantial rights in Israel. In some ways their lives may be better than those of people in neighboring countries. But living in an officially Jewish state, no Arab child can grow up with the full dignity and pride of citizenship.

Even with anti-discrimination laws on the books, and amendments to the constitution ensuring that we are in fact one nation with liberty and justice for all, it took a black president for many African Americans to begin to feel equal in the United States. Imagine how blacks and Latinos would have felt if the US was re-named to a word with the historic meaning of “White nation under God”, and they were asked to affirm its right to exist as a White and Christian State?

The framers of the American constitution had it right. The concept of the nation-state formed along ethnic lines got us out of the middle ages, but has long since outlived its usefulness. The world is evolving away from ethnic divisions and towards equality and human rights, naturally selecting post-ethnic open-access societies, and rewarding them with prosperity. Meanwhile the same long term global evolution is slowly but surely presenting Nazi Germany and her lesser cousins, in places like Rwanda, Cambodia, and Darfur, with the ultimate future of the Tyrannosaurus Rex.

But by responding to genocide with a Jewish state, the Zionists have inadvertently surrendered their humanist ideals to survivalist realpolitik. In forming their core political philosophy as an antithesis to Hitler’s rhetoric, they have extended the damage done to them by fascism. A more progressive, post-ethnic response would have been to create a refuge for all victims of attempted genocide, and to include all existing residents as equal citizens of this refuge-state. Unfortunately the path of division was taken instead, resulting in 60 years of bloodshed, recriminations, and deepening desperation.

Pragmatists inside and outside of the region continue to shout for a separate but equal two-state solution. But history shows that the two ethnically divided states will never be equal, and that in the long term, states based on ethnic division will become extinct. Only a single, bi-national, inclusive, post-ethnic Israeli-Palestinian state will have an absolute right to exist. And when an era of justice and equality for all comes to the region at last, ending thousands of years of pogroms and crusades, Barack Obama’s inaugural words will ring as true in the Middle East as they do now in America: “For we know that our patchwork heritage is a strength, not a weakness. We are a nation of Christians and Muslims, Jews and Hindus — and non-believers. We are shaped by every language and culture, drawn from every end of this Earth; and because we have tasted the bitter swill of civil war and segregation, and emerged from that dark chapter stronger and more united, we cannot help but believe that the old hatreds shall someday pass; that the lines of tribe shall soon dissolve; that as the world grows smaller, our common humanity shall reveal itself; and that America must play its role in ushering in a new era of peace.”

Saturday, January 10, 2009

Transparent mercenary humanitarian warfare and state building is starting to get some traction. I just posted the following idea there, which is a little more ambitious than most.

Transparent mercenary humanitarian warfare and state building



This is a non-profit idea that requires tens of billions in initial funding, but creates far more value in the long term.


The poorest countries in the world suffer either from pervasive predatory crime and warfare, or from corrupt, oppressive dictatorial regimes which prevent economic development, or both. Attempts to help by providing minimal economic resources are of limited value since they miss the core of the problem. People don't REALLY need crank powered water purifiers and micro loans, they need full plumbing and credit cards, and a government, education system, and social institutions which make those possible. Some organizations which attempt to protect human rights in places like Darfur, including even parts of the United Nations, have recently begun considering the use of force, in particular the use of private mercenary armies for enforcing the protection of human rights. Generally such considerations are quickly dismissed since the use of force can so easily be abused.

This proposal involves creating a layer of transparency which would make it possible to consider truly humanitarian military operations, consisting largely of mandatory always-on helmet-mounted cameras and microphones, and wireless networks to transmit the steaming images and audio to a distant monitoring center, which could also be fully accessible by the entire world via the Internet. Every mercenary would be rewarded with bonuses for effective completing pacification tasks, and penalized financially or criminally for any corruption, attacks against civilians, or other human rights violations.

  • First a country for the initial operation must be identified. It should be a very small, poor failed state, or a state run by a government whose human rights violations are particularly condemned by as much of the world as possible, where the lives of the citizen are beyond doubt a living hell. Let's say this country contains 1M people, with 50,000 active armed rebels or agents engaged in flagrant and ongoing human rights violations, commanding a $50M annual aggregate military budget. A force of 100,000 mercenaries should be sufficient to completely subdue and police the country, and create sustainable basic institutions of justice over a 5 year period. And unlike the recent US operation in Iraq, this operation would have orders of magnitude fewer people to control per combatant, and would furthermore benefit from the credibility of complete transparency, and a more pure humanitarian mission with fewer conflicts of interest. At $100K per soldier per year, this would be a $50B project. In addition, building an initial infrastructure supporting economic development, education, and heath care would cost perhaps another $50,000 per person, for $100B total commitment.
  • If the initial 5 year operation is successful in creating a small democratic regime along the lines of post WW2 Germany or Japan, funding can be obtained from world governments to repeat the experiment on a slightly larger scale.
  • The initial operation may not necessarily be legal according to international law, and may have to be funded by rogue billionaires, but with sufficient transparency and measured effectiveness it will eventually gain the support of the UN.
  • The cameras and microphones along with the offshore monitors would also be used by the local police post-pacification, as well as all government employees. Over time the organization will completely withdraw and allow the state to return to self-government. The plan and time frame will have to be clearly specified upfront, as well as the milestones for early or late withdrawal. In addition there will have to be milestones for failure: at some point before the money runs out, the organization will have to pull out and accept defeat, if necessary.
  • The real essence of this idea is that with enough transparency and clarity of mission, the local population will buy into the program and get behind it, drastically lowering the initial cost projections and time frame, and allowing the approach to scale to larger territories.
  • Another alternative to is to create incentives for existing governments to adopt the full transparency approach, for instance Israel in its current Gaza operation.

The real cause of the financial crisis

-- An MIT Blackjack Team perspective

The mathematics of probability that govern the trade-offs of risk and reward are fundamentally counter-intuitive.

The reason that societies ban pyramid schemes outright, instead of relying on the market to make them unprofitable, is that most people trust their intuition, and their intuition leads them astray. If you were to wait for the market to run its course on a pyramid scheme, the losses could devastate a whole country, as Albanians found out a few years ago.

In our days of outwitting casinos around the world, we have come across many people who thought that they also had a great system, but were in fact compulsive gamblers who eventually lost everything. Among the false systems that intuitively feel right, there is none as insidious and deadly as the Martingale, where a player doubles his bet after every loss.

The Martingale system works as follows: suppose you need an extra $100. You go down to your nearest casino, and bet $100 on a hand of blackjack, or on any other almost 50/50 proposition. Should you win right away, you have reached your goal and gotten your money. Now if you lose, you bet $200. If you win the second bet, you're up $100 over all and once again successful. But a little more than one out of four times you'll lose both, and end up down $300. In that event you simply bet $400. If you lose again you bet $800, and you just keep doubling your bet until you win once. Clearly you have to win at least once eventually, and with this system you end up with your $100 profit even if you start out losing for a while. If you're willing to bet up to ten times for instance, your chance of losing all ten bets is close to one in a thousand. That means that with a probability of almost 99.9%, you will win one of those ten bets, and therefore walk away with your $100.

Of course there's a catch that few people notice. When the unlikely one in a thousand event happens and you do lose ten in a row, the actual amount that you've lost is over $100,000, all risked to win a mere hundred bucks. You might not have any way of doubling up again. You might even need some sort of bailout.

In the world of investments, there are many ways more subtle than the Martingale to guarantee a better return over a period of months, years, and even decades, at the cost of certain ruin way down the road. Let's say for instance that you're managing a hedge fund which invests in stocks. Your strategy of sound fundamental analysis is fairly well understood. You have found that you can generate an average return of 6% per year, and so can most of your equally qualified competitors who have access to the same talent pool and knowledge base as you do. But then one of your competitors realizes that he can automatically increase his return to 9% by selling something called "out of the money puts" on the market. This means that the competitor's fund essentially sells insurance against the market crashing dramatically. In normal times his fund will gain the premium from selling this insurance which boosts his returns. However, in the rare event of an extreme market crash his investors will lose everything. This form of Martingale can be easily tuned to work for various time periods with various chances of collapse.

When investors see a fund manager generate a higher return that his competitors, they will move their money into that fund and out of the other ones. And money managers are rewarded based on the size of their fund, or the level of returns. The managers do not risk their own money. If they can provide a bigger gain for a few years, they win everything. They might even be lucky enough to be retired by the time their investors are paying the piper. The managers who have the discipline to understand and avoid the Martingale tricks will not be able to compete on the basis of their returns over a few years, and will eventually lose their funds and their jobs.

But many people managing large funds are men and women of integrity. They will not willingly expose their investors to total loss in order to line their own pockets with cash. Yet the system as it presently works does not allow them to compete without some kind of trade-off of long term risk versus short term reward. The
solution that they usually flock to is to create such a complex Martingale system that they themselves cannot understand the longer term risk implications. As long as the mathematical analysis of the risk of ruin lies beyond the understanding of the CEOs, the money managing organizations can stay competitive by employing their latest version of a return-boosting Martingale, without admitting to themselves or to others that they have been peer-pressured into the financial equivalent of selling their soul to the Devil.

In the 80's the emerging Martingales were called junk bonds and LBO's. In more recent times they are known as mortgage backed securities and
credit default swaps. You can regulate mortgages half to death and try to control what kind of risks various kinds of investment organizations are legally allowed to take. You can even forbid short selling and ban golden parachutes. But as long as managers are paid a percentage for managing other people's money, they will compete with each other based on the returns they appear to generate. The pressure to create out-sized returns will eventually force them to invent the latest complex scheme which will have the same effect: eventually the investors lose it all. Complex financial structures will once again emerge that even the best professional investors cannot fully understand. People will always move their money into the places that give the best return over a few years, no matter how many times they are warned with the disclaimer that "past performance is no indication of future returns." And eventually the crisis that results will reach global dimensions beyond the means of a government bailout, especially if part of the risk managing strategy becomes counting on bailouts happening every decade or so.

The only
solution is to forbid money management as we know it. We could certainly have people like Warren Buffet manage investors' money
alongside their own, with no additional percent-based compensation beyond their own investment gains. But we must remove the incentive to create Martingales, and protect people from their own intuitive desire to move their money into the funds which generate out-sized returns, without understanding the long term risks which create them.

In our globalized free market world, almost everyone is ultimately an investor, whether by owning a house or merely holding a job in a company which depends on access to capital. The scope of the current bailout has reached the point of
real danger. We must fix the underlying problem before doubling down again as a society, or risk going the way of Albania.