Introduction: The Power of the Solution Economy

The new trillion-dollar market for public good

Shel Silverstein’s wildly popular children’s book The Giving Tree has been translated into more than thirty languages since its initial publication in 1964. The story chronicles a tree’s enduring devotion to a boy. At first, the tree provides the simple comforts of shade and refreshment. But as it meets the boy’s continuing demands, it relinquishes everything, down to its apples, branches, and trunk. Eventually, all that remains is a humble stump, which even then is put to use.

Like the tree in Silverstein’s story, governments are finding the problems they’ve agreed to address to be truly insatiable.

During the twentieth century, the need to tackle massive public problems such as public health epidemics and large infrastructure development meant that government became the center of solving big problems. From building the Hoover Dam to eradicating smallpox, from economic development in Africa to education worldwide, government was the place to be for those who wanted to change the world for the better. The Great Society’s war on poverty, an unlimited war against want, was perhaps the zenith of this identification of government with great achievement—or at least great aspiration.

There is very little that we haven’t asked from government in modern times. We ask it to keep us safe from terrorists and to protect our privacy; to prevent global economic meltdowns and stop the contagion of failing states; to bail out banks and contain the spiraling costs of an array of competing vital interests, from health care to education.

The sheer range and variety of these goals mean that government agencies often find themselves working at cross-purposes. Public health agencies fund obesity programs while the U.S. Department of Agriculture subsidizes sugar. Transportation departments fight traffic congestion on the one hand while subsidizing road use on the other. International development agencies provide aid to farmers in the developing world while trade barriers keep foreign agricultural goods out of Western markets.

Developing countries may lack such an ambitious public sector, but neither can they afford to produce one—at least not the same model as the West. For these countries, it would take decades for GDP growth to grow fast enough to support industrial-age government, with its soaring costs in health care and education. Consider India. Per-capita health-care spending in India would have to increase thirty-seven-fold to match Canadian spending levels. At current rates of growth, this wouldn’t happen until 2070—much too late, considering India’s rapidly growing middle class. India simply can’t afford to take the high-cost Western route.

Increasingly, the West can’t, either. The defining feature of Western-style government—its success in catering to a wide variety of citizen needs—has become its greatest liability. Governments are going broke while contorting themselves into ever-stranger positions to satisfy often contradictory constituent demands.

In Colorado Springs, for instance, tight budgets led to reduced city services and, ultimately, a system in which community residents made à la carte purchases. If a neighborhood wanted its street lamps to light up at dusk, it could pay the city a $125 fee. Keep the nearby park maintained? $2,500.¹

In Europe and North America, the great recession forced governments on a path of austerity, causing them to reduce their police forces and close schools, libraries, and hospitals they could simply no longer afford. And with debt growing at a rate of roughly $4 billion per day in the United States and more in Europe, fiscal constraints have become the new normal.

So at both the low end and the high end of spending, governments have a desperate need for an alternative to a traditional top-down service model.

Fortunately, government is no longer the only game in town when it comes to societal problem solving. Society is witnessing a step change in how it deals with its own problems—a shift from a government-dominated model to one in which government is just one player among many. Over the last decade or so, a dizzying variety of new players has entered the societal problem-solving arena. Acumen and Ashoka, Kiva and Kaggle, Zipcar and Zimride, Recyclebank and RelayRides, SpaceX and M-Pesa, Branson and Bloomberg, Omidyar and Gates—the list is long and growing briskly. They operate within what we call a solution economy. These new innovators are closing the widening gap between what governments provide and what citizens need. This approach promises better results, lower costs, and the best hope we have for public innovation in an era of fiscal constraints and unmet needs.

The Economy in Eliminating Problems

In the 1970s and 1980s, governments provided for the public good while the private sector largely stuck with Milton Friedman’s admonition that the social responsibility of business was to increase its profits.² Thinking beyond the bottom line was viewed as unfocused or, even worse, a disservice to shareholders. Meanwhile, because outside the United States civil society tended to be relatively small and highly localized, individual citizens and communities were only able to organize with limited scope and scale, placing a heavy dependency on government.

Many problems went unsolved. The solutions that did emerge didn’t spread easily. Citizen needs, particularly those of the poor in the developing world, went unmet.

Today, the landscape has changed dramatically. Citizens, businesses, entrepreneurs, and foundations often turn to each other rather than relying solely on the public sector to coordinate solutions to every problem. This is blurring, if not eliminating, decades old divisions of public and private sector responsibilities.

Whereas the twentieth century was a time of sector specialization, the twenty-first century has boundaries too fluid for, say, a public nutrition issue to be the sole province of government.

A new economy has emerged at the borderlands where traditional sectors overlap. This economy trades in social outcomes; its currencies include public data, reputation, and social impact. Untapped markets are developed and drive financial returns. The business models are unusual, and the motivations range from new notions of public accountability to moral obligation to even shareholder value.

New problem-solving innovators and investors power the solution economy. These wavemakers assume many forms, including edgy social enterprises with the mentality of a Silicon Valley start-up, megafoundations, and Fortune 500 companies that now deliver social good on the path to profit. They range from Ashoka, which deploys three thousand citizen changemakers in sixty countries, to the global pharmaceutical giants that annually give away billions of dollars in medicine to low-income citizens anywhere, from Africa to the United States.

Just how big are the contributions of these new players? Unlike government spending figures, this data has not been systematically tracked. Their impacts translate only tenuously into dollar terms. However, even a rough estimate suggests trillions of dollars in impact.

Consider just a few data points. In 2009, private US philanthropy to developing countries exceeded official US government aid by almost $9 billion.³ In one survey of 184 global companies, the average company contributed about $22 million to philanthropy, with the group total exceeding $15 billion in just one year. Even institutional investors have started funding groups that create public value. Socially responsible investing has grown into a $1 trillion industry.⁴

The solution economy represents not just an economic opportunity, but a new manner of solving entrenched societal problems. Equipped with new business models and lightweight technologies, the new problem solvers are less impeded by sectorial divides. Whether a problem is public or private, social or commercial, economic or political is not what drives the design. Rather, the ability and energy to reach the previously unreachable, raise funds from untapped sources, and leverage social networks is fueling new markets for solving entrenched societal problems.

These multi-billion-dollar markets are forming around some of the world’s toughest problems, from fighting malaria to providing low-cost housing to educating the poorest of the poor. In these solution markets businesses, social entrepreneurs, nonprofits, and multi national companies compete, coordinate, and collaborate to solve megaproblems. Instead of trying to patch a market failure, they create a market for the solution. Foundations, venture philanthropists, governments—and, often, private businesses themselves—act as funders, investors, and market makers. Unlike most government-driven programs that are limited by political borders, these emerging solutions spread nimbly across the globe. In less than a decade, Unilever’s Project Shakti microloan program for women in rural Indian villages expanded from seventeen saleswomen to forty-five thousand, serving three million Indian households; it is now spreading to Sri Lanka and Bangladesh.⁵

This all might inspire a touch of skepticism. You might be thinking something like this: We have markets in shoes, in homes, and in automobiles, but markets in societal outcomes? It seems illogical. Weren’t these big, wicked problems the very areas where we’ve experienced market failure in the first place—where government was forced to step in? Take something like human trafficking. It’s easy to see how there can be a market in engaging in this awful practice, but can a market be constructed to help stop it?

In this book, we assert that yes, you can create markets—or at least market mechanisms—around problems like environmental cleanup, transitioning from welfare to work, and even fighting human trafficking. In fact, markets and economic ecosystems are developing around all manner of societal problems. The buyers in these markets purchase impacts or outcomes: healthier communities, kids who can read, reduced recidivism. Sellers provide the outcomes for the buyer: they design and sell cheap, solar-powered lights; write the code that tracks salmonella outbreaks using government data; and build the cross-sector networks to fight scourges like human trafficking.

Government’s role has changed dramatically just in the past decade or two. Sometimes it is a funder, but usually not the only funder; sometimes it integrates all the players; sometimes it’s the market maker; sometimes it’s just one of many contributors to the solution; and sometimes all it has to do is get out of the way to let these solution markets work.

Creating Mutual Advantage

We spent two years intensely studying this phenomenon, traveling to dozens of hotspots around the world, and interviewing hundreds of problem solvers both big and small. The experience made it clear that success stories like Project Shakti were anything but an isolated example. Almost invisibly, a large and growing global movement has developed around delivering better societal outcomes.

Converging factors have made this kind of social innovation more attainable. Technology and greater access to venture capital and other funding enable organizations with innovative business models to scale rapidly. Powerful collaboration tools enable citizens to work directly with peers to solve problems. Greater corporate social awareness enables changemakers to more easily connect their firm’s resources to wider problems.

The common thread across these initiatives is that of mutual advantage: the unprecedented alignment of financial and social incentives toward a greater public good. Private enterprise for public gain no longer need be an oxymoron. A growing army of societal problem solvers are rewarded for successfully tackling big, hard problems. Trillions of dollars in value potentially lies largely untapped at the intersection of the public, private, and nonprofit sectors. The Solution Revolution is about how to unlock this value.

Contrary to some of the hype, this doesn’t mean that social entrepreneurs will ride in and solve all of society’s problems. Instead, we argue that the role of the major contributors is changing and that those contributors can gain significant mutual advantage not only by working together to solve problems, but also by doing so in new ways.

The motivations go well beyond mere economic considerations. Visit almost any large company today and you’ll find individuals in executive suites whose goals match those of someone leading a social enterprise or impact investing fund—and they are beginning to speak the same language. This makes for a fundamentally more substantive conversation. Changes in the larger culture are also aligning interests. Employees, customers, and graduating MBAs that aspire to run top companies all expect higher returns than merely pure profit. That allows for more sustained interest in seeking win-win scenarios between profit and purpose.

This book builds on earlier research. Other important books have ably documented the new wave of billionaire philanthropists (Philanthrocapitalism); the rise in corporate social responsibility (SuperCorp and The Market for Virtue); and the rapid growth in social entrepreneurs (How to Change the World).⁶ Such books have greatly informed our thinking, but our task here is different in several respects. First, rather than focus on a few categories of players, we intend to provide a detailed picture of the space that hosts their interaction. Second, in just the few years since those books were published, the landscape has evolved greatly. We can now be much clearer about how to conceptualize and accelerate this movement while maximizing its effectiveness in solving society’s toughest problems.

In some ways, the solution economy resembles a traditional one. In fact, like the wider economy, the solution economy incorporates supply and demand, goods and services, trade and distribution, capital markets, and government regulation. What has evolved are the participants and how they interact.

Understanding how the solution economy works requires looking beyond traditional divisions and removing entrenched mental silos. New players dynamically react to unmet needs, and the players we think we know take on new roles; for example, Walmart assuming a major role in the fight against obesity. The contributors trade in unorthodox currencies: data, results, and reputation. They measure their bottom lines in social value. They invent imaginative new business models. Cutting-edge technical and social developments translate into remedies for old human obstacles. International borders are eventually bridged. And just as in the private sector, the pool of entrants expands as traditional barriers to entry decline.

The solution economy is powered by six principal features (figure I-1):

• Wavemakers, who solve problems

• Disruptive technologies

• Business models that scale

• Impact currencies

• Public-value exchanges

• Solution ecosystems

Each of the six central elements is powerful in its own right. However, the real breakthroughs come from deftly weaving the elements together—doing so can make even the thorniest problems solvable. The best way to understand this is to observe how they come together in solving an actual public problem—in this case, a really difficult problem that heretofore has escaped a solution: traffic gridlock.

FIGURE I-1

Innovating for the Public Good

A crowd of twentysomethings gathers in the heart of San Francisco’s Mission District. It’s 10 a.m. Google shuttles have been scooping up workers across the city for four hours already. An unmarked white bus with tinted windows pulls to the curb. Workers stream on. Some sleep while others open their laptops to get a jumpstart on their frenzied workday as they barrel toward Mountain View in the fast lane. Engineers who could probably afford Porsches are taking the bus.

“There’s really no question for me,” says a twenty-five-year-old engineer, Noah Stevens, who rides the “G-Bus” to work every day.

The shuttle offers a total win—for Stevens, Google, and the wider public. For Stevens, it saves time and gas. For Google, it lowers worker stress, cuts the need for parking lots, and allows the company to attract talent. For the public, it reduces fuel demand, emissions, and traffic. It’s a clockwork-smooth system, creating both private and public good.

It’s a small dent in an intractable problem: commute times continue to drain productivity and waste resources. For decades, governments have tried in vain to come up with solutions by adding high-occupancy vehicles (HOV) lanes to roads and spending billions on elaborate public transportation networks. Yet, traffic congestion and the cost of commuting continue to grow.

Today, 77 percent of Americans drive to work alone. Only 5 percent use public transit. A meager 10 percent share rides, down from about 20 percent in 1970.⁷ Those numbers are also miserably low in the United Kingdom; just 3 percent of commuters carpool, and 13 percent use public transport.⁸ The story is much the same throughout much of the West. Every day, neighbors steer largely empty cars down parallel routes.

In the United States, the average commuter loses thirty-four hours a year to congestion delays; that’s 4.76 billion hours among all American commuters.⁹ The economic opportunity cost is staggering: $429 million daily or about $160 billion every year.¹⁰

But that’s just the cost to individuals. Every twenty-mile commute costs government a dollar, and those costs add up.¹¹ If you include the cost of congestion, air pollution, or even lost property value near roadways, the total estimated external cost of driving runs between $0.27 and $0.55 per mile.¹²

As government coffers drain and as oil prices continue to climb, approaches to reducing traffic are multiplying like bubbles in a swamp. Municipal budgets have limited the expansion of public transit, but communities of cyclists have found a workaround. These problem solvers have requested law changes to encourage a safer bike commute and promoted bike sharing services as an alternative to driving. New technology allows Car2Go and Zipcar to rent cars by the hour, easing the viability of car-free life.

One abundant and underutilized resource offers another potential solution to the gridlock problem: the empty seats in cars. The ride-share component of problem solvers teems with ideas to turn lone commuters into a secondary public transit system. Ridesharing apps like Zimride, Avego, RelayRides, and Carpooling.com herald the revolution. Smaller, community ridesharing programs, though they never make national news, similarly carve out a piece of the solution.

Innovation in ridesharing is growing organically. Entrepreneurs and nonprofits are using clever business models and technology to backfill public services. Reward Ride awards points to riders and drivers who can trade points for rides of their own, creating a micro-economy in the process. Meanwhile, the Avego app displays a driver’s routes to passengers, who can search for rides in their direction. The app works in real time. Wherever a passenger waits, the app alerts drivers, pulling up a profile of the prospective rider. A driver can then survey the profile at a red light or another stopping point. Both a driver’s trip progress and a rider’s journey are logged via GPS. When the ride ends, Avego transfers a fee ($1.00, plus $0.20 per mile) from the passenger’s Avego account to the driver’s, with Avego taking a cut.¹³ Users then rate each other.

“We are making the private car part of the public transit network,” says Avego founder Sean O’Sullivan, echoing an increasingly common refrain of people pushing this new model of grassroots public transportation system. “The consumer is making [his or her] asset, empty seats, usable.”¹⁴

Technology is reshaping society’s ability to solve its problems. As with ridesharing, many of the successes profiled in the book have taken advantage of a combination of new technologies such as cloud computing, data analytics, social media, geospatial analysis, and mobile computing.

The new ridesharing programs track progress through digital currencies. Amovens serves as a message board where travelers with profiles post where they hope to travel and how much they’ll pay to do so, allowing dollar prices to fluctuate freely. Users trust each other according to a person’s accumulated social credit—user ratings thus form a currency to increase the odds of finding a willing driver.

The ridesharing innovations demonstrate just one of many ways the new solutions beyond traditional government spending are being fueled. They may come in the form of a loan to a promising social entrepreneur, a scientific formula for an immunization, or sharing your car with strangers. Impact currencies are a means of paying for social impacts. They determine how resources are allocated across the rapidly growing and evolving solution economy.

This is a central idea behind the solution revolution: social impact becomes a form of currency with real value to millions—from foundations to governments to venture philanthropists to individual citizens. Its form is limited only by the creativity of those who make and exchange it.

Another key feature of the solution economy is public-value exchanges, platforms created by entrepreneurs, companies, and governments to spread social impact. These exchanges range from crowdfunding platforms like Kiva that enable socially conscious citizens to invest in social entrepreneurs to prizes and pay-for-success systems that connect large funders to problem solvers.

Returning to the ridesharing example, changing commuter behavior requires that ridesharing offer an easy, comfortable, safe alternative to driving alone. The business models of the various ridesharing exchanges are predicated on the idea that the more participants, the greater the reliability that rides will be available and on time.

Such exchanges, if successful, can potentially have an outsized social impact. By our calculations, doubling the number of rideshare commuters (which would simply bring the percentage back up to 1970 levels) and shifting 10 percent of drivers to car sharing could take nearly sixteen million cars off the road and save 757 million wasted hours in congestion per year in the United States. The country’s carbon dioxide emissions would decline by nearly 2 percent.¹⁵

If the government tried to match these savings by building new public transit, the bill would run around $27.5 billion, roughly the amount dedicated to repairing the country’s crumbling roads and bridges as part of the American Recovery and Reinvestment Act in 2009.¹⁶ In contrast, ridesharing costs the public sector almost nothing. In fact, government saves more than $8 billion in road maintenance costs.¹⁷

The last element of the solution economy is the solution ecosystems—the collaboration networks that come together to solve a specific problem. For example, companies, social entrepreneurs, foundations, and individual citizens are collaborating to revolutionize education and find low-cost solutions to housing the billions of poor people worldwide who live in slums. Wavemakers and the other elements of solution ecosystems are distributing vaccines. They are combating human trafficking on a more coordinated level than ever before. And they are solving society’s big problems through unique convergences of resources and uncommon alliances.

Working to avoid the shackles or apathy of the past, the solution revolution is almost the antithesis of how society’s toughest public challenges have traditionally been approached by large institutions. In no other space do we see such diverse resources—volunteer time, crowdfunding, capabilities of multinational corporations, entrepreneurial capital, philanthropic funding—aligned around common objectives such as reducing congestion, providing safe drinking water, or promoting healthy living.

Of course, transforming something as ingrained as someone’s commuting habits isn’t necessarily easy, but it’s possible. After landing the job at Google, Stevens the engineer noticed that his Triumph Thunderbird was staying on its kickstand. “I used to take my bike everywhere,” says Stevens. “But I guess I just got used to being along for the ride.”¹⁸

Nurturing the Solution Economy

Throughout human history, new forms of economic value production created new economic structures and new political structures. The shift from hunter-gatherer to agriculture prompted the rise of the city-state. The growth of international trade in the eighteenth century made it critical to extend the rule of law to the high seas and put an end to the piracy and smuggling that had come before. With the industrial revolution, patent laws and other protections of intellectual property rights became essential parts of a functioning economy in ways they weren’t in the sixteenth century. Stock exchanges took off in the nineteenth and twentieth centuries as large corporations took on greater importance as wealth generators. New means of production required new legal, political, and economic infrastructure.

Similarly, the solution economy is spawning new exchanges, ecosystems, and currencies that are collectively creating entirely new forms of economic organization and shifting the focus away from a government-only model. In countries where the solution economy is strong, a mix of providers and sustainable business models is creating social innovations with greater transparency and more public trust. The market infrastructure for investing in social impacts is becoming more robust. And more and more of the nation’s best and brightest graduates are marrying their vocation with their passion for larger social good.

We’re still learning how government, business, investors, and philanthropists can best create and expand flourishing markets in the solution economy. In India, the government has created a $1 billion “inclusive innovation fund” to spur private-sector solutions to some of the country’s knottiest problems. Meanwhile, the Cameron government in the United Kingdom launched a £600 million fund in 2012 to help fund new societal problem solvers.¹⁹

Across the Atlantic, the Obama administration introduced a bevy of initiatives to support a growing solution sector, including a $50 million social innovation fund and a new Office of Social Innovation.²⁰ “President Obama wanted to take the ideas of social entrepreneurship and bring them into the oval office,” says Jonathan Greenblatt, who drives these efforts as the director of the White House office. “We’re trying to find new ways to solve old problems and do so at scale.” The White House even established a new Presidential Innovation Fellowship to pair top innovators in the business, nonprofit, and academic sectors with top innovators in government. The teams work together on key public policy issues in six-month sprints.²¹ “We believe cross-sector leadership is fundamental to the future of America,” exclaims federal Chief Technology Officer Todd Park, the force behind the initiative.²²

Meanwhile, the US State Department and US Agency for International Development (USAID) have begun to pivot away from traditional aid in favor of public-private partnerships that support the growth of businesses that produce both financial and social returns.²³ At the same time, changes in state laws encourage new hybrid corporate forms like the benefit corporation (B corporation, or B corp), in which a corporation can legally justify a bottom line in terms of social good, not just shareholder return.²⁴

Despite their benefits, these positive developments are still a far cry from what could be done to take full advantage of the solution movement. The stakes are high because the potential impact is so immense—tens of thousands of lives saved, millions of poor children educated, and health dramatically improved worldwide at lower cost.

For an individual citizen, civil servant, or employee at a large firm, these kinds of problems might seem daunting—even impenetrable. Where would you even start? In the pages that follow, we show myriad ways regular people can participate in the solution revolution through everything from crowdfunding to impact investing to peer-to-peer learning to citizen science. And we show the critical part change-makers in government and large companies can play in pivoting their organization’s focus toward a bigger role in the solution economy.

A quick guide to the organization of the book: in chapter 1, we’ll look more closely at the different categories of wavemakers and how they are changing conventional beliefs and practices. Chapters 2 and 3 explore the disruptive technologies and business models that are enabling radically new solutions to old problems. In chapters 4 and 5, we delve into the new currencies propelling the solution economy and the novel exchanges where they are traded. Chapter 6 looks at how these pieces can be brought together in the form of problem-solving ecosystems that do everything from fighting human trafficking to providing radically low cost housing for the very poor. Lastly, in chapter 7 we outline six strategies you can use to create your own solution revolution.

Along the way, we’ll address the big questions involved in this movement. What’s working? What’s not? How can government facilitate the solution economy? How is this movement different from traditional nonprofit efforts to deliver public good? What are the implications of these myriad efforts on existing structures and institutions? How do we judge success and failure in this new, multisector approach to governance?

We begin by looking at the growing universe of wavemakers that are at the very heart of the solution revolution.