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Really investing in poor people

Ryan Hahn's picture

No, I don't mean investing in health systems, education, sanitation, etc. I'm talking about taking an equity stake in the future earnings of poor people. This is an idea mooted in a science fiction novel called The Unincorporated Man and subsequently discussed on Overcoming Bias and Marginal Revolution (hat tip to both). This is the first I've heard of the novel, so I'm relying on Marginal Revolution for a synopsis:

The Unincorporated Man is a science fiction novel in which shares of each person's income stream can be bought and sold.  (Initial ownership rights are person 75%, parents 20%, government 5%--there are no other taxes--and people typically sell shares to finance education and other training.)

The hero, Justin Cord a recently unfrozen business person from our time, opposes incorporation but has no good arguments against the system; instead he rants on about "liberty" and how bad the idea of owning and being owned makes him feel.  The villain, in contrast, offers reasoned arguments in favor of the system.

Both blogs discuss this as a theoretical, in-the-distant-future possibility. But there is already a company doing exactly this in the education sector. It's called Lumni, and it is the brainchild of Miguel Palacios, a professor at Vanderbilt University. Students at Lumni don't get loans - they get financing, and in return they subsequently pay back a percentage of their income over some agreed number of months. The amount they pay back may end up being more or less than the amount they originally received.

Unfortunately, many who first encounter this idea find it morally repugnant. Isn't this akin to indentured servitude? I actually think there is a lot to be said for this model. A student who is investing in his or her education faces a very risky proposition - while the returns to investment in education are high on average, there tends to be a pretty high degree of variation. This model helps share the risk between the financier and financee, one of the principle goals of a well-functioning financial system. The crux is making sure that a company like Lumni doesn't have a say in the student's choices once the deal has been made (in contrast to the dystopic world of The Unincorporated Man.) 

What say readers of the PSD blog? Should IFC start promoting equity markets in human capital in developing countries?

For more background on the concept, start with Palacios's Cato paper on human capital contracts


Submitted by Michael Graham on
Many students from developing nations have been doing this for decades. Their governments offer scholarship for their education with the pre-condition that they would be bonded to serve their country for a particular period of time. I did it. There were no negative connotations. It worked out very well.

Submitted by fehmeen on
Oddly enough, this model is very similar to the model of Islamic finance, where the lender takes a share of future profits of the business, where the risk is shared equally (i.e. the repayment could be less or more than the amount borrowed). And that idea doesn't seem wrong at all, because the time frame is theoretically limited. But in cases where the lender doesn't stipulate a time frame, the models have a striking resemblance. If the deal concerns all income earned by the individual, and not just the business income, then it brings about the issue of slavery, in my opinion. The borrower will be forever forced to cut his expenses and pay back the lender.

My take would be that there needs to be some care in carrying market thinking outside the realm in which it was developed, that of trading commodities. The point was made pretty finely (and very funnily!) by the British inventors of See here: The risk seems to be debasing responsibilities we all share as humans, if that does not sound too cheesy.

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