Opinio Juris

Financial intermediation is a dicey proposition these days, and 'asset securitization' a downright dirty word in a world in which securitization allowed the obfuscation of risk - purses from sows' ears, but actually just fancy looking sows' ears, it turns out, everywhere you looked. Nonetheless, one of the important longterm issues for microfinance (and for the whole, newly emerging 'venture philanthropy' sector that links for-profit and nonprofit together) is whether nonprofit enterprises such as microfinance can or should seek to access capital in the regular global capital markets; how that might happen as a financial, legal, and regulatory matter; and who might play the role of intermediary and securitizer.

Is it possible for nonprofits to access the capital markets? Nonprofits have been going to the regular capital markets for a long time - schools, hospitals, universities, and so on, have long accessed the capital markets through bond issuances. But there have always been limitations on this, in the United States and usually even more restrictively elsewhere. First, as a practical matter, nonprofit bond issuance - since nonprofits don't have shareholders, stock issuance is not an option - is done by institutions that have one of two things, and almost always both: real estate as collateral and a reasonably dependable and steady stream of income, whether through tuition, patient fees, or something else. If you are just Joe Nonprofit Organization, engaged in some worthy activity (such as advising low income teens on how to lose weight and avoid obesity; I just finished reading the WP great but scary series on this) but don't have land and don't charge fees for services, bond investors won't lend you money because they won't see how you have the possibility to pay it back; the nature of your nonprofit is always going to be grant funding, not loans.

Second, nonprofit bond issuance typically takes place through municipal bond markets, with local government authorities giving approval to the bond issuance - if your law school or university has done some capital construction recently, the bonds were almost certainly issued via some local government agency to allow access to tax exempt muni bond markets. As a consequence, nonprofits that do not fit this model - and this includes most international nonprofits - have not been able to access the regular capital markets. Their funds come from a combination of foundation and other private giving, government agency, and international organization funding; those funds might be all grants, or they might include some amount of loans from those agencies - but the funds do not ultimately come from the public capital markets. They come from what is sometimes called the nonprofit capital market.

There have been some tiptoes into the public capital market by nonprofits that otherwise would not fit the traditional criteria. Often - nearly always, I would say - these efforts have been undertaken by or in collaboration with social responsible investment funds, such as Calvert Group. But the fundamental financial question remains the same - if you don't have an income stream, even leaving aside the collateral question, it really doesn't make sense for your organization to seek funds in the capital markets in which the whole point is that you pay a market rate of return. Public capital markets are not money for free; a nonprofit goes there because it has outstripped the capital available to it in the nonprofit capital markets at zero or negative rates of return, and in search of capital it is willing to pay market rates. But that only makes sense if the organization has an activity that produces an income stream at or exceeding market return rates (all that NPV stuff I was pooh-poohing in my last post!)

My own organization, the Media Development Loan Fund, has gone to the US capital markets with the assistance of Calvert Fund. That is, we have available to investors an instrument (under securities law exemptions) called Press Freedom Notes that pay SRI rates of return, meaning that you buy them as a regular security, but they pay less than full market rate. What has been the response among the public? Practically none, alas. That includes the regular investing public as well as the socially attuned socially responsible investor community. The problem, to be brutally frank, is that to sell these kind of bonds, you need a very attractive - i.e., very sad - story, preferably about small children with big sad eyes, or baby seals. Trying to sell regular old SRI investors on something as antiseptic and remote and abstract as the importance of a free and independent and transparent press as a crucial element of human rights, development and poverty reduction in the world - it's not just a tough sell, it's a no-sell.

MDLF has also done something unique and exciting (exciting, anyway, if innovative nonprofit financing is your thing) by issuing what we believe is the first publicly traded derivative - a swap note traded on the Zurich exchange - issued by a nonprofit. This was facilitated by a leading Swiss private bank, Vontobel, and a leader in the SRI innovation community in Europe, ResponsAbilite. In addition, liquidity in trading was guaranteed by a Swiss government agency. This was very, very cool as a concept, but even though Vontobel presented it as an SRI investment to its wealthy clients, and although we sold a lot, it didn't sell out, and the reason appears to be, once again, that even among sophisticated wealthy clients, baby seals count for a lot. Possibly - I'm not being cute here, but quite serious - if we had thought to somehow get Natalie Portman to sign on with MDLF rather than FINCA, we might have had more sales traction.

So, yes, under some circumstances nonprofits outside the usual mold can access the capital markets. Whether it is realistic or prudent to do so is another question, and that is mostly a matter of whether it can get cheaper or subsidized capital out of the nonprofit capital markets, and whether it has an income stream sufficient to service the cost of capital from the capital markets. It is, in fact, a limited set of organizations that fit those criteria.

Problems of intermediation. One group of organizations that might conceivably have the income stream to make capital markets feasible is microfinance. It is not very clear to me that this is needed now - my sense of microfinance as a worldwide activity is that it actually has more than enough capital to undertake its work. That is, the task of breaking down blocks of capital into tiny, tiny loans, the making and supervision of those loans, and the monitoring of those loans is a fantastically involved process - far more time and resource consuming that for profit lending typically. It is worth keeping that in mind when you read comparisons of loan repayment rates for microfinance versus commercial lending - microfinance typically involves a back end monitoring program that, if translated into either interest rate or additional risk, would significantly shift those figures. The nonprofit capital market, so far as I can tell, is willing to supply any amount of capital that the sector needs; lending capital is not the issue. But it might become an issue in the future. Moreover, if you accept, as I do, that the more important problem for most developing countries is not the individual entrepreneuer, but instead what, in my previous post, the New Yorker's Surowiecki calls the "missing middle" - the small to mediumsize firms that, in places like China and India, employ people - those firms have far greater difficulty getting money, or sufficient money, from the nonprofit capital markets. Again, a bit of the baby seal problem. So those kinds of firms - crucial to economic development - need access to capital, and in larger chunks than hundred dollar loans.

The examples I gave earlier involved the use of SRI experts in order to do the highly technical and legally demanding tasks of accessing the capital markets. In addition, however, eventual access to capital markets requires intermediaries, not just experts to help navigate the process. The reason is that whether in microfinance or 'the missing middle', in most cases it won't be economically sensible for individual firms or nonprofit organizations to seek to access those markets. It made sense for MDLF because we are, relatively speaking, large with large loans in our portfolio.

But in most cases, the best approach appears to be one in which a specialized nonprofit acts as intermediary, taking on the portfolios of individual nonprofit agencies, securitizing them, and then reselling them to access capital in the markets. That intermediary can add value through (1) expertise, (2) risk spreading and diversification, (3) reputation, and (4) a guarantee from its own resources in order to reassure capital markets. That last requires a strong financial commitment from some large nonprofit or government agency, as well as strong discipline to ensure that nonprofit does not mean 'bust' downstream where the income stream ultimately derives from. It also makes no sense whatsoever unless the capital is genuinely usable at market rates of interest. It is the sort of thing that an Open Society Institute could undertake, and in fact is, in part, through its economic development funds. But there is a lot of work to be done in this area. One exciting thing, however, is the way in which the SRI community has drawn in quite extraordinary talent from the private investment sector - MDLF is working with some SRI folks with backgrounds any private equity firm would envy, who are willing to take a big pay cut in order to bring their finance skills to the nonprofit sector.

This is, obviously, a bad moment to be launching new forms of securitization. But it is not a bad moment to be planning for the future of nonprofit securitization, and for entities that have the expertise and capital to act as intermediaries between nonprofits with decent income streams but not traditional collateral - especially in the international NGO sector - and the capital markets.

Fifty years ago, in the late 1950s, C.P. Snow published that famous essay decrying the gap that had grown up in his day between the culture of the humanities, on the one hand, and the physical sciences, on the other. The professors of the humanities were ignorant of science and basic facts about the technology of their own day, and above all they were innumerate. The scientists, for their part, had very little interest in the liberal arts, in literature, in philosophy (outside of mathematical logic). It seems to me that something like this divide of the ‘two cultures’ is emerging in legal scholarship – not between the humanities and physical science, of course, but between modes of explanation and method in legal scholarship, between the humanities and social science. Call it the 'new two cultures'.

(This has implications for international legal scholarship, but I will save that for another post, while keeping this discussion very brief.)

Start with the humanities in law. In one sense, the claim that they are in retreat is nonsense. The law and literature movement is alive and well, and all manner of specialized fields, with their own journals and conferences and scholarship. On the other hand, the fact that these humanities based methods and forms of scholarship are so much confined to their own niches is telling. It was not so very long ago that moral philosophy was considered the foundational discipline for law; economics has a strong claim to that role today. The withdrawal of the humanities and the rise of economics is in part the general story of the decline of the humanities in the university that Anthony Kronman tells in his new book; in part it is the rise of a successful new method. But despite all the talk about narrative and telling stories – and in part because of it – it is hard for me to see that the momentum of legal scholarship is favorable to humanities-based methods. There is a big debate to be had as to whether that is on account of legal scholars falling in thrall to the bright promises of social science and neglecting the traditional humanities, or whether the humanities themselves have 'altered' in a way that makes them seem, to many scholars at least, less and less explanatory in any very interesting way. It could always be both.

As to the rise of social science and economics in legal explanation. It is two things at once, sometimes analytically separated and sometimes commingled. One is the rise of a method – application of tools of microeconomics to a wide range of subjects, rational choice, and so on, together with empirical studies and an increasing dose of statistics. Second, this descriptive method has an ethics to go with it – an ethics suited to marginal utility analysis, tradeoffs, welfare economics, and cost benefit analysis – some form of utilitarianism. Call it pragmatism, call it utilitarianism, the common core is a normative commitment to maximizing welfare defined in some way, with the tools of social science deployed to help figure it out, and the law as handmaid to the policy conclusions thereof. Taken together, the method and the ethics, and you have the remarkable triumph of a new, analytically powerful, and intellectually much more satisfying form of American legal realism. Call it the ‘new legal realism’. It is, as American legal scholars do not always appreciate, a form of intellectual explanation incomprehensible to much of the rest of the legal academy in the world, in large part because the number of American professors who had some exposure to basic economics and social science in their undergraduate years is high and the further refinement of those concepts in American legal education, at least in the elite schools, higher still; for many non-American legal academics, this new legal realism seems concerned with nearly everything but the law itself.

There is a generational shift at work here, partly. The new, ambitious young scholars sense that intellectual momentum is with the new legal realism. There is also an odd artifact here for younger scholars, in the form of an emphasis on showing analytic skills through work that, even if not highly relevant to much of anything, shows off technical skill, and hence brainpower: as it becomes more and more difficult to discern a common standard of intellectual quality in legal scholarship overall, one place where agreed upon standards are much more prevalent is in law-as-technical social science. Yes, when one reads the law reviews or SSRN, the bulk of the work done remains the interpretation of texts, in a traditional manner, with an admixture of policy arguments thrown in - but still the process of the reading and interpretation of legal texts. But the momentum, the leading edge, the margin - that seems to me, at least, to belong to the new legal realism.

And as a matter of ethics, what began as law and economics in the hands of the generally libertarian-conservative professors of thirty years ago is now the cutting edge of impeccable left-liberalism. Cass Sunstein shows us the way, along with the welfare economics of Kaplow and Shavelll and by now a thousand other scholars, for how cost benefit analysis really is the right way to think about social problems, regulation, and law, and Sunstein, Kaplow, and Shavell are no conservatives. The new wave cannot be called “conservative” by any stretch – it is legal realism of a moderately reformist bent.

And the humanities, seen from the vantage point of the emerging paradigm of social science based legal realism? Still good for training in how to read and interpret texts, sure, and law will never really get away from that. But although no one wants to be quite rude enough to say so, it's hard in the new paradigm to resist thinking occasionally … the humanities are backwaters for the innumerate. Let no one who does not understand the basics of regressions enter here.

There are some skeptical questions one might ask. What, for example, are the unimpeachable deliverables of this new social science? At this point (still early in the intellectual day,granted) I am inclined to give it an A for effort and C+ for deliverables, maybe a B- - and I am sympathetic to the new methodologies. Or: my day job is corporate finance professor: there is surely something slightly outlandish, sleight-of-handish about a paradigm that sees as foundational, not deep questions of philosophy, but … net present value? The techniques of valuation for private firm capital budgeting duly applied to public policy? For this the saints of the rule of law sang in the fire and the martyrs of equality before the bar of the law suffered themselves to be torn apart by lions? To reach a consensus on the foundations of law that:

[Insert NPV formula]

That’s it?

The big, universal problems don’t go away, so far as I can tell. Neither do they lose their relevance by waving one’s hands and saying, “bounded rationality,” which is to say, for purposes of public policy, we don’t have to consider that. It is a little like General Powell’s famous, possibly apocryphal, reply, when pressed to take the US military into Bosnia, “We do deserts. We don’t do mountains”; or a little like the hedge funds in the 1998 crisis which, because they didn't have a method for taking the prospect of massive political risk into account, simply left the possibility of Russian government bond default out of the model. Bounded indeed. Hidden problems reemerge when we go to set the discount rate, as the famous Dilbert's cartoon said.

There are replies one can make to this kind of breezy, snarky skepticism. One is that, at least as to the basics, you don’t get to criticize unless you make the effort to understand it on its own terms. There is room for exogenous critique of the new legal realism, but too often it simply offers a way to criticize something one does not really understand. I don’t think this means you have to understand all the baroque ornamentation of the fancy math, but the basics, yeah. My rule of thumb for technical depth, outside my own teaching and active fields of law, is simple. If Larry Solum of Legal Theory Blog thinks I should know it, then I should know it.

Moreover, although this post sounds as though I am channeling a little bit Joseph Singer’s outstanding and provocative new paper on the methodology of the American legal academy, the reality is that when he remarks that cost benefit analysis has taken over the law school curriculum, really he means the curriculum of the top handful of schools. I spend time on my own faculty urging, pretty much in vain, that we incorporate more of the new legal realism into our curriculum. I fear my students are being left behind. When I have taught classes at Harvard, no student, seemingly, no matter how human rights or social justice oriented, would ever think to offer a justice-based argument unaccompanied by an incentives-based argument – whereas my students, while excellent at expressing their moral views, can’t offer incentives arguments, don’t recognize them, and haven’t been taught them. I think it puts them at an enormous disadvantage in the real world, which does care about incentives, in contracts, in regulations, in treaties, everywhere.

This is not precisely what Joe Singer addresses in his SSRN article; for his purposes, in order to address institutional legitimacy, he makes out the divide as between normative and social science approaches to law. For my purposes here, I have adopted a point made by David Zaring in comments on a presentation of mine at Temple at couple of months ago, when he suggested that I perhaps meant not descriptive versus prescriptive methods in international law scholarship, but humanities versus social science. Humanities and normative approaches are not the same, although in this discussion they have some similarities; both distinctions are important independently, too, in a complete discussion of this subject. I strongly recommend Joe's paper, and hope that it elicits a wide discussion within the legal academy.

(I will add what I think this means for international legal scholarship in my next post.)

In today’s Washington Post, a front page article titled, “Multitude of Forces Drains the Spirit of Giving,” by staff writer Philip Rucker. Compared with the tsunami of 2004 and Katrina, the natural disasters of Burma and China have not produced anywhere near the outpouring of American charitable aid donations:

In the weeks since a cyclone laid waste to Burma's delta region and an earthquake devastated a central Chinese province — catastrophes that collectively left 184,000 people dead or missing and displaced millions — Americans have donated an estimated $57 million to disaster relief charities as of yesterday.

Compare that with the $207 million that Americans donated in the first five days after an Indian Ocean tsunami struck southern Asia in 2004. Or the $226 million raised in five days after hurricanes Katrina and Rita devastated the Gulf Coast.

How to account for this? Rucker suggests, as the title says, multiple reasons. They include an uncertain domestic economy and $4 a gallon gas, but also a distrust of where the aid will go and what it will actually do. The article quotes several aid agency executives noting that people learned something from the earlier crises and whether all that money could actually be spent effectively:

Overall totals are unlikely to reach the levels of giving seen after the tsunami and Katrina, but some charity leaders said these are unfair comparisons because Katrina occurred on domestic soil and the tsunami was an unusual global phenomenon.

The tsunami "had so many factors that cried out, that were of immediate interest to people around the world," said Mike Kiernan, a spokesman for Save the Children. "It hit 12 countries, it took place the day after Christmas . . . and there were individual stories focused on survival and loss that involved Americans and Europeans."

Some donors have lost confidence in disaster relief charities after some agencies' fumbled responses to Katrina and the terrorist attacks of Sept. 11, 2001, said Eric Kessler, managing director of District-based Arabella Philanthropic Investment Advisors.

"I think a lot of people cringe when the check is written because there is not a lot of confidence in how the money is being used and overseen," Kessler said.

He said many clients are asking sophisticated questions about the impact of their dollars as they consider whether to give.

"They want to see a recovery plan," Kessler said. "They want to know how the money is being used and what impact it is having."

Are people behaving badly in holding back their donations? David Rieff suggested, in an opinion piece I linked a few days ago, that aid agencies have cried wolf so often where the affected populations turned out to be much more resilient in the disaster, or in which aid obviously was wasted, siphoned off, etc., that the general public has taken a lesson.

In the Burma and China cases, the hesitation seems to me quite rational and morally appropriate. In Burma, the issue is not the availability of funds, it is getting aid to where it needs to go: the issue is not overall levels of funds, but the wickedness of the Burmese junta. More money will not solve the geopolitical problem. In the case of China, the regime has behaved admirably, especially coming on its appalling actions in Tibet. But in an immediate crisis like the earthquake, overall amounts of aid are not the issue; the exact condition of the mountain road and how quickly heavy machinery can reach the affected zone is. Aid for long term rebuilding involves very different questions and priorities and tradeoffs than immediate aid for the immediate crisis – and this also seems to be a lesson that the general public has absorbed. China’s own citizens have mobilized a truly impressive nearly $200 million in a country with no tradition of national private giving or NGO structure.

One lesson that many ordinary Americans took away from the earlier crises is that aid agencies use any crisis as a way of raising money that will not be used for the immediate disaster – in many cases because it isn’t needed and can’t be used that way – so it simply turns into fundraising for the organization as such. It is not irrational to factor that in when deciding what and how much to give – the correct question to ask oneself, in that case, is not, “How can I help Burma?” but instead “Do I want to give money as a general matter to Catholic Relief Services or [fill in the blank]?” And finally, as the article notes, holding back giving by ordinary Americans is something that the aid agencies themselves are doing – and for precisely the same reasons:

"I think it's very wise for a lot of donors to be holding back and waiting until there's an opportunity to really get the resources to do the most good," said Melissa A. Berman, president of Rockefeller Philanthropy Advisors.

That’s what the American experts are thinking, and the American public as well. They’re not wrong about that.

(Last post on battlefield robots.)

An issue of battlefield robots that has not received, so far as I can tell, sufficient attention is what happens when battlefield robots are deployed against the US.

The assumption seems to be that robots are going to be so complicated and expensive that only the US, and maybe a handful of others, such as Japan, will be able to deploy and maintain them. What happens if that is wishful thinking? What happens instead if it turns out that once the investment in R&D is made, they turn out to be just more cheap, reasonably easily replicated consumer electronics - as the Apple slogan goes, designed in California, made in China? What then?

The most scary but also perhaps most realistic scenario for robots against the US is that the hard part, the really hard part, is coming up with autonomous battlefield robots that are able to discriminate and make proportionality calculations. But that's something the US cares about; not all our adversaries necessarily do, and might be very willing to deploy robots that are independent but lack these elements of judgment that we are still working on programming.

An adversary might be willing to deploy robots that, for example, are capable only of identifying a source of fire, and perhaps to distinguish friend from foe, and fire at it. But is not capable of determining civilians nearby, and so on. The technology to independently shoot at things is deployed by an adversary while the US is still trying to develop the judgment technology and programming.

Somewhat peculiarly, the US might find itself facing robotic technology with independent firing capability in the field, as a weapon against the US, before the US is ready to deploy its own robots. These judgment-incomplete robots, as we might call them, might legally be characterized to be mobile landmines in the sense of weapons that are inherently indiscriminate because, like antipersonnel mines, they lack the ability to distinguish combatant from noncombatant. But they might well be on the battlefield, and the US might need to develop counters to those weapons even before the US has deployed autonomous battlefield robots of its own. What are the counters to these weapons?

In a similar vein, how might nonstate actors and terrorist groups use independent robotic technology? We think of little robots able to crawl into an apartment and blow up just the bad guys with a mini-blast as a really great thing - a big advance in discrimination in targeting - and it is. But what happens when little crawly creatures with mini explosives start independently crawling across a street and into a crowded restaurant in Baghdad or Tel Aviv or Washington DC or London?

What are the counters to uses of independent, but not ethically constrained, robotic technology either against the US in war or as terrorist devices?

Because the crazy part is, the US might very well find itself having to counter robotic technology before it has deployed robotic technology in its fullest "autonomous" form.

(If this is starting to resemble a little bit too much the movie adaptation of the Philip K. Dick novel, Screamers, in which self-replicating battlefield robots take over the world, well ...)

(I fear wearing out my welcome at Opinio Juris and wearing out its readers' patience with so many posts on battlefield robots. So I will post this and one more short one, and then move on to some other topics.)

Among the reasons why the US military seeks to develop battlefield robots are (as noted in my first post on robots): force multipliers, force protection, and a technological counter to violations of the laws of war by the other side.

By that last, I mean that the other side fights using systematic violations of the laws of war, particularly co-mingling among civilians and civilian objects and the use of civilian shields. It doesn't just use these as means of fighting; it depends in part upon the US military, in its effort to protect noncombatants on the battlefield, to seek to compensate for enemy violations of the laws of war, thus increasing its military burdens. In place of traditional ‘behavioral’ responses to ‘behavioral’ violations of the laws of war by an enemy – reprisal – the US seeks technological counters as a response. It should not be underestimated how much of the development of battlefield robots is an attempt by the US to leverage technology as a response to illegal behavior on the other side.

Indeed, one way to define ‘lawfare’ (at least on the battlefield, and leaving aside other uses of the term) is systematic behavioral violations of the rules of war; violations of law planned through advance study of the laws of war for the purpose of predicting how law-abiding military forces will behave; violations undertaken in order to exploit the non-violating military’s compliance by forcing them to seek, to their own military disadvantage, to protect civilians put at risk by these behaviors; and intending such violations as a behavioral counter to superior military forces, including superior yet law-compliant, technology and weapons systems. 



Understood in this way, ‘lawfare’ on the battlefield is not merely particular violations of the laws of war and particular war crimes, such as illegal use of civilian shields or the failure to wear uniforms or distinguishing marks, etc. It is conceptually (if not in every case legally) perfidy. It seeks illegally to induce an enemy to rely for its safety and the safety of civilians upon the laws of war in order treacherously to attack through violations of those self-same laws of war.

The problem for robotics R&D is this. Robotics for the battlefield is in no small part an effort to create a technological counter to ‘lawfare’. But an enemy indifferent to the laws of war on the battlefield can counter advances in war-fighting technology, such as battlefield robots, by finding new ways to violate the rules of war faster than we can develop new technologies to address them. Behavior can usually change faster than technology, and bad behavior can usually outstrip the rate of advance in adaptive ‘good’ technology.

Update. Matthew Gross in the comments notes that:

"I didn't think anyone in this modern era considered reprisal (in the form of ignoring other laws of war as they apply to said enemy) as a legitimate action. I certainly haven't heard the administration justifying any US violation of the Geneva Convention by means of reprisal against enemy violations of the laws of war."

He is quite correct about this, of course, and it makes me realize that I wasn't as clear as I should have been above. So let me add this response:

Correct, no one considers reprisal as a response today, and certainly not against categories of protected persons under the Geneva Conventions. Nor should we, let me be completely clear. But that is the point - in the contemporary period, because we have given up reprisal as a behavioral response to violations, we seek technological means of countering those violations, technological responses that don't involve things like reprisals. And the point I make above is that people willing to violate the rules are probably able to find behavioral ways to do that faster than technologies can be found to deal with their behavior.

Everyone loves microfinance. The Wall Street Journal editorial page is super enthusiastic, but so is the World Bank, so are all those private equity kids who now want to do politically progressive 'venture philanthropy' with their gazillions, and so is Natalie Portman, peering winsomly from the cover of the NYT Magazine a couple of months ago. Muhammad Yunus set in motion a remarkable worldwide movement when he launched Grameen Bank in Bangladesh. But as it grows, as the resources available to it increase, and as people seek to scale it up worldwide to ever greater numbers, the questions about what it does, how it does it, and the limits are getting more important.

Indeed, as the movement toward microfinance as a tool of international development gets larger and richer and better resourced, there has been an outpouring of new literature on the subject. This literature falls into a couple of different genres - practical how-to books that range from best auditing practices to sample organization documents; academic writing seeking to put microfinance into perspective, often from a critical or semi-critical perspective; popular, popularizing books that, for example, tell the story of Yunus and Grameen Bank; and gradually, slowly, books by serious economists seeking to explain it in the formal terms of microeconomics. I'm in the middle of reading the current crop of books for a big review essay for the Times Literary Supplement in a couple of months; and it's a lot of reading.

But my own background in this field goes to my weird joint interest in human rights and finance, nonprofits and money, mission and bottom lines. For the past fifteen years, I've chaired the board of a nonprofit private equity fund that invests in independent media in the developing world, the Media Development Loan Fund. It started with funding from Soros' Open Society Institute, we have gradually built ourselves into a financial institution with some $60 million in media investments. What we do is not microfinance - our loans are typically to established media businesses and run in the range of hundreds of thousands to millions. But many of the basic principles are the same.

Noteworthy at this point is the decision by Grameen Bank to enter the US market. That move raises a lot of mission and financial questions. For example, the media fund I work with has so far declined (almost entirely) to work in developed world places such as the US or the EU, on the very simple rationale that even if there are media businesses such as newspapers in these places that could benefit from our assistance both financial and technical, there are lots of organizations in the developed world that can do that. We should do what pretty much only we do, which is work in places like Macedonia or Malaysia or (heaven help us and the political risk rating in our portfolio) Russia. So a question for Grameen Bank is why it makes sense for it to bring its work to the US, rather than extending itself in places in the world where its expertise is very, very special.

But a second category of questions involves the basic business of microfinance. When Grameen enters the US market, what does it think the unserved market niche is? Is it microloans to start new small businesses? This makes a lot of sense in places like Bangladesh or Peru - but, as James Surowiecki pointed out in an astute New Yorker article, one of the reasons why microfinance is successful is because it operates in places in which the informal economy is dominant, which is to say, places in which the rule of law and institutional arrangements that allow formal businesses to flourish are weak. It isn't in fact such a great idea to have every person be an entrepreneur alone; advanced economies advance under conditions in which the businesses are formalized, most people are employees, businesses pay taxes and are regulated by things like OSHA and food and health authorities, etc. The generator of new jobs in the United States is not individual entrepreneurs selling tacos or flowers on the highway - that this can be successful in Peru or Mexico is, as Surowiecki says, a sign of institutional failure, not success - but small yet legal, formal businesses that grow:

Microloans make poor borrowers better off. But, on their own, they often don’t do much to make poor countries richer.This isn’t because microloans don’t work; it’s because of how they work. The idealized view of microfinance is that budding entrepreneurs use the loans to start and grow businesses—expanding operations, boosting inventory, and so on. The reality is more complicated ... The vast majority have only one paid employee: the owner. As the economist Jonathan Morduch has put it, microfinance “rarely generates new jobs for others.”

This matters, because businesses that can generate jobs for others are the best hope of any country trying to put a serious dent in its poverty rate. Sustained economic growth requires companies that can make big investments—building a factory, say—and that can exploit the economies of scale that make workers more productive and, ultimately, richer. Microfinance evangelists sometimes make it sound as if, in an ideal world, everyone would own his own business. “All people are entrepreneurs,” Muhammad Yunus has said. But in any successful economy most people aren’t entrepreneurs—they make a living by working for someone else. Just fourteen per cent of Americans, for instance, are running (or trying to run) their own business. That percentage is much higher in developing countries—in Peru, it’s almost forty per cent. That’s not because Peruvians are more entrepreneurial. It’s because they don’t have other options.

What poor countries need most, then, is not more microbusinesses. They need more small-to-medium-sized enterprises, the kind that are bigger than a fruit stand but smaller than a Fortune 1000 corporation. In high-income countries, these companies create more than sixty per cent of all jobs, but in the developing world they’re relatively rare, thanks to a lack of institutions able to provide them with the capital they need. It’s easy for really big companies in poor countries to tap the markets for funding, and now, because of microfinance, it’s possible for really small enterprises to get money, too. But the companies in between find it hard. It’s a phenomenon that has been dubbed the “missing middle.”

At the same time, many observers, including Surowiecki, have noted that in the developing world, much of microfinance is not really about entrepreneuership, but is instead about loans that help people who do have some form of income to smooth out some of life's big events and expenses - weddings, funerals, education fees, things like that. That is a very different kind of economic model for making microfinance loans than use of loans to purchase inventory for sale on the street, as in a street food vendor.

And in the United States, it has been suggested that a role for microfinance lies in providing banking and financial services to the poor as an unserved niche. Indeed, Grameen Bank USA's website motto is "banking for the unbanked:; it then follows that up with the possibly disparate missions of entrepreneurship, banking services for the poor, and credit building for poor women. It might turn out to be the case that there is an underserved niche in the US which can be filled by nonprofit organizations such as Grameen. It might turn out to be the case in servicing remittance payments, or payday loans at lower interest rates, or various other financial services of particular interest to poor people. It remains to be seen whether such niches genuinely exist, at rates of return (i.e. negative rates of return, i.e., financial subsidy) that nonprofits can provide over the long term. I don't know the answer to that question, and I'm not sure anyone does. Still, one of the most compelling publications in the microfinance field came out fifteen years ago from Accion International, and is still telling reading - "What Microcredit Can Learn From the Moneylenders."

Put another way, it is not self-evident that the problems of the poor in the US over the last ten years have been lack of access to credit, at least not in the way that the poor often lack access to credit - capital of any kind - in the developing world. It might be so for the US, but that would not have been my first guess. What the efficiencies of a nonprofit organization are over a for-profit firm in establishing even a niche financial product such as cost-effective world wide remittance transfer is also far from evident to me. Maybe it is the case that consumer financial services such as remittance payments don't create competition and lowered transaction costs and lower fees over the long term, but why this would be, I don't know. Are the barriers to entry really so great that only Western Union is able to do it? And that a nonprofit can do it better and cheaper? Maybe, but it would not have been my first guess. After all, services like remittance payments are really just transfer services, not credit.

My own guess is that the issue of the poor and credit in the United States is not lack of access as such, but instead regulatory issues such as the ability of credit issuers to jump all of one's interest rates across the board for late payments on one card - deep regulatory inequities of the kind that Elizabeth Warren has tirelessly pointed out, but which are most efficiently addressed by stronger regulation and consumer protection laws and enforcement. In third world countries, it makes sense to establish an alternative credit market by nonprofits, in part because government regulation is weak, inefficient, corrupt, etc. But in the United States, I would have guessed - more than guessed, I would bet - that the more efficient and fairer mechanism is stronger government regulation of the market and all its participants as a whole. There is not a general equivalence between the behavior of firms and consumers in developed and developing economies, and one big reason is the efficiency and effectiveness and fairness of government regulation of the market. There are many, many inequities and fairness gaps in US consumer protection in matters of credit, but solutions worked out for places like Peru in which regulatory reform is unlikely at best - solutions that seek to create market alternatives - are really counsels of despair. I say try regulating the heck out of them first because in a developed market economy, it is likely to be both more efficient and more fair.

I am second to none in my admiration for Grameen Bank. Still, and finally, beyond questions about financial services, I have questions about whether any of these things are services that an organization with unmatched skills in dealing with the developing world should be seeking to deploy in the US, or whether that is better left to US domestic institutions, whether for profit or non profit. In the organization in which I serve, we have strongly differing views on this question; I am clearly on one side and others, with great expertise and persuasiveness, are on the other. But we are all agreed it is a crucial nonprofit resource question.

1

In my last post about battlefield robots, I quickly breezed through the ethical and legal priors that technology would go through before reaching the fundamental issues of autonomous battlefield robots - autonomy in decisionmaking in the use of weapons on the battlefield. Leaving aside the questions of exactly how that can be achieved as a matter of actual program (although, in fact, the 'how' is a primary question for me - too often, law professors and philosophers wave their hands at the practicalities, whereas the actual issues of translation to machine instructions are no less important than the 'fundamental' questions of concept), what would one want to build into an ethical autonomous battlefield robot?

One point raised in the comments that I should have addressed among the logical priors: Haven't we already crossed the autonomy line the moment we started using weapons that we launched, but could not control on their way to the target? This is theoretically true of a bullet or an arrow, but it is more than merely theoretically true of a dumb bomb dropped from thousands of feet or, even more, the "fire and forget" technology that took off in the Vietnam era. This is true, and represents another intermediate step on the way to complete autonomy. But there is still a difference: lack of control over a weapon once launched removes the possibility of aim from that point forward, but it is still different in principle from the discretion to launch the weapon in the first place. "Autonomy," in the sense meant for autonomous battlefield robots, conveys discretion subject to prior programming to launch or not launch a weapon.

2

One way to answer to this question is to say, well, an ethical autonomous battlefield robot would behave in the way that an ethically ideal human soldier would. That draws us conceptually back into the fundamental ethical and legal rules that make up the jus in bello: the principle of distinction and targeting only legitimate military targets, first; and proportionality as to military advantage and collateral damage, second. The first is categorical, meaning that one may never directly something or someone that is not a legitimate military objective. The second is a weighing up of two quite different - indeed incommensurable - values, military necessity and damage to civilians and civilian objects. (I am skipping over the technical language of IHL, and speaking in a general sense of jus in bello ethics.)

Put another way, we presumably would want these two ethical functions at a minimum in any robot soldier, just as we want them in any human soldier. These features of the ideal human soldier, but we might add layers of additional ethical architecture to a robot's programming, as a safety margin. So, for example:

°Well short of allowing a machine genuine autonomy, a robot might have an advisory role only, with the decision to use a weapon still human controlled in real time; in this scenario, a robot might function more akin to medical diagnostic computers. On the other hand, human dependence on an "advisory" computer integrating many different input streams to identify targets on the tactical, infantry battlefield, in house to house counterinsurgency, might turn out to be total, and the human "control" more theoretical than real.

°A robot might be limited to targeting other machines only, not human beings, as some theorists have suggested. Human soldiers, of course, are permitted to target combatants directly; a machine, as a margin of ethical safety, might be limited to targeting machines only. In reality, this would provide only a limited margin, since it is rare for military machines in use not to be manned, and of course targeting a machine does not deal with noncombatants in the vicinity. But it simplifies the affirmative targeting.

Very well. I don't mean to skip over the enormous issues in translation of these two ethical principles into something that a machine could carry out. But I want to raise something even more fundamental than those translation problems: Is the ideal autonomous battlefield robot one that makes decisions as the ideal ethical soldier would? Is that the right model in the first place?

This question arises from a simple point - a robot is a machine, and does not have the moral worth of a human being, including a human soldier or a civilian, at least not unless and until we finally move into Asimov-territory. Should a robot attach any value to itself, to its own self preservation, at the cost of civilian collateral damage? How much, and does that differ from the value that a human soldier has?

In asking this question, the question of autonomous battlefield robots - ethics for robot soldiers - winds back upon itself and becomes a thought experiment for how we value human soldiers. Human soldiers have value as military materiel; the existence, unity, and cohesion of soldiers in a unit, whether a tactical unit or a whole army, is part of the calculation of military necessity. So, for that matter, does military equipment - indeed, armies are frequently willing to lose many soldiers to protect vital military equipment. So in that sense, both men and machines have value - but as military materiel, in the calculation of military advantage.

3

What the robot question poses by implication, however, is what, if any, is the value of either robots or human soldiers set against the lives of civilians. To the extent that soldiers and military machines are part of the consideration of military advantage, yes. But what about circumstances in which they do not contribute to military advantage, meaning that they confer no greater military advantage on the margin - for example, under conditions in which a side in a conflict already has overwhelming advantage on its side? This is arguably the situation of the Kosovo conflict, and the question that arises is whether the lives of soldiers under conditions in which their side has overwhelming advantage can ever be weighed, on some basis of value other than military advantage, against the lives of civilians. Value, that is, simply as human beings, not as materiel.

On the one hand, as I recall (but don't have the language in front of me), the Yugoslavia tribunal prosecutor's office acknowledged in its Kosovo report that soldiers' lives have some value independent of being military materiel. (I'll go back and get the exact language, and I don't recall the hedges and limitations on it; sorry I don't have it here.) On the other hand, I had a brief conversation with Michael Walzer after a panel discussion on the impending Iraq war a few years ago and raised this issue. Without wanting to assign him a position on merely the basis of a chat after a panel presentation, he said flatly that he did not see how the combatant/noncombatant distinction could survive if it were possible that combatants were ever weighed simply as lives against noncombatants; the whole point is to separate out the one from the other. And the language of Protocol I - the formulation of military advantage versus collateral damage - while problematic in some important respects, does not admit of any consideration on the combatant side other than military advantage.

Of course we know what has traditionally taken place - military commanders wrap the value-as-human beings of their soldiers into the language of military advantage and, given the uncertainties of war, it makes sense. But conceptually, and sometimes in fact as in Kosovo, that is not always the case. it is likely to be a question that arises with greater frequency as military forces are sent to intervene in humanitarian missions, in which political support for the mission at home is dependent on low or no casualties.

So: framed as a question of whether an ideal robot would put any value on itself as more than materiel, insofar as it seeks to model itself on the ethically ideal soldier - well, the question automatically becomes, would the ethically ideal human soldier put any value on himself or herself as more than materiel, at least when in competition with the lives of civilians. And if so, on what moral basis, and what happens, as a result, to the line between combatant and noncombatant?

4

Thus one important note about 'ethics of robot soldiers' is that it can produce important discussions not only on its own terms about machines, but also about the ethics of human soldiers, in the real world of today.

It is worth noting, too, that the question of the value of soldiers as lives, rather than as materiel, is starting to enter the vocabulary, in the form of 'force protection', offered under such rubrics as 'soldiers have human rights too' or 'soldiers have a right to life too'. Anecdotally, I have started to see this in some statements by commanders in Iraq. It is unsurprising that this kind of moral language - addressing soldiers as human beings rather than as combatants or, more precisely, both - enters the moral language of soldiers under conditions in which so many of the risks to soldiers come from violations of the laws of war by the other side. And, again without having it in front of me, I seem to recall that the new US military counterinsurgency manual does indeed make reference to the rights to life of soldiers.

(Parts of this discussion are drawn from a presentation I made in May 2008 to a meeting of the Hoover Task Force on National Security and Law; it is still so early a draft that I haven't posted it up to SSRN, but perhaps I should. It differs, as you can see, from other discussions of robot ethics in that it deliberately circles around to use the discussion of robot ethics, in at least one important instance, as a way of discussing the ethics of human soldiers.)

I understand that Opinio Juris will be hosting a discussion of Benjamin Wittes' new book, Law and the Long War: The Future of Justice in the Age of Terror (Penguin 2008) when it is released for distribution on June 19. That is a very good thing to do. I have heard Ben present material from that book and My Sources have got me an advance copy, which I am now reading, and I think it is the most important new element in the discussion of terrorism, detainees, and Guantanamo to appear in years and years. In particular, Ben has done something no one else has done, so far as I know, and read word for word all the available transcripts of what the detainees themselves have actually said about who they are. He has performed an invaluable service for everyone in these arguments by trying to pull together data and not just anecdotes about the detainees. Particularly for a new Democratic administration trying to go forward next year, and trying to figure out what to do beyond the slogan, "Close Guantanamo," Ben's book provides crucial information, as well as core analysis on which a new administration can decide how to make new policy. I had heard parts of this before in various presentations Ben has made around DC, but reading it whole shows me just how extremely good and important this book is. Certainly I look forward to reading the Opinio Juris book discussion.

Many of us who work in the areas of laws of war and armed conflict have been watching the development of technology because, if history is any guide, changes in technology are a big, quite possibly the biggest, long-term, historical driver of changes in the laws of war. The development of the musket, cross-bow, airplane, machine gun, and so on. We are in an era of accelerated technological change, and naturally many of us are scanning the horizon to identify the technologies that will cause potential disruption and change in international humanitarian law.

One of these areas is cyberwarfare, and I have lots of friends who are taking advantage of their backgrounds in cybertechnologies to consider the question of whether new rules, or adaptations of old rules, will be needed to address, for example, the questions of dual use (civilian and military) of the internet in war. My own interest is somewhat different; I have been drawn, over the last year or two, into questions of robotics on the battlefield (and what follows is very loosely taken from my draft paper and several posts at my blog).

Battlefield robotics is in fact well underway. It is driven by a couple of different pressures. One is the US military’s constant search for force multipliers – a capital intensive, indeed the most capital-intensive military in the history of the planet – looking for ways to use technology to make each individual soldier more effective. A second is the search for force protection – individual soldiers in the Western armies are about as far from cannon fodder as can be, and ways to protect them individually are an important priority. A third, to which I will return in a later post, is the use in asymmetric warfare of violations of the existing laws of war by the enemy, hiding in and among civilians, civilian shields, etc., to which the US military seeks to respond with technological counters.

Considered from an ethical and legal perspective, battlefield robotics has several layers, introducing new ethical and legal questions at each step. The first is the use of robots for observation and surveillance. This does not really raise significant questions, and indeed performs a vital role in allowing the use of battlefield force to be more discriminating. But they have remarkable technological capabilities - miniature spy insects that can fly, act in groups, and are autonomous in the sense that they do not require a human operator to figure out in real time where to go and what to do. Here is a photo computer rendering of a spy spider:



A second layer carries robotics beyond surveillance, and into the use of weapons. Air platforms such as the Predator drone, initially used for surveillance but now equipped with missiles and other weapons, are also well underway. (Bryan M. Carney, “Air Combat by Remote Control,” Wall Street Journal, opinion, Monday, May 12, 2008, is a good short, newspaper article introduction, but there are lots of press articles out there. In general, a good way to keep a newspaper-level handle on the technology development is to read Popular Mechanics robotics columns online.)

The legal and ethical feature of these machines, however, is that they are remote-operated. In that sense they are robotic, but they are operated by a human being in real time – even if that human being is somewhere far away. The military efficiencies in using drone aircraft are hard to overstate – smaller, cheaper, but also do not require having a large part of your air crews and equipment down for rest and maintenance for as long a time as required with humans. You can keep a surveillance drone in the air for long periods of time … there are simply enormous advantages to remote operated aircraft. But again, given that the machine’s weapons are operated in real time by a human being, the ethical and legal questions are not so many (there are some, but I will skip over them). Here is a US Air Force photo of a Predator:



A third layer carries robotics from air drones to the ground. The US military in 2007 deployed for the first time a remote operated ground vehicle with a weapon mounted on top to Iraq for field testing. (It has also been withdrawn again for further work.) Here is a photo of the SWORDS system:



The evolution of this machine is striking – it evolved from the technology developed for use in dealing with landmine and IED removal. The difference is that it now has a weapon mounted on top. But again, it is remote operated by a human being in real time.

Where the rubber meets the road, ethically and legally, of course, is the fourth layer in battlefield robotics development – the development of autonomous battlefield robots, robots that are not simply remote operated by a human in real time, but robots that are programmed with independent decision-making in the use of weapons. We are a long way from that point, if we ever actually reach it, and there can be lots of arguments that it is a line that should not be crossed. But there is no question that this is the direction of technological research.

Part of the reason is that autonomous robot decisionmaking is not merely a feature of military research; it is a central proposition of robotic research generally, and these military applications are spinoffs from a central R&D drive. In a certain sense, indeed, the development of autonomous battlefield robots, with independent control over weapons, draws upon the obverse, for example, of Japanese work into caregiver robots for the elderly: the decision by a robot caregiver whether or not to call 911 is not unrelated to the decision by a battlefield robot whether or not to fire a weapon.

Let me hold off for future posts this week specific questions about law and ethics when it comes to robot soldiers (I know, I know, robotics experts don’t like that kind of lurid term, but I find it irresistible, not least because editors do everywhere). One set of issues involves the questions of how you translate the criteria that human soldiers must use – e.g., is it a legitimate target and what is the proportionality calculation? – into something usable by a machine. But a second set of issues asks whether the use of robots involves anything more than the successful translation of existing laws of war principles into a machine-applicable language. Is there anything different about it being a machine? Or is the problem of autonomous battlefield robots, as a matter of law and ethics, simply one of translation - to try and achieve how the ideal soldier would behave? These are some of the questions I want to take up later this week about genuinely autonomous battlefield robots.

Meanwhile, if you would like some further reading, some of the most fascinating work in the area of ethics and law applied to autonomous battlefield robots is being done by Professor Ronald Arkin at Georgia Tech. (He is completing a book on the subject due out, I believe, next year, and to judge from his several papers, it should be very, very interesting.)

Here are links to two reports from Professo Arkin dealing with the ethical and legal issues and their translation into machine programming:

http://www.cc.gatech.edu/ai/robot-lab/online-publications/formalizationv35.pdf

http://www.cc.gatech.edu/ai/robot-lab/online-publications/MoshkinaArkinTechReport2008.pdf

And finally, Jason Borenstein, also at Georgia Tech, has a very interesting new paper out in a Bepress Journal on ethics and autonomous battlefield robots - requires a Bepress subscription, but here is the abstract page.

With this as an introduction, I will put up some additional posts going to particular ethical and legal issues that I see arising in the development of autonomous battlefield robots. (Thanks Chris and Peggy for help with the images! And welcome Instapundit readers and thanks Glenn Reynolds for the Instalanche! I will be adding posts over the week dealing with issues of ethics and law re autonomous battlefield robots, and will link them in a post chain - check back over the week if you're interested.)

Any American who has ever watched the British Commons debates on TV cannot help sighing in embarrassment and shame at the sheer inarticulateness of our American counterparts in the House and Senate. Wit and intelligence are not even at issue; successfully stringing together a subject and predicate, and to do so in less than a quarter hour, is. So, just from the standpoint of rhetoric, I am of two minds about John McCain's proposal, in a May 15 foreign policy address:

"I will ask Congress," said the presumptive Republican nominee, "to grant me the privilege of coming before both houses to take questions, and address