The Price of Effective Altruism

This year’s staggering losses in the crypto market were underscored by the sudden collapse of the crypto-currency exchange FTX. The catastrophic fallout has drawn comparisons between FTX founder Sam Bankman-Fried and infamous Ponzi scammer Bernie Madoff. But preoccupation with the ins and outs of the fallout overlooks a sad truth: these schemes often reveal as much about the victims as they do about the perpetrators.

Madoff’s victims wanted big returns and were willing to forgo due diligence. Their own trust and greed betrayed them. But who would fall for Sam Bankman-Fried? What does a society full of such people look like?

Many frauds exploit our primal desire for social status and control, which fuels our greed. These frauds use financial jargon to generate unearned confidence around fraudulent enterprises. It’s not surprising to find conmen like Madoff fooling amateur investors with unsustainable returns; it’s unfortunate, but inevitable, wherever wealth means status.  

Bankman-Fried’s scam, however, was very different. He touted FTX’s effective altruism—a self-righteous movement that asks participants to maximize the good they do rather than earnings—by inviting customers and investors to imagine themselves as prophetic crypto benefactors. He promoted himself and his investors as a new breed of business people who would teach petty profit-seekers the folly of their simple ways. The money stuff was just a detail. Instead of exploiting our taste for status through greed like a conman, Bankman-Fried exploited our taste for status through moral vanity by virtue signaling. 

Bankman-Fried was a moralizing snob who lusted for control to do right as he saw it—a kind of corrupt village priest for the digital age. Whatever investors thought they were doing, they were really putting money into coffers at the church of effective altruism. Profiteering has been the big American status game since the industrial revolution, but FTX suggests a sea change in how we vie for social rank: the American need to virtue signal is now so widespread that the broader business world is susceptible to vanity scams. 

Effective altruism isn’t the only sanctimonious racket in corporate America. Stakeholder theory requires that managers weigh competing social interests against shareholder interests. ESG—“environmental, social, and corporate governance”—is another pervasive investment rubric that demands firms submit to social experts before their securities can be included in major financial funds. In theory, these ideas would produce actors who prioritize dubious moral judgment in business over economic reasoning. In practice, money flows toward political projects and management jobs for goodness experts. 

The problem with this mass conversion is that different status games have different social effects. We’re familiar with the American status game that directs social-climbers to serve the public through work. But Bankman-Fried’s success suggests there’s a new way to acquire status that doesn’t involve work and therefore doesn’t generate positive social spillover effects. A society full of people who recognize this new status game will be different from the one we have now. One result? People will work a lot less, since citizens will instead focus energy on the new status game. 

We should denounce Bankman-Fried’s shocking mismanagement of FTX. He robbed his victims of billions and exposed pension funds to default risk. People who didn’t ride the crypto bubble up may still be stuck on the ride down. But these obvious consequences are far less troubling than the fact that it was a Bankman-Fried and not a Bernie Madoff who was responsible. That suggests we’re now scrambling for status by way of moral vanity instead of greed. But moral vanity is a ruse that can’t build or maintain wealthy nations.