Social Entrepreneurship

On many college campuses, there are new programs called Social Entrepreneurship Programs.  The theory behind social entrepreneurship is that business should try and be profitable, but apply the constraint of “doing good” for humanity.  It doesn’t mean donating profits to charitable causes, it means conducting your entire business with an eye toward making sure you are benefitting everyone, and the planet.  For example, when setting up the business you should plan your operations to recycle, and have minimum impact on the environment.  When employing people, pay them wages so they can survive.  Start businesses that will have a positive effect on people and society.

Of course, engaging in this path of thinking can cause businesses not to utilize their capital in an optimum manner, compromising the business and its shareholders.  Businesses that don’t utilize their capital efficiently, especially start ups, soon become bankrupt businesses.  These kinds of businesses might only survive with government programs or subsidies underpinning them.  Ethanol is a business that comes to mind.

Here is a link to a course syllabus.

Duke, Harvard, Columbia, George Mason, and other distinguished centers of academia have all either developed programs or hosted seminars on the topic.  You might say they are liberal standard bearers, but George Mason has a pretty hard core classical economics department.   I don’t think the political leaning of the school has too much to do with the trend.

The entire premise behind the venture is a normative value judgement.  It’s central planning in a different form.  Instead of the market directing the kinds of businesses that crop up, a group of people decide what kinds of businesses would be best and encourage entrepreneurs to undertake them within the artificial constraints they have set up.  But, it begs the question, what signal makes a business socially relevant?  What signal tells someone to start a business?  No one person, or group of people is smarter or more efficient than the broader market.

There is only one objective standard really for deciding whether a business is socially relevant or not.  Do people pay for it?  Are people willing to part with their hard earned dollars that they perceive as valuable for whatever it is you are providing?  Do you have sales?  Not necessarily profits-because most start ups don’t have profits anyway and individual operations that flow through the income statement might make many good businesses unprofitable on paper.

For example, in my conversations with social entrepreneurs, they say a business like Kentucky Fried Chicken is not socially responsible.  I disagree.  KFC provides cheap, easy quick access to food.  No one is forcing anyone go in and purchase food from KFC.  They are there by choice. KFC offers a service, people buy it.  If people didn’t want it, they’d have to change what they offered or go out of business.

Many people don’t like KFC, because fried chicken really isn’t healthy for you.  But that is not for KFC to decide, that’s for the customer to decide.  There is plenty of information out on the street that is free and easy to get at so anyone can make an informed choice.  This goes right back to concepts in Friedman’s book, Free to Choose.  Put the power of choice with the individual, and the market will allocate capital better.  Ironically, many fast food franchises are putting healthier options on the menu.  They are doing this not because of a government edict, but because their customers are demanding them. Even the hated KFC.  If none of the fast food franchises did this, and there was demand for fast health food, some entrepreneur would be able to exploit the niche and make some money off it.  I wouldn’t make a normative economic statement and call KFC “bad”, but I’d call them dumb for not recognizing the changing demand of their customers.

A lot of the businesses revolving around social entrepreneurship have to do with providing things like clean water to residents of poorer countries.  This is a worthwhile and noble goal.  But, as I look around the world at the poorer countries that need basic services like clean water, there is another common denominator that I see.  Most have some type of totalitarian or dictatorial corrupt government system in power. Get rid of these governments, and you’d see the economies of the countries change.  It’s going to be very difficult for business to survive in countries that have corrupt systems of government.

Many others are focusing on clean tech, credit, environment, and other macro issues that are important.  However, these issues are better solved through application of things like the Coase Theorem than a central plan or cleverly devised strategy.  The trick is to get all the land in the hands of private property owners, have a clearly designated property rights, and an ethical rule of law to apply them.  Let everyone bargain in their own self interest and whatever they decide will be the best benefit for all of society.

This leads me back to the original ideas in the post.  Companies should structure their operations and target customers that are the most economically efficient for them.  If it pays to recycle for a company, they ought to do it.  If recycling creates higher internal costs for them, they should skip it.  Entrepreneurs should concentrate on starting businesses that solve problems.  By solving those problems, they will earn a return on their invested capital, both human and money.  Successful entrepreneurs benefit all of society simply by being successful.

Read more at Points and Figures