Archive for March, 2011

Know Nothings

March 22, 2011

Decades ago, the Cambridge economists pointed out flaws in the orthodox theory of capital, which purported to measure, in monetary terms rather than material units, the aggregate ‘productivity’ of heterogeneous capital goods.

Of course, this defeat had no impact on the neoclassical research programme. Far from it: in the following decades, they added another explanatory variable to the Cobb-Douglas function, and repeated the same error.

Knowledge, information or ‘human capital’ was uncovered as an input to production, and usually supposed to exhibit increasing returns to scale (the ‘spillover effects’ of endogenous growth theory).

From there it entered World Bank reports, which gravely explained the developmental struggles of various countries by reference to their lack of human capital and ‘good governance.’ And from the management literature – ‘knowledge transfer’ etc. – it was but a short leap into the everyday journalistic toolkit.

But human capital posed the same difficulties of measurement and aggregation as its big brother. Users relied on a single (dimensionless?) scalar to measure ‘knowledge’.

One of the participants in the original capital controversy could thus slip comfortably back into the fray. Ian Steedman gave neoclassical luminaries like Robert Lucas, Robert Barro, Paul Romer and Xavier Sala-i-Martin a deserved walloping for their ‘conceptual confusions’ and ‘terminological slapdashery’:

In all too many contributions to New (Endogenous) Growth Theory – though not in all – central reference is made to ‘a stock of knowledge’, a ‘stock of ideas’, etc., this variable featuring centre-stage in the analysis. Yet it is immediately apparent that this is far from being a crystal clear concept. Is knowledge a homogeneous quantity of which there is simply more or less? Clearly not. How then, in constructing a measure of the total stock, is one to select ‘the weights (prices) with which an idea in carbon chemistry, say, is to be combined with an idea in the production of insurance services? It is not obvious what the weights are, and they certainly are not to be found in market prices’…

Even if ‘knowledge’ either is or can be rendered homogeneous – and that is a very big ‘if’ – the question arises whether there exists any cardinal measure of the single stock of knowledge. It is certainly – and lamentably – common in the NGT literature to treat the ‘stock of knowledge’ as if it were a single magnitude with a cardinal measure, without any justification being given for this highly dubious assumption.

Few if any authors indeed state explicitly and openly that they suppose the stock of knowledge to be cardinally measurable. Yet they repeatedly assert this by implication. Let A represent the stock of knowledge. We read over and over again that a function with A as one of its arguments does (or does not) exhibit constant returns to scale. But either assertion is utterly meaningless word-juggling if A is measurable only ordinally! Again, we read over and over again that, in such a function, A has a decreasing (or increasing) marginal product – i.e., that equal successive increments in A yield decreasing (or increasing) increments in output. By the very meaning of ordinality, however, no meaning can be attached to the claim that successive increments in (ordinal) A are (or are not) equal! …

This is certainly not ‘measurement without theory’; it is theory without the minimal conceptual clarity required to make that theory worthy of attention. No amount of ‘sophisticated’ mathematical analysis can turn conceptual confusions into meaningful conclusions.

The circularity apparent in orthodox capital theory also re-appears. From the Sraffian perspective, the measurement of capital in money terms (i.e. seeing capital income as reward for productivity) was meaningless. The value of commodities depended on the income distribution between capital and labour. The ‘productivity’ of aggregations of capital goods was thus a function of the class distribution of income. The former was an algebraic result of the latter, not its cause. 

Similarly, as Philip Mirowski has observed, what today counts as ‘knowledge’ is determined by what someone is willing to pay for. The genius and productivity of managers can be inferred from the size of their salary package.

Most of them can point to educational attainment as evidence of their accumulated ‘stock of human capital’. In reality, such university degrees have merely bestowed a title to future income streams (i.e. a right to claim a portion of the social product). Today’s patents of nobility are degrees in law, finance, management etc., awarded by prestigious universities and marked with the necessary seal.

Budget cuts with a human face

March 15, 2011

In yesterday’s Australian Financial Review, Laura Tingle reported on recent budget deliberations by the Expenditure Review Committee (PM, Treasurer, Finance Minister etc.), as described to her by ‘senior sources’ within the Federal government:

Labor is pushing ahead with multibillion-dollar cuts in health, welfare and education to return the budget to surplus, even as it begins to rein in the blowout in the disability pension…

The May 10 budget is shaping up as one in which Labor will try to put to bed questions about its capacity to deliver a tough budget…

Welfare cuts are to be made in the budget on top of decisions taken in the past three years that have already carved more than $4 billion from the welfare bill.

Already, in recent months, the Gillard government has reduced access to the disability pension by toughening eligibility assessments, tightened means testing for several programs, deferred addition of new drugs to the pharmaceutical subsidy list, and prepared to extend the so-called emergency ‘income management’ (compulsory welfare quarantining) measures from Aboriginal communities in the Northern Territory to ‘vulnerable’ localities throughout the country.

In July 2009 the Labor government introduced ‘no show no pay’ compliance arrangements for welfare recipients.

Over the following year this resulted in over 1200 mentally ill and homeless people being denied ‘jobseeker’ payments for failing to attend, or behaving inappropriately during, some ‘required activity’. Overall, during the fourteen months to September 2010, over 35 000 unemployed people were given financial penalities for non-compliance with ‘activity tests’.

Most of these specific new welfare-pruning measures were contained in the programme of action provided for the incoming government in September 2010 by Treasury and Finance departments.

More broadly, cuts to welfare expenditure were always entailed by the ‘sound finance’ policies (i.e. swift return to budget surplus) advocated by all parliamentary parties, without exception, before last year’s Federal election.

Jenny Macklin, minister for Community Services, Housing, Families and Indigenous Affairs, declared that the government ‘will continue to reform the social security system to remove those roadblocks in the system which stop people from participating in the workforce.’

The twin aims are to cut public spending and create more slack in the labour market. These concerns stand behind the constant urging by the business press, ever since the last election, for the Labor minority government to undertake ‘unpopular reforms’ to increase productivity and workforce participation.

Recent opinion polls show that the Labor government is widely loathed. Further hardship is sure to produce more discontent. But the latter can be safely met with the orchestration of public mood music.

Many supposedly peripheral or ‘oppositional’ groups play a part in the ensemble. Had Tony Abbott’s Liberal-National Coalition been elected last August, the same swingeing welfare cuts would of course have been implemented. But, by now, these would have prompted pro-forma complaints from certain quarters about the conservatives’ “razor gang”.

Election of the Labor government has ensured cooperation from the public-sector trade-union bureaucracy, the Greens, the welfare and ‘community sector’ lobby, various activist groups and the ‘socialist’ organisations that presented the Gillard-led ALP as a lesser evil to Tony Abbott.

Even the conservative parties themselves, and their backers in the Murdoch press, play an essential part part in the crafting of Labor’s image as the ‘human face’ of fiscal consolidation.

Once the budget is announced in May, the Greens, and perhaps elements of the liberal Fairfax press, will venture to criticize some of the spending cuts as ill-directed and excessive. But both of these parties accept the phoney principles of sound public finance that impel the cuts (and beneath which, of course, sits the central policy priority of inflation management).

The Greens, as coalition partners of Labor’s Lara Giddings, are already helping to impose the Tasmanian government’s austerity drive.

In a multisectoral economy (made up of government, firms, households, and an external sector), one party’s thrift is another party’s borrowing. The Australian public debt thus constitutes an asset for the rentier class (local and international pension, mutual and insurance funds, and corporations that hold government debt as low-risk parts of their balance sheet).

For the Australian government to start saving, therefore, it must either eliminate its obligations to this rentier class through taxation, our induce another sector to start borrowing, i.e. to offload debt elsewhere.

Of course, the second option is the only option. Government borrowing is to be shifted on to the private sector. But, as the RBA observed today, non-financial firms currently show little propensity to borrow for investment. This leaves only one remaining branch: households.

The aim of the public-sector layoffs, foreshadowed for the May budget, is to increase indebtedness of the household sector. Newly-unemployed workers, and those no longer receiving welfare payments, will be forced to run down their savings to survive. The unemployed will no longer make contributions to their superannuation funds, reducing savings and thereby limiting holdings of government debt.

Of course, households have limited creditworthiness, are already heavily indebted, and are in the process of reducing borrowing and paying off liabilities (“deleveraging”). Rather than taking on more debt, the household sector will reduces its consumption.

Financial deficit will be shifted on to the company sector. Commercial enterprises themeselves have liqudity constraints, and will respond with wage cuts and layoffs.

In short, Australian government policy is a deliberate recipe for misery and recession of the sort now affecting Britain.

I married Mises; or, Adverse selection

March 10, 2011

In New York magazine, married couple Joseph Stiglitz and Anya Schiffrin talk about reading the book Spousonomics

Joseph Stiglitz: One of the things I disliked was that there was a lot of scorekeeping in the book.

Anya Schiffrin: That’s hilarious, ’cause you’re an economist but you don’t like to look at things in a quantitative way. You’re saying you don’t want to quantify relationships.

JS: It’s unromantic!

AS: And Joe is very romantic.

JS: For instance, one of the principles they use is cost-benefit analysis, and there was an incident in which a woman agreed to make love with her husband and she calculated it was going to take nine minutes.

AS: So she would lose nine minutes of sleep.

JS: Yeah. And then she looked at the benefit, and the benefits were a little bit better than the costs. But it raises the question: If it had taken twelve minutes, would she have decided not to do it? You know, “I’ll do a nine-minute thing but not a ten-minute, but I’ll be more enthusiastic if we do it for four minutes.” It just monetizes it, and that changes the nature of what it’s about, right?

Who said anything about money, Joe? Mises famously claimed that any society attempting economic calculation without prices would find itself ‘groping in the dark.’ But surely even a conservative in Red Vienna would have conceded that direct comparison of physical magnitudes – accounting in material terms – is the way to go in the bedroom.

Italy’s place in the sun

March 8, 2011

Its table manners exquisite where Washington is concerned, the New York Times sometimes casts aside euphemism and speaks candidly about the foreign policy of other governments. On Friday it contained a worthwhile article.

Quoting a liberal politician, it described how direct commercial exposure to North African ‘unrest’ is concentrated in Southern Europe: ‘France has Tunisia; Spain, Morocco; and Italy, Libya.’

Of course, by ‘Libya’ the politician basically meant that country’s energy resources.

Mussolini’s colonial government, short of petroleum, may notoriously have squandered the plentiful reserves across the Strait of Sicily. Agip neglected to drill during the war, finding it more profitable to supply the North African colony with imported oil from Romania.

But postwar Christian Democracy was not so neglectful.

Thus, today, by ‘Italy’ the politician meant the giant firm Eni, which is heavily tied up in exploration, production, refining, transport (through its subsidiary Snam Rete), infrastructure (through Saipem), marketing and (as Agip) distribution of Libyan oil and natural gas.

Italy absorbs around one quarter of Libyan oil exports. The Greenstream pipeline, running across the Mediterranean to Sicily, delivers natural gas to mainland Europe. That supply route, together with Algerian natural gas, provides the chief alternative to Russian-fuelled electricity generation for those unlucky European countries without North Sea frontage.

Libyan exploration and operating concessions are also held by French supermajor Total, German companies Wintershall (a subsidiary of BASF) and RWE Dea, US supermajor ConocoPhillips, Russia’s Gazprom, Spain’s Repsol, and assorted smaller US, Austrian and other companies. (Australian firm Woodside recently announced it would not seek to renew its large exploration and production contract.)

The fate of these concessions, should Gaddafi fall, is uncertain. The official opposition, based in Benghazi, contains many old regime figures. That means already-existing close relationships, and also dirty laundry that no side will want aired. A TNC spokesman has pledged that existing contracts ‘cannot be changed.’

But the final say on the matter may well fall to the airpower of NATO and the US Sixth Fleet, Marine expeditionary units, the British and Dutch special forces, and the Bundeswehr.

As the NYT article says, Eni plays a decisive role in the formation of Italy’s geopolitical stance. Italian military involvement in Afghanistan’s ISAF, and in the invasion of Iraq, are unthinkable without it. The company has interests in the Caspian Sea oil basin, claims in the politically-sensitive offshore oil and gas fields in the Timor Sea, and soon a downstream role in liquefied natural gas production in Australia’s Queensland, destined for export markets in East Asia.

The operations of Eni and a few other major Italian firms may range far afield, with the resulting accrual of shareholder income and political influence back home.

But the political capacity of the Italian state in Europe has been diminished by the hollowing out of the country’s industrial base. Since 1979, the old heavy industry, capital-goods (transport, machinery, chemicals, electronics) and durable goods (automobiles, household appliances) sectors have shrunk alarmingly.

Competitive devaluation of the lira was prevented, first (and only partially) by the European Monetary System, then by monetary union during the past decade. Intra-European market share was consequently determined by the ability to minimize unit labour costs (i.e. to increase productivity faster than wages). Unfortunately for Italian exporters, technical innovation had slowed down as the share of profits that was productively re-invested in plant and machinery fell.

Europe’s productive activity was thus increasingly concentrated in Germany, away from its erstwhile industrial challengers in Italy and France. A corporatist state, and the opening of vast labour reserves to the east, allowed trade unions to impose deflationary conditions on German employees. The country thus developed huge surpluses in merchandise trade. So, to a lesser extent, did the Benelux countries (particularly the Netherlands), Austria, Scandinavia, Switzerland and the Czech Republic.

A rump of small and medium-sized manufacturing firms in Emilia-Romagna and Veneto did manage to survive and prosper. But their output was almost exclusively consumer goods (furniture, clothing, footwear, textiles, leather goods and food). These Italian producers had to compete for European markets with low-cost output from China, Japan, South Korea and Taiwan. Italy too has held wage costs down – in Western Europe, it was bettered only by Germany. But its export-oriented firms stood little chance of success against East Asian competitors. Italian furniture, textile, garment and footwear production was thus increasingly outsourced to Albania and Romania.

The reflux of dividends and interest payments was not sufficient to overcome the structural trade deficit. Accordingly, in the twenty-first century, Italy (together another former exporting power, France) developed systemic current-account deficits.

But France, unlike Italy and just like the UK, is home to a large and liquid financial sector (led by BNP-Paribas, Société Générale and other banks, rather than pension, mutual and insurance funds, as in other rentier-led economies).

This has been important as, given the combination of external deficits and sluggish private investment, these three countries have experienced over the last decade, government borrowing has been necessary.

Under the fiscal conditions for monetary union, laid down in the Maastricht framework and Stability and Growth Pact, the European Central Bank is barred from financing public borrowing. The private liquidity shortage of Italy’s smaller money market has therefore meant a lesser domestic capacity to absorb government deficits.

Large quantities of Italian public debt are accordingly held by banks and mutual funds in Germany and France. Following the credit crunch of 2008, Italy thus came increasingly to resemble the ‘insolvent’ peripheral economies of Spain, Portugal, Greece and Ireland.

At 116% of GDP, Italian public debt was the highest in the Eurozone. Borrowing costs rose and goodwill evaporated. Bond-yield spreads between Italy and German long-term sovereign debt securities rose to their highest-ever level. Governments of the PIIGS countries, as they now were called, were recast as debt collectors for private investors.

Italy’s status as a continental power had evaporated.

There’s one more aspect of Italy’s external relations that deserves attention at the moment: immigration. Following demographic transition, Italy’s birth rate has dropped below replacement level. As France’s workforce growth has stagnated, Italy’s employed population had, by the turn of the century, begun to decline.

Italian firms have thus grown increasingly reliant on immigration from Africa and eastern Europe. And their needs have been obliged: thanks to immigration from less-developed countries, Italy’s resident population is now growing at its fastest rate since the 1960s. The fertility rate too has crept slightly upwards over the past decade.

The supposed need to deal with this flow of immigrants has publicly legitimized an ominous growth in the arbitrary powers of the Italian state’s executive branch and its repressive apparatus.

In 2008, Prime Minister Berlusconi deployed 3000 troops on Italian streets to deal with the ‘national emergency’ of illegal immigration and street crime.

The Italian ruling elite thus proclaims its commitment to Festung Europa.

In reality, it is reliant on large-scale immigration for its current and future labour supplies. The aim of its “border protection” policies obviously is (1) to create a pliant low-wage workforce by hounding immigrants into a semi-criminal, degraded condition; (2) demogogically to blame the problems of Italian economy, administration and society on foreigners; (3) to use the supposed crisis as a means to normalize repressive measures that may be used in other circumstances.

Over the past decade, Libyan and Tunisian governments have assisted in this task, financed by Rome and Frontex.

As the productive capacity of the Italian economy stagnated over the last thirty years, so did the wages and employment prospects of the broad population. At the same time, slowed growth of the capital stock raised the rate of return on fixed investment, and thus increased the capital income of the propertied classes. External influence and great-power status – a time-honoured means of broadening popular support – was diminished.

How was the stability of Italy’s social order assured under such conditions?

The path followed elsewhere was barred.

Deindustrialization in other countries (US, UK, Australia etc.) had been accompanied by a ‘big bang’ in the financial sector. The employed population’s compulsory subscription to pension funds channelled savings into capital markets. As a result of this inflow, assets prices were bid up. The appreciation of paper wealth then provided collateral for increased household borrowing (the ‘wealth effect’). Consumption standards were thus maintained despite precarious employment and wage deflation. This was portrayed as the spoils being shared.

In Italy, the decline of industrial sectors did not coincide with a financial explosion. The broader population straightforwardly did not share in the prosperity of the wealthy elite.

The stupefying crassness of Italian media culture must be viewed in this context. So too should the open criminality of the political elite. The Prime Minister’s tycoon lifestyle of bacchanalian excess, exhibited publicly, gossiped over and scolded, has become the object of vicarious enjoyment. It thus contributes to political solidity, rather than, as commonly is supposed, undermining it.

Finally, so too does the scapegoating of foreigners (Roma, Africans, Chinese) as the cause of Italy’s social ills, just as the misure urgenti of the government’s austerity programme cut service provision, reduce public-sector wages and jobs, and lower corporate tax rates for “competitive” purposes.

Help yourself

March 3, 2011

The original theorist of commercial society, Adam Smith was moved to dismiss, avant la lettre, the idea of ‘social business,’ i.e. a competitive firm striving consciously to meet some social objective:

I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.

Well, don’t look now, for ‘social business’, whatever its practical fortunes, is today a booming concept.

It’s increasingly popular among a particular social layer that combines a preference for liberal-progressive political stances with an attachment to professional success.

Its would-be practitioners are styled as ‘social entrepreneurs‘.

Their marketing language and imagery is calculated to appeal to the sensibilities of left-liberal ideology, which (1) understands political, economic and social questions as primarily matters of morality; (2) replaces class divisions, in Third-worldist fashion, with divisions between nations or races.

Since 2009, a bunch of local newspapers, magazines and blogs, each of them aimed at a youthful audience with liberal-progressive politics and “lifestyle” concerns, has taken turns promising the imminent launch of a Melbourne bar.

Why all the attention? Shebeen is a social business, the project of a social entrepreneur named Simon Griffiths:

The bar, Shebeen, will sell beers and wines from developing countries around the globe, with $2 from the purchase of each beverage sent back to a specific development project in that country. Beer bottles and wine glasses at the investment fund launch carried swing tags with typed messages, such as: “What if drinking this beer could enable an Ethiopian to start a business by buying a food cart to sell produce on the street?” or “What if drinking this wine you could train and empower a Child Safety Officer who cares for kids that have been tortured and raped in KwaZulu Natal, South Africa?”

“Our personal mandate is that we support projects that allow individuals to participate in the economy where they wouldn’t otherwise be able to,” says Griffiths.

“It’s about creating market participation, whether that’s microfinance or vocational training. That is the best way to create sustainable outcomes giving individuals the ability and economic incentives to help themselves.”

But Griffiths doesn’t necessarily want patrons to be pondering these global concerns when they’re drinking at Shebeen.

“The bar itself is first and foremost a first-class hospitality experience, and then it does all this great stuff as a secondary element,” he says.

“We’re not about guilt-motivated purchases. It’s about, ‘Wow, this is a kick ass space, I want to go there’.

“We are moving away from the Oxfam tin-rattling approach to retail to a space where we create high-quality products and services and make them non-profit.”


“The return on investment isn’t just social return, the investors will be at the forefront of the global philanthropic revolution which Shebeen is helping to create,” Griffiths says.

“They’ll be turning everyday consumers into philanthropists and giving charities access to the trillions of dollars that change hands every year in the economy.”

Despite the media profile  secured with the assistance of various ‘bar impresarios’, designers and publicists  Shebeen is yet to commence operations. Its Social Investment Fund is still seeking start-up money.

Griffiths, meanwhile, is studying at Melbourne’s School for Social Entrepreneurs.

Kinfolk café, in the west of Melbourne’s CBD, presents itself as ‘an avenue for city-goers to seamlessly integrate ethical consumption into their daily purchasing.’ Its co-founder  the son of World Vision Australia CEO Tim Costello  describes the present as ‘an exciting time because Generation Y members and youth out of unis are seeing social business as an opportunity to integrate their business skills with their social vision.’

So what is a social business?

Conceptually, it combines features of both traditional capitalist firms and charity organizations, while being distinct from both.

A charity does not cover its operating costs with commercial revenue. Losses are covered by external funding supplied on concessional or subsidized terms. To meet outlays it relies largely on donations from governments, firms and private citizens. This dependence on transfers from business and state accounts for the loyal, un-subversive political stance of most charities, and for the bloated administrative bureaucracies that the largest organizations support.

Social businesses, on the other hand, are supposed to be commercially viable, self-sustaining units that meet costs out of revenue from sale of goods or services on the market. The firm’s surplus is directed to meeting some social objective of whatever sort, rather than paying capital income (i.e. a stream of dividends) to its owners. The socially-beneficial aspect thus depends on production of marketable goods or services.

The theory, such as it is, of social business comes from the Bangladeshi economist Muhammad Yunus. Yunus received the 2006 Nobel Peace Prize for his development of microfinance and microcredit: the provision of low-interest, unsecured loans or seed capital for “entrepreneurs” in underdeveloped countries.

Microfinance is advocated by popular figures such as Bono as a tool for development and a path out of poverty, especially for women.

In reality, the promotion of entrepreneurship and private initiative merely swells the ranks of  ‘self-employed’ petty producers that already fill the favelas and slums of South Asia, Latin America and other less-developed parts of the world economy. Non-market forms of subsistence, and residual ties of collective solidarity, are weakened in the process.

The credit providers, as ever, grow fat on usury. (This week Yunus, the self-described ‘Banker to the Poor’, was removed from his position as the head of Grameen Bank, with which he shared the Nobel Prize. He is being investigated for siphoning funds.)

In 2007 Yunus co-wrote Creating a World Without Poverty: Social Business and the Future of Capitalism.

In this book, Yunus and his co-author described the supposedly untapped potential of business to advance social welfare:

Capitalism is a half-developed structure. Capitalism takes a narrow view of human nature, assuming that people are one-dimensional beings concerned only with the pursuit of maximum profit…

To make the structure of capitalism complete, we need to introduce another kind of business  one that recognizes the multi-dimensional nature of human beings. If we describe our existing companies as profit-maximizing businesses (PMBs), the new kind of business might be called social business. Entrepreneurs will set up social businesses not to achieve limited personal gain, but to pursue specific social goals…

Profitability is important to a social business. Whenever possible, without compromising the social objective, a social business should make a profit for two reasons: first, to pay back its investors, and second to support the pursuit of long-term social goals. Like a traditional PMB, a social business needs to have a long-term road map. Generating a surplus enables the social business to expand its horizons in many ways…

Once a social-objective-driven project overcomes the gravitational force of financial dependence, it is ready for space flight. Such a project is self-sustaining and enjoys the potential for almost unlimited growth and expansion. And as the social business grows, so do the benefits it provides to society.

This is very different from Adam Smith’s account, in The Wealth of Nation, of how the market’s invisible hand allows self-interested behaviour by profit-maximizing capitalist firms to meet broader social objectives:

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest… Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society, which he has in view. But the study of his own advantage, naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to the society…

[By] directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.

Smith’s description of cold-hearted calculation does not flatter the self-image of the younger and more liberal representatives of the propertied classes. Many seek the feel-good glow of social benevolence.

Nor, to their credit, do some of them recognize the real world in Smith’s account of the aggregate social welfare benefits of purely self-regarding, profit-maximizing behaviour, and the correspondence of private and public interests. What was good for General Motors may once have been good for America, but what’s good for De Beers clearly isn’t good for South Africa.

There evidently is a lot of deprivation going around, and some among the wealthy have generous impulses.

But the disagreement here doesn’t arise from contrasting views of human nature.

It’s not that Smith didn’t believe in the moral sentiments. Rather Smith’s insight, as expressed in the metaphor of the invisible hand, was that the market shunts the efforts of individual proprietors in directions different, for good or ill, to that which they originally intended.

The observed failure of capitalist firms to advance social welfare thus does not arise from the one-dimensional focus of individual managers and owners on profit, i.e. their greed or selfishness. The latter is a structural constraint imposed on them by the market and the firm itself. This limit remains in place whatever the moral character, degree of avarice or religious preferences of their owner.

As explained by Milton Friedman, firms must either maximize profits or die.

Thus a social business, just like any ordinary business, will find its contribution to social welfare limited by the revenue earned from its activities. It consequently will be obliged to pay due consideration to cutting costs, setting mark-up prices, improving productivity and other typical behaviour of capitalist enterprises.

Therefore the effectiveness or advantage of a social business compared to a regular firm in advancing social welfare is unclear.

If a profit can be made by meeting some social need, why should a regular capitalist firm not already fill that market niche? If, however, an ordinary firm cannot meet its costs in a given area, a social business will not be able to survive either.

Perhaps, instead, activity by the social business is used to cross-subsidize some other unprofitable activity, as in the declared plan for Shebeen. But this merely internalizes, within a single firm, the funding model of charitable organizations, with all the weakness described below by Yunus. In his example, a surplus product extracted elsewhere  the profits of private companies, the tax revenue of governments, or the savings of private individuals  is transferred to the charity. In the putative social business, this transfer occurs between the branches of the firm. But this means the activity of a social business could be performed just as well, or as poorly, by any ordinary charity.

Yunus explains that charitable organizations are inherently constrained by their funding model:

The persistence and even worsening of global poverty, endemic disease, homelessness, famine and pollution are sufficient evidence that charity by itself cannot do the job. Charity too has a significant built-in weakness: it relies on a steady stream of donations by generous individuals, organizations or government agencies. When these funds fall short, the good work stops…

[In] hard times, when the needs of the unfortunate are greatest, giving slows down. Charity is a form of trickle-down economics; if the trickle stops, so does help for the needy…

As a result [i.e. because that donation stream is unreliable], there is a built-in ceiling to the reach and effectiveness of nonprofit organizations…

No wonder they don’t make much progress in their battles against social problems.

But the social business, too, faces the same constraint.

This presumably is why Shebeen, during these tough times, can’t find startup investment. Should it ever do so, its non-cost-covering activities will still require some horizontal ‘trickle’ of surplus revenue from its sales.

So it is clear that, for all their proclaimed novelty, social businesses offer little new. They repackage and re-brand already-existing forms of business and charity operations.

So why all the excited talk of their novelty?

Well, they do perform some useful practical functions. Firstly, they bring yet another domain of social life  that which Smith called the moral sentiments  under the direct sway of market exchange.

That which previously involved bureaucratically-administered transfers of material goods, services or funds between donors, taxpayers, charities, governments and impoverished people will henceforth become a circuit of production and commercial exchange, lending and indebtedness.  The donor is to be replaced by the ‘ethical consumer.’

This, in turns, allows people to express disapproval of the existing state of things (poverty, inequality, underdevelopment, etc.) without disrupting the current economic-political order as a whole. In fact, like much of the liberal-progressive worldview, it channels popular discontent into behaviour that supports the survival of those features that are so abhorred.

Take, for example, the problems of ‘third-world’ underdevelopment and poverty.

The increase in agricultural yields since the Green Revolution, the consolidation of smallholdings, the importing of staple foodstuffs, and the focus on cash crops for exports, continues to drive peasants into the megacities of Lagos, Delhi, Lima, Dhaka, Jakarta, Karachi, Mexico City, Kinshasa, Tehran, Mumbai, etc.

In decades and centuries past, mechanization of agriculture similarly propelled rural populations into Manchester, Detroit and Chicago. In these earlier circumstances, as in the Shanghai and Pearl River Delta of today, there was abundant paid employment to absorb those displaced from the countryside. Urbanization went together with industrial growth.

But in most of the rapidly growing cities of today’s world, there is little formal employment to meet the growing pools of available labour. Tens of millions of urban dwellers are forced to eke out livings, in slums and shantytowns without sanitation and utility provision, as informal street vendors, care workers, etc.

The presence of these latent labour reserves then serves to drive down wages of those workers who do achieve formal employment. With wages so cheap, there is no incentive for labour-saving investment that might raise productivity and thus improve the living standards of local populations.

Many of the most pressing social needs require huge fixed-capital outlays that, as such, produce low rates of return over long time horizons, during which period the investor cannot switch his funds elsewhere. Accordingly there is little chance of such projects ever taking place.

But these seemingly intractable problems do not inspire a serious critical examination of the economic order that produces them. In the theories of microfinance and social business, they are met instead with a fuzzy mix of consumerism, White Man’s Burden, Horatio Alger, and loanable funds theory.

For all their talk of ‘changemaking’, social entrepreneurs and their ethical customers do not pose any challenge to the existing social order. This ensures that the former can indulge their progressive inclinations without risking social standing or future income.

This need, in turn, explains the otherwise unaccountable reverence  among social entrepreneurs for the historical memory of William Wilberforce (expressed by Elliot Costello in the video above, and incessantly by former Young Australian of the Year, and founder of the Oaktree Foundation, Hugh Evans).

Wilberforce provides a model of supposed moral commitment coexisting with political influence and career success.

The MP for Yorkshire and ‘conscience’ of Parliament preserved the moral legitimacy of the British oligarchy during George III’s madness and the Regency, amid numerous threats to the established order.  He was a persecutor of Jacobins, advocate of the bloody suppression of the 1798 Irish rebellion, defender of the treason trials and repressive legislation introduced by his friend the Prime Minister William Pitt, and supported Britain’s occupation of Saint-Domingue (modern Haiti) following the slave revolt. During and after the Napoleonic Wars he supported the Gag Acts, quaked at the Spa Fields riots and repudiated the slave uprising in Barbados, advising ‘amelioration’ but not emancipation of slaves.

Today’s social entrepreneurs and activists would never think of nominating as their personal heroes Toussaint Louverture or Thomas Spence, contemporaries of Wilberforce, both of whom died in prison. Nor will they engage in any form of “activism” that sees them denied a job or leaves them unwelcome in fashionable society.

Social business, in fact, will add a nice touch to the CV.