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.