Is social business the way forward?

The idea of socially-oriented business is not new, although Nobel laureate Muhammed Yunus has certainly given an enormous impetus to it by his articulate branding of it as "social business". The reason his campaign has caught so much public attention is its timing. Global capitalism, driven by the singular pursuit of profit, has in recent times exposed some of the worst brutalities of the system – repeated global financial meltdown, the increasing concentration of wealth and the unmitigated environmental damage associated with the looming threat of climate change. French economist Thomas Piketty's convincing analysis in his recent best-selling book Capital in the Twenty-First Century as to why the current capitalist system will lead to an unabated process of wealth concentration has only helped to add fuel to the fire of public discontent. It is not surprising that the global business community is eager to embrace the idea of social business, at least in its public posture, almost as a penance for the sins that have been committed. 

In the world of academia, while the business schools in top universities worldwide are setting up dedicated chairs to offer courses on social business, the response from the mainstream economics is at best lukewarm. Why? First, the idea of social business is still too fuzzy for an academic discipline that claims the status of a science. Muhammad Yunus describes it as a business which has social mission rather than profit-seeking as its main purpose and the owners of which do not earn any dividend from profit. That definition may fit a wide range of business models, so that it may be easier to say which one does not qualify than which one actually does so as a social business. 

Second, while admitting that many market distortions do exist, economists are accustomed to the elegant theorising of the efficiency of the market economy that is rooted in the premise of self-seeking behaviour and the "profit motive", and this tradition has continued ever since Adam Smith famously remarked that we owed our bread not to the benevolence of the baker and the butcher but their attending to self-interest. Yet, this need not be so. According to a long-forgotten strand of economic theorising, the success of a competitive free-enterprise economy can be shown to depend on people pursuing self-chosen interest, which can be altruistic or anything else. It was also once argued by some economists, for example, that the loyalty of the Japanese worker to his firm and to his co-workers, rather than individual self-seeking, was the key to the success of the Japanese economy. Incorporating social objectives in the working of the market economy should not be therefore altogether new to economic theorising.

In the real world of the market economy, it is now the generally accepted view that private business must exercise some measure of social responsibility beyond looking after shareholder interests. The question is how to do it best. Modern-day smart CEOs worldwide know that strategic spending on corporate social responsibility (CSR) activities can be, in the long-run, business interest of their firms. However, the phenomenon is reversed in the case of a social business, which takes advantage of commercial business methods while pursuing its overriding social goals. Indeed, an advantage of social business over conventional corporate philanthropy, as argued by Muhammad Yunus, is that once an investment is made in a social business, its benefits will continue over the years while companies have to allocate funds annually for their CSR activities. This is similar to the advantage that a revolving fund for a microcredit programme may have over annual transfers to the poor under social safety net programmes. It is no coincidence that Yunus happens to be the pioneer of both microcredit and social business.

A social business is expected to achieve its social objectives by producing some socially-oriented products or services that are not supplied by profit-oriented businesses. Examples may include marketing products at affordable prices specifically needed by the poor or promoting some environment-friendly or employment generating technology. These products and services are supposed to have what economists call "public good" characteristics; that is, their benefits extend beyond what would be otherwise reflected in the market demand and business profits. Because of the absence of the compulsion of profit maximisation, an implicit subsidy is involved when such products or services are produced and supplied by social businesses; only the subsidies in this case come not from the public exchequer but from foregone business profits. Such subsidies can be justified in economic theory as a legitimate means of correcting market deficiencies. This line of reasoning can in fact be a more fruitful way of conceptualising social business instead of either trying to fit it in the grand scheme of the theory of competitive market equilibrium or attempting to discredit the entire logic of the market economy.

A more relevant concern about social businesses is to do with the informational problem that may arise from their not being able to take full advantage of market signals in making decisions about prices and products. The informational deficiency may arise in perceiving what is good for society while not necessarily maximising profit as allowed by the market. Prices and profits, resulting from self-interested behaviour, serve a useful signalling function, since the interests of each person are best known by the person herself or himself. As Amartya Sen aptly puts it, "Doing good is not an easy matter with informational deficiency". One has to only recollect O Henry's story The Gift of the Magi to see how the pursuit of altruism can lead to frustration. A safeguard against social businesses not messing up the market mechanism is, however, provided by the stipulation of running the businesses at least on a no-loss basis, which provides a bottom line for using the market as a disciplining force. Overall, it may be more useful to judge the comparative merits of non-profit-maximising behaviour of social businesses in particular practical contexts rather than in terms of any given notion of efficiency or optimality of market mechanism.  

The problem of informational deficiency is also linked to business risks. Private capitalists or their financiers take risks while investing in new business ventures. They are willing to undertake the risk of business failure because of the lure of earning profits; in fact, the riskier the investment, the higher is usually the expected returns from profits. Donors and philanthropists, however, may feel less comfortable with the idea that the social businesses they are investing in may, in some cases, fail to deliver the goods and may therefore like to see strict pre-project scrutiny. Moreover, while profits and shareholder dividends are taken as yardsticks of profit-motivated businesses, it will be difficult to find one such single measure of success for a social business, so that the performance of each one has to be evaluated in terms of meeting its particular avowed social objectives. How far the social business campaign can go in creating an impact on global capitalism will perhaps depend, to a large measure, on the resolution of these issues. Motivating the institutions and individuals with enough capital to embrace the idea is of course a more fundamental challenge.

The writer is a member of the UN Committee for Development Policy and is on the Board of Global Development Network.