The emergence of social business
Since the appearance of modern capitalism around 250 years back, the free market concept has been promoted and it has been believed that invisible hands ensure the competition in the economy and thus, it contributes to the equilibrium in the markets. And it is believed that society is benefited automatically if individuals pursue their own benefits without looking at social benefits. Now the question is: Do the invisible hands ensure benefits equally for everybody in the society? The available empirical evidences indicate that the mechanism of invisible hands has not worked equally for everybody. Thomas Piketty has documented the rising trend in inequality is his bestselling book "Capital in the Twenty-First Century". He documents the incredible rise of the top "one percent" in the world. In a recent report, Oxfam states that the top one percent i.e. richest one percent, people in the world will own more wealth than the remaining 99 percent by 2016. In a recent paper, Armin Falk and Nora Szech argue that the pursuance of self-benefits and competition contributes to the erosion of moral values. For example, some business people do not bother about destroying the environment or adulterating food for maximising profit. Similarly, Hongbin Cai and his colleagues argue in their paper that competition encourages unethical behavior in markets. Moreover, Andrei Shleifer shows in a paper that the unethical conducts and corporate greed are consequences of the market competition. Corporate greed contributed to the collapse of large corporations like WorldCom and Enron which resulted in job losses of thousands of people directly and indirectly and thousands of people lost their savings due to the collapse of the share prices of these companies. However, these negative sides of the market competition do not mean that it is always bad. On the other hand, it is also true that competition does not benefit equally everybody in the society.
Keeping the rising inequality and corporate greed in mind, Nobel Laureate Professor Muhammad Yunus rightly argues that social businesses need to be initiated and promoted. It could be seen as the "solution" to the deteriorating confidence of people on modern capitalism. Very recently, Professor Wahiduddin Mahmud wrote an article on social business in the The Daily Star. I would like to thank Professor Mahmud for his well-written article which has helped me understand the critical issues of social businesses. He made some comments and raised some concerns regarding social businesses: (1) "the idea of socially-oriented business is not new"; (2) "the idea of social business is too fuzzy"; (3) "not being able to take the full advantage of market signals in making decisions about prices and products"; (4) one single measure of success for the performance measurement is not available; (5) investors will get discoursed in the absence of dividend payout. I would like to try to respond to these critical points.
Professor Mahmud rightly says that socially-oriented businesses are not new. However, he does not say that social businesses are not new. Before Professor Yunus's social business, the terms like "social enterprise", "corporate social responsibility", and "social entrepreneurship" were available. However, these terms are not similar to Professor Yunus's social business. Social enterprises are not-for-profit businesses for social causes. Corporate social responsibilities are philanthropic activities of businesses. Both of these are not sustainable as they are dependent on donations. When the flow of donations stops, these activities also stop. Social entrepreneurship denotes the socially motivated profit-making activities of entrepreneurs and since these activities are market based, their social benefit maximisation is questionable. When Professor Yunus initiated microcredit 40 years back, similarly, some critics argued that his concept of microcredit was not new. However, we now know that small loans that were available in some places in relatively small scales before are not similar to Professor Yunus's microcredit.
The term social business is not fuzzy. Professor Yunus puts two clear border lines for a social business: (1) the owner is not going to get any personal profit out of this business, except for getting the investment money back; (2) the sole purpose of the business is to solve a human problem. Including these, to guide social businesses, he puts a set of seven principles. These principles define the term social business distinctively from others. These principles are available on the websites of Social Business Pedia.
A social business is not a not-for-profit business initiative. It is not an initiative for profit maximisation either. The main objective of it is to maximise social benefits. A social business is expected to be sustainable without sacrificing social benefits. Professor Mahmud argues that social businesses will not be able to exploit "market signals in making decisions about prices and products". The most market signals are signals to guide businesses to get to the top of profit. Thus, those signals are irrelevant for social businesses. Society should not allow businesses in some socially important sectors, like, education and health, to utilise market signals fully for determining prices. By the same token, social businesses intentionally do not intend to utilise fully market signals to determine prices and thus, do not intend to maximise profit as it compromises social benefits. However, some social businesses have already learned the technique of avoiding inefficiency due to informational deficiency through segmenting their target markets. For example, Grameen Denone, a joint venture social business with an objective to eradicate malnutrition of rural children in Bangladesh, charges a higher price for the same product in urban areas than in rural areas. The earned profit from urban areas is used to subsidise the same product in rural areas. Professor Mahmud rightly says that "such subsidies can be justified in economic theory as a legitimate means of correcting market deficiency". Grameen Denone is a profitable venture, but profit is not taken by the owners. It is a non-dividend company.
Since the monetisation is not possible for all social benefits, social businesses lack a single performance measurement indicator. But social businesses started with the premise that money is not a good indicator of performance. It has the tendency to lead the market to socially undesirable directions. If the business is solving social problems it is a success. How to measure the degree of success is an issue to be tackled over time. From empirical research, we now know monetary values of some social benefits: The average return of protecting a child from malaria through buying an insecticide-treated bed net spending $14 is $88 per year over the adult life of that child in Kenya. A spending of $7 yearly behind iron supplements increases yearly income of a self-employed man by $46 in Indonesia. The deworming for two years spending, $2.72, is likely to increase the lifetime income of a child by $3,269 in Kenya. Gradually, we are going to know monetary values of other social benefits also.
Money does not buy always happiness. The research findings indicate that the level of happiness goes up with the increase in income up to a certain level and after that it levels off. Professor Alan Kruger and Professor Daniel Kahneman argue that "high income is associated with good mood (happiness) is greatly exaggerated and mostly an illusion". Professor Robert Lane illustrates in his book "The Loss of Happiness in Market Democracies" that the correlation between income and happiness is close to zero in rich countries and it is negative sometimes. Increasingly very rich people, like Bill Gates and Warren Buffet, are giving away the major portion of their wealth for the welfare of poor. Making others happier brings happiness. Professor Keiko Otake and his colleagues assert that there is a "close association between kindness and happiness in everyday life". Happiness has positive impacts on economic activities of people. Professor Andrew Oswald and his colleagues argue that "happiness makes people more productive" and thus, it contributes to income enhancement. Professor Yunus says that investors of social businesses get happiness instead of dividends through making others happy. Happiness is not less important than any dividends as all of us want to be happy in our lives.
In the world of rising inequality and of prevalent poverty, malnutrition, illiteracy, health care exclusion, unemployment, gender discrimination, and environmental degradation, the necessity of social businesses is unquestionable. Professor Yunus does not insist that all businesses in this world should be social businesses. However, he wants more people to come forward to start social businesses to eradicate the above mentioned social problems created by modern capitalism in the society in the name of competition, efficiency and profit maximisation.
The writer is Professor in the Department of Finance at the University of Dhaka.