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Tuesday, September 8, 2015

Social Enterprises Are Fixing What Government Destroys

Profit, People, and How Most Effectively to Serve Others

Why should the poor have to live in a blurry world? VisionSpring’s mission is to ensure that “equitable and affordable eyeglass is available to every individual to live a productive life.” The company has sold over a million cheap, ready-made eyeglasses to people throughout the world who typically earn less than $8 per day.

VisionSpring exemplifies the idea of “social enterprise.” But what exactly does it mean to be social, and how do social ventures compare with ordinary businesses?

Enterprises are labeled “social” when they seek to address broad public needs in addition to the narrow needs of their customers. In practice, this usually means running a conventional business in a special way in order to solve a social problem. VisionSpring, for example, is an enterprise in the sense that it operates as a profit-seeking business rather than as a charity. But it’s social in that it prioritizes helping people to regain their sight over maximizing profits.

The varying motivations of social enterprises sometimes clash and often leave them without clear measures of success and failure. As a result, reactions to social ventures are mixed: some see them as exciting alternatives to corporate bureaucracy and greed, while others dismiss them as naïve attempts to replace traditional business with misguided social philosophy.

Neither position captures what social enterprise really does.

It’s true that philosophies of social enterprise are sometimes based on faulty reasoning. One common confusion involves treating the pursuit of profit as if it were at odds with social goals. As economists have argued for centuries, the profit motive is actually a powerful source of peaceful cooperation and human flourishing. Yet, social entrepreneurs frequently blame the profit motive for the social and environmental problems they would like to solve. As a result, social ventures are often presented as remedies for market failure.

The goals of social enterprises hint at the true role they play in the economy: to help repair the damage caused by public policy.

Consider four major problems social enterprises aim to solve: poverty, homelessness, unemployment, and poor education.

Economic policy, not market failure, drives each of these problems:

  1. Poverty, especially in the developing world, is nurtured and institutionalized by political systems with little respect for property rights, trade, and entrepreneurship.
  2. Homelessness is increasingly criminalized and is amplified by rent controls and zoning laws that make housing artificially scarce and prevent new construction.
  3. Unemployment hinges on microeconomic factors like minimum wage laws as well as macroeconomic factors like monetary policy.
  4. Basic education is mainly delivered through the public school system, which incentivizes teachers and administrators to deliver low-quality, one-size-fits-all instruction with little or no practical value.

Given the magnitude of these problems, it’s only natural that entrepreneurs are stepping up with solutions. Traditional charities try to do the same thing, but internal bureaucracy often makes them wasteful and ineffective. Social enterprises, however, are hybrid organizations that seek to address the negative consequences of public policy and provide valuable products for consumers.

Many social enterprises, in fact, simply offer more formal ways to provide the same services entrepreneurs have been delivering informally for centuries — services that are increasingly hampered by government.

Take the homeless, for instance. Many for-profit restaurants are happy to give food to the needy. Yet, health-and-safety regulations increasingly prohibit distributing food to the homeless. Food entrepreneurs are threatened with punishment for trying to help others, then blamed for lacking compassion and wasting resources when they don’t. Consequently, social enterprises launch to fill the gaps seemingly left by business.

What are called “social” problems are usually the result of government failures, not market failures.

Another example is education. Whereas the public school system neglects its students, and government regulation prevents entrepreneurs from employing them, social enterprises offer vocational programs to build skills and experience. Their solutions may not be perfect, but they do provide a way out of the institutional traps created by government intervention.

It should come as no surprise that social enterprises are likelier than others to be led by women and members of minority ethnic groups, who are disproportionately the greatest victims of regulation, especially in the labor market (through minimum wage laws, occupational licensing, and compulsory unionism, for example). Social entrepreneurs offer numerous stakeholders a chance to escape the effects of these policies, which are deceptively marketed as compassionate innovations rather than the political entrepreneurship they really are.

Ultimately, we won’t really understand the economic function of social enterprise until we recognize that what are called “social” problems are usually the result of government failures, not market failures.

We are at our most social when we strive to serve each other. And whether it includes specific social goals or not, service is the essence of an entrepreneurial marketplace.

  • Matthew McCaffrey is assistant professor of enterprise at the University of Manchester and editor of Libertarian Papers.