A week ago, I was leafing through my microeconomics textbook in the hopes that osmosis was not just a water-based process (and that, magically, the mysteries of monopolistic pricing would seep into my brain). Instead, I was struck by the following thought: Social enterprise, fundamentally, is neo-classical economics. At its most basic level, the social economy uses not only the processes of economic decision-making, but also ascribes to economics’ ultimate goal of social optimality. Of course, they are not exactly the same thing, but the similarities are uncanny and definitely worth discussing.
Let me try and prove it to you.
Essentially, economists look at social issues and ask, "Is this efficient?” or in economics-speak “Is this Pareto Efficient?” Pareto Efficiency is when every possible resource is distributed in such a way so that no person benefits at the expense of someone else. In simpler terms, everyone's as well off as they can be without crapping on someone else's parade. So, when a company raises its prices higher than they need to be to cover costs, they are cutting off people from access to goods that they value. The company’s profits are coming at the expense of consumers: this is not Pareto Efficient.
In fact, the general feeling that economics is all about profits is just plain wrong. Classic economics holds that profits are suboptimal, because most of the time, they occur at the expense of someone else's welfare.
In social enterprise, market activity is seen as a vehicle for social change—in essence, using markets as mechanisms that can be used to create socially equitable (read “optimal” according to Pareto Efficiency) situations.
Indeed, at its heart, some of social innovations most exciting creations have the same goals. For example, Muhammad Yunus’s Grameen Bank recognized a key cause of poverty: poor people had lack of access to credit. In economic terms, this is market inefficiency, since those that valued credit were unable to access it. When Yunus created a new mechanism so that the ultra-poor could participate in the market, social entrepreneurs found themselves nodding in tune with die-hard economists: for both groups, a socially optimal condition was reached.
Indeed, at their fundamental level, classical economics and social economics share the same imperative: to distribute the Earth’s resources in socially optimal ways. On top of this, both groups have remarkably similar ideas of what “socially optimal” is.
So why aren’t all social entrepreneurs believers in economic theory? Well, as I mentioned before, there are some key differences. The main difference is in Smith’s “invisible hand”, or the belief that socially optimal conditions come about simply by blindly following self-interest. Social enterprise is based on the conscious choice of changemakers to actively use the markets, not just for personal self-interest, but also (and more importantly) for social value creation. Social entrepreneurs are consciously choosing to chase the elusive dream of social optimality, with our eyes open to the difficulties. We realize that this goal won’t come about without active engagement.
I argue that there isn’t a big difference between how social entrepreneurs and economists view the. Additionally, we are losing out by not acknowledging the similarities. We need to critically look at the theory of economics, and use this thinking to deliver social value to the world. By extension, we need to perfect our understanding of markets. In some cases, we must rewrite the theory to inform the decisions of social enterprises. By doing so, social entrepreneurs can make huge gains by proactively tapping into a knowledge base that’s been around for centuries.
However, like many things surrounding social enterprise, we must do so with our eyes wide open to the difficulties.
