Social business: A tool to redesign capitalism

While capitalism has improved the life conditions of many human beings, that well-being has been reserved for a small number of countries and people, while many still live in poverty. The author argues that it is time for a new paradigm.

While capitalism has improved the life conditions of many human beings, that well-being has been reserved for a small number of countries and people, while many still live in poverty. The author argues that it is time for a new paradigm.

Introduction

An ecosystem is “a community of living organisms in conjunction with the nonliving components of their environment, interacting as a system.” Generally speaking, an ecosystem is a mirror that reflects the features of its “inhabitants” and their interactions, with each other and the surrounding environment. There cannot be a contradiction between the inhabitants and the environment they live in; otherwise, both the inhabitants and the environment would collapse.

An economic system can be considered an ecosystem too. Its inhabitants are the economic “players,” such as companies and entrepreneurs, banks, consumers, and governments. The economic system, too, like any other ecosystem – in order not to collapse – should reflect the features of its players and their interactions.

Does our economic system comply with the features of its actors?

Capitalism

Our economic system is capitalism, a system that has been adopted by the majority of rich countries in the world. It has brought us innovation and economic growth. In 2016, however, a Washington Post headline declared that in the United States, “A majority of millennials now reject capitalism.” (The article was based on a Harvard University survey of young adults aged 18 to 29.)

It’s not clear that you can ‘reject’ capitalism, any more than you can reject gravity.

Michael Munger

Nobel Peace Prize–winner Muhammad Yunus, a pioneer of microfinancing and social business, writes about the debate that ensued in his book A World of Three Zeros: The New Economics of Zero Poverty, Zero Unemployment, and Zero Net Carbon Emissions. He quotes economist Michael Munger: “It’s not clear that you can ‘reject’ capitalism, any more than you can reject gravity.”

Munger’s objection seems unassailable: honestly, what alternatives do we have?

Should we try communism or socialism? Young people see these systems as flawed too, according to Yunus.

The point is that “you do not need a survey to ascertain the plight of American youth. You can look at their bank accounts, at the jobs they have, at the jobs their parents have lost, at the debt they hold, at the opportunities they covet but are denied. You do not need a jargon or ideology to form a case against the status quo. The clearest indictment of the status quo is the status quo itself,” writes Sarah Kendzior, in Foreign Policy magazine (also quoted by Yunus in A World of Three Zeros).

Capitalism, indeed, has created (or widened) inequalities – between different parts of the world, within the same continent, the same country, the same city.

Capitalism is based on a myth: that growth can be unlimited.

Capitalism is based on a myth: that growth can be unlimited – an impossibility, since resources are limited. By following this myth, we are over-exploiting resources, thus causing damage to our environment. Besides, these resources are not distributed fairly: “the rich” always want more, while the number of poor people increases.

As Yunus writes, “poverty is not created by poor people. It is created by an economic system in which all the resources tend to keep surging up toward the top, creating an ever-expanding mushroom head of wealth belonging to only one percent of the people.”

The attitude of “the capitalist”

As noted, there should be compliance between the ecosystem called capitalism and the features of its inhabitants. So, what are the main features of “the capitalist”?

Adam Smith, sometimes referred to as “the father of economics,” elaborated the concept of the “invisible hand” in his 1759 book The Theory of Moral Sentiments. In a nutshell, according to this theory, economic operators, by pursuing their own interests, create a general framework of well-being for the community.

The portrait of the capitalist that arises from Smith’s theory is that of an egoistic person. Through their egoism, the capitalist, theoretically, generates a common well-being for the community. But while capitalism has improved the life conditions of many human beings, no one can deny that that well-being has been reserved for a small number of countries and people, while many still live in poverty. Egoism has proved not to be a driver for a common well-being.

The capitalist is a “personal-gain-seeking being,” and this attitude has shaped all aspects of the capitalistic economic system. Not by chance, the vehicle that the capitalist mostly uses to satisfy his hunger for personal gain is profit companies – companies in which managers’ abilities are evaluated primarily in relation to the amount of profits they can generate for the shareholders.

We can observe a strict coherence between the capitalist and the kind of companies he uses: profit companies, just like the capitalist, seek a personal gain. The entire economic system reflects such “personal-gain” features.

Banks, too, by way of example, operate exclusively in order to maximize profits. When a bank makes a loan to a company, it requires collateral. A bank does not evaluate the impact that the business can make in the community. All the bank wants is to ensure that the loan is repaid; consequently, without collateral a bank will never lend money. In addition, the bank charges interest on the loaned amount; it is the tool through which the bank makes profits. A bank lends money not to support a business, but mostly to seek a personal gain through the interest rates.

This “personal-gain-seeking attitude” is strongly rooted in our society.

This “personal-gain-seeking attitude” is strongly rooted in our society. In our workplaces and outside of them, we see people who seek personal advantage – even to the detriment of others – in any given situation. Relationships are very often based on personal gain or, worse, on exploitation of others. The big picture shows an ecosystem in which the nature of people seems to be “to threaten the weak and fear the strong,” as Buddhist monk Nichiren Daishonin wrote in the 13th century.

What is “human nature”?

Are we sure that such an attitude is truly at the core of human nature?

Living in a constant state of “hunger,” always wanting more, being focused only on personal gain – this seems to describe an animal’s nature rather than a human’s. Of course, mankind also belongs to the category of animals. Humans started their existence as hunters; they lived in caves – not that different from other animals. Humans, however, had something other animals didn’t, and that something is creativity, especially when applied to solving problems.

I believe that creativity, not hunger, is at the core of human nature. Thanks to creativity, mankind moved out of caves and shaped the world we live in. If it’s true that “problem-solving” creativity is at the core of human nature, our economic system should reflect this feature.

I believe that creativity, not hunger, is at the core of human nature.

Gregorio Salatino

In this respect, however, it seems that we are behind.

For years, the theories of economist Milton Friedman have been followed religiously. According to Friedman, a corporation’s exclusive purpose is to maximize financial returns for its shareholders – the so-called shareholder primacy (Friedman outlined his theories in a 1970 New York Times article called “A Friedman Doctrine: The Social Responsibility of Business Is to Increase Its Profits”). Corporations, according to Friedman, bear no social responsibility.

Of course, this doctrine would not prevent shareholders from investing a portion of their revenues for pursuing social objectives. That, however, would be a private matter, which falls outside the purposes of a corporation.

In 2019, the CEOs of nearly 200 major US companies released a “Statement on the Purpose of a Corporation.” According to this new declaration, companies should serve not only their shareholders, but also their customers, employees, suppliers, and communities – a shift from “shareholder primacy” to “stakeholder primacy.”

Assessing that corporations should now also take into account the interest of communities is not, of course, proof of a change in the core attitude of companies – and, consequently, of a change in the broader economic system. But it is an important step, because it has been recognized that profit is not everything, not even for “pure” profit companies.

From “money-making” to “problem-solving”

How about trying a further step forward?

Companies are established by people. If we agree that problem-solving creativity is at the core of human nature, why should companies not be framed accordingly?

Could it be the time for a new paradigm? A problem-solving company is a company that builds a business to tackle a specific problem. Any time an entrepreneur is confronted with a problem, they invent a business to solve that problem.

Could it be the time for a new paradigm?

Gregorio Salatino

Problem-solving companies should be evaluated not on their ability to make profits, but on their ability to solve that specific problem that they have assumed as a “mission.”

Consequently, the concept of “creditworthiness” should change. A company is worthy of credit if it can create an impact. Financial institutions, but also venture capitalists, should focus more on this aspect than on the ability to make profits. Due-diligence investigations of such companies should assess if the company is truly able to pursue its social objectives; if it is, the company would be deemed “worthy.” Such an investigation should be a thorough one: this is not the field of charity. Financial institutions are not making donations; they are lending (or investing in the form of equity) money. They must be confident that there will be a return in terms of social impact. Otherwise, the invested money will be wasted.

The non-distribution constraint

A key feature of social businesses is the non-distribution constraint.

Revenues earned by a social business shall not be shared between the shareholders, but rather reinvested in the business purpose of the company. Consequently, the company may buy equipment, expand its business, pay salaries (including the founder’s), hire more workers, et cetera.

The non-distribution constraint frames such companies; they are – as Yunus calls them – “non-dividend companies.”

As long as such businesses manage to confront a specific problem, they may easily sell their products and services to the market and become “self-sustained businesses.” Moreover, the non-distribution constraint should foster the growth of such companies.

However, especially at the start-up stage (but even later), they may face problems of undercapitalization. To ensure these businesses thrive, various forms of support should be considered.

Governments should play a key role in this support. First of all, it is upon governments to establish legal frameworks that help develop entrepreneurial activities. Many actions can be taken in this respect: make it easy to incorporate companies (reduction of bureaucracy), improve corporate law in terms of efficiency, develop public programs of incubation and acceleration, support companies through grants or tax reductions, facilitate competition and free access to markets, and develop programs of education to entrepreneurship.

As already noted, traditional financial institutions are not keen on lending money without the promise of a return, either in the form of interest rates or the sale of shares at the exit (in the case of equity investments). The non-distribution constraint, however, for consistency, should also apply to lenders and investors of non-dividend companies. A social business investor should aim only for a management fee for the duration of the investment, with the amount invested repaid at the exit.

Social entrepreneurs, even alone, can do a lot to foster their ecosystem.

Not all the products and services that they sell have consumers as a target. Social businesses also have suppliers from whom they purchase products or services to pursue their business activities. A social entrepreneur, therefore, may consider purchasing products or services it needs only from other social businesses rather than from profit companies.

Or, social businesses might agree to apply favourable terms and conditions in their transactions with each other. For instance, they might apply discounts or agree on more extended payment terms. This type of arrangement would create a kind of financing between social businesses.

Support can come from consumers too. They might “vote with their wallets” – that is, purchase those products from companies that pursue social objectives.

This is how the spreading of social businesses can redesign capitalism.

The role of education

In Yunus’s opinion – and mine – education is the true driver of change. Young people are often advised to study hard so that they may find a job in a “good company” with a high salary. Becoming an entrepreneur is not usually presented as an option.

In the background is the (false) belief that only a few people can be entrepreneurs, while all the others must find jobs as employees – as if to be entrepreneurs people need a special gift or genetic skills. This is not consistent with human nature. When we were all hunters living in caves, everyone was an entrepreneur; no one worked for others. Indeed, entrepreneurship is at the core of human nature. It is the education we receive that convinces us that entrepreneurship is for only the few.

In Bangladesh some years ago, to demonstrate that entrepreneurial ability was innate in every person, Yunus launched a specific program for beggars, those who are the last in line in our society. He convinced them to try to sell something (cookies or candies, for instance) when they went begging to other people’s doors. At the end of the program, almost all stopped begging and became door-to-door salespeople and personal shoppers.

Starting from childhood, people should be pushed to engage in creative and entrepreneurial activities, recognizing, as Yunus says, “the limitless capacity of human beings.” The role of education should be to grow job creators and not job seekers – a dependent underclass without freedom and independence.


This article expands on a speech that the author gave during a conference held in Dubai on March 17, 2021, on the topic Social Business: A Tool to Redesign Capitalism.

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