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The rise of the social enterprise

BY DANIEL GREENER 02/10/2014

SocialBusiness is changing. A new phenomenon is rising: the social enterprise. A recent study shows that social enterprises in the UK have three times the start-up rate of mainstream small and medium enterprises and are expected to record higher profits in the coming years.1 Social enterprises “are businesses that trade to tackle social problems, improve communities, people’s life chances, or the environment.”2 The development of the social enterprise industry potentially presents a challenge to the neoclassical dogma of the rational self-interested individual. After all, how does a business exhibiting anything other than conventional profit maximisation behaviour fit into the assumption of homo economicus? Is this a cause for replacing the traditional economic textbooks that assume rational self-interest? In this article, I analyse the rise of social enterprises from a selection of theoretical positions, and argue that the answer isn’t clear cut.

Karl Marx (2008, p.15) famously wrote that capitalism “has left remaining no other nexus between man and man than naked self interest.” While social enterprises on the surface represent a break from the conventional business model, these enterprises still depend on and profit from a capitalist system: the means of production continue to be privately owned and exchange takes place in the free market. Seen from a Gramscian perspective, the social elite are simply developing a new system while retaining many of the old system’s features.3 As a result, people are still self-interested yet bourgeoisie desire is concealed as social concern. Consumers are demanding a holistic value proposition from their purchases and hence businesses stand to gain privately from investing in social causes.4

Moving on to Adam Smith’s parable of the baker, who provides goods out of self-interest and not out of altruism: this sentiment has led certain neo-liberals to argue that “there is no such thing as society,”5 and that individuals make calculations based purely on the positive and negatives to their self-interest to reach conclusions. Changing consumer preferences would explain why there has recently been a rise in social enterprises. But in reality, this argument may not stand strong. How does this position explain charitable acts? Douglas North introduced the notion of ideology as the missing factor to this behaviour, whilst others such as Mark Weber pointed to religion and other exogenous factors. It ultimately remains a matter of perspective whether acts of altruism are interpreted to be driven by a desire to improve the community or purely by self-interest.

The economic anthropologist Karl Polanyi argued that the self-interested man is the creation of a market economy. In the analysis of traditional non-market societies, humans were driven by the desire to improve their surroundings or social ties. From this perspective, because social enterprises take place under the rules of the marketplace we can still assume that humans act in their self-interest. However, many thinkers such as North  and those belonging to the neo-institutionalist school of thought, have fiercely criticised Polanyi’s conclusions, arguing that they are based on a flawed data selection. To North (1993, p.10), motivation stems from “the belief-structure that individuals possess.” In an economy with a changing business mantra, there must be awareness that similar evolution of the underlying belief-structure is possible, (perhaps to one that is more altruistic) and with it, human behaviour. Following this line of thought homo economicus never existed, but it is interesting to note how the recent rise in social enterprises could have the power to alter societal behaviour if belief and path dependence structures are altered.

Herbert A. Simon proposed that in decisions the rationality of individuals is limited by the information they have. Cognitive limitations and a finite time frame can also alter decision making. Simon ultimately argues that “humans are only partially rational.” (Kalantari, 2010, p.4). This may indicate that in fact a lack of perfect information or bad post-recession decision-making may be driving the rise in social enterprises or more ethical business practice and not a change in behavioural thinking. The individual is still self-interested, just not well informed. Others such as Keynes or Veblen have similarly emphasised imperfect information as key.

There are those who argue that although social enterprises are not an alternative to capitalism, it is reforming it from within. The social entrepreneur Muhammad Yunus dramatically altered the way capital works through microfinance, helping people out of poverty by shifting power away from the few and into the hands of the many. This would appear to show that the aforementioned Marxist criticism is invalid as elites no longer monopolise power. Perhaps there is room for social enterprises to change capitalism and the marketplace to such a degree that some of the above arguments no longer stand firm.

With this said, however, we know consumers are demanding a more ethical product, and businesses are changing to adapt to this. There are now league tables and awards for the most ethical businesses6 as well as business advice and forums for how changing your business ethics can improve competitiveness.7 There are very clear reasons to suspect that social enterprises are merely an adaptation of traditional business models to tap into this new consumer desire. There are private benefits of becoming a more ethical company, perhaps this shows that homo economicus is not dead. Or perhaps there is simply space for a company to both be altruistic and profit seeking.

This analysis has highlighted the plurality of interpretations that exist on the recent rise in social enterprise for how individuals act as agents in the market. What is apparent at the end of the analysis is that there exists no single answer to explain the significance of social enterprises. This is perhaps in itself significant, as it reflects a growing but poorly defined industry, at times indistinguishable from conventional businesses, at other times at the forefront of the empowerment of local communities and the protection of the environment.

DANIEL GREENER

Is a 3rd year BSc Politics of the International Economy student at King’s College London.

Bibliography:

Kalantari, B. (2010). Herbert A. Simon On Making Decisions: Enduring Insights And Bounded Rationality. Journal of Management History, 509-520. Retrieved from:

http://www.emeraldinsight.com/doi/pdfplus/10.1108/17511341011073988

Marx, K., & Engels, F. (1969). Manifesto of the Communist Party. Moscow: Progress. Retrieved from:

http://www.marxists.org/archive/marx/works/download/pdf/Manifesto.pdf

North, D. (1993). The Paradox of the West. Economic History from EconWPA. Retrieved from:

http://128.118.178.162/eps/eh/papers/9309/9309005.pdf

1 Holt, A. (2013). Report reveals a thriving UK social enterprise sector. Charity Times. Retrieved from:

http://www.charitytimes.com/ct/report_reveals_thriving_UK_social_enterprise_sector.php%20.php

2 Social Enterprise UK (2014). About social enterprise. Retrieved from:

http://www.socialenterprise.org.uk/about/about-social-enterprise

3 Miller, S. (2013). Getting Political: Marxism and Social Entrepreneurship. Retrieved from:

http://slowsocial.me/2013/10/07/getting-political-marxism-and-social-entrepreneurship/3/

4 TheOrganizer. (2014). Nice Guys Finish First: The Financial Case for Social Enterprise. Retrieved from:

https://www.latamstartups.biz/nice-guys-finish-first-the-financial-case-for-social-enterprise/

5 Briandeer. (1987). Epitaph for the eighties? “there is no such thing as society”. Retrieved from:

http://briandeer.com/social/thatcher-society.htm

6 Adams, S. (2014). The World’s Most Ethical Companies 2014. Retrieved from:

http://www.forbes.com/sites/susanadams/2014/03/20/the-worlds-most-ethical-companies/

Lapin, D. (2014). Using Values and Ethics for Competitive Advantage. Retrieved from:

http://www.lapininternational.com/article-cpt/using-values-ethics-competitive-advantage/

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