Social Entrepreneurship Next Social Justice?

Profits meet economic analysis

Image Credits: Keith Cooper/Flickr.

It might be a bit surprising at first glance, but the academic literature on the rather practical topic of entrepreneurship is quickly growing.

Publications in the relevant journals enjoy relatively high reputation and can be helpful in climbing the academic ladder.

In order to add new insights to the already extensive literature, one often needs new subtopics and research questions that open routes for innovative inquiries. One such line of research that has developed and grown over recent years deals with the economic analysis of “social entrepreneurship.”

Dr. Matthew McCaffrey of the University of Manchester, UK, has published a very thoughtful essay on the topic early this year in his edited volume The Economic Theory of Costs. Among other things he asked the important question of how social entrepreneurship is to be understood in the first place, and what, if anything, makes it distinct from mundane entrepreneurship in terms of economic calculation of profit and loss.

The term implies that there is nothing social about entrepreneurship as such. Similarly, the German term “Soziale Marktwirtschaft” (social market economy) suggests that there is not necessarily a social element in the market economy. However, whether or not this is actually the case, depends on the meaning of the attribute “social.” Unfortunately, it is a notoriously misused term in public debate and everyday language.

In The Fatal Conceit: The Errors of Socialism Friedrich Hayek referred to it as the “prize weasel word.” It is a weasel word because it usually deprives the connected noun of its actual meaning, like a weasel is supposed to be able to empty an egg without leaving a visible trace.

Hayek lists about 160 nouns that are commonly connected with the term, such as “social justice,” “social consciousness” or “social contract.” In particular, he refers to the German expression “sozialer Rechtsstaat” (social rule of law), which is anchored in the Western German constitution of 1949, as probably the worst abuse of the word “social” in Western languages.

Is “social entrepreneurship” just another expression that could be added to Hayek’s list? McCaffrey does not ask this question in his essay, but there is no strong evidence in the text that he would necessarily answer in the affirmative. Yet, his message is very clear: entrepreneurship is inherently social in the broad sense of the word, since it always involves interaction and human cooperation. Moreover, every successful entrepreneur, whether pursuing a “social” mission or not, acts economically and generates profit.

McCaffrey analyzes two types of social enterprises. Complementary social enterprises publicly declare that a part of their profits is going to be spent on certain “social” causes. It is clear that the entrepreneurial part of such an entity is essentially indistinguishable from any mundane enterprise. What sets them apart is merely what the profits are spent on once they are generated. Yet, this is usually not subsumed into the economic analysis of entrepreneurship. In a sense, it just constitutes a “consumption” decision on the part of the entrepreneur.

Integrated social enterprises are somewhat more complicated. They integrate the pursuit of a “social” mission directly into the production process. An entrepreneur might, for example, hire homeless people and pay them above their discounted marginal revenue product.

Now, by knowingly paying someone above their discounted marginal revenue product, an entrepreneur purposefully abstains from a potentially higher income. The entrepreneur contributes to the social cause out of her own pocket. She effectively donates a share of her profits. But it is absolutely essential to realize that this can only be done insofar as the enterprise is set up in such a way that these profits will indeed be generated. One cannot donate a share of income that one has not earned. If the excess wages are not financed out of entrepreneurial profit, they consume the capital value of the enterprise, which of course is unsustainable in the long run. The social enterprise would fail just like any other enterprise that incurs losses.

It might also turn out that the workers are not really paid above their discounted marginal revenue product. This might be the case when consumers personally value the pursuit of the social cause integrated into the production process and are thus willing to pay higher prices for the goods and services provided by the entrepreneur. The “social” mission then simply becomes a part of the marketing strategy. It actually increases entrepreneurial profits.

Hence, the successful entrepreneur combines and coordinates different factors of production in such a way that a profit is generated, whether pursing a “social” mission along the way or not. In fact, the higher the profit the better a “social” cause can be served. In that sense there is no difference in kind between “social” entrepreneurship and mundane entrepreneurship. From the vantage point of economic theory, they fundamentally differ from one another only insofar as the weasel word “social” deprives “entrepreneurship” of its actual meaning and the “social enterprise” becomes a charity.