Profit and social reform are mutually exclusive concepts
September 17, 2008
Despite increasingly muted claims to the contrary, the abolition of apartheid and the introduction of a liberal constitution and a non-racial parliamentary democracy did not cause a miraculous transformation to a grossly distorted society.
Fourteen years after the political transformation of 1994, little has changed in the overall structure of South African society. The legacy of 350 years of race-based discrimination has left a vast wage and welfare gap, a population with as much as 60 percent functional illiteracy, and a short supply of skills - in short, a country crying out for an intensive system of social upliftment.
The government has largely abrogated this responsibility and this has given rise to the latest reformist catchword: social entrepreneurism. The best definition is probably that of micro finance proponent, journalist and author, David Bornstein. In his book How to Change the World: Social Entrepreneurs and the Power of New Ideas, he notes: "What business entrepreneurs are to the economy, social entrepreneurs are to social change. They are the driven, creative individuals who question the status quo, exploit new opportunities, refuse to give up, and remake the world for the better."
That sounds good at first, but Bornstein's definition contains a potentially irresolvable contradiction: business entrepreneurs and social entrepreneurs operate in the same economic system with wholly different goals.
The system has long outgrown the small, village-based enterprises that existed when economist Adam Smith wrote his seminal The Wealth of Nations, where he postulated the existence of an "invisible hand" that moderated supply and demand, prices and profits, to the benefit of all.
Today we live in a world of large, transnational corporations that still function on the principles outlined by Smith. This, simply put, is that businesses compete to supply the demands of the marketplace and they succeed only by providing the right product at the right price.
Bornstein gives examples of "non-profits" changing government policy or mind-sets. But the question remains: has anything changed fundamentally? Have their new ideas merely been assimilated into a system that contradicts the whole idea of non-profits and collectivism?
There is obviously no invisible hand to control the system.
This has resulted in the "absurdity" of overproduction and overcapacity to produce everything from textiles to computer chips. The result is cut-throat and increasingly bitter competition between corporations. Companies are constantly looking for cheaper methods of production.
This is not a moral condemnation; they are obeying the only possible rules within the system for their own survival.
And they are legally obliged to do so: the fiduciary duty of company directors (outlined in the landmark 1919 decision by the Michigan State supreme court in the case of Dodge vs Ford and widely accepted) is to earn shareholders maximum returns.
Much more recently, economist Milton Friedman noted that any company director who prioritised social responsibility was working against the company's interest and should be sacked. He was right, and not only in legal terms.
In this intensely competitive environment, a director who does not prioritise the bottom line puts the enterprise's survival at risk.
Social responsibility, the priority of the social entrepreneur, is in stark contrast to this. Social entrepreneurs are said to "question the status quo". But such questioning, if carried to its logical conclusion, would result in direct challenges to the status quo, to the system of free enterprise and capitalism.
This is completely different from the carefully budgeted social responsibility programmes of many corporates. These are, fundamentally, window dressing and should correctly be accounted for under marketing and advertising. The cost of such programmes should never outweigh their financial benefits.
Social entrepreneurs, on the other hand, are supposed to prioritise greater wellbeing for the majority; they bewail the move of productive enterprises to regions of lower labour cost. Yet these moves are usually made necessary by the competitive rules of the system.
At the core of social entrepreneurship are alternative business models. Historically, this has led to the promotion of various forms of co-operative enterprise, almost all of which have failed or been incorporated into the existing economic system. The best examples probably include the kibbutzim of Israel and the co-operative movement in Britain.
The British co-ops, ranging from supermarkets to a bank, have their roots in the work of Robert Owen, who started his reforms at the New Lanark textile mill in Scotland and set up the New Harmony community in Indiana in the US in 1825. Both failed.
Owen's enterprises could not succeed because his business plan included the provision of schools, shorter working hours and better wages and conditions for "his" workers. This put his businesses at a distinct disadvantage. He provides a classic example of the adage that good bosses go bust.
So, is a transformative role possible for the social entrepreneur in our present system? Or should the state maybe play the role of social entrepreneur? Social upliftment, after all, is what public works and general welfare programmes are supposed to be about. But they cost lots of money.
Given that major South African companies and corporations profited greatly from the racially distorted system of the past and continue to profit today, perhaps they should provide the funding.
Might windfall taxes, proposed by Archbishop Desmond Tutu, be the way forward? But would such state intervention fundamentally change a system that seems to be at the root of the problem?
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