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Is Social Business a Good Idea?

March, 2013

A couple years ago I wrote a review of Creating a World Without Poverty, by Muhammad Yunus (that link will take you there). In the book he introduced the idea of a "social business," which I explained briefly. These businesses are established for social purposes rather than to make a profit, although making a "profit" of sorts is often important as a way to expand them or to maintain a reserve for safety. The key idea is that, unlike a charity, which must constantly seek funding, a business that provides a needed service to the poor is (or can be) sustained indefinitely by its own revenue.

Yunus did this himself with his Grameen Bank, which makes micro-loans to lift people out of poverty. He also started a company (together with the French company Danone) that makes cheap yogurt to serve the purposes of employing poor women in Bangladesh (as vendors) and getting proper nutrition to children.

Shortly after posting my review I received an email from someone who had read it and was skeptical of the idea of a social business. She pointed out that if Yunus and others do too much for the poor they effectively take over government functions, leaving political leaders free to neglect or never build essential programs. She also thinks this leads to too much power for Yunus and organizations like his Grameen Bank. She thought that the interest rates charged by Grameen Bank are outrageous, and, finally, that the term "social business" was just a meaningless play on words since all business is done for our own selfish reasons. The rest of this essay/article is my response to those criticisms.

Taking Over Government Functions

We can debate what the proper role of government is, but in any case I personally wouldn't worry about private organizations doing what needs to be done. If a business or other organization is succeeds in some area it's because they provide something that the government is not providing. It is a harsh argument to say that the people should suffer the lack of something while waiting for a government to step up and do something about it, just because we want to exclude other organizations from "usurping" power.

It is a real possibility that an organization, even if founded for doing good works, could gain a lot of power, but how it is used is the issue, and governments in general don't have a better history than any other groups or individuals on that count. In fact, as shamefully as some corporations might behave, without the power of force -- which, for the most part only governments have -- they, and other organizations, at least have to get their power by actually providing something people want and choose voluntarily.

Is Social Business a Meaningful Concept?

The term "social business" might be somewhat of a play on words, but I think it still makes a valid distinction. There is a clear difference between having profit as the ultimate goal of a business versus some other purpose. When an organization provides inexpensive medical care for the poor, for example, they might charge fees and even take in more than their costs, yet that does not mean they are pursuing a profit for its own sake. The revenue makes it possible to continue this valuable service, or even to discount or offer free services to the poorest patients. The "profit" makes it possible to expand their good work. That is nothing like owners of a business who seek only to make money for themselves.

It is also worth mentioning (just to introduce a new idea) that even if actions are taken for truly selfish reasons it isn't necessarily a problem. Like myself, you might feel a selfish interest in having a better world for as many people as possible -- who actually thinks a worse world is good for them as individuals? My sense is that self interest expands to include others as we mature, but that is a different (and long) philosophical discussion.

Usurious Interest and Profits

As for the interest charged by micro-credit organizations (and they are the prime examples of social businesses), I think it is a matter of context. Grameen Bank does charge close to 20% annually, but I know from personal experience and reflection that the rate is not all that matters. It is about the true usefulness of the loan. I once loaned a friend $100 with $7 interest due per month (84% annual interest, which is far higher than what Grameen Bank charges), and he paid it back in a month. What did he get for that $7, or 84% annual interest? He was able to buy the tools he needed so he could accept a job offer. He was soon making good money working at a job he enjoyed.

I've written about the idea of microcredit usury in more detail before. I've even proposed a new moral definition of usury. In general I think we have to give people some credit for knowing when a loan makes sense for them. Had my friend paid me $100 in interest he still was going to be better off than if he couldn't take that job (and that is essentially the test I suggested for whether a loan is usurious).

In the case of Grameen Bank there is another point, which is that it takes some minimum amount of money to process loans. Employees have to be hired, records kept, collection efforts paid for, and so on. Naturally with small loans these costs eat up a proportionally larger part of the interest revenue, and so the rate has to be higher.

But again, the proper rate of interest or "profit" is a matter of context. If a simple $120 loan to buy a bicycle with baskets means easier access to markets for selling produce, and so means a family can make $25 more per month -- $300 more per year -- for all the years to come, where is the problem with them paying $20 or even $30 in interest before repaying the loan in full? Yunus was very aware of the risk of having profit as even a secondary goal, but then that potential selfish pursuit of money is not just an issue with social businesses. It's also a risk in every charitable organization as well. Just consider how much the top executives of many charities receive in compensation.

I like the idea of a business that serves the needs of the poor in ways that other businesses, charitable organizations or governments do not.

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Social Business