Muhammad Yunus is best known as founder of the Grameen Bank. In his book “Building Social Business: The New Kind of Capitalism that Serves Humanity’s Most Pressing Needs”, Yunus introduces a new idea, the social business.
What is a social business? The idea is a business as close as possible to conventional business, with one exception. Investors can draw from the business only the amount of money they first invested in it. So, if you invest £1000, you can draw only £1000 from the business.
The idea is social business challenges business owners’ motivation. They are seeking not personal enrichment but effective ways of supporting the poor. Yunus argues most social enterprises allow personal profit from investment. Where profits are possible, owners may have conflicting aims.
Yunus first published this book in 2010 and it would be interesting to find out how the idea developed over the last five or so years. The book has a rather distant tone and it took me a while to feel the enthusiasm but it does seem to be effective. Yunus genuinely believes this approach could abolish world poverty in a few decades. Whilst I’m somewhat sceptical, I can see social business is likely to make a big difference.
Two aspects of social business interest me:
Capitalism Misrepresents Human Nature
Yunus writes in his introduction on page xv:
The biggest flaw in our existing theory of capitalism lies in its misrepresentation of human nature. In the present interpretation of capitalism, human beings engaged in business are portrayed as one-dimensional beings whose only mission is to maximise profit. Humans supposedly pursue this economic goal in a single-minded fashion.
Both right and left hold this belief. The left believes the priority is to oppose capitalism. Sometimes they give little consideration to the size or local nature of business. Others distinguish between local businesses and corporations who extract finance from local economies. I suppose that is where I stand.
Politicians on the right, take profit maximisation as self-evident, a good thing and worth supporting in legislation. Economists developed this one-dimensional model and they never intended it to be anything else. Their assumption simplifies reality to enable modelling of the way the economy works. The results of using this assumption to model the economy may be more or less accurate but it will always be approximate because human beings do not behave as this model predicts.
Corporations Invest in Social Business
Yunus provides several examples of corporations investing time and money in social businesses, where they expect to see social change and not to make a profit from their investment. Yunus anticipates a parallel economy where social businesses grow the portion belonging to the poor and conventional businesses grow the portion belonging to the rich.
Whilst I welcome the very wealthy business people prepared to invest in social businesses, I don’t think Yunus appreciates fully the consequences of growing their portion.
Problems start where personal wealth outstrips business owners’ ability to spend their wealth. This effectively removes wealth from local economies and concentrates it in financial markets. The problem is in inequality, as the gap between rich and poor widens, the gap itself is the problem.
Social business may make the poor richer and to some degree close the gap but it does not tackle the systemic problem of inequality. Immense wealth increases power and the temptation is always to use power to personal advantage. When corporations take on government contracts, they usually lack transparency and become unavailable to democratic influence.
Whilst social business appears to be an effective way to tackle poverty, it cannot possibly address world poverty as a whole whilst corporations run things outside of democratic control.
Yunus describes several social business projects and the inspiring thing about them is his approach to development. Having a good idea is one thing, working out how to market it is another. For example, arsenic poisons a lot of water in Bangladesh. The effects are cumulative and take several decades to show up.
One village piloted a social business providing clean water. The results were disappointing. First, people were unused to paying for water, even though they set the price within range of the poorest families. Also, the most vulnerable are women and children. The men usually eat out and buy far more expensive bottled water and so do not need the clean water. This alongside perceiving arsenic poisoning as a long-term problem, made take-up disappointing.
This shows the power of Yunus’ approach. By starting in a single village he was able to find out the barriers to marketing the water. The next step is to find ways around the barriers. How do you market clean water under these circumstances? Depending on the product, this period of testing can result in changes to the product, its packaging (especially size), its cost and maybe its mode of delivery.
Packaging for Different Markets
Sometimes different communities need the same product in different packages. Urban and rural communities, for example. The aim of piloting is to enable the offer of the same product in other communities with its marketing approach integral to the product.
This is an important insight. Many good products fail because they are not marketed properly and usually the reason for this is the market is not understood. No-one is going to argue that cheap clean water is a bad idea. How do you sell it to a poor community and generate sufficient income to cover costs and expand the business?
This is a question any business has to answer. Yunus argues social businesses enable solutions to be entertained that benefit the poor because the pressure to enrich shareholders is absent. The aim is to provide clean water to the poor and not generate profit for the rich.
Social businesses are a powerful tool and could be adapted for use in the West. They encourage business people to invest in effective approaches to tackling poverty and many of them are willing to do so. I doubt they are likely to be effective on their own in tackling poverty because they do not address inequality.
I suspect Yunus is trying to present a model to corporations that enables them to make an effective contribution to tackling poverty. To that extent what he says constrains him. The effects of inequality on local economies and democracy are such that I doubt social business alone can have much impact. As part of a wider democratic social movement they could be very effective indeed.
What do you think? Do social businesses have a place in local economies in the UK? Have you examples of experiments with social businesses anywhere in the world?