This is Part 1 in a multi-part sequence on social enterprises and the interaction of social good with economic forces.
Before my days were filled with code and command prompts, they were spent studying economic models of markets. One of the first lessons during my undergraduate study of Economics was that as markets tend toward perfect competition, competing companies undercut each other's prices to gain more market share, shrinking profit margins. As a result, those companies that can’t minimize input costs will eventually face extinction.
Does that mean that for-profit social enterprises – like Healthify – are ill-conceived? Is a social mission a handcuff that holds back a business from preserving profit margins and thriving in a competitive market? Will financial bottom-lines inexorably collide with and compromise nobler entrepreneurial aims?
It is no secret that many businesses do unscrupulous things in pursuit of bigger earnings. But I contend that those seeking social impact within the profit-motivated realm of private markets face not an impassable barrier but rather a worthwhile challenge. With sufficient ingenuity, acumen, and understanding of the interplay of societal forces, the private sector can be enlisted as a powerful ally toward communal betterment.
This is true for two reasons: first, because entrepreneurs can shrewdly choose business models that marry company success to socially positive externalities, and second, because there are socially harmful market inefficiencies – in particular, poverty traps – that are ripe for being attacked by efficiency-seeking enterprises.
The term “externality” is economic jargon for the positive or negative side effect experienced by third parties during market exchanges. For example, when a restaurant decides to start serving alcohol, the direct consequence of those sales is that the restaurant incurs more revenue from selling the drinks (and profits from the markup they add to the wholesale alcohol price) and the customer incurs more inebriation from purchasing the drinks (and surplus value from how much his value of that sensation exceeds the price he paid). The side effect is that there are more drunks stumbling around the neighborhood, keeping the the restaurant’s neighbors awake and irate.
That’s an example of a negative externality, but externalities can also be positive. Imagine that rather than opening a bar, the restaurant instead opens a bakery, treating their neighbors to aromas of fresh bread rather than fresh vomit.
And those are minor examples. Negative externalities can be as severely harmful as people suffering lung disease from air pollution and losing their homes and retirement savings due to the antics of financial institutions going awry. Positive externalities can include new businesses infusing depressed neighborhoods with spillover prosperity and the virtual eradication of a disease from a critical mass of individuals getting vaccinated.
Social enterprises can leverage these positive externalities to link profitable activities with major social impact. For instance, Coursera seeks profits via certification fees and other premium services all the while providing high quality education to any learner for free. Following a different model, Tom’s Shoes contrives the positive externality of giving shoes to impoverished children for every sale they complete.
At Healthify, we’re working to build a nationwide network of social services. This is aligned with our business interests since it will substantially enrich our product, improving the quality and depth of the social service information offered to our clients and serving as the engine of our closed-loop referral system. Simultaneously, we hope that by facilitating inter-CBO communication and improving the software tools at the disposal of CBOs, it will provide them great benefits that extend beyond our revenue model.
Positive externalities pose opportunities for conscientious entrepreneurs because in the world we live in, markets are persistently imperfect; prices do not reflect the true cost or benefit to society. However, these are not the only market defects of social consequence. In Part 2, I will discuss what poverty traps are and how poverty traps and circumstances of their kin can be seized upon by social enterprises.