Blending profit with social good (see related article) has not yet come close to reaching the mainstream of current discussion. It may or may not ever because the term “free market” seems to be in conflict. There is no conflict, just misunderstanding.
Pundits may name the new efforts combining profit and social good and their legal incorporations, L3cs and Benefit corporations, as “new capitalism”, “social enterprise” “corporations with conscience” “capitalism with conscience” … These new names try to encapsulate the ideas and functions of the new hybrid business relationships, and with some success these names are mildly descriptive, and may become a good trademark. As they emerge, these names will be embraced or not, but the efforts they describe are certain to move forward.
Before corporations become popular in the 1800s, businesses were associated the persons who operated them. A good or bad business practice reflected directly onto the business man or woman. As a result, the business man or woman was subject to social approval from a good business practice or social opprobrium from a bad business practice. With the introduction of the legal “person” called a corporation during the 1800s, conventional social scrutiny of the corporate “person” no longer applied, instead a view of corporations emerged that was detached from human interaction. A corporation serves its shareholders by serving its own self-interest; consequently, a corporate “person” feels no pressure from the people that corporations serves or affects. Personal interactions happen among officers and shareholders well-defined, limited manner – the self-interest of the corporation comes first. A corporate “person”, say, can exploit natural resources disproportionately and without much regard for depletion or degradation so long as the shareholders and officers are satisfied. A generation or two later, the corporate “person” may or may not be burdened with the costs of mineral depletion and water and air degradation, but individuals and our society and its lawmakers certainly will be. Later generations of individuals are faced with legislating or taxing away the problem, a process historically destined to poor results. These unfortunate consequences were not intended by the legal thinkers and legislators of 1800s; rather, the best reasons then, and today, for a corporation are continuity of existence and collective investment, and, of course limited liability – and there’s the catch. Nevertheless, unintended consequences abound. A corporation today with poor social enterprise motives will deposit its waste or environmental degradation in a community, then depart. The future population of that community must pay for the costs. In summary, poor social enterprise behavior today reallocates costs to later-in-time persons.
Let me briefly describe two macro phenomena:
1. Blending Business with the China Politburo
In China, a blending of corporate and social and government purposes serves as a different kind of rule of unintended consequences. Distant from the USA in geography, philosophy, politics and industry, China is a communist country becoming more capitalistic. The Chinese communist party has joint-ventured and financed deals with our biggest companies in aerospace, automobiles and electronics, such as Boeing, GM, and Apple. As Chinese companies sell more to USA customers, and as the Chinese government buys more US Treasury debt, and as China builds an increasingly larger industrial infrastructure, the Chinese people enjoy increasingly more appreciated values, both financially and philosophically – real marketplace values increase and the adherence to capitalistic values increases. But, as history has taught us, as investment values increase, natural resources are consumed more rapidly with the usual attendant consequences of depletion and environmental degradation. Contemporaneously, employment complaints increase due to displacement and wage disparity. In an unexpected turn (the rule of untended consequences at its best), the newly found freedom to complain and be heard grows. These are social/industrial trade-offs as communism and capitalism blend – more value but greater environmental degradation, and more freedom to complain about declining air and water standards and everything else.
2. Blending Business and the USA Government
The USA laws and regulations on industry used to favor laissez-faire economics and free-market models. When businesses went too far, whether by price gouging (during the 1980s when the Windfall Profit Tax was imposed on oil companies), or by extraction of vast amount of minerals and by leaving huge mill tailings to pollute water and air for many miles (Climax Mine and many others), citizens and conscientious corporations demanded, and got, legislation to stop the offenders. However, the trade-off is that more laws and more regulations may choke economic development. The USA free-market country is becoming more centrally regulated, for example, where trading better environmental standards is at the expense of profits – a social/industrial trade-off as capitalism and social enterprise blend. The unexpected consequence may be that the profit lost today will save the costs of environmental degradation later.
In summary, starting from opposite ends of the spectrum, the USA and China demonstrate that social + enterprise is already happening on the global scale.
At the local level, and at the micro economic level, small economic units, e.g., small business L3Cs, are taking root. Social enterprise, by any name or of any size, means enabling a citizen to work, travel, utilize energy, and consume food by conduct that indirectly helps the next citizen. Today, everyday consumption has more depletive consequences than productive ones – the L3C model may turn this around and grow social capital in a positive feedback loop.
L3C investment plus IRS’s Conduit Bonds plus charitable organizations’ Program Related Investments (“PRIs”) when mixed together are new tools for raising capital to create a new mindset for business and social enterprise.