Saturday, May 25, 2013

economics used to solve problems? yes please

All my life, I've always thought finance and business were these super boring things meant for super boring people only. The world of money and numbers wasn't meant for me; for I was a creative type,  and creative types can't muddy themselves with the cold-hearted world of finance.

But, because of National History Day, I learned about social entrepreneurship, which most people have probably heard of, but I didn't because I was lost in my whole writer-black-coffee-only-no-sugar fantasy. Social entrepreneurship is using business to create social change. It's not like nonprofits in the sense where you are actually trying to make a profit.

At first, the concept seemed weird to me. How can you make a difference in the world using business? But the more I learned about social entrepreneurship, the more it made sense.

The world seems to revolve around basically one thing: money. That thought was what repelled me from the business world in the first place. But the fact that the world revolves around money can actually be a good thing. It's possible to employ economics to make a difference. Words and ideas are great, but they're nothing without action, and action can be caused using money.

The reason why I researched social entrepreneurship is because my partner's and mine's NHD project is about a pioneering social entrepreneur, Martha Matilda Harper (our thesis isn't about her social entrepreneurship though). Without going into Martha's whole story, here is why she is important to social entrepreneurship: Martha created the business model of franchising, which is where one company, the franchise, sells the right to use its name and products to franchisees. The franchise makes it money by selling the right to use its name and by selling the products to the franchisees. The franchise model differs from a typical business expansion model in that not only does the franchise benefit, but the individual franchisees benefit, because they make money by selling the products the franchise sold them. Make sense?

Before she was an insanely successful haircare magnate, Martha was a dirt-poor indentured servant. She correctly believed that only by achieving economic independence she could free herself from servitude, without having to get married. Once it was time to expand her business, she invented the business model of franchising because she wanted other indentured servants to achieve economic independence and free themselves also (ironically, the word "franchise" comes from the French word, "to free from servitude"). She sold the rights to use her name and products only to other indentured servants. By providing servants means to make money, she freed them from an otherwise hopeless life stuck in domestic service.

In Martha's business, everybody was happy: everybody was making money and the company created social change. This is an example of how social entrepreneurship can be more effective than a nonprofit.

The more I think about it, the more I feel that most of the world's problems can be solved using commerce and economics. Disclaimer: I know nothing about economics. But what I do know is that money is a huge motivator for people. In Western Civ we learned about Adam Smith and how he said that money is a motivator for innovation. While I can think of a couple of examples of something else being a motivator for innovation (war, for one; but a lot of wars in history were caused by money), I agree with Smith. That's personally why I think a lot of communist countries founder. Isn't the fact that money is a motivator for innovation why China just decided that they're going to loosen the reigns on their economy to "unleash the creative energy of China," according to the NYTimes this morning?

If money is a motivator for people, and a reason why people start businesses in the first place, I think social entrepreneurship is a smarter approach to social change than nonprofits.
What do you guys think? Which is more effective, social entrepreneurship or nonprofits? Is money a good means to solve problems with?
Here is a super great TED video about Martha and franchising if you want to know more about her!