What does economic theory say of the social entrepreneur?
Earlier I wrote an article describing briefly what an entrepreneur is. In this article I want to widen the definition of entrepreneurship and dig a bit deeper into Mises’ notion of the entrepreneur. I would like to show that the social entrepreneur is not actually an entirely new beast and fits into how economists understand entrepreneurship. This is important and topical at present, as we explore policies to allow for social entrepreneurs to operate within the policy environment. Meaning, that we do not need to reinvent the wheel.
To Mises the entrepreneur is a function (one which everybody does at some point): “The term entrepreneur as used by catallactic theory means: acting man exclusively seen from the aspect of the uncertainty inherent in every action.” 1
This function has at its centre the idea of uncertainty, the entrepreneurial function directs the means of production in the present in order to serve (anticipated) future needs.
In Mises’ mind the person (or ideal type) entrepreneur is better called a “promoter”. “[Economics] also calls entrepreneurs those who are especially eager to profit from adjusting production to the expected changes in conditions, those who have more initiative, more venturesomeness, and a quicker eye than the crowd, the pushing and promoting pioneers of economic improvement.” 2
“The phenomenon of leadership is no less real on the market than in any other branch of human activities. The driving force of the market, the element tending toward unceasing innovation and improvement, is provided by the restlessness of the promoter and his eagerness to make profits as large as possible.”
Where the idea of a social entrepreneur versus a regular entrepreneur might be said to diverge is in the idea of profit. However, I think this comes from a mischaracterisation of profit.
Profit in the context of economics is not a reference to the purely financial definition of profit. It refers to the idea of psychic profit.
“Profit and loss can be expressed in definite amounts of money. [...] However, this is not a statement about this individual’s psychic profit or loss. It is a statement about a social phenomenon, about the individual’s contribution to the societal effort as it is appraised by the other members of society […] It merely reflects his fellow men’s evaluation of his contribution to social cooperation. This evaluation is ultimately determined by the efforts of every member of society to attain the highest possible psychic profit.”
Next, I want to deal with the apparent difference being in the idea of a mission beyond monetary profit.
A social entrepreneur is an entrepreneur who has a definite mission on top of making a monetary profit. Monetary profit is necessary for the business to be sustainable long term but is not the only objective.
However, I would argue that this idea of a mission is what we call an ultimate end. It’s something the entrepreneur is using the businesses (the means) to aim at. Since economics deals with means chosen and not ultimate ends there is no conflict and the social entrepreneur is a specific type of entrepreneur.
The mission may be to provide schoolkids with lunch, or to secure taonga, or any one of the awesome things social entrepreneurs do. Whatever it is, it forms part of the psychic profit of the entrepreneur-promoter. She or he will judge their success or failure based on both how much money profit they earn, as well as how well they achieve their mission. Clearly, the only method they have at their disposal to achieve this is economic calculation based on market prices.
What this implies, especially directed at policy, is that institutional settings that make business in general easier will also make social entrepreneurship easier. Arguably one of the most important of these is well defined and enforced private property rights (including Limited Liability Companies and other legal structures). This is a requirement for raising capital. Capitalists (as a function – the owners of savings and the factors of production) will not be willing or able to lend their savings to an entrepreneur if the legal structure is incompatible.
This has real implications for especially social entrepreneurs. Many social entrepreneurs cannot currently raise capital, for example they cannot float their businesses on the share market for lack of a well-defined legal structure. This could be a real barrier to expanding operations and growing social entrepreneurs.
1 Mises, Ludwig von. 1966. Human Action. 3rd ed. Chicago: Contemporary Books.