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“The Social Responsibility of Business is to Increase its Profits”

December 5, 2011

Milton Friedman’s article of the same name outlines some interesting arguments in opposition of “socially responsible” businesses. Whether Friedman would include social enterprises in his criticism, seems debatable. While he challenges the ability of a business to make profit when it is syphoning some of its earnings into societal goals as well as the ability of an executive who orders this distribution of funds (as opposed to satisfying the desires of the stake holders) to maintain his position, he appears to make exceptions for businesses in which the stake holders have alternative goals to profit. For example, schools and hospitals have goals alternative to profit.

Perhaps the clearest of criticisms, though, comes from Adam Smith:
“Every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.”

Still, TROSA’s continuous growth and celebrated success suggest social entrepreneurship can at least overcome any shortcomings potential opponents may propose.

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Food Deserts and TROSA Grocery

November 29, 2011

America’s usually pretty good about providing what people want and need. Even though our economy seems to have taken a dive from the top of the Grand Canyon down into the Colorado River, it’s still among the most robust economies the world has ever seen. But before we pat ourselves on the back, our system has its flaws, and not just the kind that caused this recession in the first place. One of these problems, unbelievably, is access to nutritious food. According to Feeding America, 18.2% of North Carolinians, including 27.3% of North Carolinian children, are “food insecure”–that is, they hold a “lack of access, at times, to enough food for an active, healthy lifestyle for all household members and limited or uncertain availability of nutritionally adequate foods.”

The problem can be a lack of money, or a need to decide between paying food costs and paying other bills (such as medical fees). It can also be a lack of access to food. There are some places where nutritious food is less accessible and more expensive than unhealthy food. One such area–which are often referred to as “food deserts”–was the neighborhood around the corner of Angier Avenue and Driver Street in Durham. The nearest grocery store was almost two miles away, making it effectively inaccessible to those who didn’t have a car. It should be noted that most residents of this neighborhood rely on either public transportation or their own two feet to get around. This was the situation in the neighborhood around Angier and Driver for over 50 years.

Enter TROSA Grocery. Opening in the spring of 2010, it exists where other grocery stores have been unable or unwilling to do so, due to high crime or weak demand. The only reason it could get off the ground was because it was funded and run by people who were relatively unconcerned with the money. Because it is less concerned with profit as it is with providing a social benefit, TROSA can step in to get done what a normal business is unwilling (or unable) to do because of the slim profit margins. Indeed, even TROSA sees relatively slim profit margins, relying on donations to cover a (small) portion of its operating costs where its businesses fall short. However, its model has worked to this day, helping to fund TROSA’s program while providing fresh food to residents of the neighborhood by Angier Avenue and Driver Street.

Justice, Mercy, and Utility in Rehabilitation

November 3, 2011

TROSA is not entirely self-sufficient, as we have discussed. Every drug rehabilitation program costs resources that might otherwise be spent on citizens who require no second chances. Individuals’ personal thoughts and feelings on drug rehabilitation programs are likely to invoke values of either mercy or of justice (as it is synonymous to retribution and contrasted with mercy). Here I’ll explore the basis for each of these claims. Ultimately, though, at the governmental level, broader normative claims supporting or opposing drug rehabilitation programs appear to be based most on more utilitarian examinations of the states of affairs.

Justice

In the sense in which it will be discussed here, the term justice is synonymous with retribution (“He had it coming. Justice has been served.”). Certainly, substance abusers have almost always made a significant mistake (or series of mistakes) in order to reach such a status. Some would argue that to “treat” these people using the tax dollars of citizens who have remained disciplined in abstaining from such indulgences would be wrong, that to live with the consequences of their mistake(s) reasonably follows as a matter of justice.

Mercy

On the other hand, many religions (most notably Christianity) endorse values similar to mercy or forgiveness. Subscribers to these systems of beliefs would be more willing to commit their personal resources to benefit the lives of those who have succumbed to substance abuse. In response to opponents of state-funded drug rehabilitation programs, these people may argue that everyone makes mistakes, and might even suggest that everyone has a right to amend such errors and compensate for past mistakes.

Utility

While both of the above claims operate within each of us to some degree, political discourse tends to separate itself from values and focus on states of affairs. However, an inquiry into this application of utilitarian thinking finds that it, as well, invokes aspects of the above ideologies.

The Justice Policy Institute at JusticePolicy.org published a report in 2004 which contrasted the treatment and incarceration of substance abusers. “Treatment or Incarceration?” demonstrates more utilitarian decision-making when discussing how to deal with substance abusers, examining the costs and benefits of various options. I’ll follow-up by reiterating some of the central points of the report, and relate the findings back to TROSA.

The report assumes that removing substance abusers from our communities is an important goal and has inherent benefits (even if those benefits are in preventing harms). The dispute asks whether temporarily relocating these people to detention facilities is more or less effective at achieving this and other relevant goals (including minimizing cost) than attempting to rehabilitate some of the abusers.

In 208, the New York Times reported that, nationally, it cost an average of $23,876 to incarcerate a person for one year; although, the article points out that that number varies significantly between states. As an example, DurhamCares.org reported that it costs TROSA $62.22 to support one person each day, which amounts to $22,710 per person per year.

This number has more significance beyond its being lesser than the cost to hold someone in prison. This cost may also be seen as an investment. If TROSA can spend $22,710 for four years, knowing only about 17% will relapse, and none will be re-incarcerated, the state will not have to spend the additional funds needed for many people in the prison system who never effectively rehabilitated and thus found their way back into prison.

Furthermore, because TROSA is funding about 90% of its operations (we’ll estimate), the government is only paying around $2,271 per year ($9,084 total) to rehabilitate a substance abuser and significantly decrease the chances he or she will find trouble with substances again. Notably, The Justice Policy Institute also concluded that rehabilitated abusers are significantly less likely than normally incarcerated abusers to find further legal trouble, which would, of course, amount to further costs.

Can TROSA Moving Compete?

November 2, 2011

In an earlier post, my partner, Mike, raised the question about whether or not TROSA is able to compete in its businesses’ markets. The true answer is that it isn’t a yes-or-no question. It’s a yes-and-no question.

It all depends on how you look at it. The businesses themselves are profitable—after all, that’s how TROSA gets most of its funds. But that doesn’t mean that TROSA itself is profitable. The businesses make a lot of money, but TROSA has to rely on close to $1 million in donations in order to stay afloat. Based on these figures, it would cost more than $10.6 million per year to house, feed, provide services to, and educate TROSA’s 400 residents.

Whether or not TROSA’s businesses can charge more for their services is also a factor to consider. Our preliminary research indicates that the rate for an intracity TROSA move in Durham, with the minimum of two men and a truck, is $100 per hour. However, for a move of more than 35 miles outside Durham, the rate is “based on the maximum rate tariff supplied by the NC Utilities Commission,” which is determined by the weight of the goods moved and the distance traveled. The exact figures can be determined from pages 47-48 of this document–though they stress that the mover and customer can negotiate a lower price. This means that, at least for their moving business, the price can’t increase by much more.

As to the other businesses? Well, there’s a reason TROSA needs $1 million a year in donations. Consider this an issue to be continued.

“A Great Durham Success Story”

November 1, 2011

DurhamCares.org posted a report on TROSA this past summer, praising the organization as a “great Durham success story.” The full site can be accessed through the link at the end of the page, but here I’ll just reiterate TROSA’s top three achievements:

As of June 30, 2011:

83% of graduates have not relapsed after completing TROSA.

100% of graduates do not have criminal convictions after completing TROSA.

The current average cost per day is $62.22. (DurhamCares.org)

Can TROSA compete?

October 25, 2011

In the previous post, we discussed the difference between Marginal Private Benefit and Marginal Social Benefit, and related the concept of the externality to social enterprises attempting to cover the costs they incur while producing public goods.

Let’s finally try to briefly relate this to one of TROSA’s businesses. TROSA’s businesses differ from the hypothetical social enterprise discussed above because the goods/services produced by, say, TROSA’s moving service include goods one may obtain from a typical business. We could also say, though, that TROSA’s moving service produces moving services as well as the social good of rehabilitating former substance abusers. The problem with producing these goods, though, is best seen in a comparison with a typical moving service. A generic moving service incurs the costs of paying its workers, among other things, and receives revenue from selling moving services. TROSA (assuming the quality of the service is the same, which it likely is not) receives the same revenue from producing the (hypothetically) equal service, but the costs it incurs rehabilitating its workers may be significantly higher than the cost incurred by the generic company paying wages. Thus TROSA is at a disadvantage to such companies.

Where does this model break down, though? If TROSA can provide a more desirable service than its competition, it can demand the higher price that’s necessary to cover costs. Perhaps individuals will also feel better about purchasing services from a company that they know will use revenue to do good (or, at least, to do more than a typical corporation might), in this case to rehabilitate substance abusers. Thus, in purchasing TROSA’s services over any other moving company’s, the individual (potentially) receives the typical or superior benefit of its moving services plus a feeling that they are improving their community and/or the lives of others. That being said, similar feelings can also work against the organization. Individuals may find less benefit in former substance abusers and criminals handling their furniture than they would in normally employed people performing these same tasks (not considering the very real possibility that even the normally employed movers may still be substance abusers or criminals). This may decrease the perceived value of TROSA’s services.

Finally, to answer the question proposed in this post’s title: The Carnegie Mellon Heinz College’s Chronicle of Social Enterprise presented a brief case study on TROSA. It identified TROSA as the “largest independent moving company” in the Durham-Raleigh-Chapel Hill area, suggesting that it has had no trouble competing. It reported that, in order to dispel negative conceptions about its workforce, TROSA employees must constantly uphold a “work ethic and mentality that emphasizes professionalism.” It would seem TROSA has at least discovered a creative solution to this particular problem. But is TROSA entirely self-sufficient? If not, is it just that it can control such a large portion of this market? We’ll attempt to address these questions in upcoming posts.

A Social (Entrepreneurship) Dilemma

October 25, 2011

Partnerships.org.au begins to discuss an important problem for social enterprises. The article explains: markets “work reasonably well as a test of private value creation, especially for those who are willing and able to pay” but “do not do a good job of valuing social improvements, public goods and harms, and benefits for people who cannot afford to pay.”

This may best be demonstrated with a quick economics lesson and the graph below.

Let’s say the above graph represents a cost-benefit analysis for a public good, say, the clean-up of a polluted waterway. A move along the x-axis represents more or fewer “units” of clean-up, while points on the y-axis represent “units” of price or value. Because the lines represent Marginal costs and benefits, the cost of cleaning up is initially low, maybe the first units of pollution are floating on the top and are easiest to access. The marginal cost of cleaning up increases as more units are cleaned because the pollution becomes harder to access or find. Likewise, the marginal benefit of cleaning up the first units of pollution is much higher than the marginal benefit of cleaning up the last few units. Maybe the first units of pollution are just unsightly, or are most dangerous. Subsequent units of pollution may be less necessary to clean, because pollution in small quantities poses less of a health risk and may be acceptable or even normal. The most efficient amount of clean-up, then, is demonstrated by the point at which the marginal cost of a certain quantity of clean-up matches the marginal benefit afforded by that quantity (the point MC=MB). Based on the position of this point, one can deduce the proper quantity and the price per unit of that quantity, respective points on the x- and y-axes.

Now let’s complicate the graph slightly.

The above graph still represents marginal costs and benefits, but now we distinguish between “Marginal Public Benefit,” “Marginal Social Benefit,” and “Marginal Social Cost.” Following with the above example, this graph represents that in many cases, including ours, the benefit of an action to society may be greater than its benefit to a specific individual or group of individuals. In general, individuals will perceive less benefit from the cleaning-up of the waterway, but society in general will certainly benefit from the cleaning-up of the waterway. Maybe pollution in the waterway was killing populations of fish caught for food, and continued pollution would harm the local fishing economy. Individuals may only think cleaning-up the waterway gives them a place to swim and a lovelier sight, not being able to calculate the impacts of a potentially damaged economy on their lives. This difference between marginal social costs/benefits and marginal private costs/benefits is called an externality. The result of externalities are conflicting points of equilibrium: here, a different conclusion as to the most efficient amount of clean-up (MC=MPB vs MC=MSB).

Economic models typically assume individuals are acting in their own self-interest. Individuals see only how policies directly benefit them, mostly because they are not immediately able to calculate the complex implications of actions. Thus, most basic models would direct us towards the quantity “Q” of clean-up in the above graph, even though the optimal quantity for society would be “Q opt.”

Situations that involve negative externalities can be described as Social Dilemmas. Pollution is a good example of a social dilemma because usually the cost of polluting is relative low to an individual or corporation, but that pollution affects others around it. While the corporation will make decisions based on its personal costs and benefits, usually the cost or benefit to society will be ignored. i.e. the corporation pollutes with general disregard for its negative impacts on society.

This question of individuals’ self-interest defines the dilemma stated at the beginning of this post. As individuals attribute value to marginal units based on their perceptions of benefit to themselves, they act based on those perceptions, rather than the reality of the benefit (or lack thereof) to society as a whole (“It is inherently difficult to measure social value creation.”). Social enterprises must appeal to individual consumers, even though they are trying to achieve a different equilibrium (MC=MSB) than a group of individual consumers (MC=MPB).

“Many social-purpose organizations charge fees for some of their services. They also compete for donations, volunteers, and other kinds of support. But the discipline of these ‘markets’ is frequently not closely aligned with the social entrepreneur’s mission. It depends on who is paying the fees or providing the resources, what their motivations are, and how well they can assess the social value created by the venture…Even when improvements can be measured and attributed to a given intervention, social entrepreneurs often cannot capture the value they have created in an economic form to pay for the resources they use…To offset this value-capture problem, social entrepreneurs rely on subsidies, donations, and volunteers, but this further muddies the waters of market discipline” (Partnerships.org.au).

In short, social enterprises operate within markets – using markets to more effectively accomplish their goals – but these organizations, by definition oriented towards benefitting society, are thus frequently unfit to compete within these markets where self-interest rules.

This may mean that consumers demand the goods and services of a social enterprise at  the price “P,” even though the social enterprise most likely needs to sell such goods at the price “P opt” in order to cover the costs it incurs. It also suggests that the social enterprise is producing (or wants to produce) more of the good “Q opt” than is demanded by consumers “Q.” It should be noted that this model applies best to organizations that directly produce a public good, such as an environmental group that protects endangered species. One can see, then, that it is difficult for an individual to estimate how much benefit will be created by his donation that may save “n” number of bald eagles, and the specific private benefit of such an action is equally elusive.

Partnerships.org.au concludes, then, that often only weak correlations exist between a social enterprise’s ability to attract donations and profits, and the amount of “good” it creates. The most successful social enterprises may simply be those that more closely resemble businesses and/or provide social benefits as more of an afterthought. Or, perhaps some of the most successful social enterprises are those that best utilize advertising and other competitive techniques. And how competitive ought social enterprises to be, especially if their competition consists of other social enterprises?

The site also conclude that the failure of individuals to align social benefit with their own private benefit creates a gap in revenue for many social enterprises. This gap is usually filled by government grants or philanthropy, explaining why most social enterprises cannot be self-sufficient. Although, the most successful social enterprises find creative ways around this problem.