For the last seven years I have taught an IAP course at MIT on social entrepreneurship. The early years focused on my experience at One Laptop per Child (OLPC). OLPC started at MIT and was one of the largest social entrepreneurship ventures (SEV) at the time. In recent years I have focused the course more on scaling an SEV and use three different models to develop an understanding of the key concepts for scaling. This week I am at MIT.
Coincident with this year's course I have been reading the writings of Ludwig von Mises. Von Mises is considered by some to be the leading thinker in the Austrian School of economics. I prefer Hayek for the wide range of his writings, which arguably included complexity, information theory, behavioral economics, psychology, political theory and economics. Von Mises is however the better writer with a lucidity and logic that is both compelling and original.
One of the points von Mises makes clear is the importance of capitalism and markets in allocating capital. He wrote at a time in the 20th century when socialism and communism were being actively advocated for as better alternatives than capitalism. In class one of the students was advocating for government subsidies to support certain social initiatives. I asked why he thought the government was better at allocating this capital than the individual taxpayers. Silence followed, and then he said that a small group in Washington was better able than the public to make decisions about the future. I replied that small group decision making was the same model used by dictatorships. Deafening silence. In fairness to the student, everyone has problems with decision making about the future, but let's continue to explore von Mises point.
Suppose the government announces that they are raising taxes to subsidize a lunch program for students. Sounds good, research shows that children learn better when not hungry. However, this tax revenue will now prevent the next Google from raising its first round of venture capital because certain people will not have the capital to invest. Setting aside the question of financial return, what if the next Google cures cancer! Now it may not be so obvious that we should let the government use our money to subsidize school lunches.
The point of this post is that when you look at government investment and social projects one should always consider the allocation of capital. Such an approach probably reduces the role of government and raises the bar for social projects, which I assume here will nearly all be social entrepreneurship. The bar is raised because now the social project needs to focus equally on impact and capital efficiency. One could argue that such an approach prevents certain worthwhile projects from being funded. Perhaps, but there are so many good social projects now, why not pick one that is capital efficient. It is not for me to decide whether clean drinking water or childhood education is more important, so I have no concern picking the capital efficient one amongst the two. When both projects are capital efficient I am willing to consider other factors. This paper from SSIR, Across the returns continum, offers a logic for such trade offs from Omidyar Network. If the project were a platform to facilitate additional social projects, that would probably be a deciding factor for me.
Personally I find nothing inconsistent with combining the thinking of the Austrian School of economics with social entrepreneurship. I think it brings an added discipline to the practice of social entrepreneurship. In the end the Austrians always come back to the concept of individual empowerment, whether it be in economic development or capital allocation. I am always very comfortable looking at social entrepreneurship through the lenses of individual empowerment.
20+ previous articles on social entrepreneurship are here.