Jonathan Witt on the Failure of ‘Social Business’
Religion & Liberty Online

Jonathan Witt on the Failure of ‘Social Business’

Jonathan Witt, research fellow at Acton, recently wrote a piece at The Federalist about “social business.” He argues that it might do more good to own and operate an ethical business that follows through on its contracts and “respects the dignity of employees and customers,” rather than trying to have a “social business.” Witt begins by talking about a cardboard bike. In 2012, Izhar Gafni became relatively famous by creating a sturdy cardboard bike that could be sold to the poorest around the world for $20. After two years and unsuccessful Indiegogo campaign, this potentially revolutionary project has failed to go anywhere. Witt argues that “social business” is to blame:

After talking up the virtues of a “social business model,” the start-up behind the bike, Cardboard Technologies, expended considerable energy trying to raising capital from Indiegogo donors uninterested in profit. The lack of a profit motive may have played a role. It also didn’t help that the price of the bike kept shifting—from $20 to $290 to $95 plus $40 shipping. Would-be investors had to wonder: Was the bike going to have a revolutionary everyman price, or wasn’t it?

CEO Nimrod Elmish tried to explain, saying the bicycle’s price will fluctuate depending on where you live, costing more for buyers in wealthy countries and nothing for those in developing countries. “We want to bring a social business model that will make [it] available to all,” Fortune quoted him as saying. “We don’t have a price tag, we have a value tag.”

Witt suggests that if they want to succeed with this bike project, Gazni and Elmish should “embrace some of the features of old-fashioned capitalism.” He even suggests that working with sweatshops might offer a solution:

The latter point may raise eyebrows—sweat shops, desirable?—but Leslie T. Chang has covered China for years for CNN, the Wall Street Journal, The New Yorker, and National Geographic, and she points to studies showing that rural Chinese who migrate to factory jobs in cities “are younger and better educated than the people who stay behind in the village, and that they choose to leave home as much to see the world and to develop new skills as to earn money.” According to one estimate she cites, the Chinese middle class will grow to more than half a billion in the next decade, “most of them former migrants who have done well in the cities and stayed.”

He concludes with this:

It’s time to retire the term “social business.” Better to speak of running an ethical business, where agreements are honored, and the freedom and dignity of employees and customers are respected.

The good news is that Gafni and Elmish apparently are moving in a more traditionally capitalist direction by courting for-profit investors. Moving forward, the pair would do well to avoid a series of “social business” pitfalls. These include lavish factory wages untethered from market prices or worker productivity; an allergy to big corporations and economies of scale; a refusal to pay the “obscene” salaries necessary to attract skilled corporate management; and a fixation on exporting charity but not jobs to the developing world.

If Cardboard Technologies can manage all that, then it just might be able to put the base of the economic pyramid on wheels, easing its way into the global middle class.

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