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October 2000
Volume 18, Number 10

Social Entrepreneurship
William Anderson

Al Hunt of the Wall Street Journal is excited. The leftist columnist believes that he has found a wonderful "Third Way" example of using government to help poor people without the whole thing becoming yet another socialist giveaway. However, as with most government schemes that Hunt and his statist media colleagues like to tout, the latest example of "social entrepreneurship" is simply another fraud at worst and a misuse of resources at best. 

Even though they have left a trail of human wreckage, socialists are constantly reinventing themselves. Like the notorious terrorist Carlos the Jackal, who continually changed his appearance to avoid police detection, socialists try to gain new public approval by presenting new "ideas" that really are nothing more than old socialism in a new skin. 

For the last 20 years, they have touted "public-private partnerships" that supposedly combine the certain outcomes of government-based activities with skilled private sector management that eschews the waste produced by government bureaucrats. In other words, this "new breed" of entrepreneur gives us government programs without the stifling bureaucracy that follows them, with programs they say "really work." 

In a recent Wall Street Journal column, Hunt praised private, nonprofit organizations that seek to improve the lot of poor people, calling them "the wave of the future." Now, just because something is a "wave of the future" does not make it desirable. In the fall of 1939, one could see that war in Europe was also the "wave of the future," but few folks (except for the political classes) relished the prospect of worldwide death and destruction. 

According to Hunt, "courses in the subject (social entrepreneurship) are offered at leading business schools." He writes, "The social entrepreneurs are do-gooders who demand accountability and performance standards-and increasingly look for profitable spinoffs-creating a `blurring of the boun- daries,' says J. Gregory Dees, a Stanford Business School professor." 

It gets better, writes Hunt: "`Social entrepreneurship,' he [Dees] says, `combines the passion of a social mission with an image of businesslike discipline, innovation and determination.' Programs dominated by the government are too often bureaucratic and inefficient, say the social entrepreneurs, and markets, for all their attractiveness, have limits in valuing social goals." 

While all of this gives a picture of bright, young people efficiently running "programs" that really do lift poor people into a better state of life, in reality, this is yet another socialist hustle, and one that deserves not a penny of taxpayer dollars. I next explain how these programs work. 

A large number of nonprofit organizations are really private, tax-exempt corporations that exist off government money. For example, the American Lung Association collects charitable contributions from individuals, corporations, and foundations ostensibly to help fund research into cures for diseases of the lungs. In reality, however, the ALA uses private contributions to lobby the federal government for research grants for scientists (government-funded science) and even larger shares of money for itself. 

Not only does the ALA argue for politically-based scientific research, however, but it also lobbies the government to pass regulation after regulation. For example, the EPA-caused gas-price fiasco of this past summer had the ALA's fingerprints all over it, as that organization was one of the loudest voices in the passage of the fraudulent and costly Clean Air Act Amendments of 1990. 

In other words, the nice lady representing the ALA who took donations at your home or office really was doing nothing more than asking you to help fund an alliance between that organization and environmental groups seeking to drastically lower your standard of living. And you thought that all you were doing was helping cure lung diseases. 

While the ALA most likely can account for all its government funding, there are times when such organizations cross the boundary into what may be criminal fraud. Jesse Jackson's Operation PUSH (People United to Save Humanity) receives millions of dollars each year supposedly for programs to help teach inner-city minorities to read and write and to provide different kinds of care to poor people. Several years ago, however, government auditors found that PUSH's bookkeeping system was a shambles and the organization turned out to be little more than a financial black hole. 

However, because of Jackson's political connections and because PUSH is organized to help minorities, no one received any punishment and Jackson promised to do better. (Of course, PUSH's activities are hardly limited to charitable things. The organization constantly supports marches to protest this and that and was behind the mass protests last year when a number of black youths-some with criminal records-received suspensions from school for starting a huge brawl at a high-school football game.) 

This is not said to paint all "social entrepreneurs" with the Jesse Jackson brush. No doubt, there are many people in these organizations who care about the poor and seek to lift them to a better state. However, the very nature of such organizations guarantees that many of their activities will be wasteful and fraudulent. The problem is simply that they lack a true mechanism of economic calculation. Ludwig von Mises's analysis rings as true for these groups as with any federal bureaucracy. 

Let me present a simple example. Like Vanessa Kirsch, who Hunt lionizes in his column, I wish to teach poor people to read and write. Never mind that one important reason they are in this state in the first place is that they have been subjected to government schools that do little more than commit fraud on taxpayers and students alike. My first task is to find a place of operation, then look to hire volunteers or very low-paid workers. 

To be able to just open the doors of my new enterprise, I must raise funding, just like any profit-making business. The profit-earning firm must pay back the capital (with interest) and in a timely manner. The nonprofit firm, on the other hand, does not face the same accountability standards. Its managers need only to convince someone that the organization is doing good things and the individuals running it are not absconding with the money. 

Take a company like Hooked-On Phonics versus Kirsch's nonprofit firm, for example. The way that one can tell that the product helps people learn to read is that consumers purchase the product in large quantities and that the owners of the firm can earn a profit. If the product fails to do what it is supposed to do, however, within a short time the company is taking losses. It is as simple as that. 

This is not to say that nonprofit firms have no accountability standards. I am saying that there exists no consistent standard of success for these firms that is anything like the profit-and-loss test faced by for-profit companies. Kirsch can ask corporations and wealthy individuals for donations, and as the organization becomes larger, ask those companies (and the government) for more money. 

As for accountability, however, all she can do is to tell potential donors of the activities her goals and such. If companies wish to continue to contribute, that is their business, but one cannot say that this is any realistic kind of "business decision." It is nothing more than a choice of where to place charity dollars. 

What she cannot do, unfortunately, is tell of customer satisfaction, since she has no customers. All she can do is to tell how many people tutored by her organization passed a basic reading test, but they are not customers, since they do not pay for her services. (Welfare agencies prefer to call such people clients, but that, too, is a misleading term. In the real world, clients pay for services. These folks are simply welfare beneficiaries, period.) 

All of this is not to denigrate pensions of the welfare state, and often they are attempting to undo the damage already done to people by the government. 

Mises wrote sardonically that much government intervention into the economy is done to try to correct earlier problems caused by intervention. If these "social entrepreneurial" organizations pass any Mises test, it is this one. Unfortunately, they flunk the more important test of true social usefulness. 


William Anderson, an adjunct scholar and former Mises Institute scholarship student, teaches economics at North Greenville College (


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