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Principles of Market Economy for Beginner Social Entrepreneurs

Rasa Pušinaitė-Gelgotė, Vilnius University

Profit maximization is the goal of any private company in a market economy. Social enterprises also operate in the market economy as private companies. But the main difference is that social enterprises have different goals, i.e., social and economic. The goals must be harmonized: economic profit is necessary for social profit or value maximization. Because social enterprises compete in the same markets for resources and consumers, they must follow the same rules as other firms.

How markets work is explained by the market equilibrium concept. A market is in equilibrium when demand and supply curves intersect.

Demand is the consumer’s desire to purchase goods and services and willingness to pay a price for a specific good or service. Demand can help to explain consumer’s behavior in the market: how and why a consumer decides what to buy. Demand is determined by price, income and wealth of consumers, prices of related goods, advertising and many other factors such as taste and preferences of an individual consumer (Praveen et al., 2011). The theory of consumer behavior rests on the assumption that a consumer chooses among different “commodities” with the goal of maximizing utility (Hughes, 2006).

The behavior of sellers (firms) is explained by supply. Supply is a firm’s position in the market: willingness to produce and possibility to sell goods and services at market price.

The market equilibrium concept in economics explains the price of the good or services. At the market equilibrium price, the quantity of the good that buyers are willing and able to buy exactly balances the quantity that sellers are willing and able to sell (Mankiw and Taylor, 2006). The actions of buyers and/or sellers make changes in demand and supply, which influences the price. Prices of goods and services determine allocation of resources in the market. The amount of the goods supply in the market depends on the main indicators of the firm that determine the decisions of the firm: profit, revenue, and cost. Focusing on the supply side of the market, the theory of the firm assumes, the goal of the entrepreneur is to maximize profit (Hughes, 2006). Profit is the difference between total revenue and total cost. Total revenue is calculated by multiplying quantity by market price. Total cost (or cost function) summarizes information about the production process and is divided into two types: fixed costs and variable costs. Fixed costs are costs that do not vary with output. Fixed costs include the costs of fixed inputs used in production. Variable costs are costs that change when output is changed. Variable costs include the costs of inputs that vary with output. Since all costs fall into one or the other category, the sum of fixed and variable costs is the firm’s short-run cost function.

Profit maximization and cost minimization are the main goals of all competitive firms. In addition to cost minimization, the profit-maximizing firm must also determine the optimal quantity to produce (Hughes, 2006). The most important questions to answer are as follows:

How much does it cost to make a single item of goods? (the question relates to average total cost; a company should tell the costs of the typical unit)

How much does it cost to increase production of one item? (the question relates to the marginal cost; it shows the amount that the total cost rises when the firm increases production by 1 unit of output)

Company profit maximization decisions lead to a supply curve. Because the firm’s marginal cost curve determines the quantity of the good the firm is willing to supply at any price, it constitutes the firm’s supply curve.

These economic indicators help entrepreneurs to make decisions in the market about pricing, output, and use of scarce resources.

References

1. Hughes, P. (2006). The Economics of Nonprofit Organizations. Available at: https://onlinelibrary.wiley.com/doi/pdf/10.1002/nml.1 19

2. Mankiw, N. G., Taylor, M. P. (2006). Microeconomics. London: Thomson.

3. Praveen, M.V., Vineesh, A.K., Venugopalan, K. (2011). Managerial Economics. Study material. Calicut University.

Social Entrepreneurship and Care Ethics

Raminta Pučėtaitė, Vilnius University

Social entrepreneurs are considered different from traditional entrepreneurs (Andre and Pache, 2016). The practice of social enterprises highlights the importance of these entrepreneurs’ moral emotions such as empathy and compassion as motives in identifying niches in the market and developing products/services which respond to their customers’ pain. Empathy is combined from a number of psychological capacities, mostly relational, which “are thought of as being central for constituting humans as social creatures allowing us to know what other people are thinking and feeling, to emotionally engage with them, to share their thoughts and feelings, and to care for their well-being” (Stueber, 2019). Although empathy is highlighted in the social entrepreneurship literature, it should be noted, however, that it is not a new topic in traditional business either which has been applying participative techniques known as design thinking for innovation development (Hamington, 2019).

As a concept in moral philosophy, it is closely related with the ethics of care, which is also considered a relational moral theory. Care ethics developed as a theory in the early 1980s as Carol Gilligan’s response to Lawrence Kohlberg’s theory of moral development which held the principle of absolute justice as the characteristic of highest moral development. In her book In a Different Voice (1982) Gilligan argued that Kohlberg’s focus on young males’ moral reasoning in decision making is not sufficient to generalize on an individual’s moral development. She claimed that both men and women voice care and concern about others, which cannot be considered as hierarchically lower (immature) than the justice motive for decision making. Rather, it is an alternative and legitimate criterion to justice as relations are fundamental to humans as social beings.

The aspect of care was further elaborated by Nel Noddings, who distinguished between caring for and caring about (see Andre and Pache (2016) who explain how these differences are applied in social enterprise development). Caring for refers “to actual hands-on application of caring services”, and caring about “to a state of being whereby one nurtures caring ideas or intentions” (Sander-Staudt, 2019). Hence, caring is contextual, responsive to particular needs of definite others. Therefore, it is relevant to social enterprises as they are social mission, social change and social impact oriented. Yet, traditional business has also received much criticism, in particular, in the context of economic crises as incapable of caring and, consequently, of being sustainable.

In sum, care ethics highlights the following aspects:

Humans exist in a social system that rests on interpersonal relations and forms their personality and self-perception. Therefore, they have to nurture (invest in) valuable relationships with definite people.

People have to care for those with whom they are interconnected in a network of interrelations and who depend on their caring. This does not mean that care is paternalistic (although care and empathy may grow into favoritism in practice – this aspect should not be neglected!) and makes someone less efficacious, self-dependent etc. Proper caring develops the others as personalities with their authenticity and identity by responding to their needs, values, expectations and well-being. In other words, care ethics and empathy, if properly practiced, help the other to grow.

Finally, in practice, care ethics and justice do not contradict each other. Caring entrepreneurs, managers, and enterprises build their practices on both of these principles, i.e., considering particular needs of particular employees’ groups (e.g., in diversity management) and still remaining systematically just with them. Also, teamworking would not be possible if team members were concerned just with following procedural rules and having no interpersonal contact with each other. Customer relationships are also built on care ethics and justice as they are meant to empathetically offer products or services which respond to legitimate needs (e.g., reasoned complaints) of their customers. Just offering uniform solutions would not suffice to stay competitive and sustainable.

References

1. Andre, K., Pache, A. C. (2016). From caring entrepreneur to caring enterprise: Addressing the ethical challenges of scaling up social enterprises. Journal of Business Ethics, 133: 659 – 675.

2. Gilligan, C. (1982). In a Different Voice: Psychological Theory and Women's Development. Harvard University Press.

3. Hamington, M. (2019). Integrating care ethics and design thinking. Journal of Business Ethics, 155: 91 – 103.

4. Sander-Staudt, M. Care ethics. In The Internet Encyclopedia of Philosophy. Available at: https://www.iep.utm.edu/care-eth/. Accessed on 01-12-2019.

5. Stueber, K. Empathy. In Zalta, E. N. (Ed.) The Stanford Encyclopedia of Philosophy (Fall 2019 Edition). Available at: https://plato.stanford.edu/archives/fall2019/entries/ empathy. Accessed on 28-01-2020.

Social Impact

Raminta Pučėtaitė, Vilnius University Rasa Pušinaitė-Gelgotė, Vilnius University ultimate changes that a social enterpreneur wants to Aurelija Novelskaitė, Vilnius University achieve (e.g. increased self-respect or capacities of the programme participants). Impact is understood as part of the outcome that would have evolved anyway without the intervention from a social enterprise. Goal The crucial distinction of social enterprise from traditional business or even socially responsible companies lies in its social mission and social impact. alignment requires a social enterprise to review its activities and the extent to which desired changes have been achieved. As argued by Maas and Grieco (2017), if a social A frequent case in the practice of reporting social enterprise does not measure and monitor its impact, impact is that social enterprises list outputs (Molecke it is just a charlatan using a buzzword. Measuring and Pinkse, 2017). However, the most challenging part social impact is needed to improve organizational of applying the impact value chain in practice is activities and reach the strategic goals on the one distinguishing outcomes from impact. The difference hand and to ensure transparency and accountability between impact and outcomes is that impact to social investors on the other hand (ibid.). However, assessment requires to evaluate only the effects that the diverse nature of social enterprises creates were created by a certain social enterprise, challenges to developing social impact measurement disregarding what would have happened anyway as a (SIM) frameworks. For example, Maas and Liket (2011) result of social interactions. distinguish 30 methods of SIM ranging from a broad(er) focus such as Millennium Development Goal Scan or Participatory Impact Assessment to a more References specific focus such as Volunteering Impact Assessment Toolkit or Social Cost-Benefit Analysis. 1. Clark, C., Rosenzweig, W., Long, D., Olsen, S. Yet, in some countries where social entrepreneurship (2004). Double bottom line project report: Assessing is not developed and social enterprises are still social impact in double bottom line ventures. searching for their business models SIM is not even Rockefeller Foundation. Available at: attempted, as these enterprises have neither the https://bit.ly/2GtUu7V. Accessed on 10-04-2020. human nor financial resources to accomplish it. Therefore, it is important that social enterprises 2. Maas, K., Grieco, C. (2017). Distinguishing game define their social mission which they later could changers from boastful charlatans: Which social measure with an assessment tool that fits their design enterprises measure their impact? Journal of Social and capabilities. Entrepreneurship, 8(1): 110–128.

A point of departure for nascent social enterprises could be Clark et al.’s (2004) social impact value chain that explains how social value is created (see Figure 1)

According to Clark et al. (2004), resources encompass everything that social enterprises use for their primary organizations can measure themselves (e.g. the number of a literacy programme graduates, reduced high school drop-out rate etc.). Outcomes are the 3. Maas, K., Liket, K. (2011). Social Impact Measurement: Classification of Methods. In Burritt R.; Schaltegger S. et al. (Eds.) Environmental Management Accounting and Supply Chain

activities. They define output as a result that Management. Eco-Efficiency in Industry and Science. Springer, Dordrecht, pp. 171–202.

4. Molecke, G., Pinkse, J. (2017). Accountability for social impact: A bricolage perspective on impact measurement in social enterprises. Journal of Business Venturing, 32: 550–568.

Resources Activities

Outputs

results that can be measured Outcomes

changes to social systems what would have happened anyway =

Impact Goal alignment