Social Entrepreneurship and Central Planning

I’ve been working lately on a side project, the Open Project Initiative (check it out and I’d love any comments you have!), which I guess I my first real foray into the field of ‘social entrepreneurship’. It’s had me reflecting on this idea.

A while back I read that was talking about how pricing in a market economy is critical to its success, particularly over a ‘planned’ economy (see footnote 1). The basic idea I took away was that it’s impossible for anyone to know everything, or even CLOSE to everything. Therefore, when you have a system in which individuals are trying to plan in a complex environment (as when a central planner must make decisions on things like production without any feedback mechanisms) they end up making bad decisions – they just don’t (can’t) know enough. When you have prices, however, people don’t NEED to know everything – they only need to know the things that affect their specific context, as indicated by prices, to make good decisions (see footnote 2).

The key thing I want to pull out there is the idea that no one can know everything about the whole ‘system’ – but they can know enough about their specific context to make good decisions. It seems that development partners, and often government itself, is trying to play the role of a central planner in their interventions. They’ll develop an intervention, with a lovely log-frame, and tons of rational thought put into it, and roll this intervention out across the board! All too often, this ends up failing, and so they go back to the drawing boards – what possibly went wrong with their logical model?

The social entrepreneur, however, identifies a clever solution to  a problem in a specific context, and seeks to build that solution into something ‘system-changing’. This is the very idea of social entrepreneurship, and it never assumes perfect knowledge of a system – it doesn’t need to! My guess is that most social entrepreneurs have an idea and run with it, have it fail 10 ways, then finally find a way to make it work. Once it’s working, and often when it’s time to ‘scale’ it, they sit down and try to rigorously identify the ‘magic’. The learning is all around discovering everything within the specific context and around the implementation, rather than trying to understand everything. I feel like the ‘rise’ of social entrepreneurship is the development sector finally moving away from the dream that they can ever do well as ‘central planners’.

One of the hot topics in development is the idea of ‘failure’ – Owen Barder blogs about it here, and there is Admitting Failure specifically to help development partners share their failures. For me this is a great step forward – just as in the market economy, development should expect a lot of failures between the big ‘system changing’ ideas. Failure is a great way to learn about your context, so you can try things again. Let’s abandon the idea of developing ‘perfect solutions’ and instead focus on fostering things that work – and letting the evolution, the creative destruction, of our ideas take place, so we get to things that actually work.

1. I read a while back a book called ‘Marx’s Revenge’ (a super interesting and not at all communist sort of ‘history of economics’) and it introduced me to the idea of ‘information economics’. An economist named Hayek published a paper called “The Use of Knowledge in Society”. An excerpt from Wikipedia: “He asserts that a centrally planned market could never match the efficiency of the open market because any individual knows only a small fraction of all which is known collectively.” Pricing becomes a fantastic way of communicating information through the complex system, that doesn’t require anyone to hold all information.

2. For example, take the classic example of a boot factory: A ‘central planner’ needs to be able to estimate the number of people needing boots that year, how much cloth they’ll need to buy for that, how efficient the factory will, what population growth is, what will be in style…. You see where this is going. Meanwhile, the entrepreneur needs to know how much inputs cost and how much he can sell his boots for, and always have one single thing in mind – profits! (Maybe not the clearest example but I hope it helps small!)

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4 Responses to Social Entrepreneurship and Central Planning

  1. Belinda says:

    I found this interesting considering that I just spent several months working on a project in Vancouver on how the regional district can intervene with the recycling market to improve it because the open market is just not working. Is there a place for “planners” in social entrepreneurship? What do you think would be their role?

  2. Tom Curran says:

    I think a distinction is worth making between the most efficient or desirable short term outcome for the economy and the most desirable long-term outcome for society as a whole. In the case of environmental issues, what is better may not be what is most profitable, which is the main driver for companies and many individuals, as Dan points out in his second footnote. In these cases, I feel that a compination of regulations and innovation is needed to account for “externalities” and show the long term costs – and opportunities – in your short term planning.

    OPI seems like a cool opportunity to give some of the local actors the information they need to make the best decisions. How has the initiative progressed since conference?

  3. David Lalanne says:

    The idea that social entrepreneurs succeed mainly by learning from their failures is really interesting and it should be true for everybody that deals with complex problems involving human beings. It still think however that planning is essential for any project driven by a social entrepreneur because it allows you to know where you want to go, to know your hypothesis and to be aware of possible failures so you can see them earlier in the process. The key is that your planning has to evolve at the same time as your project. It has to be constantly changing in order to adapt to new information coming in.

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