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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