Research

Historically, the majority of my research and knowledge has been in social entrepreneurship. My undergraduate honors thesis was my first attempt at trying to provide academic legitimacy to the idea that all businesses should not be required to maximize profit. But recent events have caused me to reconsider whether the issue of profit maximization is as important as making markets more efficient. Although I still strongly believe we need an alternative theory of the firm that allows businesses to deviate from the profit maximization paradigm, the corporate governance challenges illustrated by more recent events suggest that when it comes to decisions that impact the position of the least well off, research in corporate governance and efficient markets may have more of an impact on the financial position of the least well off than a reexamination of the profit maximization paradigm.

While I would love to research governance and economic issues in more depth, most of my current research focuses on the role of philanthropy and social enterprise. Here are the current research projects I am working on:

Supporting NPOs and FPOs – But Which One and When?

Foundations have the opportunity to support both nonprofit organizations and for-profit organizations, but there hasn’t really been a conceptual framework to guide decisionmaking. Should foundations support nonprofit organizations with grants, for-profit organizations with equity investments, or unconventional organizations with unconventional financing needs? Understanding theories of change and the institutional role of nonprofits, for-profits, and government organizations will be critically important in answering this question. In addition to academic sources like The Nonprofit Sector Handbook and key experts like Jed Emerson, I think the blogosphere will be an especially useful resource.

The Case Against Profit Maximization

Adam Smith and Milton Friedman, who are often invoked to help defend the profit maximization paradigm, did not actually believe that businesses were amoral. Rather, both believed that businesses were moral institutions BECAUSE of their profit maximization nature. Indeed, Kenneth Arrow and Gerard Debreu would later win the Nobel Prize for creating a mathematical proof (see “general equilibrium analysis“) that illustrated why firms led by an invisible hand would maximize social utility.

While many have critiqued the profit maximization paradigm, it is readily apparent that the way business and finance continues to be taught and practiced reflects the prevailing dominance of profit. Creating a mathematical counter proof to the Arrow-Debreu theorem, supported by rhetorical intuition and anecdotal evidence, is in my opinion, the critical condition that needs to be met in order to shift the behavioral paradigm of business away from the singular and unwavering focus on profit.

Defining the Social Enterprise

The social enterprise movement is struggling with how to define itself against the backdrop of traditional capitalism and how it should be moving forward to advance the field. Sometimes social enterprises exist within the traditional profit maximization paradigm, like eco products that are considered more safe (Method), organic products that are considered healthier (Whole Foods), and products that combine traditional products with charity (Product RED). Others like the Grameen Bank purport to be outside the profit maximization paradigm, but generate profit as a means of ensuring long-term sustainability. Still others are commercial nonprofits – nonprofits with earned income who often provide a traditional good or service, like Rubicon Bakery (baked goods), Juma Ventures (coffee shops), and BAYCAT (multimedia). Often times, these commercial nonprofits receive subsidies from the government or philanthropy because they employ individuals from disadvantaged backgrounds.

There are many overlapping definitions of social enterprise (see pp. 80-86 of my thesis), with a consensus yet to emerge on a shared definition. As a recent SSIR article points out, efforts to redefine social enterprise “have had little influence on the composition of affinity groups and funder choices,” suggesting that efforts to come together around a single definition may not be possible.

Nonetheless, I’ve been working on an article that articulates the basic theory behind profit maximization (i.e. condensing price theory and general equilibrium analysis in to a few short paragraphs) and explains the different aspects of the social enterprise movement within that framework. Some businesses are finding better ways to generate positive externalities under the profit maximization paradigm, either by finding more efficient ways to do business (Walmart) or redistributing profits through institutionalized philanthropy (Give Something Back and LaserMonks), while others reject the profit maximization paradigm and sacrifice profit in order to reduce negative externalities (BP) or increase positive externalities (Grameen Bank). However, when internalizing externalities comes at a cost, as one person I met at the SF Federal Reserve said, figuring out who will pay for that cost is the million dollar question.