By Donnie Maclurcan
and Jennifer Hinton
Oct 3, 2014
For-profit capitalism has created social and economic inequality; successful not-for-profit businesses including Mozilla and the Big Issue point to an alternative path
At the heart of the failing capitalist system is the “for-profit” ethic. Based on the myth that humans are mostly selfish and competitive, the for-profit ethic says the best way to incentivise innovation and facilitate economic activity is to appeal to people’s self-interest.
This manifests in the for-profit business model, central to the current economy, where owners and investors go into business expecting a portion of a company’s profits in the form of dividends, options or shares. In essence, capitalism ensures that we live in a for-profit world.
This way of conducting business has led to socioeconomic inequality, with capital gains and company dividends the largest contributor to income divides. What else could we expect when private profit is seen as the driver of economic activity and profit maximisation is the priority of most big businesses?
Furthermore, the social stratification that results from global financial inequity is tied to ecological devastation, driving our ongoing march towards full systems collapse in the next 50 years.
Failure to address root problem
The most commonly suggested alternative to this dysfunction is greater market regulation. But while regulatory measures are critical in responding to social and ecological challenges, they can only do so much given that a heavily regulating state is politically divisive, disempowers citizens and can suppress real innovation. Furthermore, with politicians so commonly “in bed” with big business, regulatory reform is often just window-dressing.
Others argue for “conscious capitalism”, and see avenues such as B Corp certification and “shared value” as the best ways to get there. But while these avenues bring attention to important questions of sustainability, such approaches fail to address a root problem.
Although new forms of for-profit business seek to balance people and planet with profit, they continue to treat profit as an end in itself, rather than a means to an end, encouraging the destructive greed inherent in a system that relies on the privatisation of profit.
Nor can capitalism’s innovative potential come to the rescue. Not only are the levels of innovation required to avoid collapse totally unrealistic in a growth-based system; it’s the for-profit ethic that created the very problems we now face.
What, then, might be the alternative? Fortunately, the dominant story about human nature is changing. Research increasingly shows that, under the right conditions, human nature has a tendency towards co-operation(pdf). We’re witnessing the rise of a workforce increasingly motivated by purpose, and we’re realising the potential of an existing business structure called not-for-profit (NFP) enterprise.
There’s a rising tide of entrepreneurial companies globally that have business plans, make profits and pay good wages, yet are legally incorporated as “not-for-profit”. They are a bold response to the common misunderstanding, compounded by use of the words “non-profit” and “charity”, that not-for-profit entities cannot be successful businesses.
In the UK, examples of prosperous NFP businesses include accommodation provider YHA, energy firm Ebico, furniture company Green-Works, the Big Issue, the Breadshare Bakery, and the Cowheels car-club. Around the world, well-known NFP businesses include South Korea’s Hansalim, Bangladesh’s BRAC and Mozilla in the US. Under law, 100% of any profits these businesses make must be reinvested into the business or community. So, not-for-profit really means not-for-private-profit; no more incentivising selfish behaviour.
A not-for-profit world
How then might a world look in which every business was operated not-for-private-profit? It would still involve a thriving market. Government, banks, money, loans and interest would remain. But within a not-for-profit framework, these things would have vastly different consequences.
When banks can’t privatise profits they have no shareholders, owners or partners that they need to keep happy with dividends and private returns. They have no reason to exist other than to provide high-quality financial services to their customers, and they have little to distract them from this mission. They are built to be more transparent and more efficient.
Rather than siphoning wealth away from people and communities who take out loans, all profits are allocated according to the NFP’s social mission, enabling the generation of real community wealth. Now imagine the entire financial sector being not-for-profit. Imagine the entire retail sector being not-for-profit. Imagine all manufacturing being not-for-profit.
Capital requirements are falling dramatically, and large capital investments are proving less and less necessary to seed innovation, enabling the emergence of NFP businesses such as car manufacturing company Wikispeed and solar power plant designer Zenman Energy. Furthermore, new forms of capital raising are now available to emerging NFPs, such as crowdfunding, revenue-based finance and community bonds. When the market exists to meet human needs, government requirements for taxation diminish, making good wages and purposeful work all we need for the economics of enough
By changing the nature of incentive and ownership in business, the NFP world model enables companies to make truly sustainable decisions, in turn promoting a less consumerist society. The NFP world also fosters a more equitable economy because it has an inbuilt redistribution of wealth, with companies required by law to reinvest, rather than privatise profits.
While the informal not-for-profit economy has kept human civilisation running since time immemorial, through care-giving and forms of non-monetary exchange, the emergence of the formal not-for-profit economy is now fully under way. To fund the work they do, NFP institutions areincreasingly generating their own income, as opposed to the traditional non-profit approach of depending on grants and philanthropy.
Increasingly entrepreneurs are seeing the benefits of establishing businesses as NFP, through structures such as the UK’s Community Interest Company limited by guarantee. And there is renewed focus on successful, age-old business structures that most commonly exist as “not-for-profit”, such as consumer co-operatives in the food, healthcare, insurance, housing utility and finance sectors.
The rise of NFP enterprise is catalysed by the advantages NFP businesses hold in the marketplace, which have proven largely resilient to deregulation and recession. Not-for-profit businesses don’t have to pay dividends, and can often offer lower prices, primarily because they are not-for-profit.
They may gain tax exemptions and have the ability to receive tax deductible donations. They more easily draw on the support of passionate volunteers. And their propensity for flatter organisational structures cam facilitate productivity and innovation. Moreover, in a world with risingdemand for ethical products and services, organisations that focus on fulfilling human and ecological needs are ahead of the game.
Combined, NFP advantages are resulting in a greater market share. The NFP sector in the US grew significantly faster than the for-profit sector between 2001-2011, and this from a base of 1,259,764 organisations.
For the first time in modern history we have the structures, capabilities and impetus to evolve to an NFP world, in which the best energies and drivers of good business are harnessed for our collective flourishing.
Donnie Maclurcan and Jennifer Hinton are authors of the forthcoming book How on Earth: Flourishing in a Not-for-Profit World by 2050 which can be pre-ordered here. Professor Maclurcan will share these ideas in afree public lecture in London on 6 October, 2014