Thursday, August 30, 2012

Profit is Charity

July 2011 (ed Aug 30, 2012)

Profit – legally and ethically generated - is one of the best measures of social value-add.

Clients buy services and products only when they can extract value from them. Example, if a company sells a soap for Rs 10 (when it costs it Rs 8 say), the customer buys it only because s/he can extract more than Rs 10 of value from it (say Rs 12). Hence while the company generates profit in the transaction, the customer also gains. A company’s profits therefore are a measure of the cumulative value it injects into the society. If the soap making company is earning crores of rupees in profits, it is doing so by adding value to millions of people.

A business need not do any traditional ‘Corporate Social Responsibility’ (CSR) activity for contributing to the society.  In fact traditional CSR – like donating to schools or hospitals - may not be a very economically efficient or effective way of impacting developmental outcomes. As long as a business keeps generating higher and higher profits ethically and legally, it will be making greater and greater social contributions by injecting value to its customers, and helping them inject value into their own lives or into the lives and businesses of their customers who are next in the chain.
Donating to a school or a needy child or family produces immediate visible outcomes. Therefore, these are typically more satisfying personally, and may be necessary for keeping one motivated towards social welfare. However, these may not be the most effective and efficient ways for achieving desired outcomes. For example, the same effort, time and money contributed towards governance reforms in education may help create more schools[1] and raise more people out of poverty.   

Perfect markets require information symmetry between buyers and sellers, and absence of monopolies etc. Long term complex developmental outcomes – like reduction of corruption, governance reforms, environmental sustainability etc –  whose benefits are spread across several people and are difficult to quantify may not find easy market based solutions. Even though these things will be economically beneficial for many individuals and businesses, it may be difficult for these objectives to raise business investments[2] due to complexity of information involved, long term diffused results, collective action problem etc. Such efforts therefore may still largely depend on traditional charitable and philanthropic support. Individuals (rather than business organisations) should consider philanthropic donations (out of their personal bank balance, rather than their organisations’ profits) towards solving such social problems which do not find market solutions.

However, while organisations need not spend on CSR, they should avoid ostentatious display of wealth (or control 'wasteful expenditure') and instead focus on maximising profits. Also, they should remain respectful and empathetic to the communities they are located within and people they interface with.
Please watch the following video interview by Nobel Laureate Prof. F. A. Hayek’s for more on these lines:

[1] Example, refer to this seminal paper - Reinikka, R., & Svensson, J. (2004). Local Capture: Evidence from a Central Government transfer Program in Uganda. The Quarterly Journal of Economics , 119 (2), 679-705.
[2] There are some interesting attempts though. Check this out:

Sunday, August 19, 2012

Entrepreneurship and Freedom in India – 1947, 1991, 20..

India got political freedom from the British in 1947 – the British government was replaced by an Indian government, elected democratically. Every Indian citizen got an equal right and freedom to vote. While Indian citizens have been free to vote in India since then, have they been equally free to do business, to become entrepreneurs?
There are a lot of challenges which entrepreneurs face.  Some of these are genuine challenges inherent in the process of setting up and running a successful business - entrepreneurs all over the world face these challenges. However, some challenges are artificial – imposed by the government and/or the society.
Socialist mindset after independence meant that the government took the task of building the country upon itself including in terms of science and technology, setting up large industries etc. Citizens looked up to the government to own, set up and run industries and looked upon themselves as workers – the ‘service class’. The service class paid a lot of attention to educating their children, so they could get good jobs eventually. Small business was an option available to those who could not do very well in studies. Service class families looked at business class families as less refined – money minded, typically less educated. Government policy and licence raj required entrepreneurs to bend rules to make progress in their business. Doing business became synonymous with breaking rules, evading taxes and colluding with corrupt bureaucrats and politicians (ref: Reliance story as depicted in the movie Guru). Thus social and government mindset became anti business and anti-entrepreneurs. As a nation, we respected great scientists, great teachers but not great businessmen (unless they were also great philanthropists).       
This started changing in late 80s with some progressive thinking in the government, and the realisation that socialist mixed model economy was not working. 1991 liberalisation allowed businesses to participate in sectors like telecom, GDP started growing fast, poverty started reducing faster and IT revolution made heroes out of entrepreneurs like Narayan Murthy unleashing a wave of new age entrepreneurship. India became a centre of innovation and a global power to reckon with. But a lot still remains to be done.
As we celebrate the Independence Day this year, let us be conscious that while Indians have won political freedom our economic freedom remains restricted. Economic liberalisation has stagnated after the era of 1991 reforms, and crucial sectors like education, farming remain severely controlled and distorted vis-a-vis what an ideal nationwide free market should look like. Globally, India ranks quite low in terms of ‘ease of setting up and doing business’ and indicators like ‘number of days it takes to start a business’.
While the license-quota raj weakened after 1991, it still remains strong in large pockets of the economy which therefore continue to stagger at low rates of growth. Let us liberalise these sectors and the economy further overall, so young entrepreneurs could come forward and drive the country ahead with their enterprise and initiative.
Ref: Edited Hindi Article in Hindistan (Aug 17). युवा उद्यमियों के लिए चुनौतियां कम नहीं

Monday, July 13, 2009

Inconsistencies in Prof Sabharwal murder investigation ?

State of law and order in our country:

This 'sting' investigation by CNN IBN shows that police/CID are trying to threaten key witnesses, and supress the police investigation in general. Some key accused are in jail but are allegedly being provided VIP treatment.

Can this be made an election issue ?