I have been a huge fan of the Startup Genome project and the people behind it. In particular, their report on "premature scaling" was very well done and proved, with data, something that had long seemed intuitive to many people. They have, however, misfired with their latest post on "transformational entrepreneurship."
The basic idea is that there are distinctions between businesses based on their economic or social impact--the two can either go together, or they can go in opposite directions. To this end, they construct a matrix based on "socioeconomic value creation":
So far, so-so. Many people might accept this at face value, or at least as pointing in an intuitive direction. And, most of us would probably apply Justice Potter Stewart's "I know it when I see it" pornography test to this matrix. As long as discussions like this are confined to the abstract, they will likely provoke very little disagreement. But it can all go awry when we start assigning specificity to the various cells of the matrix, making value judgments, and ignoring the messiness of reality. Thus:
This matrix reflects arbitrary assignments of value, ignores the very substantial tradeoffs of real life, and seems to be mostly a reflection of one's personal values. Not that this necessarily means it shouldn't be done; but it shouldn't be presented as somehow an objective reflection of reality.
Let's start at the top left, where high economic impact meets low social impact. Here are the apparent criteria for "negative long term societal impact":
- Persuade people to buy things they don't need or that harm them long term;
- Exploit people;
- Waste people's time;
- Make people or the world unhealthy;
- Give a false sense of satisfaction or accomplishment.
Fair enough; most people would likely agree that any organization--private, public, for-profit, nonprofit--that is defined by these characteristics (or only a few of them) is a net drag on well-being. Do oil and gas companies and the entire fast food sector qualify? Unquestionably, the oil and gas sector and fast food companies have large economic impact: jobs, consumption, corporate profits, etc. Do all those jobs count as having negative social impact? The workers and their families would probably disagree, as would the communities dependent on those industries. Of course, I suppose part of the point here is that those individuals and communities are victims, but they just don't know it. In other words, they don't know what's good for them, at the mercy of the hegemonic indoctrination of the bourgeoisie.
The reason that oil and gas companies and fast food restaurants are included, I'm guessing, is primarily because of the former's environmental impact and the latter's presumed responsibility for rising obesity rates. As to fast food and obesity, clearly it is not exactly healthy for you, but the causal links drawn by many have shown to be attenuated. In an economic sense, people wouldn't pay for this stuff if they didn't find some value in it. But I suppose the authors would chalk that up to corporate deception. What would you have in place of fast food? There are no food companies or sectors on the right ("good") side of this matrix. McDonald's (which the post calls out directly) has been a marvel of scale and organization, and the company has shown it can adapt to the changing tastes and habits of Americans. I'm going to go out on a limb here and guess that the founders of the "transformational" companies here (Facebook, Google, etc) have--gasp!--eaten at McDonald's.
I understand, and share to some extent, the general critique of corporate agriculture that is behind fast food, but it is hard to ignore, among other things, the jobs created by McDonald's and others. They may not meet your definition of "good" jobs, but for many people they do. It doesn't really matter whether or not one can launch a wholesale defense of or assault on fast food: the larger point is that categorically assigning them to the negative category escapes the hard work of dealing with all the tradeoffs involved. Righteous indignation feels good but accomplishes little.
Bizarrely, it may actually be easier to defend the oil and gas sector. Does Startup Genome want oil and gas companies to disappear? The last century of human progress has been driven enormously by petroleum and, now, natural gas appears set to redraw the energy map. Yes, petroleum helped power the automobile revolution, with bad side effects for the environment. But look at it this way: would you have preferred the continued use of horses, with all the attendant consequences of manure piles, public health threats, and poor treatment of animals? Or, perhaps you would have preferred continued reliance on wood, meaning massive deforestation, or whale oil?
Moreover, the authors appear oblivious to the fact that multinational "oil and gas companies" control only 10 percent of global production. Most of it--and growing in recent years--is generated by state-owned companies. And, such companies are mostly--though not exclusively--found in countries with very undemocratic governments. The best way to make these countries freer is to spur more economic growth and thus diversification but, damn, that will probably mean more types of companies that these authors don't like. Tradeoffs, tradeoffs.
We can't adequately analyze the left side of the matrix, however, without balancing against the right side. Startup Genome explicitly sets Google and Facebook and Apple and others as "good" companies against the "bad" ones: oil and gas, fast good, social games, Starbucks, hair dressers (?), etc. Here are the criteria for "transformational societal impact":
- Approach problems systematically, treating root causes;
- Teach men to fish rather than giving them fish;
- Focus on unlocking human potential;
- Create more value than they capture;
- Seek to empower people;
- Improve people's relationships, their ability to learn and ability to create;
- They nurture ecosystems and platforms.
Set aside whether or not you agree with this list as constituting "transformational societal impact" (the last one betrays a very superficial understanding of capitalism, or indeed of economic activity itself; the fourth one is ridiculously complicated by how one defines value and how you measure rent-seeking or rent-generating). Do the companies in the top right cell measure up?
I'm not going to get into the whole controversy about Apple and Foxconn, other than to say that it is very clear that, when they are evaluating "bad" companies (low or negative social impact), the authors see it in terms of externalities, but when they are looking at their (preordained?) "good" examples, they see it strictly from the consumer's point of view. That's not a bad thing, but it should be spelled out and should alert the reader to the near-absence of objectivity. First, compare oil and gas to renewable energy--I assume that the authors do not include nuclear power here. So where would they classify nuclear power? It obviously has huge environmental advantages when compared to oil and gas, but that must be weighed against the small but non-trivial risk of meltdown and catastrophe. This underscores the larger point that seemingly clean-cut matrices like these are nice in the abstract but break down when forced to deal with what humans must deal with on a daily basis: non-mutually exclusive values, tradeoffs, choosing the lesser of two evils, thin cost-benefit comparisons, etc.
So now let's compare oil and gas companies with Google, Facebook, Amazon, and Data Infrastructure. Are the authors aware of how these companies are able to support their glorious cloud activities? (Of which I am a huge fan.) It's electricity that powers those massive server farms underneath search engines and cloud computing and social networks. Such electricity usage is still small as a share of total electricity consumption, but it is growing rapidly. Many data centers, moreover, deliberately seek to locate near renewable sources of energy (Iceland is the next frontier), but since half of US electricity still comes from coal, it is likely that a large share of the electricity consumed to power Google, Facebook, Amazon, Apple, and so on (not just the data centers but also your personal consumption) derives from non-renewable fossil fuels. And in the near future, with massive shale gas discoveries and the conversion of coal-fired plants to natural gas, this will mean more cloud activities supported by natural gas: thus, the "bad" guys are making it possible for the "good" guys to succeed. How confounding.
(And, of course, many critics have pointed out that, in terms of jobs, companies like Apple and Facebook come nowhere near to matching the impact of companies like ExxonMobil and IBM. If you consider job creation something with not only economic but also social impact, then perhaps this should factor into your balance. Also, Microsoft seems conspicuous by its absense--telling? Or an oversight? Not to mention that classifying Amazon and Apple as high on long-term social impact ignores any cost others might ascribe to the second half of the creative destruction equation. The disruption wrought be these companies on other areas of the economy brings high economic impact but arguably mixed social impact, at least depending on one's persective, the time frame used, etc. A few years ago, would Google have been farther to the left on the X axis because of cooperation with Chinese censors?)
I'm also not sure why Wikipedia is ranked as low economic impact, and fighting terrorism gets low economic impact and moderate social impact. The metric here must be revenues versus those bullet points above, thus comparing numbers to ineffable values (of course, if revenues were the yardstick, Twitter would fall down the Y axis). Arguably, Wikipedia has generated enormous economic value because it dramatically lowers--even altogether eliminates--transaction costs in finding and gathering information. Likewise, fighting terrorism clearly benefits society (unless the criterion of distinction here is the act of fighting versus actual successes, which is murkier) and helps set a platform for productive economic activity. I hope their matrix categorization doesn't reflect a knee-jerk opposition to anything military related. It has become passé for people to point out the military's role in helping create the Internet. It is important to point out, too, that the location which the Startup Genome folks revere--Silicon Valley--owes huge debts to the military. In the first place, the stationing of a naval base in northern California helped create a community of technically-skilled workers and, later, the Pentagon accounted for a ridiculously high share of semiconductor sales in the 1960s from firms such as Fairchild. Again, tradeoffs, competing values. Likewise, it is bemusing that "most aid & charity" is accorded apparently negative values both on economic impact and long-term social impact. This reflects the current frustration with "small-scale" charity compared with sweeping efforts at transformation, but this shouldn't lead us to complete write off "most" aid or charity. The fact, emphasized on a panel last week I had the pleasure of sharing with Stanley Katz, that the impact is smaller makes them no less necessary than large-scale programs.
But the biggest lesson to take away from all this is that it is really, really slippery to begin drawing value distinctions based on the perceived social or economic value of various activities and companies, without considering externalities, tradeoffs, how the balances change over time, and so forth. It is also a bad idea to dress all this up as objective empiricism. So the last item to take up is the apparent distinction between economic value and social impact. It is becoming all too common in celebratory pieces about "social" entrepreneurship to draw a hard and fast line between these and treat them as forever separate. (Thankfully, Startup Genome does not perceive the distinction to be based on revenue-generation.) Seeing them as distinct then treats the instances in which they coincide as uniquely "transformational." If economic and social value really were that distinct, capitalist society probably would have collapsed long ago. Instead, we need to address the complexities head on and recognize that sometimes one person's distasteful business can be another's transformational impact:
In the middle of the 19th century, most of the U.S. population was ridiculously poor by today’s standards. Americans not only had low incomes, but also spent the bulk of their money on life’s basics: food, clothing, and shelter. What they purchased, moreover, was of questionable quality. Because there was no refrigeration or ability to transport foods over long distances, most people subsisted on a kind of stew that, by all accounts, was simple and tasteless. A poor diet meant poor nutrition, which meant poor health.
Clothing was also neither plentiful nor desirable. With little production of new clothing, the average American wore the same clothes over and over again. And they seldom washed these clothes—or themselves—because they lacked indoor plumbing. This was not the only failing of American homes: They were often poorly ventilated, meaning that most people’s lungs labored to breathe air made dirty by cooking and heating fires.
One innovation that fueled prosperity, well-being, and further innovation was the American railroad system. The spread of railroads in the 19th century permitted something nearly unprecedented in human history: conquest of the weather. Better movement of people and goods reduced the vulnerability of the population (especially in rural areas, which still dominated the country) to cyclical vagaries. Even in the depths of winter, consumers could purchase food from afar.
The food people ate improved dramatically as well. Long-distance transportation of food required advances in refrigeration and canning. Gustavus Swift pioneered the refrigerated railroad car and built a meatpacking company that was, at one point, among the largest American companies in terms of gross revenue. As a result, consumption of meat, dairy products, fruits, and vegetables increased. No longer were Americans consigned to eating an unappetizing stew.
Railroads also facilitated the rise of large-scale national companies and allowed a geographically disparate country to purchase new and better goods and services. Consider, for example, the contributions to American health and welfare made by just two companies: Sears, Roebuck and Montgomery Ward. Their first catalogs were only single sheets of paper, but in short order they grew to include thousands of items. By making products such as iceboxes and better farm tools widely available, these companies empowered Americans to improve their lives.
Similarly, factory production of clothing and its national distribution in new department stores—created by men such as Harry Selfridge, Alexander Stewart, and John Wanamaker—reduced prices and increased access.
The cascade of goods available to everyday consumers continued in the 20th century. The Dallas Federal Reserve has chronicled the steep declines in the amount of work Americans had to perform to afford staples like chicken, eggs, and milk. In 1919, for example, an American had to work 10 hours to afford a basket of 12 food items. By 1997, the work time required to purchase this food basket had fallen to two hours.
The falling costs and increasing quality of food, clothing, and shelter made Americans healthier and more resistant to disease. Accordingly, stature and life expectancy have risen at unprecedented rates from the late 19th century forward.
If Startup Genome had written their post one hundred-plus years ago, my guess is that they would have classified railroads, department stores, and Sears, Roebuck as having high economic impact but low or negative "long-term societal impact."
Entrepreneurs, at their best, solve problems. Some problems (trying to figure out a cheaper and more powerful source of energy) are more important than others (an improved search engine algorithm), or may seem so at first blush. Ex post, we may realize that solving one problem gave rise to a host of new challenges, but we probably wouldn't return to the prior state of affairs. This is the nature of economic progress. Actually, it's the nature of all human history: two steps forward, one step backward.