To many people, the idea of business solving societal and economic problems in developing communities is problematic. To think that a for-profit business could exist primarily for the good of the community seems like an oxymoron. Underlying this skepticism are questions like these:
“Isn’t business inherently selfish?”
“How can business be oriented toward community good when business success is based on greed?”
“Isn’t nonprofit a better solution? After all, businesses have a conflict of interest.”
The Mutual Benefit of a Free Market System
These questions reflect a prevailing viewpoint among a wide variety of people that capitalism is based on greed, where one party exploits the other for personal financial gain. Greed and dishonesty are, unfortunately, evident in any economic system be it communism, socialism or capitalism. The basic difference is that in a capitalistic free market system there is competition that provides the consumer with choices.
Transactions happening in a free market are only successful in the long-term if all parties involved benefit. A free market economy is a latticework of these mutually beneficial exchanges. Taken together, they form what Adam Smith referred to as, “the invisible hand” directing resources to where they are most needed.
The miracle of a free market is that there is no central plan or bureaucratic direction; it just happens. It is purely spontaneous. Needs exist, and people, services, and goods arise to meet those needs. There is an exchange of goods and/or services for money. If both parties mutually benefit from the deal the transaction may be repeated over and over, such as purchasing milk or bread. Over time, new entrepreneurs will arise to provide the same or similar products at varying prices. The consumer will then have multiple choices to satisfy his perceived needs.
In this process the provider of goods and services receives payment greater than his cost of providing the goods or services. This is called “profit.” It is the provider’s reward for his physical, or intellectual, investment in producing the goods or services. This is how wealth is produced in society, and the accumulation of this wealth is referred to as “capital.” It is the fuel which funds research, innovation, economic growth, new jobs, and improved living standards.
[bctt tweet=”Capital is the fuel which funds research, innovation, economic growth, new jobs, and improved living standards”]
All Innovation Requires Capital
Steve Chen, Chad Hurley, and Jawid Karim were three young employees of Pay Pal in 2005 when they founded You Tube so that they could share their home videos over the internet. One year after its creation they sold You Tube to Google for $1.65 billion. Google has taken You Tube far beyond its originally intended purpose and advanced the internet so that it can deliver video content. It is currently in the process of making the television, as we know it, obsolete.
That’s how growth occurs in a free market economy. No one “orders” or plans, it to take place; it just happens. It happens spontaneously and sometimes by accident, but it is always happening.
Where there is a need, entrepreneurs will step in to fill it, from their garages, basements, and on their kitchen tables. It begins with the perceived need, which generates an idea of how to meet that need. With time, research, and hard work a plan is generated. In many cases this takes the form of a written business plan. However, it almost always reaches the point where money, “capital,” is needed to implement the plan. Without capital the idea, no matter how good, will die at inception and become an “if only” lament of the frustrated entrepreneur.
The needed capital can come from the entrepreneur’s personal assets, from friends and family, from borrowed funds, from venture capital sources or from angel investors. Whatever the source, rarely will any progress be made in a free market economy without it.
Lack of Capital in the Developing World Hinders Progress
In the developing world starting and sustaining new businesses is surely hampered by the lack of available capital, training and basic resources. Were there resources to be provided, new capital would be created to fund new businesses and ventures. This would create new jobs resulting in new demand for goods, services and the economic cycle would accelerate.
The main reason that America has been the leader in technology and innovation is that it has the educational resources, intellectual freedom, profit incentive, and capital availability for entrepreneurs to create the Amazons and Googles of this world. The challenge is this: how do we get the cycle started in the developing world?
[bctt tweet=”Access to capital leads to innovation and progress. The challenge for the developing world is: how do we get the cycle started?”]
It basically comes down to enabling the establishment of businesses in developing countries whose objective is not making money to enrich the owners but to create well-paying jobs in an environment of trust and integrity to bless the employees, customers and the community. When profitable, socially-conscious businesses that meet real needs in the community are established, capital is created, and the cycle begins.
And when this occurs, everyone profits.
*Image Credit: Royalty free image via www.morguefile.com