Conceiving a Social Market

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John Restakis:

"When the financial crisis of 2008 exposed, in all its depressing detail, the utter falseness of the free market doctrine, no one could be blamed for expecting some measure of reform to follow. So extensive was the damage done, and so extravagant the fraud and the greed that drove it, that the public demand for reform and retribution rose to a pitch not heard in generations. It seemed a moment of reckoning had arrived. Heads would surely roll. Yet neither oversight nor accountability ensued for those responsible for driving the global economy into a crisis from which it may never recover. If anything, the concentration of power and the influence of capital over public policy have grown.

The defenders of free markets and the rights of capital are more committed than ever in defense of the very ideas and practices that gave rise to the crisis in the first place – ideas that have been debunked and abandoned by most serious economists, if not politicians. At street level, there is a growing sense that our economic system is actually bad for society and for the future of the species. Moreover, the corrosive effect of free market ideas on the role of governments has critically damaged public faith in state institutions as instruments of public policy. The mass protests against austerity economics in Europe are clear evidence of this and public anger has reached levels that now question the viability of the European Union. The shock doctrine that demands the sacrifice of public wealth to redeem the sins of private capital is, to say the least, not playing well.

In the academy, in government, and in the public arena the search for alternatives that better serve the public interest has become critical and widespread. Nowhere is this more obvious than in the role of governments with respect to public services and the provision of social care for their citizens.

Current interest in the social economy and its relation to human services and the provision of social goods is one sign of this change. With governments incapable – or unwilling – to provide public services as they once did, attention is turning to the social economy for these services. The other strand of activity – one that is gathering much more momentum – is the privatization of public goods and the incursion of capital markets in social services. This colonization of public and social space by capital is one of the effects of shrinking opportunities for profit making in the private sector. At the very time when weak economies and rising unemployment demand a strong social safety net, public services are being turned into sources of private profit. With governments as willing partners, the privatization of public goods and the monetization of social care now beckon as a new frontier from which profits might be wrung – from the provision of health care and clean water, to the running of prisons.

It is quite clear how the institutions of private capital might invest in – and profit from – what were once public services. What is far from clear is whether the institutions of the social economy are equipped to respond to this new reality. The market failures in human services in both the private and the public economies are now arguably the central public policy issue of industrialized societies. Even more to the point, should the social economy be playing a role that governments have been abandoning this last 30 years? Does doing so absolve the state from its responsibilities to its citizens? Aside from becoming a handmaiden to capital interests, what is the role of the state once public and social goods are conjoined to private profit?

This paper offers some thoughts on how we might understand and respond to this dilemma and how we might fashion the kinds of policies and institutions that are an alternative to the privatization and the monetization of social goods. Even more importantly, how might alternative models be fashioned to reflect those socially progressive values, operations and economic principles that define the social economy itself?

The Social Economy – Beyond Paternalism

There is now a growing body of research that seeks to measure the size and economic value of the social economy. But much of this measuring is based on principles and concepts that are derived from the capitalist economy – i.e. the valuing of goods and services on the basis of the exchange values that characterize commercial transactions in the private sector. These values are based on the concept of the exchange of equivalents.

Put simply, the exchange of equivalents means the exchange of one thing for another on the basis of an agreed upon value. But while appropriate for the measure of commercial exchange, the determination of value solely on the basis of commercial principles is anomalous to the character and needs of the social economy. This is because the social economy is not primarily about exchanging things of equivalent monetary value in pursuit of private ends, but rather of creating and utilizing social relations for the pursuit of social ends. These are basic principles – it is absurd to claim that a market for the first is the same as a market for the second. The attempt to measure value and to develop social and economic policy for the social economy on the basis of commercial principles alone, only serves to further marginalize and misrepresent the social economy. In most places, the character of social economy organizations and their role in society is implicitly acknowledged as different and requiring a different approach. For example, the extension of tax supports to social economy organizations such as co-operatives, non-profits and charities is that they create social benefits that are worth supporting and are in the public interest.

In Canada, and across the industrialized West, the principle of tax exemption to non-profits is well established. It hearkens back to the very origins of legislation governing non-profit societies, which in turn was a reflection of attitudes toward charitable giving. As far back as the middle ages charitable organizations –associated primarily with the church – were exempted from paying income tax, as were churches.

The work of these societies was conceived as relieving a burden that would otherwise be borne by the state for such things as providing relief to the poor, running hospitals, caring for widows and orphans, etc. In return for these services, the state compensated societies through an exemption on tax. But it was also a condition of the exemption that no profits could be retained by the society nor distributed to its governors or members. This is the constraint on the distribution of profits that today defines non-profits under society legislation. But in an age where the sophistication and complexity of social economy organizations extends far beyond simple charity models, and where hybrid models such as social enterprises and community benefit companies employ market mechanisms to pursue social goals, the old tax exemptions based on constraints to the distribution of profit are wholly inadequate. They fail to capture both the reality and the potential of the social economy as a sector deserving equal treatment, on its own terms, to that granted the private and public sectors. They also perpetuate the false notion that the generation of profit is incompatible with the pursuit of social benefit.

The reason for this is that profit is still conceived strictly in capitalist terms, which is to say as a private good. But what of profit that is a social good, a collective asset, as in the case of co-operatives? The real question is not the issue of profit but rather the purposes for which profit is created and utilized. Recognition of profit as a social asset has game changing implications – not only for the social economy, but also for how the public interest is defined, developed and defended.

A New Approach

What are needed are social and economic policies, and a tax structure, that recognize the social and mutual foundations of the social economy as a distinct sphere with its own requirements and with institutions that can support a true social market corresponding to the operations of a social economy. On what basis could such a policy, and such a market, operate? The answer lies in the economic principle that lies at the heart of social economy organizations and of the social economy as a whole – reciprocity.

Unlike the drive for private profit that animates the behavior of firms in the private sector, social economy organizations are animated by the principle of reciprocity for the pursuit of mutual economic, social or environmental goals, largely through the social control of capital.

Reciprocity animates a vast range of economic activities that rest on the sharing and reinforcement of attitudes and values that are interpersonal and constitute essential bonds between the individual and the human community. At an individual level, what is exchanged in reciprocal transactions are not merely particular goods, services and favours, but more fundamentally the expression of good will and the assurance that one is prepared to help others. It is the foundation of trust. It is also the means by which a society's stock of social capital is built up. Consequently, the practice of reciprocity has profound social ramifications and entails a clear moral element.

Reciprocity is a key for understanding how the institutions of society work. But it is also an economic principle with wholly distinct characteristics that embody social as opposed to merely commercial attributes. Social economy organizations then, are those that pursue their goals, whether economic or social, on the basis that individuals’ contributions will be reciprocated and the benefits shared.

Reciprocity is the economic principle that defines both the activities and the aims of these organizations - whether they are co-operatives, volunteer organizations, or social enterprises. Their primary purpose is the promotion of collective benefit. Their product is not just the particular goods or services that they produce, but human solidarity and social capital. And, as opposed to the capitalist principle of capital control over labour, reciprocity is the means by which a social interest - whether it takes the form of labour, or citizen groups, or consumers – can exercise control over capital.

With respect to public services and social goods the key question therefore, is this:

- How can reciprocity be actualized as an institutional force to provide for the human services that are not being met by government or the private sector?

Taxation, Capital Formation, and Social Benefit

Of all the challenges that impede the growth and potential of the social economy, the difficulty in accumulating and controlling capital is surely the most crippling. Solving this problem is therefore where much of the discussion in the balance of this paper is directed.

There are many ways that public policy can expand the capacity of social economy organizations to provide social goods. Rethinking and reforming tax policy is among the most important and the most potent.

One line of approach is to provide tax benefits and exemptions to investments in social economy organizations. These tax benefits are already provided to groups that have acquired charitable status. But there is a strong case for extending these benefits to contributions made by supporters – whether association members or other community members – to any organization whose primary purpose is the provision of a social good.

It is essential that non-profits and a wide range of social enterprises be able to generate capital for their services through tax-exempt contributions sourced from within civil society itself. Not only would the dependence of social economy organizations on the state be mitigated, but the perpetual rationing of capital due to the social economy’s dependence on state funding could also be lessened. But for this to happen, the idea of non-profits as organizations whose goals are incompatible with the generation and utilization of capital (profit) has to be left behind. It is a relic of a false understanding of profit as a private good, and associated with an equally outmoded understanding of markets as exclusively capitalist.

All enterprises, whether commercial or social, must generate a profit if they are to survive. The question is: to what purpose is this profit put? Is it private or is it social? The case of co-operatives shows how profit can equally be a social good as a private one.

Co-operatives are a form of social economy organization whose surplus (profit) is collectively owned and utilized by its members for their mutual benefit. When non-profits generate a surplus that is then reinvested in services to community this too, is profit transmuted into a common good. And just as private capital is bent on privatizing social wealth, so should the social economy be focusing on ways to socialize capital.

A social economy understanding of the market, and of profit, makes it possible to rethink society legislation so as to allow non-profits to issue shares to raise capital, to accumulate capital in the form of undistributed reserves for the pursuit of social goods, and to invest in other social economy organizations and institutions that have the same purpose. The development of the kinds of social purpose capital that are now possible in the case of co-operatives should be extended to the whole of the social economy, with the proviso that their use be transparent and democratically accountable to contributors and service users.

This is essential. Without such accountability, there is the risk that capital accumulated by an organization for social purposes may ultimately be used to pursue private interests as is the case with some non-profits today that have no structure for accountability to stakeholders. What is central in protecting the pursuit of social ends is not the conventional prohibition on the accumulation and distribution of profit, but rather the social constraint imposed by democratic accountability for the use of that capital. It is exactly the same principle that serves to protect the public interest when applied to the taxing and spending practices of the state.

Renewed interest in civil society and the social economy is challenging the old market paradigm of society as composed of two sectors - the private and the public. But from the start, the notion of civil economy (as it was then called) was itself a reaction against the narrow reading of economics as a specialized field of practice divorced from society. This is the larger frame in which the social economy has its original meaning. Current efforts to highlight civil society and the social economy as countervailing forces to the market view are a continuation of the historical struggle to reclaim the social dimension of economics.

To make any headway on this front, the dependence of civil society institutions on government has to be confronted. The social economy, despite its formal distinctions from the state, remains a dependent sector – in many ways a client sector of the state. Legions of non-profits, NGOs, and the leadership they employ are kept in operation solely by government funding. For example, more than 50% of the cost for services provided by voluntary non- profit social welfare agencies in the United States is funded through government purchase-of-service arrangements. Government funds account for 65% of the Catholic Charities budget, over 60% of Save the Children and 96% of the funding for Volunteers of America. The same is true in Canada. This absence of autonomy has undermined these organizations’ capacity to represent, and fight for, the interests of civil society as a sector with its own interests apart from those of the state.

At a time when government has all but erased the distinctions between the private and public sectors, this continuing dependence is a fatal weakness that allows capital interests to continue their domination of public policy and to perpetuate an economic system that is subservient to their interests.

Never has this been more evident. In Canada, it is obvious in the dismantling of all constraints on capital as evidenced by the gutting of environmental protections and of national regulatory powers with respect to the conduct of industry, in the promotion of corporate interests internationally under the guise of foreign aid (the corruption of CIDA), in the blocking of international progress on addressing climate change, and in the undermining of the bargaining rights of labour. The one sector of society that has the potential to defend the public interest and to push for progressive change is effectively neutered by the state through this dependency.

But the key area where the institutions and organizations of civil society need to reflect upon and articulate civic solutions is in the protection of social goods in our age of rampant privatization. Social economy organizations must face up to the contradiction between their service to society and the betrayal of the public interest by governments that fund them.

This entails the liberation of the social economy from its subsidiary status to the state, the maturation of the sector as an independent social and political force, and the creation of a true social market for social and relational goods – a social market suited to the unique role of the social economy as a primary provider of these goods. Only in this way might the overwhelming power and influence of the capitalist market be brought into balance with civic values. An autonomous social economy based on reciprocity and civic values makes possible also the political power necessary to negotiate a new social contract for a new reality.

A True Social Market

How might such a system work? An experiment in Bologna helps to illustrate how a social market might be established without compromising the obligations and prerogatives of government while at the same time tapping into the social economics of reciprocity. Even more, it points to ways in which principles of democratic control and personal empowerment are fundamental to real reform in social care systems.

In 2002, a foundation called the Fondazione del Monte di Bologna e Ravenna started to experiment with new ways of funding social care to seniors. Previously, like most foundations, the foundation had provided grants to a variety of social service groups that then delivered care to seniors and their families across the city. The service organizations retained full control of the funds while the users of these services had little or no role in influencing the content or quality of the care they received.

Nor was it easy for consumers to seek more appropriate care elsewhere if they were unhappy. The funded groups were established organizations, secure in their funding, and had little incentive to change so long as power remained exclusively in their hands. Accountability flowed to their funders, not to the people they were meant to serve. Moreover, the model incorporated one of the worst attributes of privatized services in the pubic sector – the isolation of third party contractors from the funder on the one hand and service users on the other.

Under third-party contracts, the buyer (in this case a private foundation) does not consume the services acquired, the consumer does not pay for the services received, and the contractor stands in the highly advantageous position of dealing with a buyer who rarely sees what is purchased and a consumer who never bears the expense. This is a recipe for low accountability, which affects service quality, and for the absence of consumer influence on prices, which provides no controls over cost.

This is the classic charity model of care that has now become universal among non-profits. The problem was that in many cases, seniors and their families were unhappy with the care they received. But, having neither control rights in the organizations nor any say over the funds that paid for the services, they were powerless to do anything without jeopardizing the care they depended on. As with government delivery models these non-profits, despite their best intentions, shared the common faults of paternalism, inflexibility and lack of transparency that flowed from the absence of accountability to users.

All this changed when the foundation decided to bypass the organizations and provide funding directly to seniors in the form of social vouchers. Instead of funding the supply side of social care, they would fund the demand side. Three hundred and seventy six seniors and their families were involved in the program. Each voucher covered the costs for a specified package of services. There were different packages depending on the type of services that individuals needed and also on their respective ability to pay for a portion of the costs. Those that were less able to cover the full costs were subsidized by the foundation and contributions of those that could pay more. Finally, the social vouchers could be redeemed at any of a group of pre authorized service organizations, whether co-op, or state-operated, or privately run.

Overnight, the balance of power between service provider and service user was reversed. Now, seniors or their families were able to select those service organizations that were best able to provide for their needs. The social vouchers looked identical, were the universal currency for services, and because the portion of private contribution to social subsidy was known only to the foundation there was no stigma or discrimination attached to their use. Nor was it possible to compete on the basis of cost since the vouchers covered all costs equally. Competition arose solely on the basis of quality.

In the course of three years, the quality of senior care improved, costs dropped and the organizations that flourished were those that focused on service quality, innovation, and flexibility. Social co-ops that included seniors and their families in their membership did best.

What are the lessons from this experience? First, it indicates that supply side funding for social care can have a profound effect on the quality of care received. This should come as no surprise. Competition will inevitably arise. But not in the familiar manner of government contracts where low cost (or cronyism) is often the deciding factor, but rather in a manner favourable to service users. Nor should it be surprising if the organizations that received charitable and government funding should resist such a change (as they did in this case). Ultimately however, social care isn’t about the providers – it’s about those who depend on their services.

The second lesson is that the social market that was created for senior care in this example is replicable on a much larger scale. A social market for a wide range of social goods and services can be created that involves a different set of relationships and incentives among service users, service providers, and funders – whether public, or private. The use of vouchers is just one mechanism for empowering citizens. The deeper issue concerns the distribution of economic and political leverage to those who depend on these services.

There is no reason why vouchers or other mechanisms for placing market power in the hands of citizens should be associated exclusively with the political right – as it is. The use of market power for social care is just as amenable for socially progressive purposes if the market in question is structured around civic principles. Markets are not necessarily commercial, or capitalist, and the sooner social reformers and progressives understand this, the sooner we can start resolving the contradiction between social goods on the one hand and chronically under funded and antisocial delivery systems on the other. Civil society must grapple with how economics can be made to work for civic purposes through the creation of social markets. Innovative tax policy is central to this.

What we are talking about is the creation of an institutional social market through the formal valuation of social goods and the capitalization of these goods directly by citizens as well as the state. This entails two things: allowing social economy organizations to raise capital directly through the issuance of social capital shares, and the development of a social market exchange that functions as a parallel institution to the stock market for capital, except for use by the social economy.

The Social Market Exchange

What would such a social market exchange look like? There are currently a number of social stock exchanges in operation, and they all share a common feature: the ability to invest in a social enterprise through the purchase of shares that yield a limited return to investors. This is one approach. But even a limited return to investors monetizes support for social benefit in a way that moves away from reciprocity and toward a capitalist conception of social investment.2 I am proposing something that values both contribution and return in terms of reciprocity. This is the reason I use the term contributor as opposed to investor.

What does this entail? First, it would mean the extension of tax exemptions and benefits to contributions that support the creation and distribution of social goods. In this way, the provision of a tax benefit to social contributors acknowledges the key notion of a public benefit compensated by the tax system on the reciprocity principle. It also carries the fundamental notion of public responsibility for social care as a civic right. This is what taxes should do. But in addition, there needs to be a re-alignment of powers with respect to control over the design and delivery of social care itself. A number of factors seem essential.

The first requires shifting the production of many social care services from government to democratically structured civil institutions. Government would retain its role as a prime funder for these services. The first portion of this equation is already well underway. Governments have been unloading social services to private and non-profit providers for two decades. It is the second aspect, the need for user control and service accountability that is lacking (as too, is the funding). Social services that receive public funding and are not under the direct control of the state should be conveyed only to those organizations that provide control rights over the design and delivery of those services to users.

This applies equally to non-profit and for-profit services. Examples include organizations that provide elder care, family services, services to people with disabilities, or childcare. Moreover, those services that remain under state control, and there are many, (social security, public pensions, public auto insurance, public schools, health care services, etc.), should be democratized. Everyone with a health card, with a social security number, with a driver’s license, should be entitled to membership rights in the institutions that control these services and to representation on the boards that direct these organizations.

Second, government funding should, at least in part, flow directly to social care recipients who would then select the services they need from accredited organizations of their choice. To qualify for receipt of public funds, these organizations must have provisions for user control in their operations. In addition, funds must be made available for the organization of independent consumer-run organizations to assist users and their families in the identification, evaluation, and contracting of services to their members. This is crucial, especially in the case of users that haven’t the means, or the capacity, to adequately select and contract services on their own.

Third, social care organizations must have the legal ability to raise capital from among users and from civil society more generally on the basis of social investing. Both users and community members would be able to purchase capital shares for the purpose of capitalizing the association. As a social investment, these shares would yield a limited return to investors but unlike conventional social investment models, investor control within the association would be limited to ensure democratic control by members. As social investments these capital assets would not be taxed.

Fourth, surpluses generated by these organizations should be considered, at least in part, as social assets. All social care organizations receiving public funds – whether in the form of vouchers or direct payments from government – would establish an indivisible reserve for the expansion and development of that organization and its services.3 A portion of operational surplus would also have to be used for the partial capitalization of a social market exchange through the purchase of shares in the exchange.

Social capitalization requires the creation of a social market exchange based on reciprocity. For example, individual contributors could purchase shares yielding a monetary value that is redeemed through the use of a social good or service provided by any one of the accredited organizations in the system, as in the example of the social vouchers used in Bologna. So for example, I would be able to purchase social capital shares to support the work of a childcare centre or a school in my community. I could then redeem the value of those shares later, when perhaps I require the services of a home care organization.

A mechanism for mediating the issuance of social vouchers on the one hand and their redemption on the other needs to be established to balance what some organizations receive in contributions and others redeem in services. The creation of a collective capital pool to help organizations pay for redeemed shares might be one way of managing this. A social capital exchange of this type generates an independent source of credit and investment capital to social economy organizations, in addition to what they would receive from the state. Shares would be eligible for tax credits on the basis that such contributions have a clear and direct social benefit, as would a capital pool.

In this model, the primary role of government would be to continue to provide public funds for social care services and to fix the rules of the game. In partnership with service deliverers, caregivers, and users, the state would regulate and monitor service delivery, establish service standards, license service providers, enforce legal and regulatory provisions.

Finally, the locus of service design and the designation of service needs would take place, as much as possible, at the community and regional level of delivery. This requires the creation of civil and municipal associations of public and community stakeholders to ensure the accountability of services and the flow of information necessary for effective budgeting, service design and delivery. Most importantly, this decentralization of service delivery must include the democratization of decision-making through the sharing of control rights with service users and caregivers. This is precisely the system that is in place in cites like Bologna where social co-ops and their federations deal directly with municipalities to determine the service needs of communities and to manage their delivery.

These provisions are obviously not exhaustive. They do however outline a direction for the considered development of a market structure that is focused on the social and economic realities of the goods and services it is meant to facilitate. But what is really at issue is whether key actors and organizations within civil society and the social economy are able to establish a consensus on the changed reality and the need for civil society to play a new role – to in effect grow up and take its place as an autonomous sector of society in proper balance with the state and the private market. Until this happens, the galloping colonization of social and public space by capital will continue.

The argument for promoting a renewed role for civil society in the production of social services does not mean the abandonment of the fundamental principle of collective responsibility for these services. Nor does it mean the abrogation of state responsibility in favour of private market solutions. It most certainly means the de linking of public goods from exclusive government control. Public funds would still flow to these services and they would remain universally accessible. But the organizational structures that provide them would become progressively civic.

Civil society is the repository of those values and social relations that are best suited to the provision of care in a manner that is humane, responsive, and founded on those principles of reciprocity and mutuality that are the hallmarks of caring relationships. Social care that is humane is based on these relationships. What is lacking is the development of civil society institutions that are capable of applying these civic values on a scale, and in the context, of our present economic and political reality that is daily undermining both their meaning and their relevance.

Tax policy can be a key means of protecting and promoting these values. To do so, it must recognize and reward reciprocity as a primary social good, it must understand that capital is both a social and a private good, and it must nurture the emergence of social markets attuned to the needs of the social economy. Taxation can be a powerful instrument that not only elevates the power and utility of civil society as a whole, but also strengthens those institutions and practices that, through the democratic distribution of power, can help to counteract the threat posed to social and economic justice by the domination of capital that we are witnessing in the present day." (August 20130)