Government Alone Can’t Solve Society’s Biggest Problems

September 22, 2013 Editor 0

Rising obesity. Human Trafficking. Re-skilling the workforce. A lack of quality education and safe water for the poor in the developing world. Whose job is it to solve these problems?

For decades, the answer to that question has been simple: government. Until relatively recently, governments provided for the public good, while the private sector largely stuck with Milton Friedman’s admonition that the social responsibility of business was to increase its profits. Thinking beyond the bottom line was considered unfocused or, even worse, a disservice to shareholders.

Today, the landscape has changed dramatically.

A new economy has emerged at the borderlands where traditional sectors overlap. This economy trades in social outcomes; its currencies include public data, reputation, and social impact. Previously untapped markets drive financial returns. The business models are unusual. The motivations range from moral obligation to new notions of public accountability, or even shareholder value. This “solution economy” represents not just an economic opportunity, but a new manner of solving entrenched societal problems.

New problem-solving innovators and investors power this solution economy. These “wavemakers” assume many forms, including edgy social enterprises with the mentality of a Silicon Valley start-up, megafoundations, and Fortune 500 companies that now deliver social good on the path to profit. They range from Ashoka, which deploys 3,000 citizen changemakers in 70 countries, to the global pharmaceutical giants that annually give away billions of dollars in medicine to low-income citizens.

Consider just a few data points. In 2009, private US philanthropy to developing countries exceeded official US government aid by almost $9 billion. In one survey of 184 global companies, the average company contributed about $22 million to philanthropy, with the group total exceeding $15 billion in just one year. Even institutional investors have directed funds to organizations that create public value. Socially responsible investing has grown into a $1 trillion industry.

The solutions designed by today’s wavemakers depend less on whether a problem is public or private, social or commercial, economic or political. Rather, designs consider the ability to reach the previously unreachable, raise funds from untapped sources, and leverage social networks — all conditions that fuel new markets for solving entrenched societal problems.

These multi-billion-dollar markets are forming around some of the world’s toughest problems — from fighting malaria to providing low-cost housing to educating the poorest of the poor. In these solution markets, businesses, social entrepreneurs, nonprofits, and multinational companies compete, coordinate, and collaborate to solve megaproblems. Instead of trying to patch a market failure, they create a market for the solution. Foundations, venture philanthropists, governments — and, often, private businesses themselves — act as funders, investors, and market makers.

Unlike most government-driven programs that check their ambition at political borders, these emerging solutions spread nimbly across the globe. In less than a decade, Unilever’s Project Shakti microloan program for women in rural Indian villages expanded from 17 saleswomen to 43,000, serving 3 million Indian households; it is now spreading to Sri Lanka and Bangladesh.

This all might inspire a touch of skepticism. You might be thinking something like this: We have markets in shoes, in homes, and in automobiles, but markets in societal outcomes? It seems illogical. Weren’t these big, wicked problems the very areas where we’ve experienced market failure in the first place — where government was forced to step in? Take something like human trafficking. It’s easy to see how there can be a market in engaging in this awful practice, but can a market be constructed to help stop it?

We assert that yes, you can create markets — or at least market mechanisms — around problems like environmental cleanup, transitioning from welfare to work, and even human trafficking. In fact, markets and economic ecosystems are developing around all manner of societal problems. The buyers in these markets purchase impacts or outcomes: healthier communities, kids who can read, reduced recidivism. The sellers provide outcomes: they design cheap, solar-powered lights; write the code that tracks salmonella outbreaks using government data; and build the cross-sector networks to fight scourges like human trafficking.

What about government? Its role has now shifted. Sometimes it is a funder; sometimes it integrates all the players; sometimes it’s the market maker; sometimes it’s just one of many contributors to the solution. Sometimes all it has to do is provide a space for these solution markets to work.

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Categories: HBR, Insights

Tags: developing country, Market failure, Milton Friedman, wicked problem