Political scientists like to use the image of a ‘three-legged stool’ to describe societies which keep a healthy balance between government, civil society and the market – societies that are the most successful in terms of social indicators like life expectancy, equity and quality of life, and which perform pretty well in terms of economic productivity and growth rates too (think Germany or Canada contrasted with the USA).

This conclusion holds true across a surprising range of contexts, though of course the details always differ. It was the secret of success in the East Asian ‘tiger’ economies after World War Two (where civic associations like students’ councils and service-user groups channeled information to and from both government and business), and in more recent examples of development success like Chile, Botswana and Brazil. In some ways it is even true of China and Vietnam today, though in both places ‘civil society’ activity is strictly monitored by the State.

The point is that a successful market economy has to be held in check by other forces in order to maximize its social benefits. When one of these ‘legs’ is weakened or dominates the others, societies become unbalanced and begin to suffer from too much government intervention, for example, or corporate interests that become too powerful in the public and political sphere. Maybe there’s a country somewhere that has too much civil society as well (that would be utopia for me!), though I’ve never found it, but even if it did exist I think it might well be unhealthy, given the need to sustain a constant, creative tension between three roughly-equal power centers and different sets of interests.

Over the past few years, this ‘three-legged stool’ analogy has been discarded by those who see only hybrid institutions on the horizon, like social enterprises, venture philanthropy and businesses that are socially-responsible. Distinctions between ‘for-profit’ and ‘not-for-profit’ groups and functions are seen as outmoded, and the route to social value lies through internalizing non-economic criteria into decision-making in the ‘triple bottom line’ – what Bill Gates has described as the power of ‘reputation.’

Such thinking is correct to the extent that businesses can increase their positive impact on society by incorporating social and environmental costs into their accounting, but it is seriously deluded as a general philosophy of social progress. That’s because the profit motive, even when diluted, is by far the strongest source of incentives in the marketplace, and it normally wins out over these other criteria when ‘the rubber hits the road.’ This has been the experience of successful social enterprises when they reach a certain size and profit level (think Ben and Jerry’s or the Body Shop, for example), as well as of building societies and credit unions in the United Kingdom.

The need to make a profit will always place limits on the ability of business to be a force for social good or to attack the most entrenched (and therefore expensive) social problems, and that’s why the ‘three-legged stool’ remains so important. In the very long term, it may be that ‘social business’ becomes the norm in the real sense of that term, but that will require huge changes in corporate governance and accountability, and a paradigm shift in the way markets actually work - and, of course, in the ways consumers exercise their choices.

In the meantime, give me a strong and independent civil society and an active and accountable government over a patchwork quilt of social entrepreneurs and corporate social responsibility. That’s much more secure and convincing as a path to the good society.

Why doesn’t business fix itself instead of meddling with others where it has no comparative advantage?

Over the last few years it’s become an article of faith that civil society - meaning philanthropy, community groups and the not-for-profit sector - should operate on business principles to become more effective and efficient, a movement christened “philanthrocapitalism” by the Economist’s Mathew Bishop. It sounds like a great idea, except that there’s no evidence to support it, and lots of examples that show how much damage it can do to the factors underlying positive social change. Even worse, it allows businesses off the hook by pretending that they can increase their social impact by reforming others instead of transforming their own business practices. As the best examples of CSR and social enterprise already show, real change will come when business acts more like civil society, not the other way around. That’s the message of my new book “Small Change: Why Business Won’t Save the World” which was published by Berrett-Koehler earlier this week.

Why am I so critical of the philanthrocapitalist revolution? First, it erodes the independence of non-profits and makes it more difficult for them to hold business and government accountable for their actions, or push them to do the things they don’t want to do. Second, it threatens the distinctive values of civil society which are based on cooperation and commitment, not the ethics of the marketplace, values that have spurred the creation of social movements from the abolition of slavery to pro-democracy protests in Iran. And third, it privatizes the way we solve collective problems and gives too much power to those who have little or no accountability to the public. That’s got to be bad for democracy. It’s great that business has a social conscience, but that doesn’t give them any right to decide how our schools should be reformed.

Compared to these thorny problems, there are plenty of opportunities to increase the social impact of businesses at the heart of their operations, if they choose to take them: pay your taxes as a good corporate citizen; don’t produce goods that kill, exploit, or maim people; pay decent wages and provide benefits to your workers; don’t subvert politics to pursue your short-term interests; obey the regulations that govern markets in the public interest; stop creating monopolies and other market manipulations so that other firms can prosper and wealth can be more widely shared; and scale-up new business models like commons-based production, worker-owned firms and community benefit agreements that change the ownership and governance of corporations. As Daniel Landsburg once put it on the “Creative Capitalism” blog, “if Archer Daniels Midland wants to get creative, I’d like to see them abolish their lobbying arm and let the sugar quota expire.” It’s not exactly rocket science, is it? Yet by and large, these kinds of measures are absent from the philanthrocapitalist agenda.

Is there any middle ground between these two positions? Sure, but in contrast to philanthrocapitalism, the most interesting approaches deliberately set out to use the power of the market to get useful goods and services to lower-income people while simultaneously altering patterns of ownership, consumption, production, and accountability — they don’t simply encourage more people to participate in the systems we already have. They recognize that far-reaching changes are necessary to transform capitalism, rather than simply extending its social reach or ameliorating its social costs. And by “social”, they don’t just mean a part of society, such as disadvantaged groups who are identified as targets for asset building among individuals. They mean the full range of social structures, power relations, and strategies for collective action and political mobilization that have historically underpinned large-scale progress for just these groups. They adopt some of the tools that business has to offer, but reject the underlying ideology of the market. And because the “yin” and “yang” of social criteria and the market are coequal or head from civil society to business and not the other way around, their impact can penetrate much more deeply into the structure of the economy.

We can and should encourage businesses to be more socially-responsible, but the need to make a profit sets real limits on what they can achieve. Compared to the scale and complexity of the problems we face, the contributions of government and civil society, and the benefits that come from changing the core operations of the market, business involvement in philanthropy is small change.

I will be debating these ideas with Mathew Bishop at Demos on January 20th at 6pm (www.demos.org/event_list.cfm).   Everyone is welcome, or you can watch a live webcast on the Demos website. After the debate, I’ll be posting another blog on Apesphere to describe and reflect on the conversation that takes place.

The Danish Institute for Human Rights has looked at investment decisions by institutional investors. The key finding is that social issues are not seen as material to business. Therefore they are not taken into account. And even where they are seen as material, they are difficult to quantify.

The sad truth is that most social issues are not financially material to business – at least as businesses are currently constructed. That is not an argument for ignoring them. For major businesses, it is an argument for changing the terms of listing. Disclosure of the principal social (and environmental) impacts should be made a condition of listing.

The current regime only requires disclosure of an issue if it is financially-material (which means relevant to shareholders). This might have been credible in the days before the crash when the market was supposed to sort everything out, in its invisible-handed way.

These days we need to develop stakeholder-materiality – and consider what everyone else cares about.