Events

Vijay Mahajan

Re-imagining Capitalism: Accounting for Externalities

Editor’s Note: This post originally appeared on Nextbillion.net on April 20, 2012, as part of a series on the Sankalp Forum.

Vijay Mahajan, chairman and founder of the BASIX group. (Image credit: Sankalp)

Historically, when we hear the word “capitalism” we think: markets, businesses, goods and services. But more recently images of Occupy Wall Street, broken global financial markets, inequality and ‘Too Big to Fail’ banks spring to mind. Clearly, there has been a shift in our thinking. From a description of an economic system, capitalism, to many, now represents the big bad markets.

At the Sankalp Summit 2012 last week in Mumbai, the opening plenary, “Reimaging Capitalism” set the tone for the following two days. The panel talked about the need to ‘reimagine’ capitalism, pushing us to conjure up creative definitions of how markets function and what they can do. What would it take to imagine markets being used as more than just a money-making tool?

Listening to the panel, the word that immediately popped into my head was externalities. Economics teaches us that when a good is produced, there is a cost or benefit to society, which is often forgotten by us consumers in day-to-day life.

One of the panelists, Vijay Mahajan, chairman and founder of theBASIX group pointed at the bottle of water on the table next to him, when you look at price we only look at the Maximum Retail Price (MRP). Mahajan suggested that the cost of a product to a buyer is not only the price that they pay for it, but its actual cost includes factors that we often forget to acknowledge; the non-recyclable nature of the plastic, the impact on the environment when the bottle was produced and the water was sourced, the thirst that the water quenched. In other words, the negative and positive externalities.

Social enterprises in that sense have started to assign value to these externalities – it is something that we, at Acumen Fund are starting to try and tackle, along with a group of other organizations in the sector that look at impact investing rating standards. When we make an investment, we assign value to how many lives the company positively impacts, not only how many units are sold. It’s a complicated conversation though. When Acumen Fund investee LifeSpring helps a mother safely deliver a baby girl – it is not only the cost of delivering the baby, but the positive externalities that LifeSpring is having.  For example, how do you measure the impact of the young girl, who 30 years later may positively benefit society by, for example, starting up a school in her locality? This is something that would not have existed had she not been delivered safely in the first place, which makes the accounting difficult.

(The opening plenary at Sankalp. Image credit: Sankalp)

But it’s not just accounting for externalities. During the plenary, another panellist Pravesh Sharma, managing director of Small Farmers Agribusiness Consortium (SFAC), outlined panchsheel (a hindi word meaning five-principles). He suggested that by adopting these five principles of good business, we could successfully re-imagine capitalism. Companies and growing economies, have to be inclusive and open, fuelled by innovation and enterprise, be environmentally and ecologically sustainable, be built on a truly global model that can replicate itself across the world, and exist to provide a voice of choice to even the most marginalised individuals.

Enterprises choosing to target markets that are underserved, or where the market has traditionally “failed,” face a significant series of challenges, only one of which has been outlined above around accounting for externalities. This makes discourse on how markets can do good all the more necessary. The only way to truly innovate, and not regurgitate old ideas is to keep the dialogue open. It’s encouraging to see forums like Sankalp providing a platform to push the conversation further, and allow experts and others to debate how we need to re-imagine capitalism, to truly ignite change.

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Keya Madhvani is a Business Associate in Acumen Fund’s India office.

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