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Market, State, and Community: A Dynamic Three-Sector Model of Society

Batia M. Wiesenfeld & Matt Statler1

Business in (and of) Society

Business is global, pervasive, and increasingly influential in the world today. While there

may be some social agreement about what business is (at least in broad terms), the appropriate

objectives of business and its role in society is in dispute. The recent Occupy Wall Street protests

serve as one recent example of how this dispute can be framed, but questions about the role of

business are neither new nor easily resolved.

The goal of our course, Business and its Publics, is to bring first-year students at the

NYU Stern School of Business into that debate. By working through the concepts and issues at

stake, students develop critical thinking skills and insights that can guide their future study and

practice of business.

To launch the semester's investigation, we introduce a simplified analytical model that

locates "business" in one of three sectors that comprise and differentiate forms of social endeavor

in the U.S. and other developed nations (see Table 1). Recognition that the boundaries between

these sectors are permeable, blurred, and constantly changing leads to fundamental questions

about business and its publics that should inspire dialogue and reflection over the course of the

semester.

A Dynamic Model of Business in Society

From a historical perspective, people organize themselves into social groups to achieve

objectives collectively that they cannot accomplish alone. Across different times and cultures,

these organizations take on various structures and forms, but they still share the common

function of enabling groups of people to survive and thrive by organizing the production and

allocation of goods and services. When we look at modern systems, we see social activity

divided into three distinct groupings or realms: market, state, and community. The

organizations active in each realm reflect institutionalized practices that characterize and

differentiate each sector. The resulting institutions — businesses, government, and civic groups

(including religious organizations, charities, and interest groups that bind their members to a

purpose or cause such as the NRA) — give us tractable objects of study.

Many of the social sciences (e.g., sociology, anthropology, economics, political science)

are, at their core, the study of institutions. Institutions are critical structures or mechanisms

responsible for ordering society, making and enforcing rules or constraints governing human

behavior within a particular community, and providing a framework for cooperative activity.

For example, religions, schools, courts, families and corporations are all institutions. They are

associated with social values and have a permanence that transcends the conscious activities and

intentions of any individual people associated with them. Because such institutions develop and

function through countless human choices, perceptions, and judgments, and their very existence

reflects an emergent, collective agreement, they can be said to be ―socially constructed‖. At the

1 We are thankful to Karen Brenner, Robert Lyon, Irving Schenkler, George Smith, and Paul

Wachtel for their extremely valuable feedback on a prior version of this note.

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same time, they may be embodied in formal organizations with legal boundaries, physical assets,

and human employees.

Key predictors of the growth and development of many modern economies and societies

are the complexity and development of their social institutions and the level of trust and

cooperation that institutions in those societies elicit from community members. These institutions

provide a valuable foundation in which economic activity can flourish, suggesting that they are

like public goods in that providing it to one person provides it to all.

Analyzing the Sectors

Each of the three sectors of society is associated with a set of structures and processes

that can be used to differentiate and compare them. As we explain later, however, few

organizations perfectly fit this simplified model.

Formal organizations

As noted above, social institutions may be manifested formal organizations (as well as in

more informal, subjectively-determined structures such as cultures, habits, and norms). The

three sectors differ dramatically with regard to the types of formal organizations that operate

within them. In the market sector, types of formal organization include publicly-traded as well

as privately-held corporations, various kinds of partnerships, and proprietorships. These formal

types of organization may, in turn, pursue an incredibly wide variety of activities; anything from

lawn care to bond trading.

In the US, the state sector contains formal organizations such as the offices, agencies and

directorates operating within the executive branch (including everything from the President‘s

office to the IRS and the US military), the various assemblies and committees operating within

the legislative branch (including the US Senate, House of Representatives, and various

Councils), and the different types of courts and criminal justice administrations operating within

the judicial branch. Under the federal system of government, these formal organizations can

function at different levels of scale, including national, regional, state and local spans of

jurisdiction.

Within the community sector, the types of formal organizations vary even more

dramatically, including everything from NGO‘s (i.e., non-governmental organizations such as

GreenPeace), to volunteer organizations, religious organizations, and of course families. Some

of the organizations in the community sector act like businesses in that they provide goods and

services for fee-paying participants (e.g., non-profit hospitals and private schools); others

provide goods and services for dues-paying members (e.g., professional associations and

organized interest groups which arguably may include labor unions); still others follow a more

stereotypical donor/beneficiary system (e.g, charities, volunteer fire departments).

Resource acquisition

The three sectors also differ with respect to how they acquire resources allowing their

continued operation. In the market, businesses compete to make sales or acquire investors while

state organizations ultimately rely upon revenues coerced through taxation and service fees

(though borrowing is also common), and community sector organizations match and thus

facilitate collaboration between donors and beneficiaries. Stereotypically, these three orientations

(that is, competition/innovation in the market, coercion such as via regulations and laws in the

state, and cooperation in the community sector) help differentiate sectors, but they are not

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exclusive to any one sector. For example, national governments appear to compete for

geopolitical influence, businesses appear to collaborate toward shared benefit such as with joint

ventures and alliances, and nonprofits such as advocacy organizations seek to coerce behavioral

change (e.g., with regard to recycling).

Goals, decision criteria, currencies

Institutions in the market, the state, and the community sectors also have different goals,

different criteria for making decisions, and different ―currencies‖ that are generated and

exchanged through social interaction. For example, in the market, the primary goal is economic

value creation (through innovation or other means) and the consequential profit or remuneration

(i.e., pay) and resources are typically distributed in the form of dividends, earnings or salary. The

formal organizations in this sector are expected to maximize efficiency. For markets to function

effectively they must be competitive. Moreover, freedom of action and information is critical.

For example, buyers must be able to refuse to purchase from a particular seller and sellers (in

general) must be free to withdraw goods they cannot sell for a reasonable return.

Institutions associated with the state sector are entirely different; power is a critical

currency. Resources are distributed in the form of services such as defense or sanitation, or

entitlements such as Medicare and Medicaid. In the United States and many other nations that

rely on a participatory democratic political system, the goal of the state, broadly speaking, is to

serve the people, providing everything from the rule of law and the administration of justice, to

public safety, national security, public health, education, and regulation of market sector

practices that may cause harm.

The community sector‘s key currencies that shape and guide activity include social

bonds, obligations, values, and the desire for prestige or status. The language of rights is often

used to understand goals in this sector and institutions and so community organizations are

largely designed to provide support, care, and benevolence. Thus, resources may be distributed

in many different forms.

Structure of social relations

The institutionalized structure of social relations among actors also prototypically varies

across sectors. In the market, similar power actors engage in transactions such as those between

buyers and suppliers or between competitors. As a result, investors/shareholders and customers

are among the most important participants and the time-frames that dictate interactions depend

on the duration of the anticipated relationship which may be increasingly short-term, such as the

next earnings quarter or purchasing cycle.

In the state sector, a hierarchy of social relations appears to dominate, such as between a

governing body and the governed. Voting citizens are a prioritized group, and their voting and

lobbying behaviors are critical to their influence. As a result, the voting cycle is a critical time-

frame dictating interactions in many aspects of government.

In the community sector, social relations work along boundaries erected to define groups

and differentiate different communities. Thus, social relations are structured with respect to

defining those interactions that are inside versus those outside the group. Priority is given to

members, donors, and beneficiaries, and the relevant time frames once again vary depending

upon the organization (e.g., grant cycle in some organizations, annual report or program cycle in

others).

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Other criteria help differentiate these three sectors of society, such as the division of

labor, social norms, and the means by which individuals and subgroups exert influence.

Blurring Boundaries and Finding Overlaps

As we delve more deeply and explore this model in the context of current events, actions

or issues, we see that reality does not conform to any simple taxonomy. Rather, the practices

associated with actors in each sector are becoming more dynamics, complex, and difficult to

clearly differentiate. For example, profit-making corporations in the market sector may be driven

by their mission and the desire to create value for the broader community in ways that seem to

resemble non-profit organizations. Central tools of business (e.g., cost and quality metrics, return

on investment) have been highly integrated into government organizations as well as many non-

profits. Hybrid organizations that bridge sectors have proliferated, such as FannieMae and

FreddieMac, which are organizations that guarantee mortgages and answer to both government

and shareholders. Along similar lines, universities create ―technology transfer units‖ to ensure

that the school profits from the innovations and patents developed through research efforts of

their faculty and staff. Here, we consider three examples in more detail: 1) a publicly traded

corporation whose guiding principles include ‗do no evil‘; 2) a federal government agency with

billions of dollars invested in efficient supply chain management strategies; and 3) a nonprofit

organization that leverages market mechanisms to protect the environment.

Illustrative Example #1: Google A closer look at a particular organization reveals the permeable nature of boundaries

between these three sectors. When Google went public (that is, when the corporation first sold

shares in the stock market), its founders and leaders announced to investors that the corporation

would invest 1% of its profits, 1% of its equity, and a significant amount of employee time and

effort to philanthropic initiatives such as innovations designed to address climate change and

poverty. Google created Google.org, or just DotOrg, not as a separate charitable foundation like

the Bill and Melinda Gates Foundation, but as a business division in the for-profit corporation in

order to free it from the constraints that apply to non-profits. When Google went public, Larry

Page wrote in a letter to potential investors, ―We hope someday this institution may eclipse

Google itself in terms of overall world impact by ambitiously applying innovation and

significant resources to the largest of the world‘s problems.‖

Over time, Google.org evolved to focus more narrowly on engineering-oriented projects

that are an extension of Google‘s existing products, such as using internet search patterns to track

flu outbreaks or using GoogleEarth to track climate change. At the same time, Google meets its

philanthropic goals by supporting a wide range of charitable organizations. In 2011 Google

reportedly donated over $100 million to various charities. Employees at Google are able to

identify projects that they would like to work on that may build their skills and also save lives or

address larger social issues, and they can use work time to pursue these initiatives even if they do

not work in the DotOrg side of the business. Google also partners with governmental

organizations such as the Centers for Disease Control to identify solutions to society‘s problems,

and uses its resources to lobby government to address issues unrelated to its core business such

as promoting the viability of electric vehicles.

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Thus, Google‘s initiatives represent a hybrid of market-, state- and community-sector

types of activities. These permeable boundaries work to Google‘s advantage, such as when

innovative ideas emerge from applying profit-producing products to societal challenges, but also

have costs, such as the company‘s struggle to identify ways of measuring performance in this

arena that will be perceived as legitimate in an organization driven by numbers and metrics.

Illustrative Example #2: The Defense Logistics Agency

Many different traditional functions of the state have been privatized in recent years in

the U.S., including prisons, garbage collection, and road construction. Other state organizations

are increasingly adopting business management concepts and techniques. Perhaps nowhere is

this trend more apparent than with the Defense Logistics Agency (DLA)2, a civilian government

organization that operates a supply chain management system for the US Military that is

unparalleled in the scale and global reach of its operations. The DLA employs 27,000 people

who source, procure, distribute and service the food, fuel and energy needs of all the US armed

forces in the world. In 2011, DLA‘s sales and revenues exceeded $46.1 billion. The DLA

routinely performs the same service for humanitarian relief operations as well, with support for

the recent Japanese earthquake totaling $12.5 million. The ‗competitive advantage‘ associated

with the DLA‘s on-time delivery of reliable goods and services has a direct effect on U.S.

military operations, the taxpayers who provide capital to support them in exchange for safety and

security, and in some cases, the geopolitical balance of power. The DLA leadership refines its

strategies by participating in industry conferences where they engage in direct dialogue with

counterparts from major private sector firms with similarly-scaled logistics operations, such as

Walmart, Raytheon, and Cisco. While the ultimate goal or outcome generated by the DLA may

be to preserve democracy in the U.S., the immediate goal of the organization is supply chain

efficiency. In today‘s globalized business landscape, supply chains must not only be efficient,

but also resilient to a wide range of operational and strategic risks.

The DLA illustrates how state organizations can not only adopt, but also participate in the

innovation of business practices such as supply chain management.

Illustrative Example #3: Environmental Defense Fund As with state organizations, there is a trend toward the management of nonprofit and

community organizations using concepts and techniques borrowed consciously from business.

In some cases however, nonprofits have begun to pursue their mission by directly leveraging

economic incentives to influence individuals, groups and organizations. The Environmental

Defense Fund3 combines solid science with market forces to design, advocate for, and guide the

administration of policies to protect the environment. They assume that it can be profitable to

protect the environment, and so they seek to create markets that encourage innovation and

promise profits to investors. Their initial success story is the cap-and-trade system for sulfur

oxide – EDF experts designed a new commodities market for sulfur oxide and advocated for its

creation. Congress brought it into existence through the Clean Air Act in 1990. Sulfur

emissions have been reduced through market incentives, and the levels of toxicity in Adirondack

lakes have declined significantly. EDF has addressed declining fish stocks and endangered

wildlife using similar market-based approaches, yet is formally organized as a donor- and grant-

2 http://www.dla.mil/Pages/ataglance.aspx - accessed 6 January 2012

3 http://www.edf.org/ - accessed 6 January 2012

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supported nonprofit. Its stated mission is to create triple-bottom line social, environmental and

economic value to benefit the world community. By cooperating directly with partners in the

market and state sectors, EDF seeks to align competitive forces with the power of the state.

This case illustrates not only how the three sectors can overlap, but how their

interdependence can be capitalized on in ways that benefit current investors as well as future

generations.

Dynamic Changes That Increase Complexity

The preceding three illustrations of the complexity of the current business landscape

indicate that the three-sector model of society provides only an analytical point of departure

(rather than a comprehensive picture of the reality of society today). Business and Its Publics

will provide students with a forum in which to conduct further study, engage in dialogue, and

refine their understanding of the trends currently unfolding.

Indeed, from a global perspective the three-sector model that has operated in the US and

many other developed nations appears to be undergoing extreme stress. Many European states

have historically supported the arts, education and medical care to a greater extent than in the

U.S., but this balance is shifting, as evidenced by recent cuts to university budgets in the UK.

The ongoing economic crisis in the E.U. has brought attention to reports that 60% of all

commercial activity in Greece, and 40% in Italy, occurs in the informal economy and is therefore

not subject to state taxation. An entirely different configuration of state and market sectors is

emerging meanwhile in China and the U.A.E., where the national economies depend largely on

state-run enterprises for much of the commercial activity – a structure that is referred to as ―state

capitalism‖. At the same time, globalization has permeated the community sector as well as the

market sector, and the sharing of information among activists in the Middle East, Europe and the

U.S. has toppled governments (e.g., Egypt), shaped political debates, and altered the shape of

certain markets.

On Reflection: Your Role in the Future of Business in Society

We have analyzed how institutions are structured, organized, and interact to serve

society‘s needs using a dynamic three-sector model of society. The functional differences

between institutions – i.e., formal organizations; resource acquisition; currencies, goals and

outcomes; and the structure of social relations – may be used to differentiate the three sectors.

Yet cases such as Google, the Defense Logistics Agency, and the Environmental Defense Fund

illustrate the extent to which the different sectors overlap and blur in practice. Unfolding trends

in society raise a series of questions about the future of business practice and the appropriate

models for conceptualizing business and society.

For example, should government organizations with their preferred connection to

lawmakers and regulators, or non-profit organizations with their preferred tax status, be allowed

to compete with for-profit corporations? What are appropriate models of partnership and

interdependency among these organizations?

Would it benefit society to privatize activities such as university education and prisons, to

put government in charge of internet search or online communities, or to create non-profit

organizations to manufacture and distribute pharmaceuticals?

Will you, as a citizen, community member, and future business leader, tolerate negative

externalities of corporate activity that could involve increased inequality, reduced trust and

confidence, compromised employee ethics, or exploitation of natural and human resources?

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Will you and the organizations you work for and lead create value in society by solving

social problems? Will you capitalize on rapidly evolving global, social and economic change to

generate profits from the value you create?

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Table 1: Archetypes associated with the three-sector model

Market State Community

Formal

Organizations

Corporation,

Proprietorship,

Partnership

Military, Court,

Local/State/Federal

Government Bodies

Schools, Hospitals,

NGO‘s, Charities

Resource

Acquisition

Competition (for

sales, investment,

etc.)

Coercion (e.g.,

taxation, regulation)

Cooperation (e.g.,

donors and

beneficiaries)

Currencies Profits, Remuneration

(pay)

Power Bonds, Obligations,

Prestige

Goals/Outcomes

Generated

Efficiency Justice, Security Support, Care,

Benevolence

Structure of Social

Relations

Exchanges between

similar power actors

(buyer/seller,

competitors)

Hierarchical influence

(e.g., governing body

and governed)

Inside/Outside (e.g.,

membership)