gross domestic product (GDP)—the magnitude of fl ows of goods and
services in the economy—is fundamentally grounded in the logic of
consumer and producer surpluses: the more exchange, the more value
created. In this frame of reference, Barro is right: No institution can
match the power of the large corporation in creating value.
A more broadly construed notion of the residual value created in
the course of a market transaction, however, turns out to be the key
to understanding the role of entrepreneurship. For all the diff erent
notions of entrepreneurship, the most fundamental and enduring
is the defi nition of the entrepreneur as the claimant of the residual
value generated by a new venture. Where producer and consumer
value are derived from single transactions (for example, the purchase
of a Ben & Jerry’s cone), the residual value claimed by an entrepreneur
is derived from the process of building a venture (for example,
the founders’ equity in Ben & Jerry’s itself).
The most obvious value that is created by new ventures is a
fi nancial one, but that is not the sole result of these activities. In fact,
residual values can take nonfi nancial forms. There are two principal
types of nonfi nancial residual value that can be claimed by an entrepreneur:
reputational and ethical. Reputational value is perhaps the
most important of the two. Muhammad Yunus, for example, may be
able to claim truthfully that he has never received a dividend from
Grameen Bank. But, there is no doubt that he personally has claimed
a dominant share of the reputational residual that the venture has
created. In this regard, Yunus is no diff erent from John D. Rockefeller,
Bill Gates, or Steve Jobs. Personal reputation—like a brand
for a corporation—is a valuable privately held asset.1
Another signifi cant category of residual value derives from the
ethical reward. The existence of an ethical
residual is precisely what makes it possible
for products that have a clear and persuasive
ethically based brand to be priced at a
premium. Recognizing this, explicitly ethically
based companies—for example, the
Body Shop and various fair trade ventures—
expend considerable resources to communicate
to consumers their nonfi nancial corporate
goals. Ethical residuals can also be
tangible assets: Charitable institutions such
as the American Red Cross and Greenpeace
USA have built sustainable business models
based entirely upon the creation, and reinvestment,
of the ethical residuals that motivate
charitable giving, and that over time are
capitalized in strong and enduring brands.
C r e a t i n g
Social Value
The extent to which each of these three
basic categories of private value—fi nancial,
reputational, and ethical—is pertinent for
a given entrepreneur or venture will vary
greatly. But, regardless of the composition
of the residual value, it is clear that without
at least one of these values there is no such
thing as entrepreneurship.
Yet entrepreneurs also perform other functions that generate
value. Any venture—including a restaurant or hardware store—
through its presence in a competitive market is generating some increase
in the private value captured by others. By off ering new jobs,
they keep existing companies from underpaying their employees; by
off ering new goods and services they keep existing producers from
overcharging otherwise potentially vulnerable consumers. The existence
of entrepreneurial activity in markets and the eventual reinvestment
of residuals do nothing less than create the possibility
for economic growth and social progress.
The residual value claimed by entrepreneurs also provides a resource
that can be used to address societal challenges in instances
where markets might be poorly developed or non-existent. Residual
value creates opportunities for reinvestment and cross-subsidization
of activities that may potentially benefi t people not involved in the
original transactions.
For Ben & Jerry’s, for example, the ability to charge a price above
the minimum cost of service provides the resources it needs to
support an array of other activities—some potentially “profi table”
in an accounting sense, some not—consistent with the founders’
respective visions of benefi cial societal impact. In the case of Ben
& Jerry’s, the subsidized activity is the work of its foundation, as
well as its employee relations practices and community outreach.
India’s Tata Group is another example of a business started by a
social entrepreneur that has grown into a $65 billion a year multinational
corporation. (See “From Social Entrepreneur to Corporate
Titan” above.)