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


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.

various kinds of partnerships. and human employees. The three sectors differ dramatically with regard to the types of formal organizations that operate within them. anything from lawn care to bond trading.same time. but they are not 2 . volunteer fire departments).. and proprietorships. and community sector organizations match and thus facilitate collaboration between donors and beneficiaries. coercion such as via regulations and laws in the state. few organizations perfectly fit this simplified model. As we explain later.g. the state sector contains formal organizations such as the offices. types of formal organization include publicly-traded as well as privately-held corporations. charities. subjectively-determined structures such as cultures.g. Under the federal system of government. they may be embodied in formal organizations with legal boundaries. however. and norms). state and local spans of jurisdiction. these three orientations (that is. and cooperation in the community sector) help differentiate sectors. and various Councils). In the market sector. religious organizations.. In the market. the types of formal organizations vary even more dramatically. 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). Some of the organizations in the community sector act like businesses in that they provide goods and services for fee-paying participants (e. social institutions may be manifested formal organizations (as well as in more informal. including national. These institutions provide a valuable foundation in which economic activity can flourish.g. Resource acquisition The three sectors also differ with respect to how they acquire resources allowing their continued operation. agencies and directorates operating within the executive branch (including everything from the President‘s office to the IRS and the US military). habits. physical assets. Within the community sector. House of Representatives. and of course families. 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. and the different types of courts and criminal justice administrations operating within the judicial branch.e. 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. non-governmental organizations such as GreenPeace). In the US. the various assemblies and committees operating within the legislative branch (including the US Senate. these formal organizations can function at different levels of scale. Stereotypically. pursue an incredibly wide variety of activities.. non-profit hospitals and private schools). Formal organizations As noted above. regional. competition/innovation in the market. These formal types of organization may. including everything from NGO‘s (i. professional associations and organized interest groups which arguably may include labor unions). others provide goods and services for dues-paying members (e. in turn. to volunteer organizations. still others follow a more stereotypical donor/beneficiary system (e.

power is a critical currency. The formal organizations in this sector are expected to maximize efficiency. In the market.. in the market. freedom of action and information is critical. Moreover. social relations work along boundaries erected to define groups and differentiate different communities. pay) and resources are typically distributed in the form of dividends. national security. and nonprofits such as advocacy organizations seek to coerce behavioral change (e. For markets to function effectively they must be competitive.g. with regard to recycling). social relations are structured with respect to defining those interactions that are inside versus those outside the group. In the United States and many other nations that rely on a participatory democratic political system.g.e. currencies Institutions in the market.exclusive to any one sector. values. Voting citizens are a prioritized group. grant cycle in some organizations. public health. national governments appear to compete for geopolitical influence. the state.. donors. such as the next earnings quarter or purchasing cycle. is to serve the people. care. annual report or program cycle in others). such as between a governing body and the governed. Priority is given to members. 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. to public safety. 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. and beneficiaries. broadly speaking. 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. The community sector‘s key currencies that shape and guide activity include social bonds. the voting cycle is a critical timeframe dictating interactions in many aspects of government. or entitlements such as Medicare and Medicaid. Resources are distributed in the form of services such as defense or sanitation. resources may be distributed in many different forms. and the desire for prestige or status. Thus. As a result. education. Goals. In the community sector. the primary goal is economic value creation (through innovation or other means) and the consequential profit or remuneration (i. different criteria for making decisions. For example. earnings or salary. For example. For example. and regulation of market sector practices that may cause harm. providing everything from the rule of law and the administration of justice. and the relevant time frames once again vary depending upon the organization (e. obligations. and their voting and lobbying behaviors are critical to their influence. the goal of the state. As a result. and benevolence. decision criteria. similar power actors engage in transactions such as those between buyers and suppliers or between competitors. 3 .. a hierarchy of social relations appears to dominate. businesses appear to collaborate toward shared benefit such as with joint ventures and alliances. In the state sector. Thus. Structure of social relations The institutionalized structure of social relations among actors also prototypically varies across sectors. Institutions associated with the state sector are entirely different. and different ―currencies‖ that are generated and exchanged through social interaction. and the community sectors also have different goals.

its founders and leaders announced to investors that the corporation would invest 1% of its profits. and uses its resources to lobby government to address issues unrelated to its core business such as promoting the viability of electric vehicles. social norms. Blurring Boundaries and Finding Overlaps As we delve more deeply and explore this model in the context of current events. Central tools of business (e. 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. 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. actions or issues. For example.Other criteria help differentiate these three sectors of society.. or just DotOrg. which are organizations that guarantee mortgages and answer to both government and shareholders. such as the division of labor. At the same time. when the corporation first sold shares in the stock market).org. not as a separate charitable foundation like the Bill and Melinda Gates Foundation. such as FannieMae and FreddieMac. Illustrative Example #1: Google A closer look at a particular organization reveals the permeable nature of boundaries between these three sectors. Larry Page wrote in a letter to potential investors. evolved to focus more narrowly on engineering-oriented projects that are an extension of Google‘s existing products. and difficult to clearly differentiate. When Google went public (that is. the practices associated with actors in each sector are becoming more dynamics. and the means by which individuals and subgroups exert influence. 1% of its equity. but as a business division in the for-profit corporation in order to free it from the constraints that apply to non-profits. 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. In 2011 Google reportedly donated over $100 million to various charities. such as using internet search patterns to track flu outbreaks or using GoogleEarth to track climate change.‖ Over time. Along similar lines. ―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. and 3) a nonprofit organization that leverages market mechanisms to protect the environment. we consider three examples in more detail: 1) a publicly traded corporation whose guiding principles include ‗do no evil‘. 4 . Here. and a significant amount of employee time and effort to philanthropic initiatives such as innovations designed to address climate change and poverty. we see that reality does not conform to any simple taxonomy. complex. When Google went public. cost and quality metrics. Google created Google.g. 2) a federal government agency with billions of dollars invested in efficient supply chain management strategies. Google. Hybrid organizations that bridge sectors have proliferated. return on investment) have been highly integrated into government organizations as well as many nonprofits. Google meets its philanthropic goals by supporting a wide range of charitable organizations.

such as when innovative ideas emerge from applying profit-producing products to societal challenges. and the levels of toxicity in Adirondack lakes have declined significantly. 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. 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. with support for the recent Japanese earthquake totaling $12.Thus. Raytheon.S. supply chains must not only be efficient.S. Google‘s initiatives represent a hybrid of market-. advocate for. In some cases however. garbage collection. the immediate goal of the organization is supply chain efficiency.and community-sector types of activities. distribute and service the food.. 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.edf.5 million. there is a trend toward the management of nonprofit and community organizations using concepts and techniques borrowed consciously from business. the taxpayers who provide capital to support them in exchange for safety and security. In today‘s globalized business landscape. military operations. including prisons.and grant2 3 http://www. They assume that it can be profitable to protect the environment. EDF has addressed declining fish stocks and endangered wildlife using similar market-based approaches. but also resilient to a wide range of operational and strategic .S. but also have costs.accessed 6 January 2012 5 . and guide the administration of policies to protect the environment. state. and in some yet is formally organized as a donor. the geopolitical balance of power. such as Walmart. Sulfur emissions have been reduced through market incentives.dla. The ‗competitive advantage‘ associated with the DLA‘s on-time delivery of reliable goods and services has a direct effect on U. 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. Perhaps nowhere is this trend more apparent than with the Defense Logistics Agency (DLA)2. and so they seek to create markets that encourage innovation and promise profits to investors. Illustrative Example #3: Environmental Defense Fund As with state organizations. but also participate in the innovation of business practices such as supply chain management. DLA‘s sales and revenues exceeded $46. In 2011. Other state organizations are increasingly adopting business management concepts and techniques. While the ultimate goal or outcome generated by the DLA may be to preserve democracy in the U.accessed 6 January 2012 http://www. procure. Illustrative Example #2: The Defense Logistics Agency Many different traditional functions of the state have been privatized in recent years in the U.. Congress brought it into existence through the Clean Air Act in 1990. These permeable boundaries work to Google‘s advantage.1 billion.aspx . The Environmental Defense Fund3 combines solid science with market forces to design. groups and organizations. The DLA illustrates how state organizations can not only adopt. and Cisco. The DLA employs 27. The DLA routinely performs the same service for humanitarian relief operations as well. nonprofits have begun to pursue their mission by directly leveraging economic incentives to influence individuals.000 people who source. fuel and energy needs of all the US armed forces in the world. and road construction.

tolerate negative externalities of corporate activity that could involve increased inequality. For example.E. Europe and the U. and interact to serve society‘s needs using a dynamic three-sector model of society. reduced trust and confidence. The ongoing economic crisis in the E. and altered the shape of certain markets.e. Unfolding trends in society raise a series of questions about the future of business practice and the appropriate models for conceptualizing business and society. 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‖. but this balance is shifting. globalization has permeated the community sector as well as the market sector. has brought attention to reports that 60% of all commercial activity in Greece. goals and outcomes.supported nonprofit. At the same time. An entirely different configuration of state and market sectors is emerging meanwhile in China and the U.g. and future business leader. formal organizations. and the structure of social relations – may be used to differentiate the three sectors. has toppled governments (e.U. to put government in charge of internet search or online communities. Its stated mission is to create triple-bottom line social. compromised employee ethics. Many European states have historically supported the arts. currencies... EDF seeks to align competitive forces with the power of the state. the Defense Logistics Agency. 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). but how their interdependence can be capitalized on in ways that benefit current investors as well as future generations. environmental and economic value to benefit the world community. and the sharing of information among activists in the Middle East.. organized. shaped political debates. or non-profit organizations with their preferred tax status. resource acquisition. 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. 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. The functional differences between institutions – i. or to create non-profit organizations to manufacture and distribute pharmaceuticals? Will you. On Reflection: Your Role in the Future of Business in Society We have analyzed how institutions are structured.S. Yet cases such as Google.A. Egypt). and the Environmental Defense Fund illustrate the extent to which the different sectors overlap and blur in practice. Business and Its Publics will provide students with a forum in which to conduct further study. occurs in the informal economy and is therefore not subject to state taxation. as evidenced by recent cuts to university budgets in the UK. as a citizen. community member.. or exploitation of natural and human resources? 6 . and refine their understanding of the trends currently unfolding.S. engage in dialogue. Indeed. should government organizations with their preferred connection to lawmakers and regulators. education and medical care to a greater extent than in the U. This case illustrates not only how the three sectors can overlap. and 40% in Italy. By cooperating directly with partners in the market and state sectors.

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? 7 .

Charities Cooperation (e. governing body and governed) 8 .g. Court. Security Exchanges between similar power actors (buyer/seller.g. membership) Power Justice.g. regulation) Community Schools. investment.) Profits.Table 1: Archetypes associated with the three-sector model Market Formal Organizations Resource Acquisition Currencies Goals/Outcomes Generated Structure of Social Relations Corporation. Prestige Support. etc. Benevolence Inside/Outside (e. Remuneration (pay) Efficiency State Military... Local/State/Federal Government Bodies Coercion (e. Partnership Competition (for sales. Obligations. Proprietorship.g. Hospitals. taxation. Care... competitors) Hierarchical influence (e. NGO‘s. donors and beneficiaries) Bonds.