As businesses, social enterprises are subject to economic principles in the same way as any other business, but with their own special twist. This was further brought home while on a recent study visit to look at rural social enterprise development in the Scottish Highlands.

Adam Smith’s theory of the Division of Labour outlines the relationship between market size and specialisation in the work place and how that increased specialisation improves productivity. Importantly, he also went on to talk about some of the terrible human consequences when this idea is taken too far. But that’s for another time. For now I just want to stick with the numbers.

Essentially Smith observed the making of nails (hence the common “Pin Theory” moniker) and noted that if each of the workers focussed and specialised on just one or a few parts of the nail making process, as opposed to each of them making an entire nail from beginning to end, the quality and rate of production went up: an increased efficiency as a result of specialisation. He also noted something further: that this opportunity to ‘divide labour’ was directly proportional to the size of and access to markets – the bigger the market, the greater the demand; the greater the demand, the greater the opportunity for division and specialisation; therefore greater efficiency. Further still, he stated that the opposite was also true, that a nail maker in the Highlands, serving a much smaller, local market would undertake the whole production process individually, due to the significantly lesser demand.

This idea still holds pretty true today and has implications for social entrepreneurs trying to trade and make social impact in more rural settings. Because social enterprises rely on generating income from trading services and goods, when the local market is limited and/or seasonal, labour doesn’t only not divide, it starts to aggregate.

Consider the community of Knoydart. Like many places the Highlands and Islands at the latter end of the last century Knoydart suffered from a declining and aging population, lack of employment, business closures and issues of fuel poverty. With little existing markets, no private, purely for profit businesses were going to ‘inwardly invest’, and there was real need for services, if the community was to survive at all. With the right support there were opportunities for ‘more than profit’ businesses – social enterprise – however this relied, amongst other things, on a serious aggregation of labour.

This was the case in 2001 when with an initial start-up grant Angela Williams was employed by social enterprise, the Knoydart Foundation, to lead regeneration on the peninsular.

With a broad background in landscape architecture, project management and fundraising, Angela, supported by a team of one full time equivalent, found herself taking on new roles around deer management and ranger services, asset management in the form of leasing land, building renovation and affordable housing, a tourism bunk house business and even a hydro-electric scheme. More recently additional roles have also included the development of a community shop, venison butchery and establishment of an independent maintenance company, as the foundation worked to meet the demands of a variety of micro markets and social needs. This process of aggregation, responding to markets, and clearly the great work of the team, has led to growth. The foundation now has a sound traded income base and this ‘market making’ has led back to greater division. With population and visitor numbers growing, the Foundation now employs nine full-time equivalent staff and yes, their own hydro-electric engineer.

While Knoydart takes rurality to the micro extreme, the idea still holds weight for other less remote communities to a corresponding degree. Indeed this is also important in other areas of market failure, something we refer to as ’stacking up’ at RIO. Devonport Guildhall is a successful, independent trading social enterprise, spearheading the regeneration of a once deprived, recovering neighbourhood. For modest profits and a long return on investment no private company was going to care to involve itself in a near derelict Grade I listed Guildhall in the wrong end of town: a high risk project that no public body (what with plenty of other work to do) is going to dare to involve itself in. This is a job for social enterprise, because social enterprise ’dares and cares’.

Offering serviced offices, event hire, a popular café bakery, arts events and even weddings, the Guildhall ‘stacks up’. Eight years on, the business trades from strength to strength and Devonport is become a ’go to’ place for housing, business, heritage and culture, oh and bread of course.

Reality is more complex, often not just aggregating jobs into one person but more often a degree of simultaneously aggregating a range of businesses and social services into one organisation – social enterprises with multiple subsidiaries, business activities and projects. And that’s kind of the twist, because they care, they are able to bring in additional funding to address other areas of community need – health, education, culture and the environment, all generating additional income lines. And it’s this social benefit that increasingly offers a competitive edge in a 21st century market, a demonstration of the huge role that social enterprise has to play in regeneration, in both rural and urban settings.

If we want to succeed as businesses, we need to think like businesses and that means understanding economics in the socially interchangeable way that Smith did. That will allow social enterprise to keep doing the big job of going where the public sector dares not and the private sector cares not.