What is a social economy and why does it matter?

The idea of a social economy is not particularly new, but in the UK at least, it remains rather an under-used and ill-defined idea. So, what exactly is a social economy? In this blog, Bristol activist Jim Brown discusses its history in order to decide whether it is really different from other types of economy. Does everybody mean the same thing when they refer to a social economy?

Back in the early 1980s we didn’t know about the “social economy”. Instead, we talked about the “third sector” to refer to co-operatives and community businesses. The third sector occupied the space between private businesses and nationalised industries. Three different models of ownership and control, three different sets of values and principles, all competing in the same “market economy”. This was the era of the “mixed economy” that blended the market economy with the planned economy of the state. Market economies are transactional with products and services being bought and sold. Planned economies are non-transactional, with needs-based provision at the point of delivery. Public and third sector enterprises were an essential part of this mixed economy, addressing private sector market failure, and ensuring that public benefit in key areas.

The rise and rise of the market

From the late 1970s onwards, the mixed economy came under attack. Monetarism and the Thatcher Government set about dismantling nationalised industries, rolling back the state, and promoting what they called a free market economy. The Labour Party responded by using Labour held local authorities as a vehicle for implementing its vision of an Alternative Economic Strategy. Co-operatives and community businesses were the flavour of the month. The Greater London Council (GLC), under the leadership of Ken Livingstone, ensured that every London Borough had a local Co-operative Development Agency (CDA). Co-operatives were seen as the answer to mass unemployment, poverty and inequality. When they failed to deliver on this front, local government started to lose confidence. On top of this, the Thatcher government, having already privatised most public sector industries, set about putting lower levels of local government under a tremendous financial squeeze.

By the late 1980s it was evident that the number of co-operatives and community businesses had peaked and was now in decline. Nationalised industries were a thing of the past. The concept of a third sector, as originally conceived, was becoming untenable. Then, in 1989, the European Commission established its Social Economy Unit to guide and develop its social programmes. The term “economie sociale” had been used in France since the 1900s to refer to the activities of co-operatives, mutuals, associations and foundations. In the UK, with its different traditions of voluntarism and charity, the concept of a social economy that connected co-operative and community enterprise with voluntary and charitable activity was new. Nevertheless, the term social economy started to gain currency among the dwindling number of local CDAs, in part spurred on by the fact that many were dependent upon the European Social Fund for their continued existence.

But there was a reluctance to embrace a social economy that brought together the three Cs of co-operatives, communities, and charities. Co-operative and community enterprise proudly hung onto its business credentials, and although it welcomed as much grant income as it could get, it was suspicious of voluntarism replacing paid work, and instinctively mistrusted the inequality of relationships in philanthropy, charity and the “gift economy”. The voluntary and charity sector meanwhile, was suspicious of anything that sought to promote a “more business-like approach” to management.

The old model of philanthropy, based on a gift economy where donors gave and beneficiaries received, mediated by independent trustees who guaranteed fair play, was under attack. Charities that specialised in public service delivery were under increasing pressure from public sector service commissioners to bid for contracts based on outputs not outcome. It had been the unwritten rule of charitable giving that you supported the purpose and the outcome, and that you were not purchasing a specified set of outputs. The concept of public benefit is what sets the gift economy apart from the market economy and its central assumption of self-interest and private benefit. Now, public service commissioners wanted evidence of value for money. The boundary between grants and contracts were blurred by “service level agreements” that skirted around UK charity law. More and more charities were establishing trading subsidiaries so that they could compete for contracts without jeopardising their charitable status.

Social enterprise

Meanwhile, co-operatives and community businesses were also competing for these public contracts, creating further tensions around a unifying concept of a social economy. New types of enterprise were entering the fray, including “social firms”, development trusts, and intermediate labour market projects, competing for the same European funding. Local CDAs in London, fearing for their own future, and wholly dependent on European funding secured through a consortium body called London Co-operative Training (LCT) decided something had to be done to rebrand itself. To claim a broader relevance for its work, it sought a term and brand that would bring together all the different types of enterprise including co-operatives, community businesses and social firms. They came up with the label “social enterprise”. A year later, in 1998, LCT was merged with London ICOM, a regional membership body for workers co-operatives, and Social Enterprise London was born. It was the first organisation in the world to use the term social enterprise in its name.

Social enterprise soon became the rocket fuel that powered the concept of a social economy in the UK. In 2001, the Blair government established a Social Enterprise Unit within the Department of Trade and Industry. By 2006, the Social Enterprise Unit had been merged with other parts of government to establish the Office of the Third Sector within the Cabinet Office. Confusingly, the government used the French definition for the social economy to define what it meant by the third sector.  The charitable world struggled with this redefinition and continued to resist the pressures to be more business-like. Charities and profits don’t mix, indeed a charity is not allowed to use the word profit (or loss) in its accounts. It is an alien concept. Instead, it must account for any unexpended income, and justify why it might build up financial reserves. Charities have a different relationship with money and income, capital and revenue.


In these early days, I found myself working with charity professionals who had been drawn into the social enterprise world via the new contract culture that was steadily marketizing the charity sector. The Blair government was urging charities to replace grants with social investment.  This didn’t make sense at all, because social investment meant loans or other forms of “patient capital”, whilst for most charities, grants meant revenue income, not capital. It was the kiss of death for a charity to replace a revenue grant with a capital loan.

I struggled to make sense of the charity world and its take on enterprise and contracts. At the time Stephen Bubb was making a big fuss about a new concept he called Full Cost Recovery that was taking the charity sector by storm. He was the boss of the Association of Chief Executives of Voluntary Organisations (ACEVO) and a champion of the contact culture. I struggled to understand what this new wonder concept was, until I translated it into business speak. What he meant was that charities should price their contracts above the marginal or direct cost of the activity and ensure that it made a full contribution to the overheads of the charity, employing what the business world liked to call break-even analysis. This was so obvious to me that I convinced myself Full Cost Recovery must be referring to something else. It couldn’t be so basic, could it?

Then one day I was invited by a charity to help them sort out a financial crisis. They had set up a consultancy business as a trading subsidiary, using the time and expertise of their staff to win lucrative contracts with businesses. It had won lots of contracts. So why was the charity in financial difficulties when its new subsidiary was making all this money? The simple answer turned out to be that it was treating its trading income as pure profit, without attributing any costs to that income, these were all being born by the parent charity. Not only was this bad business (it was making a loss when the full cost of those activities was attributed to the subsidiary), it was breaking charity law, using charitable resources to prop up commercial activities.

The marketisation of the charity sector surged throughout the late 1990s, with the proportion of earned income soaring from 33% of total income in 1995, to 51%, the main source of income, by 2007. Earned income in charities reached a peak at 56% in 2011 and has since fallen back to 47% in 2019 prior to the pandemic.  Earned income remains an important part of the funding mix for charities, matching voluntary income from grants, gifts and donations. Charities can earn income in pursuit of their primary objects without recourse to a trading subsidiary. They must compete for trade, with the singular advantage that they do not have to generate profits to satisfy shareholders. On the other hand, they are at a disadvantage in not being able to raise share capital, unless they are a charitable community benefit society.

Voluntarism and mutualism

It is curious to me that the main national charity support organisations choose not to use the word charity in their names. The National Council for Voluntary Organisations, the National Association for Voluntary and Community Action, the Association of Chief Executives of Voluntary Organisations all avoid the term, despite making it clear they support charities as soon as you look at their websites. The preferred term is “voluntary”, pointing to an important aspect of the gift economy, where people give freely of their time and expertise. Volunteering is an important resource for most, if not all, charities. I am not sure why charity support organisations prefer this term, but I suspect it might have something to do with the image of charities as patriarchal concerns, governed by self-appointing oligarchies, anonymising their donors, and distrusting beneficiaries, deciding what is best for “them” on the donors’ behalf. Voluntarism is a lot more empowering, engaging and egalitarian for the “gifter” or donor in this gift economy, and a whole lot more personal and direct for beneficiaries and gifters alike.

Voluntarism overlaps with its close cousin, mutualism, where a community works together for their mutual or community benefit. Mutualism often relies on volunteer support and donations to provide services within the community. There is an important distinction here between public benefit and community benefit. Public benefit separates donors from beneficiaries, whereas community benefit implies that actors can be both donors and beneficiaries.

Building societies, one of the earliest types of mutual in the UK, enabled communities to pool their savings to finance home building for members of that community. Another early type of mutual aid were the many friendly societies that were established in the nineteenth century to provide for health and sickness insurance, pensions, and other forms of benefits, in an era before the welfare state and national insurance was developed. Today, many community groups and local grassroots organisations work to the principles of mutualism, even though they might not use or even be aware of the term.  Lots of amateur sports clubs, village halls, youth organisations, residents’ associations, neighbourhood groups rely on voluntary support, local fundraising and donations to provide facilities and services of mutual community benefit.

So what is the social economy?

From the early 2000s onwards, I became involved in the development and delivery of a national professional development programme for social enterprise support practitioners in partnership with Social Enterprise London.  One of the most basic and important lessons in this programme was an analysis of the social economy. Using the same definition as the French, the social economy spans co-operatives, mutuals, associations and foundations (similar to charities and voluntary organisations in the UK). What unites these three very different forms of organisation, is that they are all in pursuit of a social purpose, be it the public benefit of charities, the community benefit of mutuals, or the member benefits of co-operatives. What separates these three forms is that they each work to their own set of economic principles.

The social economy is comprised of three distinct sets of economic principles, the market economy, the gift economy, and the mutual economy. All three models can serve a social purpose, although an alternative model of enterprise is required to deliver a social purpose in a market economy, hence the special emphasis on social enterprise.

The best, and most basic advice a practitioner can give is to identify which of these three economic models best suits a proposed activity. Social enterprise is not always the best way of delivering social purpose. It may be that the social purpose can only be fulfilled through charity and the gift economy. Alternatively, it might be better suited to the mutual economy.

Of course, the boundaries between these three different models are very fuzzy, and in the same way that charities might include some trade in their activities, social enterprises might be most effective by drawing on the gift economy to make their activities economically viable. For instance, consider the supply of food to a community. If the social need is that people in the community cannot afford to buy a healthy supply of food for their family, then a food bank based in the gift economy is probably the most appropriate response. Alternatively, if the community is losing its last grocery store, then a community owned grocery store may be appropriate. Finally, if the community is concerned about the lack of fresh fruit and vegetables, it may be best addressed by a mutual economy initiative, such as a community allotment scheme, or a community buying group.

Getting the basic model right is crucial. Then the more advanced task is to know how to draw on the other two models in the social economy to improve the performance of the organisation. For instance, a food bank may be able to draw on the local community for volunteers, to reduce overheads and strengthen community identity that this is a mutual concern. A community-owned grocery store can also reduce overheads by using volunteer workers, as well as drawing on local professional advice, and inviting more wealthy members of the community to invest in the business.  The community allotment scheme could strengthen its sense of community solidarity by donating surplus produce to local food banks or charities. Alternatively, it might sell surplus produce to meet its overhead costs.

For me, the most exciting part of the social economy is social enterprise. How can we transform the business model for a socially purposive, post-capitalist future? Social enterprises must be able to compete with private and public enterprises in the market economy. It can best do that by drawing on other parts of the social economy to give itself a social competitive advantage.