Arnold Kling  

A Rant Against Non-Profits

Narrating the Mortgage Crisis... Sumner on the Big Macro Debate...

Today, I attended this panel (the link already has an audio, so you can listen. I ask a question at one hour and 29 minutes in.) featuring Gara Lamarche, who I mentioned in this post.

He was much more self-effacing in person than he is in his ideology. He believes in big political programs. He asserted that the reason that the elderly are not poor today is because we have Social Security. I'm sorry, but economic growth is a much more important factor.

One of the other panelists, Maya Wiley, made no pretense of humility. She would gladly spend whatever it takes (of other people's money, of course) to give everyone broadband Internet access, whether they want it or not. I can imagine a scene where she announces getting government funding for fiber-optic Internet connections to a poor neighborhood, and while she stands beaming in front of a group of poor people, several of them get out their smart phones and ask her, "You're not going to make me give up my 4G, are you?" (And, yes, poor people are adopting smart phones.)

Basically, Wiley and LaMarche reinforced my view that non-profits are for people who would rather dictate to customers than serve them. Consider this table:


In the profit-seeking sector, there is tension among all three groups. Shareholders and managers would like to sell to consumers at the highest possible price and lowest cost. Consumers want the opposite. Shareholders would like management to be maximally effective and minimally compensated, and management wants the opposite. But, as you know, the forces of competition force an alignment of interests. In particular, consumers have a strong say in what happens, because they can choose how much they are willing to pay for what the business is selling.

In the non-profit sector, donors are comparable to shareholders and agencies are comparable to management. But the beneficiaries have no say in the matter.

The issue for discussion in the panel was whether "metrics" are over-used or under-used in the non-profit sector these days. LaMarche and Wiley were arguing that they are over-used. I might actually agree. "Metrics" might give donors the illusion that they are holding agencies accountable for helping beneficiaries. In fact, though, who knows? Do you believe that school test scores are a sufficient measure of teacher quality, and that students and parents cannot possibly figure out for themselves who the good teachers are?

One of the other panelists, Leslie Lenkowski, embraces a Tocquevillian vision of many diverse small non-profits. I buy into that vision, but I fear that the reality is that government and non-profits have become too heavily intertwined. Many non-profits owe much of their funding to government grants. And other non-profits owe their existence to the desire of donors to push political agendas (LaMarche and Wiley proudly do that).

What's worse than a non-profit that by its nature ignores the wishes of beneficiaries and instead gives them what the donors and managers think they should want? A non-profit that by its nature uses the coercive mechanisms of government to ignore the wishes of beneficiaries, etc.

Holden Karnofsky has found a charity through which you just give money directly to beneficiaries. Obviously, this seems like a promising concept. However, my prediction is that it will not meet the psychological needs of the typical donor, and it would not surprise me to see traditional charities lobby with the IRS to make sure it does not maintain a tax exemption.

UPDATE: More in GiveDirectly from Alex Tabarrok.

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CATEGORIES: Economic Philosophy

COMMENTS (7 to date)
rpl writes:

It seems odd to use Wiley's proposed government program as an example in a rant against charities. There's a world of difference between a charity and a government.

It's not even clear what you're trying to argue in this recent string of anti-charity posts. Are you trying to say that people should monitor the charities they donate to more closely? That they shouldn't give to charities at all? For a while it looked like you were trying to argue in favor of for-profit "charities" but that's ridiculous because nobody would donate to such an organization (for reasons that should be obvious). So, what are you actually trying to say here?

Shangwen writes:

@ rpl:

What I take from the series of posts is that Kling (like many others) identifies a huge problem in the effectiveness of charities. A big part of the problem is the likelihood that, in the whole set of institutional activities (organizational management, soliciting donations, soliciting big gifts, selecting board members, picking causes, spending decisions, media exposure), there is more value provided to the organizers of benefits than to the recipients. I've volunteered on charity boards, and I think this is a fair criticism.

Some people think that leaving charities in the hands of tender-hearted rich people looking to expand their social network, is just a cost of doing business. However, the importance attached to managing those relationships means that "investors" will be averse to causes that may signal the wrong thing about them. If someone found that pedophilia could be permanently cured by putting participants through a costly but brief behavior modification program with guaranteed success, and that enormous future pain could thus be avoided, how many Wall Street wives would sit on that board?

Finally, consider this not-shocking article about cancer fundraising.

rpl writes:


I appreciate the point you're making, but I'm still not clear what the conclusion is supposed to be, unless it's that donors should give some thought to how effective their charities are. I'd have thought that was obvious, though. Moreover, I don't see how the focus on the not-for-profit business model of charities and how it differs from for-profit business models contributes to that conclusion, assuming it's even the intended conclusion.

In short, I get the feeling that Arnold wants us, the readers, to change our minds about something, but I can't figure out what, nor what sort of change he is advocating, nor what the relevance of the fact that charities are non-profit is supposed to be.

postlibertarian writes:

Hmm. The distinction between government and charities is muddy, especially when one funds the other, and even when they are completely separate the incentives may be the same. I think Arnold is simply saying that non-profits don't necessarily have the same incentives as profits to satisfy their customers, so to speak - thus his point about bringing broadband to a region perhaps better served by wireless internet.

It's a good point to get your profits-are-evil friends to think about, yet I also don't think non-profits are totally devoid of this motive, either. I mean, the whole point of most charities is "we want to help people" and there can even be competition to keep "customers" (for example, at Skid Row in Los Angeles where there are half a dozen homeless shelters within a couple blocks of each other). Perhaps the point is that when non-profits are wrong about what their customers want, a correction to that misallocation may not happen as fast as it does for regular businesses? I don't know, just rambling some thoughts here...

rpl writes:
The distinction between government and charities is muddy,
No, it really isn't. Taxes are mandatory, and donating to charities is voluntary. Even the fact that government sometimes gives grants to charities doesn't really change anything. If donors judge a charity to be ineffective, they will stop donating to it. If, on the other hand, taxpayers judge a government program to be ineffective, there's not much they can do about it. The fact that some of the residents might prefer wireless to broadband does not by itself make her plan unreasonable. If she were raising money through donations, then donors could decide for themselves if they felt that enough residents got something out of it to make the project worthwhile. Not so, with government funding.

I understand that charities (not, however, all "non-profits") don't necessarily have good incentives to please their customers. This is a special case of the general rule that when one party spends its own (or even more so, somebody else's) money for the benefit of a third party, they don't take as much care as they do when spending money on themselves. This is not exactly a new observation.

Perhaps the point is that when non-profits are wrong about what their customers want, a correction to that misallocation may not happen as fast as it does for regular businesses?
That is almost certainly true, but so what? The whole point of a charity is to provide goods and services to people who can't buy those things for themselves. That pretty much rules out a model where the recipient is a paying customer. Charity by its very nature involves one party providing something on behalf of another.

You could use these observations as an argument for giving out cash directly to the charity recipient, like in the post on MR earlier today, but if that's what's being argued, then the not-for-profit status of the charity is irrelevant. What you're really arguing about is how the charity can best use the money from its donors.

Jeremy writes:

Perhaps the difficulty lies in trying to describe solely in economic terms what is essentially a sociological problem.

I just finished reading Robert Nisbet's Twilight of Authority, which talks about how smaller centers of "authority" observed by Tocqueville have died, and the functions, expectations, that fell to these smaller centers of authority have been placed on the political sphere, which is creating intense pressures in the body politic that it was never meant to bear. This post is making me wonder how an economist would describe this shift. Anyone care to take a shot at it? I'm rather ignorant about economics, so I wouldn't dare to try.

It sounds like I'm saying that the difference between gov and non-profits is "muddy," but I'm not. I don't think that follows from what I said above.

Bryan Willman writes:

A Very Key Point is to always ask the question "who is the customer and what is the goal?"

Sometimes, the party who receives the charity is not actually the intended beneficiary, or at least not the only one.

A shelter for skid road bums - is the goal to "serve" said bums, and if so, what is the best service? Arm twist them into not drinking? Give them whatever they want?

Or, is the goal to reduce the burden on society of non-participating people - so the goal is to turn the bums into participating (tax-paying, less tax-eating, non upsetting) members of society.

Consider education - there's clearly an argument that the students are the customers of education.
But there's also an argument that the rest of us are the real customers, because we want upcoming children to be skilled and productive, so we don't have to provide our own medical care nor grow our own food in old age. To some extent, education is not "for" the students, but is rather "for" everybody else.

A charity can make this confusion many times worse. Is the goal to help poor people? Then why not start some enterprize that would hire them, so they wouldn't be poor anymore? Is the goal to save some part of the environment? Then why isn't population control the number 1 worldwide charity activity?

Or is the goal to serve the social needs of donars and volunteers? Well, that's been discussed above....

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