Arnold Kling  

More on Profits vs. Non-profits

Lessons from the Yellowjacket ... What I'm Reading...

Picking up some comments on this post:

1. Non-profit is just a tax status.
2. One thinks of non-profits serving the poor, with for-profits serving the affluent.

On (1), I can see it for hospitals. When I go to a hospital, I do not know whether it is for-profit or non-profit. Of course, either way, there is a lot of regulation, and you can argue that you are dealing with something close to a public utility.

On (2), I am not so sure. For example, my guess is that the average household income for parents of students at the University of Maryland is above that of many for-profit universities. On the other hand, my guess is that the most profitable part of the for-profit education industry is the segment that serves affluent customers--I am thinking of the companies that do "test prep" for SAT's, LSAT's, etc.

I do get the point that if you are young and idealistic and want your work to have a goal of alleviating poverty, working for a typical business may seem unlikely to relate to your objective. But it's hard to know. Has poverty in India and China been reduced more by the action of aid agencies or by the fact that those countries are now embedded in the supply chains of U.S. service and manufacturing firms?

[UPDATE: Fabio Rojas expresses (2).

Non-profits provide services that are not sustainable in a for-profit format. This does not mean that the non-profit is waste, or that it is a subsidy for some wealthy person's vanity project, though some non-profits do reflect that desire. Rather, the customers simply can't pay for what might benefit them and "we" (the donors) have decided that these people need the service. The non-profit format is a way to handle donations to third parties in an organized and semi-public fashion.

...Non-profit charities have existed for centuries, which suggests that the organizational form has something going for it. My hunch is that it's signalling. Not only in the Hanson "I do this because I care" sense, but as a commiment to a specific issue. The people who run the local church organization for recent Mexican migrants have to show that they won't bail in order to give shareholders a slightly higher return. Rather, by making their organization non-profit, they show an allegiance to a specific type of person, not their wallet.

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COMMENTS (8 to date)
Don Levit writes:

Not-for-profit is a tax status that has to be earned, to be kept.
For example, in 1986, IRS code section 501(m) was introduced. This code section stripped Blue Cross and Blue Shield (and similar insurers) of their non-exempt status. The main reasons for the loss of tax-favored status were that the products were similar as well as the operations, to their for-profit competitors.
If an insurer today were to apply for 501(c)(3) or (4) status (what 501(m) directlt applied to), innovation and creativity could abound.
The purpose would be to set themselvs apart from their for-profit competitors. As long as their operations and products were distinctive, and they were financially sound, just think of the possibilities.
Don Levit

Brandon Berg writes:

It seems important here to draw a distinction between what one might call "non-profit businesses" and "non-profit charities." A non-profit business is very much like a for-profit business except that it must not pay dividends and is ostensibly run for the benefit of paying customers.

A non-profit charity is exactly what it sounds like, brokers transfers from donors to beneficiaries, and has no for-profit analog. There's no reason why a for-profit charity couldn't exist in principle, but it's unlikely that anybody would donate to one, even if it were proven to be more effective.

Other than being called "non-profits" and more or less conforming to the label, they don't have a lot in common.

By the way, what happens to a non-profit's assets upon dissolution? I assume they can't go to any particular individual--do they have to be donated to some other non-profit organization?

Paul McLellan writes:

I had an interesting argument a couple of years ago with a the sister of my then girlfriend. She was a senior person in finance at Nokia but was thinking about leaving and working for a non-profit like Oxfam. I took the position that Nokia had done more for poor people in Africa than Oxfam had since cell-phones had revolutionized communication, access to up-to-date market prices etc and so had led to growth, whereas aid is, at best, very cost-ineffective.

jsalvatier writes:

Fabio's point is a really great one. This definitely operates in Cryonics. I (and from what I can tell, others too) would be pretty hesitant to sign up for a for-profit Cryonics organization, but I am signed up for a non-profit Cryonics organization.

Bald Idiot writes:

For some reason Dr Kling's initial question, which I'll paraphrase as "what do most people believe about non-profit companies?" has been conflated with questions about the actual nature, purposes, and relative benefits of non-profit companies. I'm surprised Dr Kling allowed this muddying of the waters.

There's abundant anecdotal evidence that people believe non-profit companies serve society in a way that for-profit companies cannot. In the common imagination, the "missing" profit goes to an altruistic end. For example, in the case of Hospital NP (a non-profit) and Hospital P (a for-profit), Hospital P obviously will each year aim for a certain amount of profit. Suppose it averages a million dollars. In the popular understanding (perhaps I should use scare quotes), Hospital NP has foregone that million dollars each year in favor of cheaper prices, better equipment, more staff, or something else that serves its patients. The ability to work without need of profit also enables non-profits (in the popular imagination) to provide valuable services that a for-profit company could not or would not consider.

The popular understanding is, however, off the mark. A company's decision to seek non-profit status is often (I suspect always, but of course I can't be certain) strictly a tax/regulatory decision. I base this on my direct experience working for a non-profit organization and from conversations with principles of many other non-profit organizations.

Kevin Bob Riste writes:

Robin Hanson responds.

Bald Idiot writes:

I neglected (above) to mention the other reason a company might seek non-profit status: signalling (PR). In my experience, the tax (or regulatory) benefits were always primary, but the signalling benefit was acknowledged.

Michael Strong writes:


"Has poverty in India and China been reduced more by the action of aid agencies or by the fact that those countries are now embedded in the supply chains of U.S. service and manufacturing firms?"

See my article "Forget the World Bank, Try Wal-Mart" on Wal-Mart as the world's leading anti-poverty organization:

"Between 1990 and 2002 more than 174 million people escaped poverty in China, about 1.2 million per month.[1] With an estimated $23 billion in Chinese exports in 2005 (out of a total of $713 billion in manufacturing exports),[2] Wal-Mart might well be single-handedly responsible for bringing about 38,000 people out of poverty in China each month, about 460,000 per year.

There are estimates that 70 percent of Wal-Mart's products are made in China.[3] One writer vividly suggests that "One way to think of Wal-Mart is as a vast pipeline that gives non-U.S. companies direct access to the American market." [4] Even without considering the $263 billion in consumer savings that Wal-Mart provides for low-income Americans, or the millions lifted out of poverty by Wal-Mart in other developing nations, it is unlikely that there is any single organization on the planet that alleviates poverty so effectively for so many people.[5] Moreover, insofar as China's rapid manufacturing growth has been associated with a decline in its status as a global arms dealer, Wal-Mart has also done more than its share in contributing to global peace.[6]"

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