Arnold Kling  

Non-profits, yet again

A Decade of Mexican Progress... Posner's Great Mystery...

Christopher writes,

imagine three axis [axes], one that runs from voluntary to coerced, one that runs from private means to public means, and one that runs from public ends to private ends. Now imagine three spheres: one tends towards voluntary, private means and private ends; one tends towards coerced, public means and public ends; and one tends towards voluntary, private means and private [sic--I am pretty sure he means public] ends. The first of these spheres is exchange, or what Kling seems to intend by for-profit. After all, it is usually the case that for-profit enterprises tend to involve the voluntary of exchange of private resources for private benefit. The second of these is taxation, though that could also be seen as tending towards coerced, private means and public ends. The third of these is philanthropy, in which private means are voluntarily put towards public ends; what I think Kling is gesturing at with his use of 'non-profit'.

I think he is right to want to draw a different distinction than the one between profit and non-profit. That distinction has not proven to be very satisfying.

He puts the focus on distinguishing private ends from public ends. I think that is the distinction that my hypothetical young idealist would like to make. When I say that the idealist wants to work for a non-profit, I am saying that the idealist wants to work toward public ends, not private ends.

But what is a "public end," and how does it differ from a private end? We could try borrowing the economic textbook distinction between public goods and private goods. But, honestly, I do not think that is what is driving our idealist.

I submit that the difference between a "public end" and a "private end" is like the difference between a gift and a purchase. You give someone a gift because you think it is something they ought to have. Either they will not or cannot purchase it for themselves. Hence, you give them health insurance, or education, or money to make ends meet. See Robin Hanson on this topic.

From an economic perspective, gift-giving appears to be rather inefficient. But it has some utility. Givers feel good about themselves. There is a greater sense of intimacy or personal connection involved in gift-giving.

I think the error (if indeed it is an error) in thinking that you are more noble working for a non-profit is the same as the error (if indeed it is in error) in thinking that picking out a present for someone else is better than giving them cash. Your motive might be paternalistic--giving the other person what you think they ought to want. Or it might be an attempt to signal intimacy. In any case, you are willing to sacrifice some efficiency in order to satisfy other motives.

Suppose that there are two organizations operating in poor villages in Africa. One provides cell phones and earns a profit. The other provides a school and earns no profit. An economist might wonder, which organization is providing the greatest benefit to the people of the village? It could very well be the cell phone company.

I think that my hypothetical idealist would not ask this question. The idealist would rather work for the school, regardless. Again, the idealist might think that education is what the villagers ought to have. Or the idealist might feel a greater sense of intimacy from "giving" education, as opposed to selling telecommunications.

[UPDATE: A commenter points out, correctly, that Mike Munger and Russ Roberts covered much of this ground in a podcast.

Related: See this post, recommended by George Paci.]

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CATEGORIES: Economic Philosophy

COMMENTS (8 to date)
Jeff writes:

There was an Econtalk podcast that Russ did with Mike Munger on the value of non-profits a couple years ago that was quite interesting. I'd highly recommend it if you've got an hour or so.

[Link added--Econlib Ed.]

Mike writes:

A thoughtful series of posts, thank you.

Ted writes:

I said this in a prior comment, but I'll say it again. We tend to judge actions based on our perceived motivations behind those actions. We view for-profit work as being driven by a selfishness and we view non-profit work as being driven by altruism and self-sacrifice. I think our perceptions of for-profit work are correct. Our view of non-profit work motivations is, I think, wrong because it's not that simple. Only a small minority give and work for non-profits due to pure altruism and care. Probably a majority are involved due to warm-glow altruism. And then there is a large minority of whom do it out of impure altruistic or signaling reasons.

Gift-giving, at least as described in the book you linked too, is not the same as charitable giving or non-profit work - not the same at all. I think it's clear non-cash gift giving is a signaling device. Non-cash gifts signal two things. The first, and most important, thing they signal is that you know enough about the person that you could reasonably infer something they would desire. The second signals that you put time and effort into thinking about them. Giving someone cash shows you put no thought or effort into their gift. For example, my girlfriend had a birthday last week. If I just handed her a check of equal value to the gift I gave her, she'd be incredibly pissed because it would demonstrate to her that I don't know her well enough to buy her something she would like and that I'm a lazy bastard who just woke up that morning and got my checkbook out.

Charitable giving is different, however. Who exactly am I signaling to? Nobody knows how much you give to charity and nobody asks (only my mom has ever asked me). I've never heard anyone tell me what percentage of their income goes to charity or how many hours they contribute to non-profits. Couldn't people just lie if they wanted to signal they were nice people?

Finally, I want to emphasize, as I did previously, that trying to compare non-profits to for-profits as you just did is a worthless exercise. Both serve vital functions and trying to say one is "better" than the other is to fail to recognize the different roles for-profits versus non-profits play in society.

Evan writes:


Couldn't people just lie if they wanted to signal they were nice people?

Lying can be hard to pull off convincingly. Maybe giving is a way to avoid this. Another possibility is that in the tiny villages we lived in for most of our evolutionary history, it was easy to see who was giving and who wasn't. So we evolved a desire to give without knowing why, in order to satisfy our nieghbors. This desire is now maladaptive from a purely selfish perspective, but it still persists, luckily.

steve writes:

Evan has a good point. Maybe its a hardwired effect left over from hunter gatherer days where charity could be expected to be reciprocated in the future. i.e. this week I have a good hunt, next week you have a good hunt.

Under those circumstances keeping your tribe mates alive for the long term may be far more usefull then collecting a bigger pile of arrow heads.

Bryan Willman writes:

I happen to be working with an org trying to get going (to help in the developing world, including Africa literally) and the motivations and constructions seem very complicated. (Even though the actual mission is simple and obvious goodness.)

The org has a non-profit because people will give money to a non-profit, both for tax reasons and because 501(c)3 is a kind of "stamp of goodness" from the IRS. And it has a non-profit because it's generally illegal to "volunteer" for a for-profit org, and this effort depends heavily on volunteers.

There will likely be some kind of "for profit but not really" orgs associated with or attached to this (fully legal, albeit complicated) because such can funnel investor funds to do the task.

(So, if a non-profit uses a low-profit L3C to provide some good to poor people, which those people buy at a subsidized price, but which somehow still makes a profit for investors who made the whole effort possible, where does that fit? You can argue it's more efficient than simple charity because the users are choosing to buy the product rather than something else - showing they value it.)

The motivations of the participants (including me) can be hard to assess. Some are interested because it's an interesting project. Some because of its possibility to improve the world. Others, I think, because it's "what they do".

Some similar orgs give the product away, and hit huge funding limits. Others sell products at much too high prices, and have little effect. All are in competition pretty much like they would be in conventional business, but with some different funding sources. The operations end up looking just like a for-profit, EXCEPT that they don't return any "excess return" to shareholders.

CONJECTURE: Some people who want to work for non-profits might be just as happy to work for a "no shareholder" org that returned 100% of its profits to either future project investment or to employees. So there's no "rent" to owners.

BFH writes:

I volunteer for two non-profits: one rescues/fosters/places stray cats and dogs and the other records textbooks for people with various learning disabilities. I think they both provide valuable "private" and "public" ends.

Stray animals are never going to be able to help themselves out of their situations. There is no "purchase" or amount of economic development that will change their lot.

The recording service stands a greater shot, but many of the textbooks are only ever used by one or two students. Even spreading the cost of production over five or six or ten students, for a full set of text books from elementary school through college courses it would cost thousands of dollars.

I don't think I'm more noble because I work with these groups. I just think these kinds of services would have an extremely difficult time being provided outside of a non-profit framework. If there were companies making money at it, I would have no problem going to work for them.

Michael Strong writes:

"I think that my hypothetical idealist would not ask this question. The idealist would rather work for the school, regardless. Again, the idealist might think that education is what the villagers ought to have. Or the idealist might feel a greater sense of intimacy from "giving" education, as opposed to selling telecommunications."

Unless your idealist has studied economics and concluded that, in fact, a properly structured free market system that is open to entrepreneurial initiative by all would actually have more impact than would either the cell phone company or the school. In which case the idealist would work, quite possibly for very low wages, for a free market think tank.

My implied quibble is that you assume that the motivation, i.e. idealism, is necessarily combined with ignorance of economics, as it usually is for "idealists." That said, I am an idealist, and know many similar libertarians, who do in fact believe that most for-profit work is more beneficial than is most non-profit work, and yet that most libertarian non-profit work is nobler still. Perhaps even Arnold Kling has a touch of this idealism?

I once drafted an essay on Charles Koch as the 20th century's greatest philanthropist on completely analogous grounds. Because most for-profit companies and wealthy individuals do NOT support libertarian idealism, those rare corporations and individuals who do have a disproportionately positive impact and deserve proportionately greater praise.

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