Arnold Kling  

What I'm Reading

The Great Factor-Price Equaliz... End the IMF?...

Uncharitable, by Dan Pallotta. Recommended by Amy Willis with regard to my discussion of nonprofits.

So far (I am less than 1/4 through), the book says the following:

1. Organizations that seek to achieve charitable ends should be permitted to use capitalist means. That is, charities should be able to pay high salaries, advertise, make long-term investments, and earn a profit. If you eradicate third-world poverty or cure cancer, why should it be a problem that in the process somebody earned a large salary or a high return on investment?

2. The reason that we do not let charities do this is that our concept of charity is derived from Puritan beliefs. According to Pallotta, Puritans believe in what Dierdre McCloskey would call bourgeois dignity. Hard work and commerce are virtuous. However, they lead to rewards, and the Puritanical outlook is that humans are fundamentally sinful, so that they do not deserve rewards. They need to offset their rewards by working for charity. Furthermore, charitable work must not earn rewards. Hence, nonprofits and the restrictions thereon.

On (1), I think that the distinction between ends and means is interesting. It certainly points out the difficulty of segregating profits from non-profits. If an office at a non-profit has a working lunch, can they order in from a for-profit pizza place? Or does doing so corrupt the non-profit.

Pallotta speaks as if people make a clean distinction between a commercial sector, where it is ok to get rewards and a charitable sector where it is not ok. I am not sure that the distinction is quite that sharp. For example, in health care, Marcia Angell and others will argue that it is immoral for money to go to advertising and profits in the pharmaceutical industry.

On point (2), I will grant the descriptive value of associating our ethics regarding charity with Puritan values. But as far as saying that our views on charity definitely trace back to Puritanism, I think that is a lot of weight to put on one variable. I would look to other countries or parts of the U.S. where Puritan influence is weak, and then I would see whether similar sentiments about commerce and charity can be found. If so, then Puritanism per se is not the causal factor.

Pallotta points out that among Puritans, men tended to dominate the commercial sector while women were more prominent in the charitable sector. He assumes that this reflects cultural factors. However, the gender differences may be related to the finding that women use volunteer activity as a mating signal. Of course, this finding might be a product of culture. But it could be that what Pallotta ascribes to Puritan religion might in fact be explained by evolutionary psychology at some level.

UPDATE: corrected (I hope!) multiple misspellings of author's name

COMMENTS (12 to date)
rpl writes:
Organizations that seek to achieve charitable ends should be permitted to use capitalist means. That is, charities should be able to pay high salaries, advertise, make long-term investments, and earn a profit.
Charities can already do most of those things. They can certainly advertise, and they can retain excess earnings, though they can't pay them out ad dividends. Some charity CEOs have been criticized for earning salaries in the mid-six figures. I don't know whether you consider those "high salaries" or not, but it should be enough to attract good talent. What, specifically is it Pallotia wants them to be able to do that they can't do already?
If you eradicate third-world poverty or cure cancer, why should it be a problem that in the process somebody earned a large salary or a high return on investment?
Seriously? Charities rely on donations. I can see how paying higher salaries, up to a point, to attract more effective management might make the charity more effective at spending the remaining money, so I could (maybe) over look that. Why, however, would I reach into my own pocket to donate money to an organization who is going to turn around and give it to its shareholders. These are shareholders, mind you, who chose not to donate their investment to the charity, but instead to take dividend-paying shares.

Sorry, but a "charity" like that would fall pretty far down my list of causes I'd like to donate to. Specifically, it would fall well below the Springfield Geographic Society, a charity I just invented whose proceeds will be 100% dedicated (no overhead!) to sending me and Mrs. rpl on a fabulous vacation in some exotic land. I'm very excited about this project, so do let me know if you'd be interested in donating.

kurlos writes:

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E. Barandiaran writes:

Here in Chile there is a hot debate about whether universities should be only non-profit organizations. Current law dictates that they must be non-profit but indeed some business practices can be regarded as profit-motivated (for example, paying high rents for buildings owned by members of the university's controlling group or paying high salaries to managers that are also members of that group). Not surprisingly, some practices of state universities also amount to overpayment for the provision of goods and services, or worse weak controls on the quantity and quality of the goods and services actually delivered. Everything you have said about the difficulties to separate the two types of organizations applies to Chilean universities. The problem is that the law mandates that private universities must be non-profit and the Chilean government --as usual-- has a hard time controlling its implementation.

More important, between 1990 and 2010 Chile was ruled by a center-left coalition that never questioned the law and never intended to improve the control of its implementation. Since March 2010, a center-right government is challenged by the left for not controlling private universities and they like to denounce a number of practices as indicative of a profit motivation. It's part of the left's standard strategy everywhere --when they are in government, they milk profit and non-profit organizations as their own cows, but once they are out of power they denounce the bad guys running now the country. So I don't blame Chile's Puritans for the new campaign against for-profit universities; it's just the left that is out of power.

Joe writes:

Getting rid of the corporate income tax would solve this problem.

AMW writes:

I'd just like to point out that in mentioning the author's name you spelled it 3 different ways in 5 attempts, and managed to get it wrong in every case. His last name is spelled "Pallotta."

Otherwise, this is a great post.

PrometheeFeu writes:

Well. I think the main problem is that charities have all sorts of tax advantages. If they are allowed to operate identically to for-profit organizations, many of us might create shell non-profits to escape taxes. I'm sure you can see why that might be a bit of a problem.

Justin writes:

"If you eradicate third-world poverty or cure cancer, why should it be a problem that in the process somebody earned a large salary or a high return on investment...The reason that we do not let charities do this is that our concept of charity is derived from Puritan beliefs."

Charities aren't eradicating third-world poverty or curing cancer. Third-world poverty and cancer continue to be problems. The charities do help relieve suffering or advance knowledge at the margins, but thats it. In that context, an extra dollar going to an administrator is a dollar that could be used for cancer research or to immunize a child against some vicious disease. As rpl notes, that's why I'm handing the money over to them in the first place. It's not out of Puritan beliefs that I don't want administrators earning a high salary - it's because I'm giving the charity $100 to put (as close as possible) $100 worth of food in starving children's mouths, not help an administrator buy a BMW. Now, if that awesome administrator won't work for the charity if he can't afford a BMW, then fine, some overhead is acceptable. But in general, I want my nonprofit dollars to be helping the people the nonprofit claims to be helping.

That all said, I'd have no problem with the administrators of a charity that actually 'eradicated' third-world poverty or cured cancer making $1 million or $10 billion for that matter.

Tim writes:

I really wonder if anyone can make a case that our view of charity is Puritan. I was thinking the other week that it was, if anything, due to western intellectualism's debt to Roman Catholicism.

Catholics (generally) posit that humans posses libertarian free will. That is to say, we don't choose things on the basis of deterministic factors. A thing can be good and we're free to choose it, or a thing can be bad and we're free to choose it just the same. A person is moral when he chooses the good, despite being able to choose the bad.

Puritans, particularly American Puritans, follow Jonathan Edwards' notion of compatibilistic determinism, wherein humans always do what they most want. Choices are made on the basis of what the chooser considers to be the best option available. People are moral when we believe those things which are morally good are the best choice we can make, such that good people choose to do good things deterministically.

You can see in the latter view the beginnings of the modern Economic definitions of scarcity and opportunity cost. To say that people can only choose to do one thing with their time/money, and therefore consider all their choices and do that which they consider to be best, such a claim fits equally well within modern economics textbooks and 17-18th century treatises on free will. Within Puritan philosophy on the subject of free will, the Randian ethic "I will never live for the sake of another" isn't moral or immoral, it's tautological. All humans always do what they most want. If we help others, we can only help others because we want to help others, because helping others provides us with pleasure, in which case what we are doing is in a very real way self-serving.

As such, I don't see how any consistent Puritan could have a problem with allowing people to do charitable work out of self-seeking motives.

Shangwen writes:

Great post. I see this as consistent with the belief that doing good or providing a benefit needs to be immediate and direct in order to be "authentic". This is consistent with a religious orientation and a bias for signalling. If you donate a box of old National Geographics to a palliative care center, you will get more accolades than the company that upgrades their pharmacy software for a tiny cost.

One of the limitations of the non-profit world is that there is limited openness to the concept of an impersonal value chain, regardless of the benefits that accrue from it.

Keith writes:

The third paragraph from the bottom: You've written the author's name as "Pellatio." Really.

anonymous writes:

I look forward to reading Pallotta's book.

A few posts back you said:

"I am starting to come around to the view that the distinction between profit and non-profit may not be the central issue."

From point 1 above, it sounds to me as if Pallotta's position is that the non-profit/profit distinction is very much the central issue. Where does the non-profit get the information it needs to determine whether so-called "high salaries" are appropriate? Absent profit and loss accounting it can do no more than guess, and in so guessing the non-profit leadership may place too much weight on whether those salaries are politically and culturally palatable. This is no way to determine compensation--that is, IF the non-profit's explicit and implicit goals are perfectly aligned.

odinbearded writes:

Pallotta seems to be missing a big issue. A charity's 'product' is its identity. It tries to sell its vision to donors. Since all charities mean to "help" others, we should look at them as competing goods.

As with any product, people look at the price. If I want to give $100 to someone in need, I give $100 to the charity of my choice. If the charity spends $20 on overhead, then I end up donating only $80. If another charity only needs $10 for overhead, then I end up donating $90.

So why should I buy the more expensive product? Maybe they provide more oversight, or a greater value per dollar spent. But if they are more expensive, they can't complain that they receive fewer donations. So what Pallotta seems to be missing is that what is "preventing" higher salaries and marketing budgets is market forces, not Puritan ideals.

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