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profit vs. non-profit: responding to kling

Arnold Kling has a post questioning the profit/non-profit distinction.  The whole post:

I am curious about the intuition that people have about non-profit work. The standard intuition is that going to work for a profitable company means that you are not serving people, only the profits of the company. On the other hand, working for a non-profit means serving the community. Do I have that right?

Of course, I think that profit-seeking enterprises serve the community, also. In fact, they do it in a way that is more sustainable and more accountable. It is more sustainable, in that the value of what they produce is greater than the cost of the resources (including labor) that they use. Otherwise, they would not make a profit. However, a non-profit can very well use more resources than the value of what it produces. A profit-seeking enterprise is more accountable, in that a profit-seeking business must satisfy consumers or else go out of business. Hence, it must provide something of value to its customers. On the other hand, if a non-profit fails to provide any benefit to its customers, it still might be able to obtain grants from the government or from donors.

Is my perspective valid? If so, why is the conventional intuition so pervasive?

A few responses:

  1. Arnold is right in thinking that for profit firms can have positive benefits. Doctors, grocers, and all others kinds of people provide enormously important services in a for-profit format, and thankfully so. Some for-profit forms, such as shopping malls, seem to thrive precisely when they provide free services to other people. Arnold is also right  that the common “man on the street” view is that for-profits are for the benefits of owners, not the wider community.
  2. However, I think Arnold is mistaken on the real profit/non-profit distinction. 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.
  3. There are many examples. The family is essentially a non-profit designed to channel resources to children. Parents do not make their money back! Other examples include services to poor children (e.g., Boys and Girls Clubs), women (e.g., battered women’s shelters) and immigrants (e.g., many religious groups donate time and services to poor immigrants).  My intuition is that it would be hard for a profit oriented institution to help battered women or poor children.

It might be tempting to say that non-profits only exist because of tax breaks, or as Kling implies, because of clueless donors or gov’t grants. 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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Written by fabiorojas

July 6, 2011 at 12:02 am

16 Responses

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  1. First, I think it is important to point out that nonprofit organizations, as they exist in the United States at least, are able to make a profit. The major difference between for-profit enterprises and nonprofit enterprises is how that profit is distributed. Nonprofits face a nondistribution constraint, meaning that they cannot pass these profits along to shareholders in terms of dividends. But as we know from a variety of nonprofits, many do make money and quite a bit of it (think hospitals and some of our very own institutions of higher education).

    I think one of the best treatments of the distinctions between for-profit and nonprofit firms was laid out by Henry Hansmann at Yale with his three failures theory (1980) and updated by Steinberg and Salamon more recently. People interested in the nonprofit sector more specifically should definitely start with the Powell and Steinberg Nonprofit Sector Handbook.

    The distinctions between nonprofits and for-profits are quite complex. The lines between state, market, and civil society are often quite blurry, as for profit firms are increasingly entering fields traditionally dominated by nonprofit organizations (think long-term care facilities for the aged and disabled), and as many nonprofits increasingly use traditional for-profit techniques to sustain themselves (fee-for services especially).

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    Scott Dolan

    July 6, 2011 at 2:23 am

  2. […] I also want to point to four points Fabio Rojas makes in reply: […]

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  3. I think the distinction above is a bit limiting. Non-profit does not necessarily mean social work. There are many for-profits doing social work (hospitals, private charter schools, etc.) whose profit depends on funding from third parties (foundations or governments). There are also many non-profits existing outside of social work (co-ops, credit unions, etc.) which directly compete with for-profit firms.

    There is certainly some sort of self-selection along beliefs about capitalism between the two organizational forms, right? For example, with hospitals, we know in the econ literature about huge differences between policies of for-profits and non-profits. I think it’s also safe to say that co-ops generally do not concern themselves with growth in the same way that standard firms do. In any case, the distinction is much richer than simply “for-profits are paid by consumers, and non-profits are paid indirectly.”

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    afinetheorem

    July 6, 2011 at 5:04 am

  4. I wanted to add a few more comments. In reference to the following:

    “The standard intuition is that going to work for a profitable company means that you are not serving people, only the profits of the company.”

    I think Kling might be equating the “standard intuition” with a set of beliefs held mainly by critics of capitalism. In some ways, I think Kling has a valid point in wanting to push our thinking about business/capitalist/for-profit organizations. I think his larger point is correct, we should treat business in a more nuanced way. Among liberals and progressives, I think we often start with an automatically critical position. Just as we sociologists often like to point out “blaming the victim” theories, I think sometimes the assumptions about business/for-profit/capitalist firms from the left turns into “blame the capitalist,” theories. While many of the criticisms are empirically valid, they often seem to be one-sided. Which I think gets to a larger point about Kling’s question about the benefits of for-profit and nonprofit organizations. Such an evaluation of whether for-profits are more beneficial than nonprofits is rooted in our specific values and depends a lot our political orientations and beliefs.

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    Scott Dolan

    July 6, 2011 at 11:00 am

  5. @afinetheorem – Co-ops are not the same as non-profits, nor are credit unions. If I understand it correctly (and someone please correct if not), non-profits have *no* owners (in the US legal framework). Rather, they are run by a board of directors who manage the assets of the organization. In case the organization ceases to exist, it must distribute its assets to other non-profits (or the government, I think). A co-op could be a non-stock business corporation, meaning that they could easily attempt to make profits, and be taxed, or they could be a non-profit. Or a co-op could be worker owned, meaning that the workers own all the stock, but otherwise it’s the same as other non-public corporations. All this to say that these alternative organizational forms may or may not be run in a non-profit manner. But I agree that there are more shades of gray than just for vs. not for profit (public vs. private, and arguably dispersed vs. concentrated ownership make a big difference, as Berle and Means and everyone since have argued).

    Marc Schneiberg has done interesting work on the history of alternate forms, especially cooperatives and mutual associations. See his faculty page here, and his most recent essay here.

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    Dan Hirschman

    July 6, 2011 at 12:26 pm

  6. […] This post by Fabio Rojas made me  realize that I neglected the role of government in my thinking. […]

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  7. […] Fabio Rojas responded: […]

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  8. Families look after children because kin-selection caused us to evolve that behavior. But as Trivers pointed out, there is genetic conflict as well and parents would resist being held accountable by their children. Standard non-profits serving people who can’t pay (I don’t know if most churches count) cannot be held accountable by the people they are supposed to serve. From Jeffrey Friedman, There Is No Substitute For Profit and Loss.

    I think the “common view” Kling discusses might be more applicable for voluntary vs paid work. Doing paid work, you are (hopefully) serving people, but also being paid enough to compensate. When you volunteer, you are giving something and not taking anything, so there is social spillover. Volunteering is a public good. This framing should appeal to Kling due to the political leanings of people who volunteer vs have careers at non-profits.

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    Wonks Anonymous

    July 6, 2011 at 4:05 pm

  9. @WonksAnonymous

    Standard non-profits serving people who can’t pay (I don’t know if most churches count) cannot be held accountable by the people they are supposed to serve.

    In nonprofit publicly-funded services (such as those funded through Medicaid), using funding methods (such as fee-for-service) where the money follows the person at least theoretically adds accountability. Where there is sufficient competition among providers (such as in a large metropolitan area), those served can (ideally) “vote with their feet”, choosing another provder.

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    KMD

    July 6, 2011 at 4:34 pm

  10. I want to second Scott Dolan on pointing out that there’s really good theory on this, which I also read through the Nonprofit Handbook. The first edition (which I’ve read) has a really good Hansmann chapter. The second edition (which I have not read) doesn’t have this but it does have a chapter by Steinberg with the same title.
    The handbook is well worth reading as the theory chapters anticipate everything discussed on these threads and are well-argued to boot.

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    gabrielrossman

    July 6, 2011 at 4:49 pm

  11. There is a lot of good information about nonprofits out there as some have indicated. A few good researchers on the topic: Powell and Steinberg, Frumkin, Salamon, Gronberg. Websites include:
    – Guidestar.org
    – The Chronicle of Philanthropy
    – Urban Institute: http://www.urban.org/nonprofits/index.cfm
    – ARNOVA

    I would add while it is true that many nonprofits serve the less privileged, there are a lot of nonprofits with significant funding that primarily serve the affluent. The nonprofit sector is not just (and not primarily) the social service sector. It includes art museums (MOMA, Smithsonian) dance companies, opera (Metropolitan), sports (NCAA), Universities (Yale, Harvard etc), hospitals (Sloan-Kettering, Mayo). The significance of these nonprofits is felt both fiscally and culturally. Just look at the executive compensation they offer and the donations they receive. (guidestar.org)

    Incidentally, accountability is a big issue in research on nonprofits and most nonprofits strive to be more transparent to stakeholders, to offer some metrics of their value added and to create indicators of outcomes to retain their grants. Most granting agencies will tell you that they require this of their grantees. It’s not clear to me that the nonprofit sector generally is any less accountable than for profits. The structure of accountability is different without shareholders, but nonprofits of all types are greatly worried about losing donors and often work hard to make sure that they are seen as accountable. There are exceptions like Mortensen’s Three Cups of Tea etc. But one can easily counter with Enron.

    Finally, I think this discussion does raise a point that many orgtheorists are interested in: Does sector difference actually matter? As nonprofits executives have begun to come from the for profit sector and firms are starting to focus on corporate social responsibility and social entrepreneurship. The lines are certainly blurring.

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    Beth Duckles

    July 6, 2011 at 7:18 pm

  12. Following up on Beth Duckles post, I would like to do some shameless self-promotion. I recently completed my dissertation looking at interlocking directorates among the largest businesses, public charities, private foundations, think tanks, and federal advisory committees. Indeed, Beth is correct in pointing out that the nonprofit sector consists of more than organizations active in social services.

    Interestingly and probably not suprisingly, in my analysis I find that the largest nonprofit organizations active in the social service sector are largely peripheral, if not isolated from these elite interaction networks. Also not surprisingly, I find that some nonprofit organizations are well-connected in these elite interaction networks, including centrist think tanks, private universities, and arts and culture organizations. Using an elite theoretical approach to democracy, I propose that this might be reflective of represenativeness of American democracy at the elite level.

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    Scott Dolan

    July 6, 2011 at 7:36 pm

  13. Not-for-profits do the work businesses can not do profitably and the government can not do efficiently.

    This is a broad generalization, but a good starting place to understand the sector.

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    Hadrian Micciche

    July 8, 2011 at 5:31 am

  14. […] a comment » Last week, I responded to Arnold Kling’s skeptical approach to non-profits. The comments were excellent and stressed the wide variety of non-profits. For example, Robin […]

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  15. […] all of the talk and debate about nonprofits, it seems like an opportune time to share a book review I’ve written about […]

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  16. […] vs. for-profit organization distinction, with some spirited discussion in the comments. Click here, here, and here to read the posts and comments. In addition, orgtheory blogger Brayden King has […]

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