The notion of capital formation and accumulation led me to wonder whether the formation or accumulation of capital in non-profit organizations was the same as it is in regular businesses. In order even to start to understand the non-profit organization, one must realize that there are different types. There are some that function like a business, taking money for services from those who use the organization, such as colleges and most hospitals. But there are some who give their services to those from whom they expect no contribution, such as the St. Vincent de Paul Society, and those who rely on mere donations, as opposed to payment, from those who use their services, such as churches.
The complexity discovered in this initial search led to the perusal of some of the standard literature on the subject of non-profit organizations. The results can be summarized as follows:
a. Many sources see the purposes of non-profits as taking up the slack from either market failure or government failure, thus revealing a pro-statist, anti-market bias.
b. The rest of the studies tend to cram the non-profit organization into the neo-classical paradigm. These studies, assuming the “maximization of profit” rationale, also assume that the non-profit organization must be maximizing something. Thomas Carroll of Memphis State writes: “One [allegedly] fruitful approach is to view not-for-profit producers [notice the term producers] as professional syndicates, whose members try to maximize the sum of income and amenities. This sometimes leads to tensions between the ‘professionals’ and the ‘staff’ of such institutions.” One example he gives is that of well-heeled physicians wanting more money and exploiting underpaid nurses, an example that is irrelevant in that the physicians are usually independent operators, and the examples he gives really do not say much about the organization itself.1
c. There is, in the neo-classical analysis, both of non-profit organizations and of business in general, too much orientation to heavy industry, reflecting the era in which most of the terms and concepts were developed. The Austrians are also influenced in this way, though to a lesser extent.
d. The “standard” Austrians have virtually nothing to say regarding non-profits, even though non-profits comprise 2–3 percent of GDP.
What this means, of course, is that my desire to discuss capital accumulation in non-profits is now subordinated to a study of the real nature and behavior of non-profits.
By far the best study that I came across on non-profit organizations was done by the Austrian management expert Peter Drucker, in Managing the Non-profit Organization: Principles and Practices2. While he is not primarily an economist, somewhere I read that Drucker says that he has been heavily influenced by the Austrian economists. In point of fact, as is typical of an Austrian analysis, we recognize real human beings in Drucker’s analysis, and not in the neo-classical analysis. For example, instead of maximization of the utility of the managers or workers of the non-profit organization, Drucker says that the purpose of the non-profit organization is to produce a “changed human being”3. In these organizations, the people, including the board, are “deeply committed”, and this explains the high level of volunteers, unpaid staff and low-paid professors at certain private religious colleges.
Returning to the problem of capital accumulation in non-profits, since non-profits do not produce anything, it cannot be said that the production of the capital they do acquire is stimulated by a perceived market demand as it is in a real business. Major exceptions to this might be medical equipment and the scholarly publishing industry, with all that these imply, but I doubt that these are non-profit. But then it comes to mind that the source of most funds gotten by most non-profit organizations are contributions. Every non-profit has a list of regular contributors, and acquires lists of potential contributors. Since the contributors are not usually the beneficiaries of the services of the organization, they are not the customers, although they are the source of funds. Are the contributors the capital?
My recommendations are as follows:
a. To follow Aristotle’s advice in book II of the Politics, and adapt the methodology of the study to the requirements of the subject at hand. Certainly, the current concentration on “production” and “maximization” and “profit” has led to a dead end in not only in the current economy but in the non-profit segment as well.
b. A completely new study of non-profit organizations is necessary, being sure to separate them by types. The category “non-profit” is too broad for a (shall we say) “profitable” analysis.
c. It needs to be asked whether some organizations, because they were run by the Church and religious orders in the middle ages for free, should still be non-profit. Would it not be more efficient for the non-profit organizations that get money from those who use their services to be for-profit organizations? There are already some examples. Some technical colleges and hospitals are for-profit. Are there any studies of these organizations comparing them to their non-profit counterparts?
1 Thomas M. Carroll, Microeconomic Theory: Concepts and Applications (New York: St. Martin’s Press, 1983), 314.
2 (New York: HarperBusiness, 1992).
3 Drucker, xiv. His emphasis.
Dear Dr. Luckey,
As I understand it, the total national debt is now $9.6 trillion. How did that happen, and what are the implications of this enormous debt?
When a credit card company gives you a credit card, they give you a credit limit with it. This limit is based on your current debt, current income and the likelihood that you will be able to make the payments. So, if they give you a $500 credit limit, that means that you either have a low income and/or very little credit record. If they give you a $25,000 credit limit or more, that means the opposite of these. In any event, there is a limit as to how much you are able to charge. If you could raise your own salary to meet your credit obligations, there would be very little problem with a credit limit, because if the payments got too difficult, you could merely give yourself a decent raise. But suppose that the credit card company allowed you to raise your own credit limit, and would ask no questions. With this, suppose the credit card company would let you pay more or less whatever you wanted toward the debt. Well, you thought I was crazy before, now you see clearly that I need to be sent to the funny farm. What company would ever do that? The answer--none!
There is a good reason why this would never be done. Despite popular opinion, money does not grow on trees. Wealth actually has to be produced, and that is done by production. Productivity increases—wealth increases. Credit is based on an estimate of increased productivity, and therefore, increase of wealth in the near future. Giving credit with no increase in productivity in sight is like flushing it down the toilet.
But this is how the Federal government actually acts toward money—your money. The Founding Fathers rightly prohibited an income tax in the Constitution. But in 1913, the wool was pulled over the eyes of the American citizens and they approved an amendment to the Constitution approving such a tax. I asked my grandmother (who was born in the 1880’s) why people fell for such an idea. She said that the promoters promised that the tax was only going to be ½ of 1% and it was only going to apply to the very wealthy, like J. P. Morgan and others like him. Who could resist? The government could have more money for a slight tax on the super-rich. Well, this lasted a year or two and then year after year it crept up to what we have today.
But, you say, that explains only the big Federal spending spree that has been going on since 1913. It doesn’t explain the debt.
Good insight. It is in everybody’s self interest to try to get something for nothing. If you see something at a yard sale for $.10, and it is something you’ve been looking for for years, you consider it a steal. But it really is not. The person selling it doesn’t want it. You lucked out, and so you should rejoice.
The government does a similar thing. They sell services for votes. A vote is not worth much economically, maybe one trip to the voting place, or maybe two a year if you vote in the primaries. In exchange, you get police, fire protection, free schools, protection from foreign enemies, welfare, Medicare and Medicade. But wait, you say, I have to pay for those, don’t I, with taxes? True, but here is where what Hayek calls the “fiscal illusion” comes in. In exchange for the services you receive, the cost is spread out over those who receive, and those who do not receive, the services. Public schools, for instance, are paid for by everybody: childless couples, single people, those sending their children to private schools and already paying tuition, home schoolers. So you are not paying dollar-for-dollar of services. Also, to keep the taxes down, the government does not pay for all of it either. Every year the Federal government spends much more than it takes in, in order to be able to buy votes yet avoid a tax revolt. It borrows money and even prints money to pay its bills. This means that the real cost of government is no where near what you pay in taxes. It is estimated that the Federal government this year will spend nearly $400 billion than it takes in in taxes. That means that you received 16% more in services that was paid for by taxes, and the rest was paid for by borrowing and/or printing money. This debt accumulates every year, and no one has the will power to do anything about it, despite the cries of economists and outraged citizens.
Who is going to pay all those bonds when they are due? You, your children and grandchildren. Debt service, i. e., the repaying of the bonds runs about 19% of the Federal budget each year. It will increase as the larger deficit bonds come due. This is like you paying 19% of your income on paying off your credit cards, but the amount you borrow each year increases. So if you net $30,000 per year, you are then paying $5,700 to credit cards with no end in sight. This also means that you buy substantially more than $30,000 in stuff each year. If this in very imprudent for a citizen, why should it be permissible for the government to do it?