Profit vs. Nonprofit

The idea of non-profits as noble, selfless entities vs. profit-driven enterprise as evil and corrupt has been a pervasive cultural meme for some time.  However, these ideas couldn't be further from the truth.

"Philadelphia Scandal Underscores Pitiful State of Public Housing Oversight," read Jonathan Berr's Aug. 28 report in the Daily Finance. It was a story about Carl Greene, the embattled director of the Philadelphia Housing Authority (PHA). He was put on paid leave while the board investigates charges that he settled four sexual harassment claims against him without notifying the PHA, doled out work to politically connected law firms and pressured employees to donate to his favorite nonprofit.

Greene is also being investigated by the U.S. Attorney General Office for the Eastern District of Pennsylvania and HUD's Office of Inspector General. They have yet to bring criminal charges against him.
People always act surprised by revelations of political corruption but the Philadelphia Housing Authority corruption is highly probably in nonprofit entities such as government. Because of ignorance and demagoguery, being profit-motivated has become suspicious and possibly a dirty word. Nonprofit is seen as more righteous.

Very often, people pompously stand before us and declare, "We're a nonprofit organization." They expect for us to believe that since they're not in it for money, they are somehow above self-interest and have the public interest as their motivation. There's little much further from the truth.
People are always self-interested. It's just when they manage a nonprofit organization such as the Philadelphia Housing Authority, government entities in general, universities and charitable organizations, they face a different set of constraints on their behavior.

The fundamental difference between nonprofit organizations and their profit-making counterparts is that nonprofits tend to take a greater portion of their compensation from easier working conditions, more time off, favors and under-the-table payments. Profit-making organizations take a greater portion of their compensation in cash, except those that are highly regulated.
In the profit-making world, there is much greater monitoring of the behavior of people who act for the organization. Profit-making organizations have a financial bottom line they must meet, or sooner or later, heads will roll. Not so with nonprofits, who have no bottom line to meet. On top of that, incompetence for nonprofits means bigger budgets, higher pay and less oversight. That description aptly fits one the nation's largest nonprofit organizations — the public education establishment.
Profit is vital to human well-being. Profit is the payment to entrepreneurs just as wages are payments to labor, interest to capital and rent to land. In order to earn profits in free markets, entrepreneurs must identify and satisfy human wants and do so in a way that economizes on society's scarce resources.
Here's a little test. Which entities produce greater customer satisfaction: for-profit enterprises such as supermarkets, computer makers and clothing stores, or nonprofit entities such as public schools, post offices and motor vehicle departments? I'm guessing you'll answer the former. Their survival depends on pleasing customers. Nonprofits, such as public schools, post offices and motor vehicle departments, survival depends mostly on pleasing politicians.
When a firm fails to please its customers and thereby fails to earn a profit, it goes bankrupt, making those resources available to another who might do better. That's unless government steps in to bail it out. Bailouts permit a business to continue doing a poor job of pleasing customers and husbanding resources.

Government-owned nonprofit entities are immune to the ruthless market discipline of being forced to please customers. The same can be said of businesses that receive government handouts.
It's this ruthlessness of market discipline that forces firms to please customers, economize on resources and thereby earn profits or go out of business and goes a long way toward explaining hostility toward free market capitalism. And much of the hostility toward free market capitalism is held by businessmen. Adam Smith recognized this in his "Wealth of Nations" when he said, "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."

Their co-conspirator is always government.

Walter E. Williams is a professor of economics at George Mason University in Fairfax, Virginia. He has authored more than 150 publications, including many in scholarly journals, and has frequently given expert testimony before Congressional committees on public policy issues ranging from labor policy to taxation and spending.

5 comments from readers  

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The difference is exclusively a matter of who collects the profit. Since a "non-profit" has no investors expecting a return, the portion of contributions considered "excess" is allocated to satisfy the whims of the owners, either as personal compensation or the pleasure of controlling the allocation of all other resources.

Although "non-profit" donors have expectations, they have no legal recourse against the owners for incompetence or diversion of funds to marginal or inefficient purposes. In other words, the owners have no fiduciary responsibility to anyone, just an obligation to persuade future contributors that they appear to be doing something beneficial.

More often than not, the donors are simply being conned.
There are non-profits and there are really non-profits. I belong to a group of citizens who are truly all volunteers and take no money for their efforts. We are The Friends of the Library in a little town in northern California-we have no staff. All the FOL's in our county are much as we are...I don't like outfits that label themselves as non-profits when in actuality they have a paid staff that is compensated quite well. Little money they receive in support of their endeavor reaches the place of need.
Dr. Williams: Non profit is not an economic issue, it is a moral issue. The fundamental idea is that having to pay for something is immoral. Taken literally, if someone created a service that was non-profit were would lthe money come from to create the service in the first place? Only government can produce a business that would give shoes either free of charge or at absolute cost. It means that someone has to make those shoes for no personal reasons such as food or clothing which he might obtain from some non-profit organization; or he is paid for his labor by public revenue. Non-profit is a crooked scheme from beginning to end based on the delusions created in the Bible. It destroys Freedom and promotes slavery, as a moral good, and that is the name of lthe game. There is no rationale for slavery, North Korea being a good example, but virtually every government on earth wants some form of it. They never promote it as evil, which it is, but consistently imply it is God's wishes for mankind.
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I am an Objectivist and a Capitalist who manages a nonprofit, and I'm disturbed and slightly outraged by this column. It's very obvious to me that the columnist has not spent significant time around non-profit organizations, or attempted to consider their economic significance from any other perspective besides the obvious.

While I believe there are some non-profits that fit what he describes, there are many others that do not. Not all non-profits are owned by the government, for those who don't know; mine is an arts organization that has struggled to increase both earned and contributed revenue in order to get out of debt, and we were in the black for the first time this year.

The primary difference in business model between non-profit and for-profit arts organizations is that a significant portion of our revenue (usually 50-60% in my industry) comes from donors, and the rest comes from sales. But what is a sale besides someone valuing what you have to offer enough to justify giving you their money? It is the same whether it is a donation or a ticket sale.

The overgeneralizations in this column are what give Objectivists a bad name. Not all non-profits are evil.
The writer who is usually "right on" has engaged in numerous logical fallacies as well as the error in etiquette of insulting his host.

Having served on the boards of non-profits for the last thirty-something years, the writer's reductionism and lack of empirical proof is particularly galling. To survive, a non-profit must not be internally a charity, but must keep a close eye that its investment is not wasted. Otherwise, the non-profit dies just as any other business model.

The problem with Housing Authorities is (1) a lack of good government oversight over government funds and (2) bureaucrats who purchase the board members who serve as board members because they "represent" a "class" rather than the best interests of the entity.
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