What is a “non-profit” organization?

Are they subject to economic calculation?

What can economic theory tell us about their functions?

With Hillary Clinton under fire for (among other scandals) using the Clinton Foundation as “a kind of globalist grift,” and with promising new lines of research into social entrepreneurship by Professor McCaffrey and the economics of gifts by Professor Hülsmann, we should take a closer look at “non-profit” organizations and how they fit into the market, if at all.

Since the term includes “profit,” a good place to start would be to distinguish between two types of profit.

Psychic Profit

All human action is directed toward the attainment of some desired end, but requires the use of specific means. Acting man forgoes the attainment of less desired ends for the sake of higher valued ends. In this sense, every action is profit-motivated because of the “psychic profits” attained in successful action and “psychic loss” is incurred from regrettable, unsuccessful action.

Mises covers these fundamentals in Human Action, p. 287: “We cannot even think of a state of affairs in which people act without the intention of attaining psychic profit and in which their actions result neither in psychic profit nor in psychic loss.”

Money Profit and Economic Calculation

In economics, the term “profit” is more frequently used to convey “money profits.” When an entrepreneur purchases factors of production for less than the revenues from the sale of the output of the production process, including considerations for interest, we say that money profits have been earned. These profits only come from the efficient production of goods consumers value.

This phenomenon is only possible through economic calculation, whereby the entrepreneurs appraise the costs of production and the anticipated revenues. Economic calculation is the driving force of growing and flourishing market economies because it is the only way to economize the use of resources. Not only are resources economized between production and consumption, but also between various production projects. Only the most valuable projects are rewarded with profits, while wasteful projects are abandoned to free up resources to be used in other, hopefully profitable ventures.

Thus the consumers are sovereign in their choices for what shall be produced, but only if entrepreneurs are allowed to engage in economic calculation. Heavy government interventions and socialism hinder and disallow this important process.

The Case of a Charity for the Poor

Now let us turn to the enigma of the “non-profit organization.”

We are not all cold-hearted, greedy Scrooges, and so many of us value helping others in need. We form voluntary associations dedicated to distributing funds and resources to the poor, and these organizations can sort of look like other firms in the market.

One could argue that, for those who donate, they (vaguely) produce the knowledge that the donors’ gifts are used to benefit people in need. This seems flimsy, however, because no market price can emerge for such a feeling. Nevertheless, the donation does yield psychic profit for the donors, and the receivers obviously profit from the gift, or else they would not voluntarily take it. Either way, profit is an important part on both ends of the charity’s function.

Can charities like the one described engage in economic calculation? One could argue this as well, but we’d be on very shaky ground. To make this stretch, donated funds would have to be viewed as revenues to the charity in the same way standard businesses receive revenues from the sale of their product. Also, the necessary expenditures to create and maintain the functions of the charity, including the distribution of funds or other resources to the recipients would have to be considered their costs of “production.” Only then could one claim charities engage in economic calculation. It’s easier just to say that the charity might make decisions geared toward the maximization of donations.

The inherent difficulty in applying these economic concepts to charity comes from the fact that there are no market prices and because we can’t pinpoint who is fulfilling what economic function in the organization. Are the donors the consumers, or are the recipients? Who owns the resources, or who is the capitalist-entrepreneur? How are the resources economized?

However, these ambiguities do not prevent us from being able to say with certainty that profit, even if it is psychic profit, is present in the function of any so-called “non-profit” charity. The donors give because they prefer the charity and, ultimately, the recipients to have the funds than the donors. This action yields psychic profit for the donors, just like any action.

The Case of a Firm with Multiple Functions

The emergence of firms with an explicit dedication to social causes is another interesting phenomenon along these lines. This is where Professor McCaffrey’s research is focused. He has introduced his research at the most recent Austrian Economics Research Conference, and I’m looking forward to what he will produce.

Unlike a charity that merely takes money from donors and gives it to certain recipients, some firms sell goods with the promise that their product was produced in a certain way (like fair trade coffee, or “Proudly Made in the USA” goods). Other firms may make promises that all or some of their income is automatically reinvested in the organization with a certain mission (like ideological or political institutions) or donated to other charities (like Newman’s Own or Firehouse Subs).

Rothbard wrestled with this topic in “The Myth of Neutral Taxation,” found in Economic Controversies:

We have been describing two polar cases: the business firm, and the nonprofit organization. Probably most real-world institutions on the market fall into one of these categories. In some cases, however, an organization can partake of both modes. Let us consider two cases. First, a charitable organization, instead of, or in addition to, giving away alms, may sell some products to the poor at a low, subsidized price. In this case, while the donors provide the overall thrust and guidance, part of the feedback gained by the firm is willingness to buy goods by the recipients. In some sense, the recipients of alms provide a guide to their interest in the organization. There are now two sets of consumers: the donors, and the charity recipients, each of whom demonstrates its preference for this organization in contrast to other uses for its money. But the overall purpose of the organization is not to make a profit, but rather to serve the values and goals of the donors, and so the donors must be considered the regnant consumers in this situation.

Another case is a profit-making business firm where the owner or owners decide to accept a lesser monetary profit on behalf of some other goals of the owners: for example, because a certain line of product is considered immoral by the owners or because the owner wishes to hire incompetent relatives in order to keep peace in the family. Here once again, these are two sets of consumers—the buyers of the product, and the producers or owners themselves. Because of his own values as a “consumer,” the owner decides to forego monetary profit because of his own moral principles or because he holds keeping peace in the family high on his value scale. In either case, the owner is foregoing some monetary profit in order to achieve psychic profit. Which motive will dominate depends on the facts of each particular case. Since the market is generally characterized by a division of labor between producers and consumers, however, the general tendency will be for monetary profit, or service to non-owning consumers, to dominate the decisions of business firms.

Rothbard concluded that even in these weird cases where it can be difficult to apply economic theory, profit, and intention to profit are present at each step, even if monetary profits are exchanged for psychic profits or vice versa.

One clear statement we can make regarding organizations like these is that involuntary associations must be treated in a totally separate way. Government programs that may look like charities for the poor or other socially beneficial bureaucracies are not what they appear to be. If the funds are forcefully taken, we can categorically reject that their stated purpose is economizing or even beneficial, or else the funds would not have had to be forcefully taken in the first place. Rothbard’s “Toward a Reconstruction of Utility and Welfare Economics” is crucial to understanding this point.

Conclusion

Applying economic theory to charities or social businesses is difficult, but I’m optimistic that new lines of research will get us closer to answering the questions outlined above.

Although these questions are difficult to answer, we can say with certainty that any voluntary association must involve profit in one way or another. Therefore, there really is no such thing as a purely non-profit organization.


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