Nonprofit organizations: Revised theory and new evidence

It is apparent that comprehensive analysis requires at least some application of elementary axioms from the economics of politics (or public choice). One of these implies that, because of asymmetric costs of political participation, some suppliers of goods and services usually do better for themselves out of lobbying and organization than do others. Moreover for the same reason dispersed consumers would appear to do worst of all. Legislation and policy on nonprofit organization seems to be one of many examples of this phenomenon. In this case, however, the supply-side lobbyists are aided by an ancient and deep-seated popular prejudice against profit making. The man in the street has apparently not yet fully grasped the point that, so long as competition is possible, the profit inducement acts as a continued incentive to minimize costs. Constantly and indiscriminately to condone pejorative language against profits is to create a climate that results in legislation giving unprecedented new ‘profit’ opportunities via not-for-profit organizations. And such increased rewards can result in social harm rather than social gain. Granted there may be cases that justify nonprofits in some circumstances (Preston, 1988), the fact remains that the costs of separating and monitoring these cases, at least at federal level, would appear to be overwhelming. The nonprofit system that is usually advocated calls for a federal general tax exemption. Yet the value of this advantage is the same to all nonprofit firms whereas we need to know the extent of the particular social benefits generated in each particular case so as to give ‘tailor made’ government assistance. And since in very many instances the social benefits are negative, the government's ‘shotgun approach’ appears highly questionable. Well expounded “invisible hand” reasoning is obviously not sufficient by itself. Adam Smith's propositions require the continual check of systematic empirical enquiry. But from the emerging results of such research on the comparative performance of nonprofit organizations, the Smithian point of view of general reliance on for-profits organization appears so far to be scoring well. Will further applied research one day begin to undermine popular prejudice against competitive as distinct from monopoly “profits”? Perhaps; but not before still more empirical enquiries on nonprofit firms have been conducted. Copyright Kluwer Academic Publishers 1989