A reader asks my thoughts on these remarks by Russ Roberts.
As much as I like the nonprofit world as an alternative to government and business, in my experience, they often tend toward mission creep, to expand budget rather than to achieve what was their original goal and the problem they were trying to solve.
That’s a tragedy. It’s evidently a very human tragedy. It’s very hard to avoid that, so I think that’s a very good reason for philanthropists to sunset their foundations and have them die after a certain amount of time.
The reader asks whether this also might apply to think tanks. Perhaps. I don’t know enough about the inner workings of think tanks. I’ve never had an office at one or been on salary at one. I’ve only had “adjunct” status, and that is a comparable to being an adjunct professor.
My general view on non-profits is that their status is too high relative to profit-seeking firms. In the for-profit sector, I think of the example of Elizabeth Holmes, the founder of Theranos. The company had a noble vision, and she made compelling presentations, but the product didn’t work. Because she claimed that the product worked better than it did, she got in trouble. She was ousted as CEO, and she faces a lot of legal jeopardy.
In the non-profit world, there are no end-users to hold you accountable if what you are doing doesn’t work. Just having the noble mission and being able to make compelling presentations to donors is sufficient.
I think that on the margin out society should invest less money in non-profits and more money in profit-seeking enterprises. and we should have fewer people making a living at non-profits and more people making a living in profit-seeking enterprises.
“In any bureaucracy, the people devoted to the benefit of the bureaucracy itself always get in control, and those dedicated to the goals the bureaucracy is supposed to accomplish have less and less influence, and sometimes are eliminated entirely.[Pournelle’s law of Bureaucracy]” ― Jerry Pournelle
Add to that that every organization will become a bureaucracy after a while. Even in small organizations with committed founders/leaders there will be a slow creep towards people who think they deserve a little additional privilege or to rest on their laurels.
Re: “In the non-profit world, there are no end-users to hold you accountable if what you are doing doesn’t work. Just having the noble mission and being able to make compelling presentations to donors is sufficient. I think that on the margin our society should invest less money in non-profits and more money in profit-seeking enterprises.”
Colleges and universities are insulated from accountability for grandiose advertising and from competition by profit-seeking enterprises.
1) Accountability. See Jason Brennan & Philip Magness, “Why Most Academic Advertising Is Immoral Bullshit;” chapter 3 in their book, Cracks in the Ivory Tower (Oxford U. Press, 2019).
Brennan & Magness conclude:
“The title of this chapter understates just how bad all of this is for universities. It’s not just that they engage in unethical advertising. Rather, look at the content of what they advertise—they say they develop students’ skills, knowledge, and character. But the evidence makes clear that for the most part, universities don’t do that—or they do so only in narrow ways and only for the top 10 percent of students. One of the main missions of the university system is to educate students, and our discussion here suggests that we’re spending half a trillion a year on a failed mission.”
2) Competition by profit-seeking enterprises. Precisely because profit-seeking universities compete at the margin, they disproportionately enroll lower-ability students, who then have lower completion rates or less success in the labor market. Observers then confuse (minor) treatment effects and (major) selection effects, and conclude that the not-for-profit university (Harvard) is superior to the for-profit university (Phoenix).
1) I agree that there’s a lot wrong with contemporary universities, but there’s also quite a bit there that’s functional. They still turn young adults into competent doctors, engineers, and biochemists. We should be careful to avoid throwing the baby out with the bathwater.
2) Does Phoenix have any success stories? Just because the selection effects are huge doesn’t mean that the treatment effects aren’t. Also, “selection effect” is just another way to say “poor market fit”. If you open a school to teach dentistry to cats, a lack of teachable cats shouldn’t be handwaved away as a “selection effect”.
Bryan Caplan’s book, The Case against Education (Princeton U. Press, 2018), provides systematic evidence that selection effects (ability bias) and ‘signaling effects’ are much greater than treatment effects, although the relative weights vary by field of study. The narrow fields that you indicate do have substantial (preponderant?) treatment effects. However, for-profit universities don’t compete at this margin, partly because endowments, tax-exempt status, and donative research subsidies favor established selective not-for-profit universities in these fields.
Bryan Caplan makes a case that public subsidies and guaranteed student loans massively increase college and university enrollments to socially counter-productive levels.
No one wants to throw out the baby with the bath water!
I should mention also a crucial subtlety:
Students at selective universities interact and learn much from one another, often more than they do from Faculty. In this way, selection effects are also a major part of treatment effects at prestigious universities.
Not all non-profits (#notallnonprofits) are so unaccountable. Consider a musical ensemble, say– these are often organized as non-profits and the most successful of them have significant numbers of paid employees. They take donations, but ultimately the measure of their success is whether they attract audiences (customers who may be paying or not) and high quality musicians, and this exerts a powerful social pressure on the quality of their musical output, i.e. on how well what they do “works”.
Can we make a principled distinction between these and other types of non-profits? Or do you think these also deserve lower relative status (which in the musical realm would amount for example to lowering the status of symphony orchestras relative to pop stars)?
I don’t understand why Roberts considers entities acting in entirely rational and predictable ways a tragedy. The tragedy is the tax code. Just eliminate all the tax exemption.
Henry G. Manne’s has an exellent chapter eight entitled “All Education is For-Profit Education” in a Cato publication entitled “Unprofitable Schooling: Examining the Causes of, and Fixes For, America’s Broken Ivory Tower.” In it he demonstrates that there is no such thing as a nonprofit organization, because an entity cannot survive if it does not have revenenues in excess of costs, and those revenues in excess of costs are profits. He notes with nonprofits, insteads of distributions to shareholders “what there is, of course, is a well-designed system of obfuscating the distribution of these profits.” Professors get lighter work loads, larger park-like campuses, etc, etc.
David Hyman further extends this type of analysis in chapter 11 entitled “Nonprofit and For-profit Enterprise in HealthCare: Birds of a Feather” in which he demonstrates that there are “more provable similarities than differences in the real-world performance of nonprofits and for-profits.”
If these entities need tax exemption to exist, then they are not worthy having. Just repeal the whole stinking section 501 of the Tax Code and be done with it.
+1. This has always been my position, t00- “non-profits” don’t survive without actual profits, so the tax exemption should be eliminated.
I should add that the abuse and waste involved with tax-exempts, estimated to be about $60 billion per year, is the least of the problems with tax-exempts. The distortion in talent flows that tax exemption creates, nudging talent toward the non-tax paying sectors rather than tax paying enterprises, is orders of magnitude a greater problem, probably worth about 2% of GDP.
Do non-profits “work”? Compared to what? Kling is right that non-profits are not as good as for-profits at providing non-public goods and services where costs and benefits can be internalized to decision makers. But, maybe the most salient comparison is between non-profit and government in providing public goods. The mission creep problem that Russ Roberts cites would seem to apply to government bureaucracies too. Non-profits would seem to be less centralized than government in that anyone can start or donate to a non-profit. That would seem to allow non-profits to incorporate local, distributed information more readily than government.
The tax “exemption” that some people apparently don’t like would seem to apply to government as well. I don’t even know what it would mean to tax government given that taxes are government revenues. Tax “exemptions” don’t give non-profits an advantage over their government competitors.
Perhaps, our hierarchy for solving problems should be (1) first look to for-profits and market mechanisms, (2) then look to non-governmental non-profits, (3) narrowly target governmental programs to only plug “gaps” not solved by (1) and (2), and (4) constantly re-evaluate whether for-profits or non-profits could replace existing governmental programs or whether for-profits could replace non-profits. That does not seem to be the hierarchy applied to K-12 education, nor retirement savings, nor increasingly health care. Perhaps not coincidentally, the first area seems to be one of much dis-satisfaction and the last two are the areas that seem to contribute most to governmental budget problems.
The point about government is a good one. Pournelle’s Iron Law applies to all organizations, but ultimately private organizations run out of money. The government doesn’t, so it is never forced to clean house. This is a serious, unsolved problem.
Good blog and intriguing comments.
I started a non-profit charter school. We were able to get some really great teachers to discount themselves….take less and work more hours…than they had in traditional public schools. For a while there, we had the Golden State Warriors of teachers.
Because of their skill/hard work, kids got pretty good results.
That attracted donors, so our “surplus” went up even more, which allowed us to hire some tutors. They discounted themselves even more (recent top college grads earning minimum wage before med school etc), and so kids did even better.
I thought non-profit status helped the kids in that example.
The limitation was we couldn’t “raise our price” – charge the gov’t more, because we were generating much larger gains per dollar than their other schools. If that had happened, we could have paid enough to keep those top teachers as they changed from single 26-year-olds to married 32-year-olds with kids. Without that, we weren’t able to hold onto All Star talent, and things dipped somewhat.
When I worked for a for-profit chain of schools in the developing world, one good thing was it really designed to scale, in a smart way.
I like both models for K-12 schools; each has some inherent pros/cons.
My general view on non-profits is that their status is too high relative to profit-seeking firms. In the for-profit sector, I think of the example of Elizabeth Holmes, the founder of Theranos. The company had a noble vision, and she made compelling presentations, but the product didn’t work. Because she claimed that the product worked better than it did, she got in trouble. She was ousted as CEO, and she faces a lot of legal jeopardy.
This analysis seems a little cherry picking that you upset that a CEO over-state or LIEING a product effectiveness is a sign people don’t appreciate profit making. To me it sounds like a CEO did not do the right thing and the market racted. Somehow other CEOs were not chosen here like Bezos, Gates, Buffet, Schlutz, and Dimon. And there is whole CNBC that worships the CEO and lets them on TV to say whatever they say.
1) We have saying if you want love then go to church. You are payed and CEO gets loads of money so they are high status in general.
2) I am sure what else you expect Society to give these people.
3) Even if they feel say Immelt with GE in 2016 or Rick Smith with Equifax with the hacking of 150M personal information, they are given millions to go away.
“My general view on non-profits is that their status is too high relative to profit-seeking firms. In the non-profit world, there are no end-users to hold you accountable if what you are doing doesn’t work.”
True. I think Bill Gates and Warren Buffett could do the world much better by re-investing their foundations’ assets in for-profit ventures. But, hey, it’s their money.
“My general view on non-profits is that their status is too high relative to profit-seeking firms. In the non-profit world, there are no end-users to hold you accountable if what you are doing doesn’t work.”
I feel comments like this are from a lack of private sector experience. I have worked at a number of firms and most are run no better than a kid at a lemonade stand. They just seem to get by because they are entrenched players.
I feel non-profit do worse than necessary because they don’t attract the best talent. They can’t pay for that talent so it goes elsewhere and that’s unfortunate.