Why Do We Need Nonprofits?
We live in a world that could, with a fraction of its resources, provide clothing, food, clean water, and basic medical and educational services to everyone. In this post I want to examine the mix of institutions that can provide these things, and show why nonprofits are an essential piece of the puzzle.
Most goods and services are provided by the market or the government. With some exceptions, these institutions are very good at what they do. Markets are ruthlessly efficient, and governments can mobilize massive resources, coordinate large projects, and provide services to their citizens without discrimination. Still, these institutions have their limits and their failures, and once this is understood it becomes clear why we need nonprofits.
You can get almost anything on the market, subject to one constraint. That constraint is the ability to pay. It's important to understand that even the best market simply isn't meant to provide things to people who can't afford them. The market will solve many things, but it will not solve poverty unless poor people have something to sell.
Healthy adults can generally sell their labor. Dirt poor Americans have done quite well in the past simply by working hard and investing the proceeds wisely. Where there are good labor markets, then, healthy adults usually won't need much help. Anyone who can't (or shouldn't) sell labor, though, can't rely on the market for their needs (unless they have adequate savings). I say shouldn't sell labor, because while some people could make money selling sex, we don't always approve of this choice, particularly for children. Usually, though, children can rely on their families and, indirectly, on the market for their needs.
Labor markets can fail, for our purposes, in two ways. First, they can fail by not existing, perhaps because of political instability, discrimination, or bad or nonexistent laws. Second, they can fail because labor simply doesn't command a high enough price for workers to live dignified lives. Most of the labor markets we consider functional are actually mixed labor and capital markets, which is to say, human capital is part of the bargain. An illiterate, inexperienced worker often can't provide much value, and can't expect the market to provide much in return (the US was historically different because of its high ratio of natural resources to willing laborers). Recall that markets, at their best, allocate resources according to ability to pay. If all you have to sell is manual labor, you might not be able to pay for very much at all.
Governments can theoretically step in where markets fail. Education is a good example: even the poorest children in the US can attend school free of charge. Sadly, good government is elusive. Democracy isn't enough. According to the Wall Street Journal, local (elected) governments across South America are reaping big royalties from natural resource extraction (the commodities market is booming). Many are spending the money on vanity projects like bullfighting rings, despite a need for clean water and other basic infrastructure. Solving the governance problem would do more good for the world than almost any other project I can think of, but I don't see it happening anytime soon.
In the face of government failure and market indifference, nonprofits are the only alternative. Still, we can see from the preceding discussion that nonprofits shouldn't ignore other institutions. In fact, I would go so far as to say that nonprofits should first work to establish functioning markets and governments, and then try to fill in the remaining gaps.
One final note: I've been a bit imprecise in this post. When I say nonprofit spending, I mean to include foreign aid, which can serve many of the same purposes. In fact, nonprofit work and diplomacy can be highly complementary. Ideally we would use our diplomatic resources to promote democracy and free markets, and then step in with nonprofit spending and foreign aid to supplement these efforts and plug any remaining gaps. Things haven't always worked out this way, but at times our approach has worked along these lines.
Most goods and services are provided by the market or the government. With some exceptions, these institutions are very good at what they do. Markets are ruthlessly efficient, and governments can mobilize massive resources, coordinate large projects, and provide services to their citizens without discrimination. Still, these institutions have their limits and their failures, and once this is understood it becomes clear why we need nonprofits.
You can get almost anything on the market, subject to one constraint. That constraint is the ability to pay. It's important to understand that even the best market simply isn't meant to provide things to people who can't afford them. The market will solve many things, but it will not solve poverty unless poor people have something to sell.
Healthy adults can generally sell their labor. Dirt poor Americans have done quite well in the past simply by working hard and investing the proceeds wisely. Where there are good labor markets, then, healthy adults usually won't need much help. Anyone who can't (or shouldn't) sell labor, though, can't rely on the market for their needs (unless they have adequate savings). I say shouldn't sell labor, because while some people could make money selling sex, we don't always approve of this choice, particularly for children. Usually, though, children can rely on their families and, indirectly, on the market for their needs.
Labor markets can fail, for our purposes, in two ways. First, they can fail by not existing, perhaps because of political instability, discrimination, or bad or nonexistent laws. Second, they can fail because labor simply doesn't command a high enough price for workers to live dignified lives. Most of the labor markets we consider functional are actually mixed labor and capital markets, which is to say, human capital is part of the bargain. An illiterate, inexperienced worker often can't provide much value, and can't expect the market to provide much in return (the US was historically different because of its high ratio of natural resources to willing laborers). Recall that markets, at their best, allocate resources according to ability to pay. If all you have to sell is manual labor, you might not be able to pay for very much at all.
Governments can theoretically step in where markets fail. Education is a good example: even the poorest children in the US can attend school free of charge. Sadly, good government is elusive. Democracy isn't enough. According to the Wall Street Journal, local (elected) governments across South America are reaping big royalties from natural resource extraction (the commodities market is booming). Many are spending the money on vanity projects like bullfighting rings, despite a need for clean water and other basic infrastructure. Solving the governance problem would do more good for the world than almost any other project I can think of, but I don't see it happening anytime soon.
In the face of government failure and market indifference, nonprofits are the only alternative. Still, we can see from the preceding discussion that nonprofits shouldn't ignore other institutions. In fact, I would go so far as to say that nonprofits should first work to establish functioning markets and governments, and then try to fill in the remaining gaps.
One final note: I've been a bit imprecise in this post. When I say nonprofit spending, I mean to include foreign aid, which can serve many of the same purposes. In fact, nonprofit work and diplomacy can be highly complementary. Ideally we would use our diplomatic resources to promote democracy and free markets, and then step in with nonprofit spending and foreign aid to supplement these efforts and plug any remaining gaps. Things haven't always worked out this way, but at times our approach has worked along these lines.
posted by James | 8:46 AM
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