Skip to main content

Understanding nonprofit social enterprises: Lessons from Austrian economics

Abstract

There is a large literature on the role of nonprofit enterprises within society. This literature typically views nonprofits as either substitutes for government enterprises or complements to, and even necessary extensions of, these government efforts. While this literature has improved our understanding of the role and importance of nonprofit social enterprises, how social entrepreneurs identify opportunities, allocate resources, and adapt to changing circumstances has been relatively underexplored. Efforts to fill this gap within Austrian economics have categorized nonprofits and identified the limitations of calculation and coordination in the nonprofit sector and the characteristics of successful and unsuccessful nonprofit enterprises. This strand of literature focuses on the differences between economic calculation in for-profit enterprises and decision making in nonprofit enterprises. We argue that another meaningful aspect to determining the ability of nonprofit enterprises to coordinate plans is whether they are structured more like private enterprises and public enterprises. These insights from Austrian economics shed light on why some nonprofits are more effective than others at achieving social goals.

This is a preview of subscription content, access via your institution.

Notes

  1. For a discussion on the definition of the nonprofit sector and how it, at least until the last few decades, has been understudied, see Salamon and Anheier (1992).

  2. Of course, nonprofits can be unsuccessful as well. They often lose donors and volunteers when people do not approve of their practices or the goods and services they provide, they end up not helping the people they hope to help, and they often face pressure to change their ways, shrink their portfolios, or close up shop.

  3. While Acs (2013) views this as a robust capitalist system, he nonetheless promotes coexistence, rather than competition, with the state.

  4. This approach is different than studying traditional organizations that fit within the private and public distinction (notably, markets and governments). It is about using the categories of private and public for studying how effective and flexible an organization is (whether within markets, civil society, or even possibly government).

  5. Cornuelle inspired and encouraged others to pursue the possibilities of nonprofits. His contribution is explored in volume 10 of Conversations in Philanthropy, http://www.conversationsonphilanthropy.org/journal/volume-x/.

  6. See Aligica (2015) for a discussion on the continued gap in the literature.

  7. The Austrian contribution to economic calculation began when Mises critiqued the notion that socialism can match or outperform the material progress and social benefits achieved through markets. Mises ([1920] 1963) argued that markets are able to coordinate plans and allocate resources efficiently through rational economic calculation because of the existence of private property rights (which enable exchange in the means of production), monetary prices over the means of production (which signal relative scarcity when determining between various alternatives), and the feedback mechanism of profit and loss (which signals success, encourages error correction, and promotes innovation). Socialism eliminates private property and, thus, undermines the system of economic calculation. As the socialist calculation debate continued, Mises and Hayek further refined their arguments to highlight the coordinating tendencies of markets—such as the role of entrepreneurs in correcting errors in the market through arbitrage and innovation (Mises [1949] 2007; Kirzner 1973), the role of prices in disseminating dispersed and inarticulate knowledge (Hayek 1948; Lavoie 1985a, 1985b, 2001), and the role of rivalry in incentivizing productive behavior while constraining unproductive activities (Hayek 1948; Lavoie 1985a, 1985b). The emphasis on knowledge highlights the way in which prices and profit and loss coordinate the plans of individuals within the market and leads to the distinction between market and non-market activity.

  8. Ironically, the social entrepreneur wants to do social good but cannot ever be sure that they are actually doing good. The commercial entrepreneur, on the other hand, cares primarily about doing good for themselves but must necessarily do good for others if they hope to improve their own lot.

  9. Thus, this approach provides an important to critique to the application neoclassical economics to nonprofit enterprises and calls for a robust study of social enterprises that examines knowledge problems and comparative institutional analysis (see Boettke and Prychitko 2004; Aligica 2015). This paper takes that call to action seriously and attempts to further develop an Austrian approach to nonprofit enterprises.

  10. Of course, it is possible and even likely that this ambiguity only exists in the short run and that in the long run any errors will be revealed (i.e. consistent losses will eventually cause investors to reconsider supporting the endeavor).

  11. See Hendricks (2014) and Fox Business (2015).

  12. Admittedly, the entrepreneurs and enterprises we observe and examine in the real world often contain elements of both private and public activity; these characteristics are not mutually exclusive but rather intermixed in a modern society. As such, a large firm that takes government subsidies and supports regulation that restricts competition exhibits characteristics of a public organization although it ostensibly rests within the market order. A particular publicly-funded university that fosters an environment of academic freedom where scholars debate ideas and critique each other’s research in the search for truth exhibits characteristics of a private organization although it supposedly rests within the government system.

  13. Furthermore, “If the conditions are right, informal systems of reputation and status can feed into community-level norms of trust, reciprocity, and rules of just conduct. Thus, a sound reputation rewards not only the person who possesses it, but also spills benefit over to the community at large by reinforcing social rules that foster widespread cooperation, coordination, and mutual support in both market and non-market contexts” (Chamlee-Wright and Myers 2008: 161).

  14. First, Sobel and Leeson (2007: 520) posit that effective disaster relief efforts must succeed in three broad areas: “The first is the recognition stage: Has disaster occurred, how severe is it, and is relief needed? The second is the needs assessment and allocation stage: What relief supplies are needed, who has them readily available, and what areas and individuals need them the most? The third stage is the feedback and evaluation stage: Are our disaster-relief activities working, and what, if anything, needs modification?” And, second, Storr and Haeffele-Balch (2012: 320) build off of their approach in order to determine criteria for effective recovery efforts, which “must determine (a) which residents are most likely to return and which neighborhoods are most likely to rebound, (b) how best to allocate resources, and (c) when it has made mistakes and how to correct them.”

  15. As, Boettke and Prychitko (2004: 25–26) argue, social entrepreneurs “would have a greater incentive than government officials to assess effectiveness, because … they cannot rely upon the power to tax. Instead, they must depend upon the voluntary contributions of their donors. This, of course, is problematic in our society, where many nonprofits often bypass the responsibility of persuasion and voluntary exchange and instead seek support from the state (not unlike many private business enterprises). In this regard, to accept Salamon’s advocacy of third-party government, which in effect seeks to legitimate nonprofit firms as arms of state action, would further weaken the effectiveness of nonprofit organizations by encouraging them to engage more in political rent-seeking than in marketplace persuasion.”

  16. For more information, see http://www.habitat.org/how/default.aspx.

  17. This time period was arguably the peak of the Birmingham Habitat affiliates success, having expanded its jurisdiction, and was recognized by Habitat for their capacity and effectiveness.

References

  • Acs, Z. (2013). Why philanthropy matters: How the wealthy give and what it means for economic well-being. Princeton, NJ: Princeton University Press.

    Book  Google Scholar 

  • Aligica, P. D. (2015). Addressing limits to mainstream economic analysis of voluntary and nonprofit organizations: The Austrian alternative. Nonprofit and Voluntary Sector Quarterly, 44(5), 1026–1040.

    Article  Google Scholar 

  • Anheier, H., & Ben-Ner, A. (Eds.). (2003). The study of the nonprofits Enterprise: Theories and approaches. New York: Kluwer Academic/Plenum Publishers.

    Google Scholar 

  • Baggett, J. (2000). Habitat for humanity: Building private homes, building public religion. Philadelphia, PA: Temple University Press.

    Google Scholar 

  • Boettke, P. J., & Coyne, C. J. (2009). Context matters: Institutions and entrepreneurship. Foundations and Trends in Entrepreneurship, 5(3), 135–209.

    Article  Google Scholar 

  • Boettke, Peter J. and David Prychitko. (2004). Is an independent nonprofit sector prone to failure? Toward an Austrian School interpretation of nonprofit and voluntary action. Conversations on Philosophy, Volume 1: Conceptual Foundations: 1–40.

  • Brinkerhoof, J. M., & Brinkerhoff, D. W. (2002). Government-nonprofit relations in comparative perspective: Evolution, themes and new directions. Public Administration and Development, 22(1), 3–18.

    Article  Google Scholar 

  • Carmen, J. G., & Fredericks, K. A. (2010). Evaluation capacity and nonprofit organizations: Is the glass half-empty or half-full? American Journal of Evaluation, 31(1), 84–104.

    Article  Google Scholar 

  • Chamlee-Wright, Emily. (2004). Comment. Conversations on Philosophy, Volume 1: Conceptual Foundations: 45–51.

  • Chamlee-Wright, E. (2010). The cultural and political economy of recovery: Social learning in a post-disaster environment. New York, NY: Routledge.

    Book  Google Scholar 

  • Chamlee-Wright, E., & Myers, J. (2008). Discovery and social learning in non-priced environments: An Austrian view of social network theory. The Review of Austrian Economics, 21(2/3), 151–166.

    Article  Google Scholar 

  • Chamlee-Wright, E., & Storr, V. H. (2009). The role of social entrepreneurship in post-Katrina Community recovery. International Journal of Innovation and Regional Development, 2(1/2), 149–164.

    Article  Google Scholar 

  • Cornuelle, Richard. ([1965] 2011). Reclaiming the American dream: The role of private individuals and voluntary associations. New Brunswick, NJ: Transaction Publishers.

  • Cornuelle, R. (1983). Healing America: What can be done about the continuing economic crisis. New York: G.P. Putnam’s Sons.

    Google Scholar 

  • de Tocqueville, Alexis. ([1835] 2012). Democracy in America.. Edited by Eduardo Nolla, translated by James T. Schliefer. Indianapolis, IN: Liberty Fund, Inc.

  • Fox Business. (2015). Big companies without profits–Amazon, Twitter, Uber and Other big Names that Don’t Make Money. Fox Business, October 30. https://www.foxbusiness.com/markets/big-companies-without-profits-amazon-twitter-uber-and-other-big-names-that-dont-make-money. Accessed 20 Dec 2018.

  • Fuller, M. (1994). The theology of the hammer. Macon, GA: Smyth & Helwys Publishing.

    Google Scholar 

  • Gazley, B. (2010). Linking collaborative capacity to performance measurement in government—Nonprofit partnerships. Nonprofit and Voluntary Sector Quarterly, 39(4), 653–673.

    Article  Google Scholar 

  • Gazley, B., & Brudney, J. L. (2007). The purpose (and perils) of government-nonprofit partnership. Nonprofit and Voluntary Sector Quarterly, 36(3), 389–415.

    Article  Google Scholar 

  • Grube, L. E., Haeffele-Balch, S., & Davies, E. G. (2017). The organizational evolution of the American National red Cross: An Austrian and Bloomington approach to organizational growth and expansion. Advances in Austrian Economics: The Austrian and Bloomington Schools of Political Economy, 22, 89–105.

    Google Scholar 

  • Habitat for Humanity International. (2005). Annual Report: FY2005.

  • Habitat for Humanity International. (2008). Annual Report: FY2008.

  • Habitat for Humanity International. (2010). Annual Report: FY2010.

  • Habitat for Humanity of Greater Birmingham. (2010). Annual Report: Year End June 2010.

  • Habitat for Humanity of Greater Birmingham. (2012). Annual Report: Year End June 2012.

  • Habitat for Humanity of Greater Birmingham. (2013). Annual Report: Year End June 2013.

  • Haeffele, S., & Storr, V. H. (2019). Hierarchical management structures and housing the poor: An analysis of habitat for humanity in Birmingham, Alabama. Journal of Private Enterprise, 34(1), 15–37.

    Google Scholar 

  • Hayek, F. A. (1948). Individuals and economic order. Chicago: University of Chicago Press.

    Google Scholar 

  • Hendricks, Drew. (2014). 5 successful companies that Didn’t make a Dollar for 5 years. Inc., July 7. https://www.inc.com/drew-hendricks/5-successful-companies-that-didn-8217-t-make-a-dollar-for-5-years.html. Accessed 20 Dec 2018.

  • Husock, H. (1995). It’s time to take habitat for humanity seriously. City Journal, 5(3).

  • Kirzner, I. (1973). Competition and entrepreneurship. Chicago: University of Chicago Press.

    Google Scholar 

  • Lavoie, D. C. (1985a). Rivalry and central planning: The socialist calculation debate reconsidered. New York: Cambridge University Press.

    Google Scholar 

  • Lavoie, D. C. (1985b). National Economic Planning: What is left? Cambridge: Ballinger Publishing Company.

    Google Scholar 

  • Lavoie, D. C. (2001). The market as a procedure for discovery and conveyance of inarticulate knowledge. Comparative Economic Studies, 28, 1–19.

    Google Scholar 

  • Leeson, P. T., & Sobel, R. S. (2008). Weathering corruption. Journal of Law and Economics, 51(4), 667–681.

    Article  Google Scholar 

  • Lohmann, R. A. (1992). The commons: New perspectives on nonprofit organizations and voluntary action. San Francisco: Jossey-Bass.

    Google Scholar 

  • MacIndoe, H. (2013). Reinforcing the safety net: Explaining the propensity for and intensity of nonprofit-local government collaboration. State and Local Government Review, 45(4), 283–295.

    Article  Google Scholar 

  • Martin, A. (2010). Emergent politics and the power of ideas. Studies in Emergent Order, 3, 212–245.

    Google Scholar 

  • Mises, Ludwig. ([1920] 1963). Economic calculation in the socialist commonwealth. In Collectivist economic planning, edited by F. Hayek. London: Routledge & Kegan Paul LTD.

  • Mises, Ludwig. ([1949] 2007). Human action: A treatise on economics, Indianapolis: Liberty Fund.

  • Mises, L. (1965). Correspondence between Mises and Cornuelle. Ludwig von Mises Archives at Grove City College, (November 1).

  • NPR. (2014). Red Cross 'Diverted Assets' During Storms' Aftermath To Focus On Image. NPR Special Report: The American Red Cross, October 29. http://www.npr.org/2014/10/29/359365276/on-superstorm-sandy-anniversary-red-cross-under-scrutiny. Accessed 20 Dec 2018.

  • Richmond, B. J., Mook, L., & Jack, Q. (2003). Social accounting for nonprofits: Two models. Nonprofit Management & Leadership, 13(4), 308–324.

    Article  Google Scholar 

  • Rose-Ackerman, S. (Ed.). (1986). The economics of nonprofit institutions: Studies in structure and policy. Oxford: Oxford University Press.

    Google Scholar 

  • Salamon, L. M. (1981). Rethinking public management: Third-party government and the changing forms of government action. Public Policy, 29(3), 255–275.

    Google Scholar 

  • Salamon, L. M. (1987). Of market failure, voluntary failure, and third-party government: Toward a theory of government-nonprofit relations in the modern welfare state. Journal of Voluntary Action Research, 16(1–2), 29–49.

    Article  Google Scholar 

  • Salamon, L. M. (1995). Partners in Public Service: Government-nonprofit relations in the modern welfare state. Baltimore: Johns Hopkins University Press.

    Google Scholar 

  • Salamon, L. M. (Ed.). (2002). The state of nonprofit America. Washington, DC: Brookings Institution Press.

    Google Scholar 

  • Salamon, L. M. (2003). The resilient sector: The state of nonprofit America. Washington, DC: Brookings.

    Google Scholar 

  • Salamon, L. M., & Anheier, H. K. (1992). In search of the non-profit sector. I: The question of definitions. Voluntas: International Journal of Voluntary and Nonprofit Organizations, 3(2), 125–151.

    Article  Google Scholar 

  • Skarbek, E. C. (2012). Experts and entrepreneurs. Advances in Austrian Economics: Experts and Epistemic Monopolies, 17, 99–110.

    Article  Google Scholar 

  • Skarbek, E. C. (2014). The Chicago fire of 1871: A bottom-up approach to disaster relief. Public Choice, 160(1–2), 155–180.

    Article  Google Scholar 

  • Skarbek, E. C., & Green, P. R. (2011). Associations and order in the cultural and political economy of recovery. Studies in Emergent Order, 4, 69–77.

    Google Scholar 

  • Skelcher, C. (2007). Public-private partnerships and hybridity. In E. Ferlie, E. Lynn Jr., & C. Pollitt (Eds.), The Oxford handbook of public management (pp. 347–370). Oxford: Oxford University Press.

    Google Scholar 

  • Smith, S. R., & Gronbjerg, K. A. (2006). Scope and theory of government-nonprofit relations. In W. W. Powell & R. Steinberg (Eds.), The nonprofit sector: A research handbook (pp. 221–242). New Haven, CT: Yale University Press.

    Google Scholar 

  • Sobel, R. S., & Leeson, P. T. (2007). The use of knowledge in natural-disaster relief management. Independent Review-Oakland, 11(4), 519–532.

    Google Scholar 

  • Stater, K. J. (2010). How permeable is the nonprofit sector? Linking resources, demand, and government provision to the distribution of organizations across nonprofit Mission-based fields. Nonprofit and Voluntary Sector Quarterly, 39(4), 674–695.

    Article  Google Scholar 

  • Storr, V. H., & Haeffele-Balch, S. (2012). Post-disaster community recovery in heterogeneous, loosely-connected communities. Review of Social Economy, 70(3), 295–314.

    Article  Google Scholar 

  • Storr, V. H., Haeffele-Balch, S., & Grube, L. E. (2015). Community revival in the wake of disaster: Lessons in local entrepreneurship. New York: Palgrave Macmillan.

    Book  Google Scholar 

  • Watson Bishop, S. (2007). Linking nonprofit capacity to effectiveness in the new public management era: The case of community action agencies. State and Local Government Review, 39(3), 144–152.

    Article  Google Scholar 

  • Weisbrod, B. A. (1988). The nonprofit economy. Cambridge, MA: Harvard University Press.

    Google Scholar 

  • Wing, K. T. (2004). Assessing the effectiveness of capacity-building initiatives: Seven issues for the field. Nonprofit and Voluntary Sector Quarterly, 33(1), 153–160.

    Article  Google Scholar 

  • Young, D. R. (2000). Alternative models of government-nonprofit sector relations: Theoretical and international perspectives. Nonprofit and Voluntary Sector Quarterly, 29(1), 149–172.

    Article  Google Scholar 

  • Youngs, B. B. (2007). The house that love built: The story of Linda & Millard Fuller, founders of habitat for humanity and the Fuller Center for Housing. Newburyport, MA: Hampton Roads Publishing Company.

    Google Scholar 

Download references

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Stefanie Haeffele.

Additional information

Publisher’s note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Haeffele, S., Storr, V.H. Understanding nonprofit social enterprises: Lessons from Austrian economics. Rev Austrian Econ 32, 229–249 (2019). https://doi.org/10.1007/s11138-019-00449-w

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11138-019-00449-w

Keywords

  • Austrian economics
  • Social learning
  • Civil society
  • Civic associations
  • Nonprofits

JEL codes

  • B53
  • L31
  • L33
  • O18