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.
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Notes
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).
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.
While Acs (2013) views this as a robust capitalist system, he nonetheless promotes coexistence, rather than competition, with the state.
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).
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/.
See Aligica (2015) for a discussion on the continued gap in the literature.
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.
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.
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.
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).
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.
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).
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.”
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.”
For more information, see http://www.habitat.org/how/default.aspx.
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.
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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
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DOI: https://doi.org/10.1007/s11138-019-00449-w