Non-profit and economic accounting – Econlib

In a recent post on Longterm Liberalism, I discussed how the calculation problem applies to the nonprofit sector. Although nonprofits purchase factor inputs in the market, they do not sell the products and services they produce. And as their name implies, they do not receive a profit-loss response. This lack of feedback means that nonprofit decision makers do not know whether they have created value for those who will benefit them, especially if they expect to benefit people other than their donors and employees.

I am certainly not the first Austrian school economist to discuss this. Peter J. Boetke and David L. Prichitko discusses this in more detail in an article Conversations on philanthropy. As they explain:

“Voluntary nonprofits and associations may purchase or lease input into the market, and are therefore guided by price at that stage, but they do not determine the price of their” product “or service (although they define it). Provides a rare service to others (or any other product, in that regard) without exchanging money (Boulding 1981, ch. 1). They have access to the market process (and, of course, the political process). They have been isolated from other social institutions and processes, yet can do non-profit work Measurements, And, if encouraged, a logical evaluation of their results (using both quantitative and qualitative methods), there is no way to calculate the results available as opposed to their expected results. Non-profit organizations and associations, in other words, cannot calculate the remnants or financial value-added of their efforts ex or post. In this sense, Non-profit A good word for those who do not value their services or products. Here No. Calculated financial gain. “

However, they argue that this inability to calculate does not mean that nonprofits have failed in some serious sense. They describe this in great detail:

“The nonprofit volunteer sector is not an isolated island of human activity – Commons মতো like any other organization, family, nonprofit participants themselves are involved in the institutional matrix of the market economy. Nonprofits have a price to guide them, especially when buying or leasing inputs. Providers can coordinate their resource needs with supply and they can and do participate in the knowledge-dissemination features of the market process.Although they cannot add value to their efforts, they can determine if their specific goals and efforts are successful Donors need to understand that their efforts are worthwhile. Instead of trying to persuade them with financial gain or calculated signals, they must go through computational but measurable or measurable ways. Any of the “voluntary failures” is theoretically sustainable Can’t have ideas. It may be objected, however, that the application of a subjective theory of the values ​​proposed here does not help to create an overall efficient allocation of public resources (or tax-generated resources for welfare). Here, in the absence of the need for more comprehensive but undefined and unattainable criteria of social adaptation, a more comprehensive achievement of plan implementation is certainly sufficient. Even in contrast to the Pareto standard, there is little rationale for criticizing nonprofits for failing in terms of efficiency.

We suggest that nonprofit managers, “social entrepreneurs” and their donors be able to make logical decisions about the effectiveness of their activities even though they cannot calculate the value added in financial terms – calculation, again, a dollar measure is the total cost of their efforts and their efforts. The total advantage, the difference is the financial gain (or loss). We will add that they will have more incentives than government officials to evaluate performance, as they cannot rely on tax powers like Miss Councilmen. Instead, they must rely on the voluntary contributions of their donors. This is certainly problematic in our society, where many nonprofits often avoid the responsibility of persuasion and voluntary exchange and instead seek support from the state (not unlike many private business ventures). In this regard, Salmon’s advocacy of a third-party government, which effectively seeks to legitimize nonprofits as a weapon of state action, further undermines the effectiveness of nonprofits and encourages them to engage more in seeking political rent than the market. Persuasion. “

While nonprofits need to protect donors from rent-seeking tendencies and ensure that nonprofits will at least benefit their donors more than their costs, nonprofits often claim that they are pursuing more high-minded goals. They often aim to improve the lives of people who would never donate to a nonprofit organization or provide any factor input into it. To know if they are succeeding in such high-minded goals, they need some other way to evaluate their actions. As Boetke and Prichitko acknowledge:

“In an independent nonprofit sector, actors must rely on voluntary contribution signals and create output arrangements to see that the desired results are achieved. This is a recognized difficult project, not only for real-world participants in the sector but also the sector coordinator. Also for theorists trying to explain the features.

Boettke and Prychitko provide reasonable grounds for rejecting Lester Salmon’s proposal for government intervention to prevent so-called “failures” in the nonprofit sector. But the question of how nonprofit decision makers can best learn and guide their efforts to improve the world is still an open and important one.

The “Effective Philanthropy” community engages in a variety of analyzes, competitions, empirical and theoretical works and discussions that seek to discover how the world can be improved through philanthropy, research and other voluntary work. However, they are certainly not the only ones engaged in this type of project.

Some nonprofits try to create market-like processes within their organizations to learn more about how to serve others. For example, in Journal of Economic PerspectivesCanis Prendergast explains how nonprofit Feeding America has “switched from a centralized queuing system, where food banks will wait their turn, in a market-based system where they bid on food truckloads every day using a ‘fake’ currency called stocks.”

Another example of using market logic to serve help recipients more effectively is seen in the work of GiveDirectly, which provides direct cash transfers to extremely poor recipients. It enables recipients to buy something most valuable with cash, rather than accepting what decision-makers think they might need in a nonprofit organization.

Of course, not all decisions made by nonprofits can use the semi-market process. And we should not pretend that we can design something that will act as a proxy or replacement for economic calculations. But philanthropists and social entrepreneurs can engage in different types of social education because they want to help others better.


Nathan P. Goodman is a postdoctoral fellow in the Department of Economics at New York University. His research interests include economics of defense and peace, self-governance, public choice, institutional analysis, and the Austrian economy.

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