For-profits vs. non-profits

by E.D. Kain on July 5, 2011

Arnold Kling asks:

I am curious about the intuition that people have about non-profit work. The standard intuition is that going to work for a profitable company means that you are not serving people, only the profits of the company. On the other hand, working for a non-profit means serving the community. Do I have that right?

Of course, I think that profit-seeking enterprises serve the community, also. In fact, they do it in a way that is more sustainable and more accountable. It is more sustainable, in that the value of what they produce is greater than the cost of the resources (including labor) that they use. Otherwise, they would not make a profit. However, a non-profit can very well use more resources than the value of what it produces. A profit-seeking enterprise is more accountable, in that a profit-seeking business must satisfy consumers or else go out of business. Hence, it must provide something of value to its customers. On the other hand, if a non-profit fails to provide any benefit to its customers, it still might be able to obtain grants from the government or from donors.

Is my perspective valid? If so, why is the conventional intuition so pervasive?

I don?t think Kling is wrong when it comes to purely for-profit businesses. Where I start to see a conflict of interest with profit-making is when those profits rely entirely (or mostly) on government dollars. Take the for-profit college industry. One would imagine that the efficiencies of a for-profit firm would translate into a successful business model for educating students. But for-profit colleges rely almost exclusively on government money to be profitable. This doesn?t lead to the sort of innovation and efficiency one might see in the actual private sector. Rather, it leads to more and more creative ways to get prospective students to take out massive loans and then turn those loans into profits for the for-profit colleges, education be damned.

That?s where I start to become uncomfortable with the for-profits. The profit incentive isn?t bad until it morphs into corporate welfare. Then these firms become no better than government itself, and in many ways much worse with far less accountability.

Whether Kling is correct that non-profits have little accountability is something I?m not sure I can speak knowledgeably about. I do know that many non-profits have specific missions and that they are accountable to the people with the purse-strings. This creates similar incentives to the profit motive, though it?s not a perfect match.

Source: http://ordinary-gentlemen.com/kain/2011/07/05/for-profits-vs-non-profits/

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