I have become very interested in the stated premise that public charities and private foundations exist in a "3rd Sector" outside of the market system - and therefore not regulated by normal laws of economics.
I am currently researching for my thesis (Master of Public Administration with a focus on nonprofit management) on the subject of nonprofit funding (not fundraising). In my research I have come across an obvious bias in the nonprofit community that they are outside of the market, that the "consumers" they serve in the form of those they provide charity to are not "consumers" and therefore there is no market transaction that takes place.
However, when I give resources to an organization, that organization and I are involved in a voluntary exchange. I present my money to the organization because I value that money less than I value the services they will be able to provide to those they serve. Is a charity or foundations customer me or those they serve? If it is me as a donator, then would they not be a regular part of the market - involved in voluntary exchange?
My second question relates to the issue of free-ridership and my previous question. Would someone who paid a lower (or higher) price for a consumer good be considered a free-rider (or represent a negative externality) because of my choice of whether or not to purchase said item? Clearly my choice to consume or not has an effect on overall supply and demand and would therefore affect price (I know for a consumer good this is not the case, but assume a very small economy here). If I am the true consumer of charitable services, not the person who actually receives the services, but the one who paid for and values those services - am I not hte consumer?
Yep, you are the client-consumer, and the service you're purchasing is aid to others - or the distribution of it. It's cute how many people try to devise new forms of economics, in which the traditional laws do not apply. Neoclassical economics is unfortunately constrictive in its terminology, so from that point of view it does seem necessary - but Austrian economics is much broader.
-Jon
Freedom of markets is positively correlated with the degree of evolution in any society...
The first chapter of my thesis is a review of the historical underpinnings of the modern charity and philanthropy units. I have been able to make use of a great deal of literature found within the wonderful electronic halls of the Mises library. However, I have been unfortunate in my search for economic related queries and statements on charity and philanthropy. My research plan calls for a study on economic insights on charity and philanthropy and the literature related to this subject is sparse. Turgot and Smith provide some early insights, but their theory of charity is really ex-economic law as well, really more of a synthesis of their personal ideals (so it seems) of duty to mankind.
If you were trying to make an argument about how nonprofits are as much a part of the market economy as any other business or individual - how would you go about it?
Marginal utility analysis. I'd start with Menger's theory of the good and how valuation occurs. I think if you haven't already, you should read Menger's Principles of Economics. The first thing you'd have to demonstrate I suppose is that charitable aid is indeed a good - once that is done you can show how its consumption satisfies the consumer, and so that it is hardly outside economic analysis. You'd need to make it clear you're not working within neoclassical analytics, broadening what may count as a market exchange. I think it's great that you're working on this by the way - like you say, there is too little on it.
mpablazer:However, when I give resources to an organization, that organization and I are involved in a voluntary exchange. I present my money to the organization because I value that money less than I value the services they will be able to provide to those they serve. Is a charity or foundations customer me or those they serve? If it is me as a donator, then would they not be a regular part of the market - involved in voluntary exchange?
You could try to relate this to other similar ecosystems. For instance, advertisement: they are the customer (the one that purchases the service) to, say, a television station. But what they want the station to do is to broadcast enjoyable program to the consumers (the viewers), so they can then fit the ad.
The employee-customer relation is also similar I think -- assuming they work just for a wage (no tips, bonuses nor dividends). For the employee, his employer is his customer. That's the person he needs to please. Of course, the employer wants him to please the customers, so that's what he does (not necessarly, by addressing them directly, but doing work in the background as the employer tells him: like someone that works in a warehouse -- certainely his employer isn't the one that's going to consume the goods there) .
So, I think there are examples of related situations in the market economy... I guess you could say that in the case of the ad example, the ad company is the customer and the viewer is the indirect customer -- or a second-customer. In the employee situation, we have the employer as the employee customer, and the employer's customer as the employee's indirect-customer.
In the charity case, the person paying for charity may not get an obvious benefit from it (unless the charity promises some safety net services or something, which I think was more the case in the old days, with churches and all, but not really today), but one way or the other, the person is giving that money away because he values the return. It could be that he has had a friend with cancer dying and now wants to support cancer research, or a less dramatic case where he can't stand the idea of people don't have an in-doors place to sleep, or whatever. Nobody just gives to charity without really knowing what they are giving to -- possibly when it's the occasional street fund-raiser and you feel guilty for not have been contributing to charity or something... Anyway, I'm not sure gifts are an entirely beast than an exchange, because you do get some value in exchange.
I think you may also have ecosystems like these in state planning. For instance, in some registration department, the clerk may have some quota of people to attend like 50 people every 5 days... These clerks couldn't care less about people standing in line: maybe in the first days, but then they get used to it. Anyway, they need to make sure the burocrats on top of them are happy, so they must attend those 50 people. You have here a case of direct and indirect customers.
I hope this isn't a bunch of silly non-sense, and may actually give some insight. At least on where not to go in your thesis. :P
I didn't quite got the second question, but one note is that when demand increases, prices also increase, and that signals producers and prospect investors to produce more of that. I dislike this notion that those people that e.g. do medical checkups more regularly than the rest are locking resources. This is only true for state planned medical systems. In the market, an increase in demand will only take resources from others temporarly (it's not entirely true for everything, but surely it is the case for services, which is the main activities of the western economies).
mpablazer:I have become very interested in the stated premise that public charities and private foundations exist in a "3rd Sector" outside of the market system - and therefore not regulated by normal laws of economics.
One suggestion here: what about instead of public, private and volunteer sectors, which I personally think are very misleading labels, using names like planned, market and gift economies? Or state, exchange and gift activities? I dunno, but anything is better than some abstract "3rd sectors" or misleading "volunteer sector", which could apply to the market...
Equality before the law and material equality are not only different but are in conflict with each other; and we can achieve either one or the other, but not both at the same time. -- F. A. Hayek in The Constitution of Liberty
mpablazer: have been able to make use of a great deal of literature found within the wonderful electronic halls of the Mises library. However, I have been unfortunate in my search for economic related queries and statements on charity and philanthropy. My research plan calls for a study on economic insights on charity and philanthropy and the literature related to this subject is sparse. Turgot and Smith provide some early insights, but their theory of charity is really ex-economic law as well, really more of a synthesis of their personal ideals (so it seems) of duty to mankind.
Rothbard touches on the subject in The Myth of Neutral Taxation, starting on page 5 of the pdf.
faber est suae quisque fortunae
JackCuyler: Rothbard touches on the subject in The Myth of Neutral Taxation, starting on page 5 of the pdf.
Thank You very much for this link.
I see Rothbard's argument as placing a distinction between the voluntary (market) economy and the coercive (state theft) economy. Of coursre they are interrelated in our mixed economy, but it is only 2 real sectors. This provides some juice against the 3rd sector/voluntary sector tripe I hear on a day in and day out basis - and will help better formulate my overal largument.
Byzantine:and the recipients are free riders taking advantage of an opportunity to subsidize items like single motherhood or drugs and alcohol.
That is of course the flip side of my problem with the argument from nonprofits that they exist in a 3rd sector. The literature is abundant with mentions of free-ridership. To me they are NOT the consumer, and the positive externalities they receive are gifts given in "full" knowledge of other consumer/producers. If I buy a nice young lady a drink at a bar is she experiencing the effect of free-ridership, what if she acts like she wants to talk and I buy her a drink and then she moves on, is that free-ridership (to make it more than a two party exchange - insert a bartender into the equation).
I do agree about charity employee's. Even charity volunteers work for a profit, although it is a psychic one!
Typically, the donor does not donate in exchange for any tangible good or service. He typically donates for psychological reasons; i.e. it makes him feel good to do so. While this "warm, fuzzy feeling" fits the standard neoclassical description of utility (which is entirely subjective), it isn't what most people think of when they think of consumption.
mpablazer:My second question relates to the issue of free-ridership and my previous question. Would someone who paid a lower (or higher) price for a consumer good be considered a free-rider (or represent a negative externality) because of my choice of whether or not to purchase said item?
Free riders aren't negative externalities in the case of non-rivalrous, non-excludable "public" goods (such as knowledge), because use of knowledge in and of itself does not impose any cost on others. They are externalities in the case of rivalrous, non-excludable "common" goods (such as fish in the ocean), because use of the good does impose a cost on others who wish to use the good themselves.
A person is only a free rider of a public good if he values the good more than he is willing to pay for it. For example, if I was happy that philanthropists provided for my city's poor even though I didn't contribute a single cent, I'd be a free rider. If I didn't give a damn about the city's poor and didn't contribute anything I wouldn't be a free rider, because I don't value the good at all. I wouldn't be a free rider if I valued the poor being taken care of and contributed an amount equal to that value.
It is possible to provide public goods in the face of the free rider problem, but as far as I know its not possible to prevent free-riding itself without the use of taxation (which arguably just creates more free riders).
mpablazer:Clearly my choice to consume or not has an effect on overall supply and demand and would therefore affect price (I know for a consumer good this is not the case, but assume a very small economy here). If I am the true consumer of charitable services, not the person who actually receives the services, but the one who paid for and values those services - am I not hte consumer?
Each individual has some amount he is willing to pay for the good, and the good itself has a cost. If the amount each individual is willing to pay equals or exceeds the cost, then the good can be provided. A higher demand for a public good could cause the public entrepreneur to raise his price in order to gain more profit, but I'd think this sort of behavior would be looked down upon in charities, and could be bid down in a competitive marketplace for public goods.