For-profits vs. non-profits

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.

Erik Kain

Erik writes about video games at Forbes and politics at Mother Jones. He's the editor of The League though he hasn't written much here lately. He can be found occasionally composing 140 character cultural analysis on Twitter.


  1. I’m not sure that Kling knows what a non-profit actually is; his argument suggests he has only a rather simple colloquial understanding.

    The whole purpose of having a (503) corp isn’t to “do good things in the community,” it’s to have a mission that exists solely “for public benefit.” These are very different things; a for-profit company is entirely different for a (503) even when it does good in the community:

    One is required by law to stick to it’s mission at the (possible) expense of greater profits – or any profits; the other has not such restrictions, and in fact is often required by market forces to do the opposite, or at least as close to the opposite as the law and public relations issues allow it.

    Some of our larger clients are non-profits that do both residential care and vocational training for the developmentally disabled. This is a labor intensive field; depending on the level of disability, you might need a *lot* of people to complete the tasks associated to the mission. This demand of labor means that these organizations are very expensive to run. It is true that as funding is cut in bad economic times these organizations look for new strategies to more efficiently fulfill their mission. But they do not – and more importantly, cannot – abandon their mission. They don’t decide, for example, that will can kick out those whose welfare they are charged with and use the homes as bed and breakfasts until the economy turns around because it will result in a greater return on their investment. Even if they wanted to do so, they aren’t allowed unless they want to give up their non-profit tax status.

    To think that a (503) organization exists only so that people can feel good about working to make the community better is eye-rollingly naive about the structure, purpose, and necessity of these organizations. And his not understanding that – coupled with his concern about people’s “intuition” – makes it seem like Kling is far more interested in what looks “cool” to others than anything else.

    • Doesn’t that depend at least partially on the nature of the non-for-profit? Harvard can be as selective as it wants and can select people based on formulas directed towards letting those in who are most likely to give back to the university as alumni.

      There’s also the health insurance industry. Sometimes they’re for-profit, sometimes non-profit, but there doesn’t seem to be a discernible difference in the behavior of either.

      • Two key differences in both examples: Harvard and a non-profit hospital cannot – as stated above – choose to abandon their public benefit mission for greater profit without losing their tax status; this does not mean that they are required to take any student or patient that wants to attend/receive treatment.

        Second, if a for-profit school/hospital makes gobs of money the business itself can be treated as a financial investment for those thAt put money in. Not so for non-profit. Most people I meet tend to think non-profit means the business does not earn a profit on it’s balance sheet; this is wrong, and if it doesn’t make a balance sheet profit it will fail as surely as a for-profit. The “profit” in non-profit refers to profit on a financial investment.

  2. And one more damn point, because this post is annoying me:

    “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.”

    This is absurd, as this view of running a non-prof assumes that there is: a). no competition among non-profits for government, grant and donation moneys, and b). there is an elastic amount of those moneys to go around. Neither is true.

    Our non-profit clients often compete against *one another* for the same dollars. Those dollars are won or last by the organizations; they are not divided equally amongst however many registered non-profits are in existence, or how many ask for money. Each organization is trying to create results and a narrative that convinces those with money to choose them – same as a for profit company.

    Kling seems to be suggesting that those that don’t get results, or those that do but cannot articulate that they do, just go merrily along indefinitely, as if running a non-profit is a golden handcuff job akin to being a tenured professor. In fact, those that fail to do these things go out of business.

    Are there some non profits that fail to achieve competitive results but are able to continue longer than they otherwise would have because they were able to craft a narrative that created false confidence to their “consumers?” Sure, you bet. And the difference between that and what happens on the for profit side is… what?

  3. Kling is a free market fanatic. RT nails most of the obvious criticisms of this. I’d add that non-profit structure exists to give advantages to organizations do certain kinds of work. If there were business’ making money at those jobs that for the most part NP’s wouldn’t be needed or be able to survive. There are just some things that are well nigh impossible to make profitable. His apparent belief that gov grants and donors are easy to find and a permanent guaranteed source of funds is laughable and shows a lack of knowledge of what he is talking about. The last non-profit I worked at cut many jobs and suffered a major degradation in our services because of problems getting grants and funding.

    If you work in non-profit as some point someone will make joke about non-profit meaning all the workers get crappy salaries. In general that is true, most NP’s pay poorly especially those engaged in social service type work.

  4. There’s nonprofits and then there’s nonprofits.

    As Paul Goodman said, large, hierarchical, bureaucratic organizations with Weberian “best practices” and prestige salaries and all the rest of it tend to cluster into coalitions. A giant bureaucratic nonprofit run according to exactly the same pointy-haired boss crap as a regular Fortune 500 corporation is way different from a small, ad hoc, self-managed cooperative with intrinsic motivation.

    And the term “nonprofit” assumes that dividends to shareholders are the main form of profit. But in fact I think the management of a large, diversified public corporation can far more legitimately called residual claimants than the shareholders. Shareholders are simply another kind of contractual claimant. Shareholder ownership is a myth. So when the boys in the C-suite run a company into the ground, downsizing human capital with a chainsaw, stripping assets, and destroying long-term productive capabilities, in order to give themselves multimillion dollar salaries, that’s the profit that counts.

    And large institutional nonprofits have exactly the same pointy-haired organizational culture as their for-profit counterparts. The CEO of the community nonprofit hospital in the neighboring town has the same giant salaries and bonuses, the same proliferation of committees, the same mission statements, the same motivational horseshit, and all the rest of it, as the hospital I work at that’s owned by a nationwide corporate chain. At the large nonprofit as well as the large for-profit, the primary purpose of the organization is to line the pockets of the people at the top of the pyramid.

  5. “There is one Market, and Hayek is its prophet.”

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