Against the Third Sector as a Contrivance of the State

0:00My name is Kevin Hutchins and I am presenting a paper against the third sector as a contrarian of the state. So this is the paper that hopefully all of you will read and will be made available is on the historical foundations of modern non-profit firms. It's the first of four parts of my thesis for my Masters of Public Administration degree and in the thesis, review historical foundations, economic theories of non-profits, review of capital market theories, and then application of history and theory to a new equity-like capital market for charity and philanthropy. So today I'd like to set out and reframe the third sector of rubric, a notion that charity exists separately from the private commercial and government sectors.

0:53Second, I'll show some commonalities between the commercial and non-profit business firms and third, show the danger of increased government intervention in a historically independent sector of the economy. Okay, so let's talk about the modern third sector. Well, this was a concept that was really first introduced in 1975, so it's a very recent concept that has really just completely taken over, I think. Most of us have probably heard the terms either third sector or independent sector when talking about nonprofit institutions, charities, philanthropies, or what I like to say, private voluntary assistance for social needs. So this was put together by the Commission on Private Philanthropy and Public Needs, commonly called the Filer Commission for the Chair.

1:41The commission was put together by John Rockefeller III and presented their findings to Congress in 1971. So, in the commission report, the third or independent sector is reframed as separate from private commercial and governmental sectors of the economy, even though there is a thousands year long history, tradition of, of course the terms non-profit were unused, but a thousands of year tradition of private voluntary assistance for public or social needs. Also, the third sector in this paper said to basically live and die by the tax deductibility of donations. Again, we didn't have personal income taxes in the United States until the 20th century, so what the heck about all the money that we've been giving for thousands of years for social needs voluntarily?

2:32So, the third sector, not by the pilot commission report, but just generally, the third sector is primarily defined by a non-profit distribution constraint. So, you can make profits, you just can't give them out to owners. Recognition of special exemptions in tax law and the voluntary nature of its activities for a non-private or a public benefit. So why is the third sector important as a field of study? Start here and say, approximately 10% of US GDP comes from the third sector, from nonprofits and charitable institutions. 7% of the civilian workforce, or if you include volunteer hours, 10% of the civilian workforce in the United States comes from this sector.

3:23They have over $3 trillion in capital assets on their books as of two years ago. So I'd say it went up, but it probably just went back down. So we'll say around $3 trillion in asset value. And interestingly, over the past two decades, they have seen double the growth rate in revenues, in asset values, and in the number of firms that the private commercial sector has seen. So that's kind of interesting, why all of a sudden have we had this explosion of nonprofit firms? Of course, I think we probably know some of the reasons. Another thing here that I'd like to say that I think is important about the third sector, Aristotle claimed that where there is friendship, justice is not necessary.

4:09And Aristotle friendship was in any association of mutual advantage where both parties contributed to the transaction. So the third sector is important because it helps build the kind of social trust that is necessary for commerce. Without private action or non-private means only, only, the trust that we have in society can be damaged, and then we can end up allocating more resources to defining trust, making sure that we're not getting built into transactions and just going on and committing commerce. So I'd like to talk a little bit about the sources of revenue. This is a chart from the NCCS, National Nonprofit Research Database. When we see that non-profit institutions receive about 44% of their revenue from fees and charges, that number is actually 71% if you include the regular fees and charges with government reimbursements for fees and charges, primarily from Medicare and Medicaid, other government programs.

5:15So, they actually receive 71% of the revenue from fees and charges. Most of us pay fees and charges to a non-profit institution to attend here Government reimbursements per charge is 27% Direct government grants, 9% Individual giving, 12.5% Investment income, 4% So this is interesting, where I received this graph from, it shows the 71% in the lowest number to talk about, you know, how a large percentage of the fees and charges came from government reimbursements. So in the literature, you want to go and see, you just see the full times where it only gives 9% in charities.

6:07Of course it's not, it's actually 36%. On this slide, I just want to show you a little bit more about the third sector, why it's important. So this is as a share of revenue, which of course approximates their economic impact. So healthcare makes up almost 60% of the nonprofit sector. And then education, so institutions of higher education and private schools make up about 16%. And then Human Services, what a lot of us traditionally think of as charity. The Human Services field and the public benefit field together is about 19 percent. And then we have a little bit more. This non-profit charity obviously does not include churches.

6:54We do have a little bit down here for religion, non-direct church hate, but churches are typically not included in regular discussions on the non-profits. The sectors contrived by the state. 36% of the revenue is derived from federal resources. Increased government grants and payments for service have led to a huge increase in the number of firms, especially over the past 50 years. Tax changes in the 20th century were specifically the change from a for-profit form, proprietary forms of organization for the firm, into non-profit, especially in health care and in research and in education. And we can see that less than 50% of the third sector that we have today actively exists in what is historically based charity and philanthropy.

7:46So now, that's interesting. Also, we take out that 50% and that double the growth goes back to the same growth rate as commercial firms over the past 20 years. which is also something that's seen throughout history that there are a lot of similarities between non-profit firms and for-profit firms. They grow together over time. They're highly interdependent on one another. So, now I'd like to move on and talk a little bit about what's actually in my paper, this first part, is on the historical foundations of charity and philanthropy. So, we find some universal themes reviewing the literature. First and most important is that voluntary assistance addressing social needs is absolutely consistent through history of time and place.

8:38So in the paper, which again I truly hope all of y'all will read and what I comment on, I take the reader through a journey through ancient China, Persia, into Judea, Greece and Rome, up into Christian Europe, Islamic Asia, into the colonial period and into the modern world. So I kind of trace the history of charity and philanthropy all the way through. Now there's some great books available and I have a 40-page paper so I tried to make it a little bit more concise as just a foundation for my thesis. Next, voluntary assistance is consistent regardless of state provision of resources to address social needs, early Christian church assistance is an example of this.

9:27In ancient Rome, when the church started, the state didn't provide any social services. They did, but very, very small amount. So the early Christian church on that side, I think some of the religious historical literature says that that's part of how the church was able to grow, is they were able to build these in the Community through Providing Assistance to Those in Need, Private Non-Religious Assistance during the period of Church dominance, so towards the 15th century when the Church in Europe was beginning to run into financial troubles and they were no longer able to appropriately support those in need, private parties came up and were able to support some of the needs, and also in the historical religious literature, that's given as part of the reason for the Protestant Reformation.

10:18And then of course there has been vitigating and socialist and dictatorial regimes as well. So we see that again this voluntary assistance is consistent regardless of state provision. Third voluntary assistance is entrepreneurial in addressing social needs. It was philanthropy that introduced the first savings banks. These banks would, of course, take in small savings subscriptions from regular people. Normally, with an income test, you couldn't join a savings bank unless you had under a certain amount of income, and then delay for this and donations to the charity. The savings bank would pay typically a 5% interest rate back on this. Mutual insurance, of course, was also started by a bill of private institutions, as was free education.

11:10entrepreneurial because many methods are used and tried by many different firms I mean this isn't like government provision of service where we say okay we're going to do it this way no we have many different firms doing many different things and to me that is part of the entrepreneurial approach trying to produce new combinations of goods and services to meet any also voluntary assistance was extremely instrumental in the very growth of the US commercial sector in the early republic these savings banks and mutual The financial insurance firms were huge capital aggregators, say under the largest of them, had over $100 million inflation adjusted in dollar assets. In a downturn in, I don't remember exactly when, maybe between 1817 and 1820, there was a real monetary crunch and there wasn't liquid capital available.

12:03These folks had liquid capital, they made it available. So they took the cash out of the bank and these things funded roads, canals, hospitals, schools, and commerce. The historian at the time in the 1830 something of Lowell Mills, so they had an on-site historian at the Lowell Mills, he said that Massachusetts Life, which was affiliated with Massachusetts General Harvard University, was the primary provider of intermediate capital for low mills expansion, and specifically said that without that capital, low mills would not have been able to expand at the rate it did. Two minutes, okay. Alright, so a couple more things here. We have, Voluntary Assistance has always been a first responder to new social needs. They've introduced free education. They were the first to address the needs of urban poor during a change from an agrarian to a commercial economy.

12:59There are first to address health care and medical research needs during periods of epidemics in play where some of our earliest great medical research comes from the Islamic world and these were funded by non-proprietary but private business firms that are like charities today. Voluntary assistance is especially adept during times of social upheaval so we see during the fall of the Roman Empire more charitable and philanthropic assistance was made available. was either in the Protestant English Reformation, this is really when the sector exploded, was during the Protestant English Reformation, because there was that need, and the need was met by private activity, and that's been changed from a very industrial age.

13:44Last universal theme here is the voluntary assistance, it's always acted as a buffer against state of Germany, so it's provided assistance to persecuted minorities in ancient in Rome, Medieval Europe, Pre-Civil War America, the modern world, of course we know agitated for the end of slavery, voluntary associational activity has helped to agitate for and fund the American Revolution itself. In a way, the original Continental Congresses that did not have charter from the King, they were voluntary associations, and the original funding came from voluntary subscriptions. and then last and no less important, the Mises Institute itself, that we here help provide love for Oregon State. Okay, so I'll run through these real quick, I didn't get the wrong one, sorry, alright in conclusion, basically everything I just said, go on to one more, I'm out of time, I want to talk just very briefly about the power of Austrian economics in studying the third sector.

14:52Being here this week has helped me a lot. I was very interested in the number of presentations that touched on social entrepreneurship or sustainable business development. The nonprofit sector isn't just nonprofits. To me, it's really those that are using private means to meet more than just a private end. There was a presentation yesterday on sustainability. And when we do that privately, it's great. When government forces us to do it, it's bad. But the Austrian focus on subjective pricing, individualism, entrepreneurship, firm, time value, and uncertainty has the ability to frame a voluntary private action for public gain within a holistic voluntary economy. What right now is solely being studied outside of nonprofit management and business schools is solely studied in schools of public administration like I'm in.

15:44So we are teaching people to help meet these great social needs. We're teaching them to do it the government way. We're teaching them to do it with poor economics that can't even model non-profit firms. The only reason non-profit firms exist in classical economics is because of market failures. It's not a market failure. I want to do what I'm doing. All of us want to.