Consumption, Profit, and Competition in the Not-for-Profit

0:00I will try to speak about consumption, profit and competition in the not-for-profit. I will start with the assumption that the donor is a consumer. We know that the goal of for-not-for-profit organizations, charities, NGOs, foundations or other associations is to achieve social, humanitarian but also cultural or environmental purposes by multiple resources, monetary resources, donations and sometimes also investments, human capital, employees or volunteers, and every material aid available. So starting with this assumption means that, as Robert points out, the member of an organization consumes the services of the organization not by purchasing a product but by helping the organization pursue its goal.

0:56It means that people support the organization and the programs they approve and sympathize with. A donor patronizes an organization and its projects when he approves its goal and, generally, the tools to achieve these goals. So, the not-for-profit is a market directed by donors. If the donors share the same aims with an organization, it means that he has decided what programs have to be accomplished and what not. It is the donors to decide the ends. And Rothbard has, suppose, for example, the organization is a charity giving ends to the poor. In a sense, the purpose it is is to benefit the poor, but the actual consumers here, the gifts to productions, decisions, are the donors, not the recipients of the charity.

1:53The charity serves the purposes of the donors, not the recipients of the charity. The charity serves the purposes of the donors, and these purposes are in turn to help the poor. But it is the donors who are consuming, the donors who are demonstrating their preference for sacrificing a lesser benefit, the use of their money elsewhere, for a greater, giving money to the charity to help the poor. It is the donors whose production decisions give the action of the charity. So, it's always a question of choice. Every individual makes choices and evaluates things according to his needs. Mises explains that, in very different states of satisfaction and the means for their attainment, man arranges all things in one scale and sees in them only the relevance for an increase in his own satisfaction.

2:48In correcting men, there exists primarily nothing but various degrees of relevance and urgency with regard to his own well-being. So, individuals do not make a selection process from absolute and immutable, unchanging values, but from decisions dictated by preferences done under a limited time and under some conditions. Every choice depends upon the values subjectively given to goods or services. Individuals make preferences according to what they judge better for them. And as Mises himself observes, the value given to something can be objectively opposite to its real value, but this does not mean that a choice is not founded on a subjective estimation.

3:35Consequently, in the market consumers orientate the production according to their actual and future needs, which producers have not only to satisfy but also to anticipate. Equally, in the not-for-profit, people support those institutions they share intention with and those ones consider more efficient or original to approach the problems. The donors, even if they can be individuals or firms or other associations or foundations, because sometimes foundations don't develop programs, but they grant. They give only grants to other foundations or other associations. So, a donor do always a choice of preference according to their own conviction, beliefs, disposition, ideas and objects.

4:24Even if a donation owns a sentimental aura, it is always a choice between alternatives, that is, to give money or to keep it, and to do a grant to an institution rather to another. A donor makes his choices on the basis of information concerning the typology of programs and Engagements, concerning the requested amount and the quality of the philanthropic institution. A donor reacts on the basis of a subjective judgment about the competence and ability to work and to obtain results, but also about the nature of the organization, if it is, for instance, secular or denominational. Therefore, we can see clearly it is the donor to lead the not-for-profit market. The real consumers are not the recipients of the giving, as it is always told.

5:14The final recipients are the object of the purpose. The grants, under the guise of monetary aid and material aid, are social investment run by third parties. Not-for-profit organizations manage donors' wealth, and the donors will judge organizations on the basis of the outcomes. We can say that even if a charity's act is not a market's act, it has some distinctive signs that bring it back to the market exchange. In a sense, the donor buys from a not-for-profit institution the engagement to solve or to bring humanitarian, social or cultural or artistic, environmental questions down. So the profit.

6:00Well, this is a very delicate question, but some consideration can be done. Well, I will quote Hazlitt. It's better to start with it. Profits, in short, resulting from the relationships of cost to prices, not only tell us which goods it is most economical to make, but which are the most economical ways to make them. As a classical firm, also not-for-profit institution has to direct its factor of production, that is, all available resources, monetary, human and material capital. It has to maximize its resources and avoid all capital scattering if it wants to succeed and attain its missions.

6:51It has to leverage funds, that is, to extend the value of each grant in the long term and create a benefit greater than the benefit generally obtained by that amount. In other terms, each dollar invested has to give a social return, an impact greater than the impact generally obtained by one dollar. So the institutions that last and increase capital are those ones that achieve the maximum and social return. So, the more competitive not-for-profit bodies are those with a better performance that is a better return on the donor's investment. In other terms, for an actor of the for-profit market, the profit is the difference between the cost of production and prices. Profit is depending on the consumer's judgment. Profit rewards the entrepreneur and the entrepreneurship. For a not-for-profit actor, it is a question of social return, And the social return it is not only the partial or the full solution of a problem, but it is also all direct and undirect benefits it causes.

8:01For a classical firm, the profit is the mean to evaluate what to produce and how to produce it. For a not-for-profit institution, the social return is the way to estimate its activity, to see weak and strong spots, to revise what elements to improve and to plan the way to It exists a way to calculate the social return. It is the social return on investment. The social return on investment is a way to show in monetary terms the social return, the impact of programs. There are many discussions about the feasibility of giving monetary value to things that do not have market value. But the social return on investment can help investors to better analyze if the investees are efficient and if the adopted systems, strategies are good or not.

8:56Moreover, by the social return on investment we can give a value to not-for-profit bodies and have a view on why and where their programs are effective or not. And also, by social return on investment, for instance, we can evaluate the amount of reduction in public assistance costs. We can show, in example, how much the cost of government policies for elderly persons or the homeless are decreased thanks to private funds and projects. But I think it could exist another kind of profit for a not-for-profit actor. For instance, let's take an organization serving meals to the poor.

9:42This association prospects to the donors, or the potential donors, the cost for the daily meals of a family. The costs prospected are higher than the real cost. The difference is necessary, firstly because you don't know how many donors will reply to assure the programs. The donors who reply positively accept this cost, that is that they are accepting the price of the mission. The difference between the real cost of the mission and the price is a kind of profit that the institution, the foundation, can use, for the same mission, to benefit a larger number of families, for instance, but also for other projects, for other programs, or it can use it to collect monetary resource to improve the organization performance, that is to say, capital expenditure or human resource, for instance, to hire a secretary.

10:43In a way, also, the reiteration of grants, the new donors and increase of funds that depend on donors' judgement can be considered profit. It is maybe to force things, but if we think that the profit is also a reward for the entrepreneur and the entrepreneurship, The reiteration of grants and the arrival of new donors are a reward for a not-for-profit actor, like in the not-for-profit market. Let's pay attention to the... no, I told it because I told it before, so it's okay. It's okay. Competition.

11:29Well, let's stop... let's focus on these words of Mises. The function of competition is to assign to every member of a social system that position in which it can best serve the whole society and all its members. It is a method of selecting the most stable men for each performance. So, as it is always told here, and it is true, competition is not about a perfect competition, about a fantasy equilibrium built on mathematical models and where the actors have not a perfect information. You know that men are fallible and their knowledge is limited.

12:15So, competition concerns the best means to reach ends. It is so. And as Hayek pointed out, competition is a problem of the utilization of knowledge which is not given to anyone in its totality. What it means is that competition leads to a decentralized organization made by various individuals. There is not a central power that plans what goods to produce and consume and how to produce them. In a competitive system, individuals, consumers, decide who can better serve them. The competition is not a stable phenomenon, but it is a continuous challenge to improve our knowledge and our condition. By competition, we can understand what is better and why.

13:08Competition processes allow us to do things better in different ways to better serve individual needs. And I would like to quote also Kirzner, competition process depends entirely on the freedom of those with better ideas or with greater willingness to serve the market to offer better opportunities. In the not for profit we can do similar consideration. We see that, especially in recent years, the institution, the not for profit institution, and better reacting to social and humanitarian problems are also those who are discovering new means to treat them. And after we will talk about the venture philanthropy.

13:56In the non-for-profit market, as in the classical market, the competition process entails a maximization of the knowledge available, and entails a maximization of all new information showing on the surface during the activity. It follows that only in a free market society, a not-for-profit competitive system, that is not concluded with government, individuals decide what programs are better and what not. There is not a central planning deciding what and who benefits. The decentralization makes new ideas possible. So, what is the venture philanthropy? Well, in the last 20 years we have seen a change in the not-for-profit sector.

14:49The first thing is the professionalization of the not-for-profit. Because donors are no more disposed only to give, they wait for results. They want to see a real return on their giving. At the same time, in the 90s, we can see the growth of the venture philanthropy. Venture philanthropy is a phenomenon related to Philanthrocapitalism. The term Philanthrocapitalism has been created by Matthew Bishop of The Economist and it can designate two things. The first one is the advantages of a free market society.

15:36But in particular, Philanthrocapitalism refers to Venture Philanthropy, a micro-level philanthropy that takes the instrument and the sour fare of business and adapts them to the not-for-profit sector. Venture philanthropy is not interested to transform the not-for-profit in a business of giving. Rather, it wants to integrate with not-for-profit bodies. The message of venture philanthropies is to treat social problems as entrepreneur-threat business. Venture philanthropies do not limit direction to give monetary resources or other. They involve themselves in programs, for instance, helping organizations to create good things, to construct a good strategy, or to manage their funds, their communication, their human resources.

16:25So, I quote this phrase I found on the website of Slate, on an article about winter philanthropy. They say, failure isn't an option, partnership between investors and investors. So it is related to consumption, profit and competition. It is entrepreneurship, to reason in this way. We can tell also other things about venture philanthropy. We don't have one single model of venture philanthropy. But the venture philanthropy shares some points. First of all, it is a logic of the long run. The second is the maximization of investment and resource for the maximum social impact, for instance supporting programs and organizations that better can solve the problem.

17:22The third is the evaluation of the results. This is mandatory. The evaluation of performance to better plan future projects and to collect information. Well, to finish, only three examples of venture philanthropy institutions. The first one is the Venture Philanthropy Partners of the United States. They work on the education and in the development of communities. And the second is the Fondation de Metre in France. They work for the professionalization of association, foundation, NGO and so on. And the third is It's very interesting, the Media Development Loan Fund, because they work for the expansion and the birth of free and independent mass media in East Europe, Africa, former Soviet Union and South America.

18:16So I finish my presentation, but I would like only to say why to talk about this. Well, because normally they demonize consumption, profit and competition. By this paper I would like to demonstrate that consumption, profit and competition exists also in the not-for-profit. We can make our life better thanks to consumption, profit and competition. And so it is mandatory also for the not-for-profit. They do that even if they say, Sorry, no, we don't do that. We don't do that. No, sorry, you do that. So, that's all.