Conservative> Walter Williams> Profit Versus Nonprofit

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Profit versus Nonprofit

"Philadelphia Scandal Underscores Pitiful State of Public Housing Oversight," read Jonathan Berr's Aug. 28 report in the Daily Finance. It was a story about Carl Greene, the embattled director of the Philadelphia Housing Authority (PHA). He was put on paid leave while the board investigates charges that he settled four sexual harassment claims against him without notifying the PHA, doled out work to politically connected law firms and pressured employees to donate to his favorite nonprofit. Greene is also being investigated by the U.S. Attorney General Office for the Eastern District of Pennsylvania and HUD's Office of Inspector General. They have yet to bring criminal charges against him.

People always act surprised by revelations of political corruption but the Philadelphia Housing Authority corruption is highly probably in nonprofit entities such as government. Because of ignorance and demagoguery, being profit-motivated has become suspicious and possibly a dirty word. Nonprofit is seen as more righteous. Very often, people pompously stand before us and declare, "We're a nonprofit organization." They expect for us to believe that since they're not in it for money, they are somehow above self-interest and have the public interest as their motivation. There's little much further from the truth.

People are always self-interested. It's just when they manage a nonprofit organization such as the Philadelphia Housing Authority, government entities in general, universities and charitable organizations, they face a different set of constraints on their behavior. The fundamental difference between nonprofit organizations and their profit-making counterparts is that nonprofits tend to take a greater portion of their compensation from easier working conditions, more time off, favors and under-the-table payments. Profit-making organizations take a greater portion of their compensation in cash, except those that are highly regulated.

In the profit-making world, there is much greater monitoring of the behavior of people who act for the organization. Profit-making organizations have a financial bottom line they must meet, or sooner or later, heads will roll.

Not so with nonprofits, who have no bottom line to meet. On top of that, incompetence for nonprofits means bigger budgets, higher pay and less oversight. That description aptly fits one the nation's largest nonprofit organizations — the public education establishment.

Profit is vital to human well-being. Profit is the payment to entrepreneurs just as wages are payments to labor, interest to capital and rent to land. In order to earn profits in free markets, entrepreneurs must identify and satisfy human wants and do so in a way that economizes on society's scarce resources.

Here's a little test. Which entities produce greater customer satisfaction: for-profit enterprises such as supermarkets, computer makers and clothing stores, or nonprofit entities such as public schools, post offices and motor vehicle departments? I'm guessing you'll answer the former. Their survival depends on pleasing customers. Nonprofits, such as public schools, post offices and motor vehicle departments, survival depends mostly on pleasing politicians.

When a firm fails to please its customers and thereby fails to earn a profit, it goes bankrupt, making those resources available to another who might do better. That's unless government steps in to bail it out. Bailouts permit a business to continue doing a poor job of pleasing customers and husbanding resources. Government-owned nonprofit entities are immune to the ruthless market discipline of being forced to please customers. The same can be said of businesses that receive government handouts.

It's this ruthlessness of market discipline that forces firms to please customers, economize on resources and thereby earn profits or go out of business and goes a long way toward explaining hostility toward free market capitalism. And much of the hostility toward free market capitalism is held by businessmen. Adam Smith recognized this in his "Wealth of Nations" when he said, "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." Their co-conspirator is always government.

Walter E. Williams is a professor of economics at George Mason University. To find out more about Walter E. Williams and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate Web page at www.creators.com.

Comments

6 Comments | Post Comment

Ask anybody who works for a public agency what happens toward the end of the fiscal year--you have to spend the money in the budget or you get less the next year. I once had a job every Christmas break for several years because a former employer had money in her budget that she preferred giving to me than back to the city we worked for.

Comment: #1
Posted by: partsmom
Tue Sep 21, 2010 1:07 PM

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Has Congress passed a budget yet?

Comment: #2
Posted by: David Henricks
Wed Sep 22, 2010 6:07 AM

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So how do you account for the fact that airlines became much, much less interested in customer comfort and service after the government got out of the way and air travel was deregulated?

Also, how does the salmonella deaths of so many people fit into your ivory tower theory of entrepreneurs pleasing customers? And where do all the dead miners fit in--those who died because government let the profit-seeking mining companies run things their own way?

Comment: #3
Posted by: Tom Blanton
Wed Sep 22, 2010 8:04 PM

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Re: Tom Blanton
After airline deregulation, which actually wasn't, I dunno about you, but I know that for several years I was able to fly anywhere I wanted for a whole lot less than what it cost during the heavier regulated years. Lately some of the freebies have been eliminated, but I can still get back and forth for a fair price which is the most important element to me. I do note though that some of the airlines who did not sufficiently please their customers are losing their independence being forced to merge.

The government has hardly let mine operators run things their own way. They are so heavily regulated today that it is a rarity that new discoveries ever become operating mines in the US - or hadn't you noticed. I believe there have been relatively few miners die in job related accidents of late so I am not sure what you are getting at in this remark.

Comment: #4
Posted by: Jerry Citti
Wed Sep 22, 2010 8:39 PM

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I generally like Mr. Williams articles, however, for a Professor of Economics, he has demonstrated an appalling lack of understanding of the not-for-profit (NFP) world. The main difference between for-profit and NFP organization is that for-profit earnings must be shared with investors. Unless they have creditors, NFP's don't have owner investors. Rather they are owned by the community and the NFP's profits are churned back into furthering their mission. It's that simple.
NFP's must make profits to survive and those profits feed the NFP's mission. The old saying is, "No money, no mission". For example, a hospital that loses money will eventually close its doors. Most hospitals in this country are NFP and are often the largest employers in their communities. Mr. Williams stock with the millions of NFP hospital employees who may read this opinion will be almost worthless.

Mr. Williams characterization of NFP's shits on the hard work of the vast majority of people employed in the NFP world. A disappointing lazy piece of work Mr. Williams.

Comment: #5
Posted by: Uncly Uncle
Sat Sep 25, 2010 5:32 AM

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At best, I suspect WW meant to focus his wrath on 501(c)4 organizations, which includes Civic Leagues, Social Welfare Organizations and Local Associations of Employees. Their missions would fall in the realm of the "Promotion of community welfare; charitable, educational or research.
Even so, nonprofit entities such as public schools, post offices and motor vehicle departments are NOT not-for-profit organizations. They are governmental or quasi-governmental.
Mr. Williams, please back up this following: "The fundamental difference between nonprofit organizations and their profit-making counterparts is that nonprofits tend to take a greater portion of their compensation from easier working conditions, more time off, favors and under-the-table payments."
You are painting with a broad brush today Mr. Williams.

Comment: #6
Posted by: Uncly Uncle
Sat Sep 25, 2010 7:04 AM

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