Is an Independent Nonprofit Sector Prone to Failure?

Nonprofit organizations have traditionally been considered a legitimate alternative source for the services provided today primarily by the bureaucratic welfare state (Berger, Neuhaus, and Novak, 1996). Taken together, nonprofit organizations can be viewed as a vibrant but largely “independent” sector characterized by a spontaneous ordering of associations that are founded neither on the state’s compulsory power nor on the capitalist’s search for private monetary profit (Cornuelle, 1965). In an extensive body of work, however, Lester Salamon, one of the leading scholarly investigators of nonprofit organizations, questions the “independence” of the sector. 1 Salamon argues that the U.S. has a long, established history of efficient institutional linkages between the nonprofit sector, which he calls the “voluntary sector,” and the state. Rather than a substitute or alternative source of services, Salamon sees nonprofits as being in an effective “partnership” with the state, a viable form of “third-party” governance. He argues that the independent sector is, in fact, not so independent, and that on its own it is prone to failure. Salamon points to the aftermath of the September 11th attacks as evidence:

Revealing though this episode has been of the remarkable strengths of America’s “third,” or nonprofit, sector, however, it simultaneously revealed the sector’s limitations as well. Private voluntary groups, though highly effective in mobilizing individuals to act, are far less equipped to structure the resulting activity. In short order, fragile systems of nonprofit response were severely challenged by the enormity of the crisis they confronted in the aftermath of September 11. Individual agencies, concerned about their autonomy, resisted efforts to coordinate their responses, either with each other or with government authorities. Individuals in need of assistance had to navigate a multitude of separate agencies, each with its own eligibility criteria and targeted forms of aid. Inevitably, delays and inequities occurred; many individuals fell through the slats, while others benefited from multiple sources of assistance. What is more, misunderstandings arose between donors, most of whom apparently intended their contributions to be used for immediate relief, and some agencies, most notably the Red Cross, that hoped to squirrel the funds away for longer-term recovery, general institutional support, and other, less visible, disasters down the road. What began as an inspiring demonstration of the power of America’s charitable community thus became a demonstration of its shortcomings as well.

In this, the story of the nonprofit sector’s response to the crisis of September 11 is emblematic of its position in American life more generally. Long celebrated as a fundamental part of the American heritage, America’s nonprofit organizations have suffered from structural shortcomings that limit the role they play. This juxtaposition of strengths and limitations, in turn, has fueled a lively ideological contest over the extent to which we should rely on these institutions to handle critical public needs, with conservatives focusing laser-like on the sector’s strengths and liberals often restricting their attention to its weaknesses instead. Through it all, though largely unheralded and perhaps unrecognized by either side, a classically American compromise has taken shape. This compromise was forged early in the nation’s history, but it was broadened and solidified in the 1960s. Under it, nonprofit organizations in an ever-widening range of fields were made the beneficiaries of government support to provide a growing array of services—from health care to scientific research—that Americans wanted but were reluctant to have government directly provide. More than any other single factor, this government-nonprofit partnership is responsible for the growth of the nonprofit sector as we know it today. During the last twenty years, however, that compromise has come under considerable assault (2002a, 4-5).

Salamon’s work attempts to show not only how the nonprofit sector can support and improve the modern welfare state, but, more importantly, how the welfare state supports and effectuates the nonprofit sector. Salamon’s theory of third-party governance is recognizable as a species of postcommunist scholarship seeking new foundations for strong state action in social and economic planning. Much of today’s postcommunist analysis—epitomized by the work of economist Joseph Stiglitz (1994), among others 2 —has turned not toward free and open markets but instead toward the market-based welfare state. Salamon’s longstanding advocacy of “third-party government” strikingly resembles this postcommunist justification of the state and likewise relies on an economic critique. Salamon proposes that the rise and evolution of “third-party government” was missed, misinterpreted, or, worse, ignored outright by scholars, largely because of defective economic theory.

Salamon is not the only theorist of the nonprofit sector critical of the standard economic approach. In his intriguing work The Commons: New Perspectives on Nonprofit Organizations and Voluntary Action, Roger A. Lohmann (1992, 159-76) agrees that the standard theory fails to understand the nature of the nonprofit organization, but he argues this for reasons that differ substantially from Salamon’s.

This paper outlines a critical assessment of the coherence of Salamon’s paradigm from a largely Austrian economic perspective (that is, one in the tradition of Ludwig von Mises and F.A. Hayek), examines the potential for Lohmann’s suggested revisions, and begins to explore how Austrian economic theory can advance our understanding of the social role of nonprofit voluntary organizations.

Click here to read the rest of the article.