Gold for Glory

Arnold Kling ponders one of my favorite mysteries of public opinion:

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…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…Is my perspective valid? If so, why is the conventional intuition so pervasive?

The answer, I think, is based on our idea of why people act a certain way. True altruism, defined as a renunciation of the self and a devotion to maximizing the welfare of others (broadly defined), is very rare. Even though we call people who do social work for little money “altruistic”, we acknowledge at the same time that they have a strong desire to do this kind of work, that they receive a lot of immaterial compensation in terms of respect, a positive life narrative and “feeling good”, and that the common good they provide is not very large at the policy-relevant margin – in other words, that they are neither renouncing their  happiness nor are they maximizing others’ welfare.

Rather, when we see people do non-profit work we implicitly consider the difference between their wage and their opportunity cost and impute that the gap must be made up by non-monetary compensation. As the cognitive ability to derive non-monetary pleasure from mere institutional and societal interactions is essential for the functioning of mechanisms of social discipline and coordination, working “for” the community is  a strong signal of subordination to informal sources of authority. Such signals of loyalty are encouraged (just like supporting the military, waving the flag, singing the anthem etc. ) because they screen for deviants and resolve cognitive uncertainties about group delineations. Non-profit work signals all these things and that’s why we like it.

PS: Further support wanted? Women in the 50s worked for no money whatsoever as the homemaker, but we rarely laud their community service, so it seems that the public aspect of non-profit work matters. Moreover, we find the signal of non-profit work only commendable, if a salaried alternative exists. Think about the unappreciated non-profit work that begging street musicians do, as opposed to the highly-respected efforts of renowned singers who give charity concerts. It’s clearly also not simply about not making a profit. We clearly don’t respect bankrupt company-owners for having resisted the pull of profit. Again, we clearly regard the choice of not making a profit important, because it clarifies the differential between the non-profit compensation and the relevant outside options. That is, we would like to see the exact going rate at which one may exchange gold for glory.

Update: This post by Fabio Rojas made me  realize that I neglected the role of government in my thinking. Government is the ultimate non-profit historically, providing services to the poor and vulnerable by redistributing part of the national income. Perhaps encouraging non-profits has the same purpose of basically redistributing income to those in need. Why not leave it to the government? The reasons might be cognitive – the tax system does not feel like we are handing money to the poor, as it is too indirect. Or, we have caught on to the fact that redistribution through taxes and transfers is quite wasteful and cumbersome and that non-profits will be more efficient and responsive to local needs. In that sense, the relevant margin of comparison for efficiency might not be for-profit vs. non-profit business, but federal government vs. non-profit business. While in the former comparison the non-profits lose in many ways, in the latter non-profits might well come out ahead. Thus, non-profits might be a grassroots attempt to decentralize governmental redistribution. However, while this explains why non-profits exist, the widespread dislike of profitable activities seems to require further explanation.

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