Freeman

ARTICLE

There's No Such Thing as a Nonprofit Organization

All Employees Have a Profit Motive

JUNE 01, 2003 by KAREN SELICK

Karen Selick is a lawyer in Belleville, Ontario. Copyright 2003 by Karen Selick.

“Four legs good, two legs bad,” chanted the sheep in Orwell’s 1945 satire Animal Farm. In Canada today the people are chanting something slightly different: “Non-profit good, profit bad.”

Take Medicare, for instance. A recent widely publicized, government-commissioned report (the Romanow report) recommended shoveling billions into public health-care facilities and nixed the idea of more private facilities. Now some group is running radio ads bleating that we’ve got to “stop the slide into for-profit health care.”

Then there are the child-care lobbyists, who got another few minutes in the sun recently when the government re-announced its planned national child-care program. These folks are forever lauding non-profit day-care centers and bad-mouthing private ones—often even insinuating that private centers are unsafe for kids.

Here’s another example. When a furor erupted over the fact that an Ontario prison run by a private company was recording each inmate’s race along with hair and eye color on his identity tag, one critic called it “a perfect example of why leaving our jails up to private interests guarantees all kind of injustices.”

Like Orwell’s animals, Canadians seem to have mentally divided the world into two distinct groups. Everyone who works for a profit is a greedy, money-grubbing, corner-cutting, cheat-his-own-grandma sinner, while everyone employed by a nonprofit institution is a conscientious, selfless, caring, sharing saint.

Here’s my question to these true believers: just where do you suppose the nonprofit institutions find these shmoo-like creatures to work in their organizations? Do you imagine they breed ‘em themselves, or what?*

The answer, of course, is that the employees of nonprofit institutions are selected from the same mixed bag of humanity as the owners and employees of profit-making ventures. Whether they be teachers, nurses, day-care workers, or prison guards, they exhibit self-centeredness, greed, laziness, dishonesty, and venality in roughly the same proportions as the rest of the population.

In fact, every single employee of a nonprofit institution is actually a “profit center” in himself. He has certain basic expenses he must incur in order to work—food, shelter, clothing, transportation, and perhaps tools or training. He tries to minimize these expenses by shopping around. He tries to increase his revenue (his wages) by seeking raises, promotions, or a better job. His financial goal is to maximize the gap between revenues and expenses so there’ll be as much money as possible left over for luxuries, hobbies, vacations, or whatever else he finds rewarding in life. This is his profit.

Kira Heineck and Cheryl DeGras of the Ontario Coalition for Better Child Care wrote recently in the Toronto Star: “Not-for-profit [child] care is almost always of higher quality than commercial care. Simply put, this is because all available resources are used for delivering care, instead of setting aside some for profit.”

This is typical of the mindset of nonprofit advocates. They seem to think of a privately owned enterprise as a bottle of unprocessed milk, with a layer of cream called “profit” floating on top of the skim milk called “overhead.”

In reality, every enterprise, private or “nonprofit,” is more like a bottle of homogenized milk. The cream is commingled throughout the bottle. From top to bottom of the organization, every individual’s personal goal is to procure his own profit. So while Ms. Heineck and Ms. DeGras may like to think that nonprofit child-care funds are being used to “deliver care,” in actuality a portion of them are being used to deliver profits—that is, income beyond the necessary expenses of being employed—to the organization’s employees.

A study published by the Fraser Institute compared the wages being paid to nonprofit-sector hospital workers and for-profit-sector hotel workers in British Columbia. The nonprofit jobs compared required no specific medical knowledge. The employees in both groups were unionized. The table above suggests what happens when you eliminate the profit that would otherwise go to an entrepreneur: it gets divided up among employees at other levels in the enterprise instead.

When a nonprofit enterprise gets its funding from government, no one within the organization has any incentive to control costs. On the contrary, all employees have the same incentive: to increase their own profits by demanding higher wages and more tax dollars.

Efficiency through Profits

In a private business the entrepreneur’s desire for profits actually serves an extremely useful function: it provides the incentive to look for the most efficient way to do things. If the owner can keep expenses down by finding cheaper sources of inputs, or by inventing an entirely new and more economical method of producing the same finished product, he gets to pocket the difference. This is a benefit not only to him, but to society at large. The fewer resources that are consumed in making one product, the more resources are available for making others.

Critics contend that the profit motive leads to corner-cutting and shoddy output. They forget that where competition is permitted, entrepreneurs can’t get rich by cutting costs alone. They also have to fight for market share, which means they have to make the best possible product at the lowest possible cost.

Consider: health care in Canada—an industry that is almost entirely nonprofit—is getting ever more expensive and ever more deficient. Computers in Canada—produced by a for-profit industry—are getting ever cheaper and ever better.

Wise up, Canadians. Profit’s not a dirty word, and nonprofit enterprises are just a figment of your imagination.

*The selfless shmoo was a character from Al Capp’s comic strip, “Li’l Abner.” “The Shmoo believed that the only way to happiness was to bring happiness to others.” See www.lil-abner.com/shmoo.html.


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