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History and theory
of the nonprofit sector

January 18, 2022

PMAP 3210: Introduction to Nonprofits
Andrew Young School of Policy Studies

Do your check-in!

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Plan for today

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Plan for today

Why do nonprofits even exist?
Theory part

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Plan for today

Why do nonprofits even exist?
Theory part

Why do nonprofits even exist?
History part

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Why do
nonprofits even exist?
(Theory part)

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Playing cards
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Who contributed a red card at the beginning? Why?

Who contributed a red card at the beginning but then started to change their minds? Why?

Did anyone not contribute any red cards? Why?

If we're thinking of the group, everyone can do better by turning in their red cards; but each individual can earn more money by keeping their red cards and still earning money from the red cards others turn in.

Introduce public goods

How does turning in a red card make a contribution to a public good?

Make sure that they understand that EVERYONE receives a dollar from the public good, whether there are 10 people in the class or 200 people in the class: the more people there are, the greater the benefits that can be enjoyed. They should also point out that everyone receives a dollar, even those that don't contribute to it.

What it is about the characteristics of a public good that give people an incentive to free-ride?

  • Earnings for each person if no one contributes to the public good. Answer: Money is only earned from cards kept, since nothing is turned in. So earnings are $4 × 2 red cards kept = $8.

  • Earnings for each person if everyone turns in both red cards (no cards are kept by anyone). Answer (assume for this example there are 30 people in the class): Money is only earned from cards turned in, since none are kept. Since each person has 2 cards, 30 × 2 = 60 cards are turned in, which earn $1 each to every person. So each person earns 60 x $1 = $60.

  • Earnings for a person if he or she keeps both red cards but everyone else turns in both red cards. Answer (assume for this example there are 30 people in the class). In this case, the person earns $4 × 2 = $8 for the two red cards kept. If the other 29 people turn in both red cards, there are 29×2 = 58 red cards turned in. So everyone earns 58 x $1 = $58 from red cards turned in. So the person who keeps both red cards earns $8 + $58 = $66 (and the others in the class only earn $58).

How did communication help? Higher initial levels of contributions, followed by a decline. Why? Hard to sustain cooperation.

How do you sustain cooperation? How do you increase contributions toward public goods?

What if you could create institutions to enforce cooperation?

Public goods

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Public goods

Non-excludable

Not possible to stop others
from using the good or service

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Public goods

Non-excludable

Not possible to stop others
from using the good or service

Non-rivalrous

One person using the good or service
doesn't prevent anyone else from using it

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Types of goods

 

Excludable  Not excludable 
Rival  
 
 
 
Not rival  
 
 
 
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Types of goods

 

Excludable  Not excludable 
Rival Private
goods
 
 
Not rival  
 
 
 
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Types of goods

 

Excludable  Not excludable 
Rival Private
goods
 
 
Not rival Club
goods
 
 
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Types of goods

 

Excludable  Not excludable 
Rival Private
goods
Common pool
resources
Not rival Club
goods
 
 
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Types of goods

 

Excludable  Not excludable 
Rival Private
goods
Common pool
resources
Not rival Club
goods
Public
goods
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Rivalry and excludability

A free public lecture at a university

Noise produced by aircraft around an airport

A forest used by the community to collect firewood

Hamilton ticketsA public park

Bird/Lime/Uber scooters

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Government failure

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Government failure

The government doesn't provide
public goods or services like it should

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Government failure

The government doesn't provide
public goods or services like it should

Nonprofits can fill those gaps

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Government failure

The government doesn't provide
public goods or services like it should

Nonprofits can fill those gaps

How to recognize if a nonprofit is fixing this:
ask "could the government do that instead?"

Examples?

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Market failure

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Market failure

The private sector doesn't provide
goods or services because there's no incentive

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Market failure

The private sector doesn't provide
goods or services because there's no incentive

Nonprofits can fill those gaps

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Market failure

The private sector doesn't provide
goods or services because there's no incentive

Nonprofits can fill those gaps

How to recognize if a nonprofit is fixing this:
ask "Could/should the private sector do that instead? Why aren't they?"

Examples?

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Transaction costs

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Transaction costs

Fixing public goods issues is expensive!

Time, effort, money, resources

 

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Transaction costs

Fixing public goods issues is expensive!

Time, effort, money, resources

 

Nonprofits can work more quickly and have
more connections to communities, making it
easier and cheaper to provide services

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A nonprofit providing a forum for communicating in that game - private sector won't do it

Externalities

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Externalities

A cost or benefit to someone who
did not choose that cost or benefit

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Externalities

A cost or benefit to someone who
did not choose that cost or benefit

PollutionVaccinationsCell phones and driving

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Externalities

A cost or benefit to someone who
did not choose that cost or benefit

PollutionVaccinationsCell phones and driving

Internet bandwidthResearchEducation

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Externalities

A cost or benefit to someone who
did not choose that cost or benefit

PollutionVaccinationsCell phones and driving

Internet bandwidthResearchEducation

Nonprofits can help mitigate negative ones
and promote positive ones

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Contract failure

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Contract failure

Principal-agent theory + information asymmetry

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Contract failure

Principal-agent theory + information asymmetry

Good or service too complex for consumer to understand

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Contract failure

Principal-agent theory + information asymmetry

Good or service too complex for consumer to understand

Consumer not competent to understand

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Contract failure

Principal-agent theory + information asymmetry

Good or service too complex for consumer to understand

Consumer not competent to understand

Purchaser not ultimate consumer

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Contract failure

Principal-agent theory + information asymmetry

Good or service too complex for consumer to understand

Consumer not competent to understand

Purchaser not ultimate consumer

Nonprofits have inherent trust, or "halo" effect;
no assumption that organization
is trying to exploit the consumer

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  • Too complex: Healthcare, higher education
  • Not competent: Dementia patients
  • Purchaser not ultimate consumer: Assisted living center

Pluralistic theory

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Pluralistic theory

Even if government is competent and can
provide public goods, nonprofits are seen as
less bureaucratic and more responsive

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Pluralistic theory

Even if government is competent and can
provide public goods, nonprofits are seen as
less bureaucratic and more responsive

Nonprofits…

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Pluralistic theory

Even if government is competent and can
provide public goods, nonprofits are seen as
less bureaucratic and more responsive

Nonprofits…

…encourage individual action for the public good

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Pluralistic theory

Even if government is competent and can
provide public goods, nonprofits are seen as
less bureaucratic and more responsive

Nonprofits…

…encourage individual action for the public good

…create stronger societies

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Pluralistic theory

Even if government is competent and can
provide public goods, nonprofits are seen as
less bureaucratic and more responsive

Nonprofits…

…encourage individual action for the public good

…create stronger societies

…respond better to the needs of diverse societies

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In small groups, think of
two different nonprofits

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Why do these organizations exist?

What are the differences and similarities of these organizations?

What need do these organizations fill?
Government failure? Market failure? Something else?

Would the work be more efficient if done by the government or
private companies? Or are nonprofits the best route?

Do people trust these nonprofits? Can they reach out to diverse groups
better or worse than the government or private companies?

What would happen if the nonprofit failed?

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Why do
nonprofits even exist?
(History part)

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Six characteristics of nonprofits

Formal organization

Non-profit-distributing

Private

Self-governing

Voluntary

Operating for public benefit

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British Colonies

1601 Elizabethan Statute of Charitable Uses

Elizabethan Statute of Charitable Uses
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British Colonies

1601 Elizabethan Statute of Charitable Uses

Elizabethan Statute of Charitable Uses
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British Colonies

Formal organization  Mostly in churches
Private Government control
Income sources Mostly tax supported
Self-governing Government control
Voluntary Yes
Public benefit Poverty and education
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New Republic (1787+)

Two big changes

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New Republic (1787+)

Two big changes

Separation of church and state

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New Republic (1787+)

Two big changes

Separation of church and state

First amendment right of association

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New Republic (1787+)

Two big changes

Separation of church and state

First amendment right of association

Dartmouth v. Woodward (1819)

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Supreme Court's first great civil liberties case - issue of government control of nonpublic sector - Dartmouth chartered by NH state government - board expanded, NH wanted to appoint the trustees - but, this conflicted with some donor stipulation that said the board would stay the same size - Daniel Webster argued for Dartmouth (brought the audience to tears) - SC told state government to step out of the way—it didn't have ownership or control over nonprofits like Dartmouth

New Republic (1787+)

Formal organization  Corporations
Private Arbitrary state charter
Income sources Private sponsorship
Self-governing Boards
Voluntary Yes
Public benefit Poverty and education
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19th Century

James Smithson
James Smithson

"Charitable purposes"
expanded to include
arts and museum

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On his death, Smithson's will left his fortune to his nephew, son of his half-brother, but stipulated that if that nephew died without children (legitimate or illegitimate), the money should go "to the United States of America” to found at Washington, an establishment for the increase and diffusion of knowledge among men"

https://www.si.edu/about/history

19th Century

Alexis de Tocqueville
Alexis de Tocqueville

"I have seen Americans make great and real sacrifices to the public welfare and have noticed a hundred instances in which they hardly ever failed to lend faithful support to one another."

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19th Century

Formal organization  Religious resurgence
Private Arbitrary state charter
Income sources Donations and earned income
Self-governing Boards
Voluntary Yes
Public benefit Add arts and museums
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1900–1960

Two big changes

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1900–1960

Two big changes

16th amendment (ratified 1913) creates a federal income tax

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1900–1960

Two big changes

16th amendment (ratified 1913) creates a federal income tax

Tax exemption for nonprofits (1913)Tax deduction for donations (1917)

 

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1900–1960

Two big changes

16th amendment (ratified 1913) creates a federal income tax

Tax exemption for nonprofits (1913)Tax deduction for donations (1917)

 

Definition expanded to include science and research

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1900–1960

Formal organization  Corporations and trusts
Private Broad state charter
Income sources Donations and earned income
Self-governing Boards
Voluntary Yes
Public benefit Add scientific research
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1960–2000

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1960–2000

War on
Poverty

LBJ and the war on poverty

Increased
federal funding

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1960–2000

War on
Poverty

LBJ and the war on poverty

Increased
federal funding

Neoliberal
privatization

Ronald Reagan

Explosive growth &
professionalization

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1960–2000

War on
Poverty

LBJ and the war on poverty

Increased
federal funding

Neoliberal
privatization

Ronald Reagan

Explosive growth &
professionalization

Rise in
secularization

Secular nonprofits

Increase in non-religious nonprofits

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1960–2000

Formal organization  Corporations
Private Simple charter
Income sources Mostly earned income
Self-governing Boards
Voluntary Yes
Public benefit IRS categories
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2000–today

Social entrepreneurship and sector blending

B Corps
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2000–today

Formal organization  Sector blending
Private Simple charter
Income sources Mostly earned income
Self-governing Boards
Voluntary Yes
Public benefit IRS categories
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Questions

Are the roles of nonprofits and government properly balanced?

What does the religious history of nonprofits mean to us today?

Why is the corporation so important to nonprofit history?

Should "charitable purpose" be broader or narrower?

Why do we feel a need to treat nonprofit money differently?

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Plan for today

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