Conversations On Philanthropy
Emerging Questions on Liberality and Social Thought

Conversation 10: Rethinking Philanthropy and Business Download Printable PDF

David Ellerman

Can philanthropy share the success of the business sector as a spontaneous order? Instead of directly addressing this question, I will analyze some of the presuppositions. Firstly, I argue that two logics run through human affairs: the logic of exit and the logic of commitment and voice. Secondly, the economy or business sector is composed of markets, natural sites for the logic of exit, and organizations which are natural sites for the logic of commitment.  Economics, neoclassical or Austrian, focuses on exit-based markets, the main examples of spontaneous orders, while I argue along with Herbert Simon that organizations have an equal if not more important role in modern economies. How might people address their community's social and environmental problems to the extent that government is ineffective?

While people may have some associational life after-hours and on weekends, their principal involvement beyond the family in joint human activities is in their job in the organizations that have an increasingly important role in the economy. But the structure of most companies of any size—namely, securitized absentee ownership on the stock market—institutionalizes irresponsibility by disconnecting the far-flung shareholders from the social and environmental impact of their "corporate governance." Or viewed the other way around, that structure prevents the local managers and staff in widely held companies from using their principal outside-the-family organizational involvement to address local problems. That in turn increases the need for a stronger third sector, the philanthropic or non-profit sector, to address those problems. Then if we come back around to our original question, we see the answer may lie not in making philanthropy more like business (in some sense) but in finding forms of business that allow people to be more socially responsible directly through their principal associational involvement.

How might philanthropy (the nonprofit sector) be organized to share more of the vitality and efficiency of the market economy (the business sector) as a spontaneous order? Instead of trying to answer this question directly, I will analyze some of its presuppositions. That analysis, in turn, will suggest a different approach to the broader problem of harnessing the power of the business economy to address the social and environmental problems that are usually the target of philanthropic efforts.


The Two Logics: The Logic of Exit and the Logic of Commitment

Throughout human affairs and even in mathematics, science, and engineering, there are two logics that are, in a certain sense, "dual" to one another (Ellerman 2005). Albert Hirschman investigates them as the logic of exit and the logic of commitment, loyalty, and voice. The expressions "logic of exit" and "logic of commitment" are used by Tadao Kagono and Takao Kobayashi (1994) who develop the two logics of organizational design by contrasting the American-style firm and the Japanese-style firm. Jane Jacobs (1992) develops a variation of the theme with the contrast between the exit-oriented commercial syndrome and the commitment-oriented guardian syndrome.

The logic of exit and the logic of commitment can be illustrated rather abstractly by considering the ubiquitous human activity of searching over some tree of possibilities for the "answer" to some question or the "solution" to some problem.

Layout 1

Search tree for some "answer" or "solution"

Suppose that one starts the search at A but does not find the answer there. There are two contrasting "logics" or strategies of search, which illustrate the logics of exit or commitment.

1. The logic of exit would recommend breadth-first search: Since A is not the solution, exit that branch of the search tree altogether and try B or C. Only if none of the initial branches contained the answer would one proceed along any of the branches to a higher branch such as A1 or A2.

2. The logic of commitment would recommend depth-first search: Although A is not the solution, stay committed to that branch (for whatever reason) and continue to look for the answer in a higher branch such as A1 or A2. Only after exhausting the A branches would the logic of commitment recommend exiting the A branches to try B or C.

These two logics run throughout human affairs. We might consider one logic to be appropriate to one sphere and the other appropriate to another sphere without giving the matter a second thought.

For instance, for a consumer in a competitive marketplace, the logic of exit would be the natural assumption. If a company's product was found to be continually deficient, then one could follow the logic of commitment to write letters to the company or otherwise try to exercise what Hirschman called voice, to get the company to improve its product. But most consumers would follow the logic of exit and switch to a competitor's product. The logic of exit fits well into the marketplace.

There are other spheres of human affairs, however, such as the family, where the logic of commitment would be the presumed strategy. To take an extreme example, if a child's behavior is continually unsatisfactory, one would presumably not apply the logic of exit by dropping the child off at a foundling hospital or adoption agency and trying another child by birth or adoption. The presumption would be commitment to that "branch of the search tree," and one would explore further branches to improve the situation. Other examples suggested by Jane Jacobs' "guardian syndrome" (1992) are the police officers, military personnel, and public officials who are supposed to operate on the basis of the logic of commitment and loyalty rather than the logic of exit (for example, by selling their services to the highest bidder).

In many other situations there may be more of a real choice between the two logics. For instance, a person in an undeveloped country who is contemplating migration faces the basic choice: commit to making one’s home better or exit to find a better home. In general, the choice is not simply "love it or leave it" but whether to change a loved place for the better or leave it to find a better place.

What determines which logic is best in a given situation? One key consideration seems to be the extent to which the person or persons can change a situation for the better. Does a voice have a decent chance of being effective, so that a commitment to improving the given situation will pay off, or is the unsatisfactory situation essentially "hopeless" in the sense that commitment and voice have little hope of success and thus exit is probably the best option? The search tree analogy may be misleading in the sense of presenting the branches as if they were already there and as if search were a rather passive activity of finding a preexisting "solution." A better understanding would emphasize that the higher branches in the "search tree" may have yet to be constructed. The key consideration, then, is this: Can better "branches" be constructed or changed through commitment and voice, or is that hopeless, leaving exit as the best option? Hirschman referred to the change-the-characteristics strategy as voice: "Voice is here defined as any attempt at all to change, rather than to escape from, an objectionable state of affairs" (1970, 30).


Economics, or the Logic of Exit as "the" Logic

Both neoclassical and Austrian economics focus almost exclusively on the logic of exit. The market operates largely on the basis of the logic of exit, and economics developed first as the theory of markets and market behavior, so economics tends to see the world through an exit-oriented lens. Hirschman wrote, "The economist tends naturally to think that his mechanism [exit] is far more efficient and is in fact the only one to be taken seriously" (1970, 16).

For instance, under the exit-oriented logic, all labor questions are "labor market" questions, while under the alternative commitment-oriented logic (as in a Japanese-style firm), a labor question is a "human relations" or "human resources" question. An amusing example of this is that the advice of the World Bank to developing countries about labor is in the "labor markets" topic area [see ]; there is no "human resources" topic area. But for its own staff within the World Bank, there is a Human Resources Vice President but no "Labor Market Vice President." Thus the World Bank looks outward through the exit-oriented lens (provided by the discipline of economics), and looks inward through a commitment-oriented lens.

Now we are in a better position to unpack one of the presuppositions in the original question about philanthropy partaking of the vitality and efficiency of the market economy as a spontaneous order. The basic presumption is that the principal institution in the successful industrialized economies is the market, and thus if the philanthropic sector is to share this success it needs to be reconceptualized in some sense as a spontaneous or emergent order like the marketplace. But if in fact the market is only a part, say, "half" the story in the advanced industrial economies, and if the logic of commitment naturally applies to the other "half," then the questions about philanthropy might be seen in quite a different light.


Modern Economy = Markets Organizations

Of all the Nobel Prize winners in economics, Herbert Simon was perhaps the most interdisciplinary and the least committed to some of the conventional wisdom of the discipline. Late in his career he published a seminal paper, "Organizations and Markets" (1991), emphasizing the importance of organizations in understanding a modern economy and stressing the incompleteness of an economics that views the market and its logic as the center of a modern economy.

Simon imagines a visitor approaching Earth from Mars and viewing Earth through a special telescope that reveals different social structures with different colors. Organizations are colored green, and markets are red:

No matter whether our visitor approached the United States or the Soviet Union, urbanChina or the European Community, the greater part of the space below it would be within the green areas, for almost all of the inhabitants would be employees, hence inside the firm boundaries. Organizations would be the dominant feature of the landscape. A message sent back home, describing the scene, would speak of "large green areas interconnected by red lines." It would not likely speak of "a network of red lines connecting green spots" (27).

When the visitor learns that the green masses are organizations and the red lines are market transactions, it might be surprised to find the economy described in both neoclassical and Austrian economics as a "market" economy: “The economies of modern industrialized society can more appropriately be labeled organizational economies than market economies. Thus, even market-driven capitalist economies need a theory of organizations as much as they need a theory of markets” (42).

The mischaracterization of a modern industrial economy as a market economy is not one of the issues that divides neoclassical and Austrian economics. If anything, Austrian economics pays even less attention to organizations than neoclassical theory (with the latter's "new institutional economics"). For instance, in Friedrich Hayek's juxtaposition (1973; 1989) of the unplanned spontaneous order of markets ("cosmos") to a planned social order ("taxis"), he takes government, and particularly socialist government, as the canonical examples of planned orders. Hayek, of course, recognizes the existence of organizations as examples of taxis or planned orders in the middle of the spontaneous order of the market (1973, 46-54; 1989, 37). But organizations are mentioned as an aside (in Simon's terms, only "green spots" rather than "large green areas") and cryptically as parts of an "even more comprehensive spontaneous order" (1989, 37). There is no recognition of their role as the principal actors in a modern industrial economy and little recognition that much of the spontaneous order theory about the market does not apply to organizations (taxis).

If market commerce is at best only "half" the story in the private-sector economy, then one might find a richer set of motives associated with the logic of commitment potentially at work in the private sector within organizations—which means one does not need to look to the philanthropic sector to find alternatives to the narrow self-interest usually taken as the model of market exchange.

Given the ubiquity of organizations in a modern economy, a basic problem arises because, as Simon writes, 

most producers are employees of firms, not owners. Viewed from the vantage point of classical theory, they have no reason to maximize the profits of firms, except to the extent that they can be controlled by owners. Moreover, profit-making firms, nonprofit organizations, and bureaucratic organizations all have exactly the same problem of inducing their employees to work toward organizational goals. There is no reason, a priori, why it should be easier (or harder) to produce this motivation in organizations aimed at maximizing profits than in organizations with different goals (1991, 28).

Insofar as conventional economics tries at all to explain organizational behavior—for example, in the "new institutional economics"—it falls back on the exit-oriented template of the market transaction but with the addition of "transactions costs" (Williamson 1985) and "asymmetric information" (Ross 1973; Stiglitz 1974).  As Simon notes:

A fundamental feature of the new institutional economics is that it retains the centrality of markets and exchanges. All phenomena are to be explained translating them into (or deriving them from) market transactions based upon negotiated contracts, for example, in which employers become "principals" and employees become "agents" (1991, 26-7).

What are the motivations involved in organizational behavior that fall outside the market commerce paradigm? In many cases, employees (particularly those with high skills and professional education) are intrinsically motivated to do the work. They need the salary to live, but they are committed to the work itself, so their organizational involvement is not well-described simply as a market exchange of labor for salary. Some modern management theorists such as Douglas McGregor (1960) have probed the difference it makes if employees have or potentially have some intrinsic motivation on the job (Theory Y) instead of only the usual extrinsic pecuniary motivation (Theory X).

There is also the phenomenon of "identification," where, far from just being a seller of labor in a market transaction, the employee identifies with the organization that is the "employer" or with the organization's product:

A department will be less likely to skimp on quality to cut costs if its members identify with the final product. In particular, identification becomes an important means for removing or reducing those inefficiencies that are labeled by the terms "moral hazard" and "opportunism" (Simon 1991, 41).

Intrinsic motivation and identification are two examples of the commitment-oriented factors that are important in a modern economy but which are either ignored or inadequately treated by an economics that sees through the exit-oriented lens of the marketplace:

The attempts of the new institutional economics to explain organizational behavior solely in terms of agency, asymmetric information, transaction costs, opportunism, and other concepts drawn from neo-classical economics ignore key organizational mechanisms like authority, identification, and coordination, and hence are seriously incomplete (42).

Intrinsic motivation and identification are also not well-described in juxtapositions of self-interest versus altruism, or market transactions versus gift-giving (see, for example, Godbout 1998). Like an onion skin, the "self" has concentric layers of stronger and weaker identification that determine one's identity. Action in the interest of others in a family or a larger group with which one identifies need not be seen as altruistic in the sense of selfless action but could be seen as self-interested action in support of an expanded sense of self. In addition, intrinsic motivation is derived from the nature of the action, not from monetary rewards or any other quid pro quo given in exchange for the action. An understanding of how organizations work requires going beyond extrinsic, pecuniary self-interest as the paradigm of motivation, and yet the consideration of identification and intrinsic motivation are not well understood as "altruism" in contrast to self-interest.


Rethinking Philanthropy

Now we are in a better position to rethink our original question about philanthropy. The need for a philanthropic sector arises from the many social and environmental problems left unresolved by the public and private sectors, i.e., the government and the economy. While government-led social renewal is always possible, particularly in a vigorous democracy, our focus is on somehow extending the success of the economy to the tasks of philanthropy. To see how that might happen, we need to understand the principal factors in a modern economy.

We have argued that modern economies are composed of two principal parts: markets and organizations. Markets provide a natural setting for the logic of exit, and organizations may be seen as providing a natural setting for the logic of commitment. These are the two logics that might be applied, with the unsatisfactory situation being a community with accumulating social and environmental problems that a philanthropic sector might be called upon to face. The community could be a small town, a city, a regional state, or a country. Philanthropy here refers to one of the ways a community might try to resolve the problems left unresolved by its governmental and economic actors—not to charity or "do-gooderism" wherein the better-off think they can resolve the problems of those in very different circumstances.

If the causes of the community's problems are seen as unchangeable by means of the public or private tools at hand, then many people, particularly the most energetic and ambitious, will adopt the logic of exit. Since there seems to be little chance of making the community better, they will exit to find a better community. If communities operated like companies in a marketplace, exit could promote renewal or, failing that, lead to the complete demise of the community and the dispersal of its assets. But communities often do not operate like companies, particularly regarding the bankruptcy option. Instead of triggering a process of renewal, the exit of the most energetic and ambitious citizens makes renewal even more unlikely. The result of the logic of exit may be a vicious circle of ghettoization leading to a semi-permanent failed community (or failed state in the case of entire countries). That, in turn, leads to the call for more "philanthropic" intervention in the sense of charities alleviating the symptoms of community failure. On an international scale, the logic of exit leads to the flight of financial and human capital from underdeveloped countries which, in turn, calls for a strengthened response from international aid agencies to assist the ghettoized failing states.

It was the failure of the logic of exit in the case of Nigeria's railroads in the 1960s that prompted Hirschman to make his analysis of exit versus voice. The conventional economists' logic of exit predicted that the continual unsatisfactory performance of the Nigerian railroads could be addressed by promoting the trucking industry to provide competition, to provide an exit for some freight customers from the railroads to trucks. Indeed, the most discerning and time-sensitive customers did switch to trucking, but this did not lead to any renewal in the state-run railroads. There was then even less voice to prompt changes, so the railroad's performance got worse rather than better.

The key point is that the social choice of exit versus commitment depends in large part on the extent to which people are empowered in their own community to address their own social and environmental problems. Political participation and action is always a possibility, but the original problems may have arisen, in part, from those channels being blocked and ineffective. In addition, political action to unblock those channels is always difficult for the simple reason that most people have to devote their time to making a living and to their private family life. Their principal activity outside of family life is their work. That is what people typically "do all day long." Moreover, the workplace is where most people learn to work together to take effective collective actions to do what they couldn't do by themselves individually.


Economic Organizations: "Footloose" or Embedded in Communities?

The question of people being empowered in their community to address their local social problems raises the question of their role in the economic organizations of their community, the organizations that form "half" of a market economy and are the natural loci for the logic of commitment. That is where people spend their productive hours and where they have the skills for effective joint activities (in contrast, say, to individuals volunteering after hours for unskilled work in a charity). Why can't these economic modalities address the social and environmental problems that face the community?

The argument has thus taken a perhaps unexpected turn to look at the form of economic organizations. The line of argument began by looking at where people apply the logic of exit or the logic of commitment. In spite of advertisers' best efforts, most people do not "identify" with the products they consume, and thus they are willing to apply the logic of exit in the consumer marketplace. In contrast, almost all people apply the logic of commitment to their own family without a second thought. In spite of economists' best efforts to explain organizational behavior by using the logic of exit, it would seem that the logic of commitment based on identification with the company and its products plays a key role in modern economic organizations. The logic of commitment would also seem to be the natural default for most people's relation to the community where they live.

But as social problems accumulate, that commitment may be called into question if there are no channels for social action to address them. It may be that the commitment to one's family can be honored only by exit from a deteriorating and seemingly unchangeable local community. Since most people's primary time commitment outside their family is to their job, the question of economic organization thus comes to the forefront.

Is a company embedded in a community in the sense that the community members who work in the company (as managers and staff, for example) can see it as an instrumentality for their commitment to help address local social and environmental problems? Or is a company simply a footloose asset with only a contingent connection to the community and an externally imposed "purpose" unrelated to local concerns? Clearly both types of companies could exist. For instance, a longstanding family-owned company would be embedded in a community in a way that helping to address local problems would seem a natural response in view of the family's commitment to the community. But an absentee-owned subsidiary of a distant company would have no such embedding or commitment and would likely see any such efforts as a misuse of corporate resources for some unauthorized goal. Any local commitment would be a potential immobility retarding the efficient allocation of corporate assets to their highest-valued use wherever that might be.

Which form of organization predominates? If the latter sort of company predominates, then the for-profit business sector would have little commitment to using its successful modes of organization to address accumulating social and environmental problems. This is not "its purpose" (as determined by footloose absentee owners with no local commitment). In that situation, there would be the essential need for a third sector, a nonprofit sector, that could try to address the unresolved problems. And then our question would arise of how the philanthropic sector might share more of the success of the "market economy." But as the argument has unfolded, we now see that there is another path. The problem may lie not in the philanthropic sector but in the way most economic organizations are structured, which blocks direct social action and thus strengthens the need for a philanthropic sector.


The American Model of the Widely Held Company

Since this line of argument leads to an understanding of the importance of the form of the economic companies, we will briefly review two stereotypical models: the American model of the widely held company as a footloose company unconnected to local communities, and the Japanese-style firm (or "J-firm" of Aoki 1988) as a model of the embedded company based on the logic of commitment.

If the exit logic fits markets and the commitment logic fits organizations, then what would an organization look like if it were based on the logic of exit? This brings us to the "model" of the widely held American corporation. To apply the exit logic, we must know who's in and who's out. Who are the members of the organization?

There are actually two “companies”: the company as a legal entity and the company as a working group of human beings: “The human association which in fact produces and distributes wealth, the association of workmen, managers, technicians and directors, is not an association recognised by the law. The association which the law does recognise—the association of shareholders, creditors and directors—is incapable of production and is not expected by the law to perform these functions” (Percy 1944, 38, quoted in Goyder 1961, 57).

The legal entity, the legal or de jure company, has the shareholders as its members. But the members of the actual or de facto company are the managers and workers who actually carry out the company's business. In a small, closely held business, the de jure company and the de facto company are largely the same. But for the large, modern, publicly traded American corporation, there is very little overlap between the de jure company (shareholders) and the de facto company (employees including managers). Those who are actually inside the company (the staff) are from the legal viewpoint outside the firm and have only a contingent market relationship (employment) to the firm. Those who are legally inside the company (the legal members of the company) are the far-flung shareholders who typically have no business relationship with the company (not to mention its local community or environment) aside from the share of ownership, and who typically have well-diversified portfolios of shares.

 Layout 1

The Two Companies in a Publicly Traded American Firm

The commitment-oriented logic of organizational design would be appropriate for a company, but the problem is that there are the two companies. The shareholders are seen as the insiders, principals, members, and owners of the (de jure) company. When things are not going well, the shareholders are legally empowered to change "their company" in accordance with the logic of commitment. And since the people who actually work in the company, the de facto company, are seen legally as having only a market relationship to the company (the employment relation), their role is legally modeled on an exit-based logic.

In the Anglo-American economies, starting from closely held firms (with little divergence between the de jure and de facto firms) the growth of the public market in equity shares has created these rather odd chimeras. And as the de jure firm ("ownership") diverged more and more from the actual firm, the legal theory broke down. The transaction costs for dissatisfied far-flung shareholders to organize and actually change things were very high. And the returns from organizing enough shareholders would be shared by all shareholders, so there was also a strong collective action problem. Thus the logic of voice and commitment did not work in practice in the American-style widely held company. Hence shareholders used the "Wall Street Rule": if you don't like the way things are going, exit by selling your shares.

Hence the people legally empowered to implement a commitment-based strategy (those who have the voice and vote to "change things") use an exit-based strategy (sell the shares). And the managers and workers who are de facto in a position to implement a commitment-oriented strategy of voice ("change things") are seen legally as being outsiders ("employees") on the other end of a market relationship with the company. They are not the principals or owners directly empowered by corporate law to change things, so in the eyes of the law their only option is to quit ("exit") if they are dissatisfied.

Any attempt of the workers, the members of the de facto firm, to formalize powers to directly "change things" is seen as infringing on the "management rights" exercised by the supposed agents of the far-flung shareholders who are the legal members of the company.

Of course, this bizarre structure does not actually work. Some insiders gladly grabbed the levers of actual control dropped by the shareholders. Those insiders are the top managers, and thus we arrive at what Adolf Berle and Gardner Means called the "separation of ownership and control" (1932, 89) and what is currently called the "corporate governance problem." The legal theory or "model" is shareholder capitalism; the underlying reality is managerial capitalism. Since there is no legal basis for the actual system of managerialism, the public relations machinery in the companies, in the business press, and in academia broadcasts the professed goal of "maximizing shareholder value" while the top managers reveal their actual goals in their salaries, bonuses, benefits, perquisites, (manipulated) stock options, and golden parachutes. The top managers have every interest in keeping the fantasy of "shareholder capitalism" alive as the cover story for the reality of managerial capitalism—much as thenomenklatura of the Communist Party had every interest in keeping the fantasy of "People's Democracy" alive.

From the motivational viewpoint, the bizarre model structure does not work unless those who are legally outsiders on the other end of the employment contract—getting only the economic reward of salary or wage—are to a significant degree committed to and identified with the company. Although this is almost entirely ignored by conventional, exit-oriented economics, Herbert Simon has emphasized the point: “Organizations would be far less effective systems than they actually are if such [economic] rewards were the only means, or even the principal means, of motivation available. In fact, observation of behavior in organizations reveals other powerful motivations that induce employees to accept organizational goals and authority as bases for their actions. . . . [The] most important of these mechanisms [is]: organizational identification” (1991, 34). Hence the members of the de facto company do in fact tend to identify with the company even though they are legally outside the company!

The large American firm is thus a rather odd and incoherent organization. Those who are legally inside the firm (shareholders) use the logic of exit as if they were outside, and those who are legally outside the firm (employees) often use the logic of commitment as if they were inside.

This mismatch between the model and reality leaves the analyst in a quandary. Should one analyze the rather mythical company model that lives in the law books and in the economics textbooks? That is the "American model" broadcast to the world by ivory tower academics who might think that American companies actually work that way. But since actual organizations need a healthy dose of commitment-oriented behavior to work well, the archetypical exit-oriented "American model" is a textbook model only. Actual large, widely held American companies use a version of the logic of commitment, but the top managers who assume and exercise the legal rights of the insiders (owners) often try to treat all the other employees as outsiders on an exit-based model (in the labor relations system, for example). Those other employees have the collective self-interest to address local social problems, but the top managers invoke the exit-based employee model for the de facto members of the firm in order to deny their voice. Hence the actual large, widely held American company ends up being something of a contested battleground between the two logics.


The Modern Japanese-Style Company

In their introduction to a book of essays by Japanese authors about the Japanese-style firm, Ronald Dore and Hugh Whittaker echo Herbert Simon at least as regards the Japanese
case: “Most of the authors would agree that if you want to understand what goes on in Japanese boardrooms, you can throw most of the writings that go under the rubric 'agency theory' out of the window” (1994, 3).

In the postwar era the large Japanese firms have perhaps gone the farthest in developing the organizational logic of commitment and contrasting it with the logic of exit. For instance, to one trained to think in terms of the logic of exit, any immobilities, rigidities, or barriers to exit would just seem inefficient and irrational, but Japanese economists have developed the notion of useful barriers to exit, as in the practice of a captain being expected to go down with his ship:

The way in which underpayment of wages in the early years of service and the acquisition of firm-specific skills create barriers to exit is obvious. These exit barriers perform several important functions for the firm as an organizational entity. The first is the incentive function whereby the interests of the firm and the interests of the individual are linked. Unable easily to exit, people can only protect their interests by working to ensure that the firm prospers. . . . The interlinking of interests means that when crisis looms, efforts are redoubled. The option of leaving the sinking ship is not freely available, either to the crew or the captain (Kagono and Kobayashi 1994, 94).

Barriers to exit can enhance identification and thus effort-efficiency or "X-efficiency" (Leibenstein 1984).

In a similar vein, John Maynard Keynes was much concerned with the adverse effects of the stock exchange on real investment and enterprise. He argued that significant investment in productive enterprise should be largely immobile and the management of an enterprise should have a long-term commitment and engage in the application of "intelligence to defeat the forces of time and ignorance of the future" (1936, 157). In short, investment should be based on the logic of commitment. But when investment is securitized as a marketable asset on the stock exchange, then it "is as though a farmer, having tapped his barometer after breakfast, could decide to remove his capital from the farming business between 10 and 11 in the morning and reconsider whether he should return to it later in the week" (151). The stock exchange panders to the "fetish of liquidity" and thus the logic of exit continually undermines the bonds of long-term commitment that are so important to problem-solving and productive enterprise.

The current economic crisis offers ample new examples of how securitization breeds irresponsibility by substituting the logic of exit for the logic of commitment. For instance, the traditional commitment-based banking relationship between a local bank and a homeowner was transformed by the securitized mortgage obligations into an irresponsible relationship where bankers could make subprime mortgages and then slough off the consequences onto distant financial institutions which lacked the local knowledge to value the financial assets.

The argument being made here is that this securitization-breeds-irresponsibility phenomenon (by substituting the logic of exit for the logic of commitment where the latter may be more appropriate) has occurred on a massive scale in the widely held American-style corporation. With "ownership" securitized and scattered to the four winds, the most powerful non-governmental organizations may slough off social responsibility to the communities where they operate. Or, put the other way around, the people in those communities are blocked from using their principal associational involvement to address local problems. This organizational failure in the form of institutionalized social irresponsibility then increases the need for increased government involvement or a third sector response to address the problems.


Beyond the family, most people have thick day-to-day participation in only one organization: their workplace. They may have some participation on weekends and evenings in other groups such as churches and various social clubs and hobby groups, but that marginal participation is rarely coupled with effective social action. The more natural site for collective action to address community problems would be where people are involved in effective collective action all day long: their work organization. Yet we have seen that the peculiar organization of the American-style company leaves the de facto members of the firm without any franchise to address their common problems in the community or environment. In contrast, there would be no such limitation on embedded companies such as locally owned businesses or family farms making their contribution to local problems directly through their businesses.

As was noted long ago (for example, Scitovsky 1951), there is no reason for the entrepreneur or family firm to take profits as the sole maximizing goal (although costs, of course, have to be covered for long-term sustainability). But with scattered, absentee owners, profit seems to be the only thing that they can agree on in general. Hence profit maximization has been canonized as "the goal" of the firm when in fact it is only an artifact of a particular and in some respects incoherent organizational form. A Japanese-style firm such as Toyota has a much more complex set of goals (where corporate social responsibility is not just a public relations stunt) and yet can still out-compete its American counterparts. For the connection with the local community, one might compare any of the large car-producing Japanese cities to Detroit. The empirical hypothesis is that the relative size of the nonprofit sector in a country is roughly proportional to the prevalence of the American-style model of a company as a piece of property widely held by absentee investors with (thus) the sole goal of profit maximization.

By this argument, the size of the philanthropic or nonprofit sector in America is a result, over the decades, of the organizational blockage in the absentee-owned corporation that prevents people from attending directly to local matters through the organizations where they already have collective efficacy. With those natural channels of social action blocked, special or ad hoc nonprofit corporations need to be created to try to address the social problems that government leaves unresolved. Then attention is focused on how to vitalize or revitalize the nonprofit sector so that its organizations are as effective as the productive organizations of the modern economy.

Our analysis suggests that the root of the matter is that the primary organizations for effective collective action are limited by their ownership structure to narrow, profit-maximizing goals, and this in turn requires the strengthening of the third, "nonprofit" sector which attempts, often ineffectively, to address the social problems unresolved by government.



Aoki, Masahiko.  1988.  Information, Incentives, and Bargaining in the Japanese Economy.  New York: Cambridge University Press.

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