Conversations On Philanthropy
Emerging Questions on Liberality and Social Thought

Explaining the Scale of the Philanthropic Sector

David L. Prychitko

David Ellerman offers a nice paper on organization theory, one that combines Hirschman’s two logics (exit and commitment) with Simon’s work on organizations. He suggests that the size of the philanthropic sector in the United States is positively related to the size of the absentee-owned, profit-maximizing corporation. This is a novel hypothesis.

I agree with the bulk of his lengthy discussion of Hirschman and Simon (and the contrast between the theory of American firms versus J-firms), and this accounts for almost the entire paper. Those of us acquainted with the literature will find little that is new here. This makes it something of a challenge for me to find something to criticize.

I do have a few disagreements, however, and I hope that my brief discussion of them does not distract from the key issue at hand: an explanation of the size of America’s civil or voluntary sector.

For example, I disagree with Ellerman’s lumping of neoclassical and Austrian economics, which he characterizes as focusing almost exclusively on market organizations using the logic of exit. He suggests, in fact, that Austrian economics has little or no theory about organizations, particularly for-profit corporations. The theory of market exchange crowds out a theory of corporate organization, what Ellerman describes as “the other half” of a modern market system. He chides Hayek in particular for apparently juxtaposing the market system, as a spontaneously generated order, with that of government planning. “There is no recognition of [corporations] 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).” (Ellerman 2009, 84) On this, Ellerman might be comforted to hear that younger Austrians have been working on the theory of the firm and on market-based management.

On a related note, it might be worthwhile to consider corporations—or for-profit firms in general—as institutions that combine workers, managers, and owners in an “ends-oriented” sense. People with unique knowledge and skills are combined with financial and physical capital to produce not only a product or service but also ultimately to produce profits for the owners. That is their economic “end” or goal. We can also consider nonprofit and not-for-profit associations as ends-oriented as well. The markets within which firms coordinate their plans (Simon’s red-colored social structures) are largely “means-oriented,” which is to say, profit-seeking organizations approach one another as means to the fulfillment of their own ends. Similarly, nonprofit firms obtain physical plant and equipment not with the intention of being “charitable” to the suppliers but instead with the goal of accomplishing their own missions.

The modern economy, and the “civil” or “philanthropic” sector too, is indeed unthinkable without “ends-oriented” organizations—institutions—that fulfill their plans through “means-oriented” exchanges. I wouldn’t refer to them as the other half of a market economy. I fully agree with Ellerman that they are the primary actors that seek mutually beneficial coordination among themselves using market processes. In this sense planning is universal; it is not restricted to the interventionist plans of contemporary government bureaus. It’s a question of who is planning and for what ends. The resulting pattern of coordination within markets is not planned as a whole—it is not an end sought by its participants—but emerges as a spontaneous order.

I have a minor point of disagreement with Ellerman’s brief claim that consumers don’t follow the logic of commitment. I think we witness today a panoply of goods that consumers (not simply the workers) strongly identify themselves with, for better or worse. Nike, Apple, Windows, particular brands of clothing and shops, autos, and so on inspire a sense of attachment: “I’m a Ford Man.” “Not me, I’m a Dodge Man.” “I only drink Sam Adams.” This has also grown to the more abstract level of “Buy American.” There seems to be little of that kind of identification with large philanthropic organizations, but it does seem to be growing among local consumer co-ops and other associations.

One last, minor point. I find it more difficult to accept that the family is perhaps the clearest example of a commitment-oriented institution. Ellerman offers the relationship of the parent to the child, but today divorce is widespread and marriages are entered into with a strong exit-oriented strategy. One might say, using Habermas’s language, that the market has “colonized the lifeworld” of potential marriage partners. One need not follow Habermas here, but perhaps the modern economy’s exit-strategy and means-oriented behaviors are now reaching into areas that were once strongly tied to commitments. On a related issue, if philanthropic enterprise is modeled after for-profit, “competitive” business organizations (if only theoretically, as in the work of Weisbrod), I think all bets are off regarding the possibility of a vibrant and growing civil sector.

Ellerman, to his great credit, makes no recommendations whatsoever that the philanthropic organization should be viewed through the narrow lens of neoclassical economics and business-model imagery. I would guess that he, like me, would hesitate to use the term “philanthropic enterprise,” because it connotes and may even encourage the image of enterprise as commonly understood.

But it is also unclear to me what an alternative theory of philanthropic organizations would look like. How might the Hirschman-Simon approach cast light on civil-sector associations in general? This is not the aim of Ellerman’s paper, so I raise the question not as a criticism but instead as a suggestion for further research.

Ellerman’s discussion of the literature of organizations seeks to show that the American-style corporation is wedded to the logic of exit, and he suggests (at least implicitly) that this institutional form is unlikely to be transformed into one organized by the logic of commitment. He points to the Japanese-style firm as being partly rooted in the logic of commitment (if imperfectly). He suggests that the J-style firm tends to satisfy the local, specific needs and community-oriented spirit of its workforce, lowering the incentive for people there to adopt philanthropic associations, because they find it within their own corporate enterprise.

His is largely a theoretical paper, and I find no fault in that. At the end he raises a testable and potentially fruitful idea: “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 goal of profit maximization” (Ellerman 2009, 94) The American economy is more likely to have a robust set of voluntary associations than the Japanese economy because American corporations aren’t designed to satisfy the non-work needs of citizens, who, in turn, pursue the economist’s logic of exit. Agreements based upon commitment are more likely to emerge in the civil sector, which is not guided, for the most part, by the exit strategy.

From the perspective of mathematical statistics, Ellerman suggests a positive partial derivative. (That’s merely a fancy way of saying there are other variables at work that might explain the relatively large scale of our philanthropic sector.) There are probably other “parts” to the explanation. I would imagine that arguments can be made to suggest that the scope of the state (and its unintended consequences), the level of wealth, long-term economic growth, taxation, and other such factors also affect the incentives and motivation to pursue philanthropic activities. In short, this is a ceteris paribus experiment, one that good social science is apt to make.

Testing it could be a challenge. We would need to home in on the specifics. For example, how might we measure the prevalence of the American-style company? Corporate profits as a percent of GDP? That approach would measure prevalence by means of accounting profit. But profits in the aggregate change from year to year, along with real GDP, and even if we could identify a long-run trend, is it a meaningful measure? Should prevalence be measured instead by the level of the workforce employed in corporate firms? (This is an interesting issue if proprietorships employ a larger percentage of the workforce. Could we predict a kind of reversal process if the number of people employed by proprietorships increases because of significant job losses in the corporate sector, whose long-term consequences include a growing commitment to the philanthropic sector, all other things constant?) How, too, might we measure the relative size of the philanthropic sector? This immediately raises the difficult issue of defining the philanthropic sector, a problem with which we are all too familiar. Does it include foundations along with all sorts of voluntary associations from the Little Brothers of the Poor to the local branch of Narcotics Anonymous? Would we look at the number of people who are employed and volunteer in these organizations? Would we add foundation incomes and the estimated values of volunteers’ labor time? Would we seek to develop some kind of shadow-estimate of the dollar market values of the services these organizations provide?

Ellerman’s fine paper encourages us to reconsider the organizational logics and strategies of for-profit firms and their implications for civil society associations. It should also further encourage us to develop clearer concepts with which to study and measure the nonprofit sector.



Ellerman, David. 2009. “Rethinking Philanthropy and Business.”  Conversations on Philanthropy VI: 79-96. ©2009 DonorsTrust.

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