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Economic Calculation in the Nonprofit Commonwealth
Nonprofit organizations lack market feedback. Waste is a serious problem. Cause prioritization can help.
In his classic 1920 essay Economic Calculation in the Socialist Commonwealth, Ludwig von Mises argues that socialist systems of central planning will not be able to rationally allocate scarce resources, especially various goods used throughout the production process. Without property rights, prices, and profit and loss feedback, central planners would be unable to engage in rational economic calculation.
In a market economy, the Three P’s of property, prices, and profit and loss act as guides that help people discover the most efficient ways to use scarce resources. Property rights create an institutional framework that enables processes of mutually beneficial exchange, whereby resources move from lower valued uses to higher valued uses. Prices are exchange ratios that emerge from these exchanges, and that provide market participants with valuable signals regarding the relative scarcity of different goods. Profit and loss feedback uses the prices of both inputs and outputs to tell producers whether they have created or destroyed value. If their decisions have destroyed value, they are making losses, and have incentives to revise their plans.
This argument has implications beyond just the question of whether to rely on market processes or socialist central planning. It also has implications for decisions regarding philanthropy. While non-profit organizations generally work within arenas that feature stable property rights and prices for the inputs they use, the goods and services that the non-profit organizations offer are typically not sold for a price. Moreover, the non-profit organization does not rely on profit and loss feedback.
This creates serious concerns about whether philanthropic resources will be allocated towards the uses that create the most value. Within a private market, it’s reasonable to think that workers and owners pursuing their own interests will tend to produce an outcome that benefits consumers more than alternative uses of scarce resources would. By contrast, within the non-profit sector there’s no similar mechanism to guide donors and workers towards creating value for intended aid recipients.
Absent the feedback provided by profit and loss signals, philanthropic decisionmakers need some other set of guides. One guide might simply be the intuitions and preferences of staff at nonprofit organizations. For example, a libertarian nonprofit might hire a variety of smart free-market economists, and those economists might work on whatever they personally find interesting. But perhaps our academic interests do not neatly match with which types of research have the biggest impact on human freedom and flourishing. Another free-market nonprofit might hire people from conservative political circles, and their priorities might be shaped by what’s popular in right-wing circles. But once again, there is no reason to think that popularity in right-wing circles correlates with freedom and flourishing. All of these non-profit organizations will be shaped to some extent by donor preferences. But if donations are based on what gives donors a “warm glow” rather than what will actually do the most good, there could still be serious misallocations of resources.
This is why the analytical tools of Effective Altruism are so valuable. Different forms of charity, research, and other activities within the non-profit sector can have very different impacts on the world. Unlike market processes, the mental heuristics and research methods used by Effective Altruists will not incorporate the tacit knowledge of millions of consumers and producers. But they can still help move us closer towards marshalling scarce resources in a manner that does more good.