Meeting “Needs” in the Private Sector: Nonprofit Institutions and Non-Monetary Supply

and Demand

John GarenDepartment of Economics

University of KentuckyUniversity of Kentucky Economics Teaching Conference

April 2010

Motivation

• Seeming ascendency of belief in greater government intervention in the economy; loss of confidence in markets.

• Resurgence of the ideas that markets are “unfair,” don’t meet “needs,” and that government is needed to temper markets, to provide a conscious for markets, etc.

• Discuss the private sector relative to the public sector in this regard.

How One Might Use This in a Principles Course

• Address the old question of fairness in markets.• Discuss needs versus tradeoffs.• Using basic economics to think about “altruistic”

behavior.• Thinking about free enterprise as being more

than profit max. firms and self-serving consumers.

• Using the non-nirvana approach to policy, i.e., comparing imperfect markets to imperfect govt.

. . .Uses – cont’d.

• Public good aspect of poverty programs; tradeoff with inefficient govt.

• General ideas on the role of govt. • A novel application of S & D analysis and

elasticity.

Needs vs. Tradeoffs

• “Needs” are hard to systematically and logically define. For example, is water a need?Many uses are not: washing the car, running the sprinkler, bathing.Can “needs” be forgone for something else, e.g., forgo buying a shirt (clothing) to be able to go to more movies? This type of activity occurs.

• I don’t have a systematic definition. Use “need” as in common usage as something important in one’s life.

What’s Fair?

Much has been written on this. Here are a few basics ideas.

• Socialist/Marxian phrase: “From each according to his ability, to each according to his needs.” Many, of various political stripes, are attracted to this.

• Merit: Rewards based on the merit of accomplishments. This has broad appeal.

• Mutual benefit: Activities where all participants benefit are fair. (Pareto optimality is our phrase for this.) This, too, seems to have broad appeal.

How Do Markets Fare on These Metrics?

• Merit based. Thought to do well. Productivity is rewarded. Some is due to luck, but much to effort.

• Mutual gains. The exchange that markets bring promotes this goal. Not always well understood by the public, however.

• Needs based. Markets are often thought to do poorly, e.g., “the less fortunate are ignored,” “self interest triumphs, ” and government is required to address this.

• I will focus the talk on this last point when comparing the private and public sectors addressing of needs.

The Usual Approach: Profit Maximizing Firms and Self Serving Consumers

• The above are the usual characterizations of participants in free markets.

• Goods and services are sold by firms only to those who will pay the market price. Only profits matter. It is argued that this implies needs are ignored.

• Consumers ignore the needs of others, it is claimed, in acquiring goods.

• But note that requiring the payment of the market price essentially requires a respect for one another’s desires and needs.

• Still, concerns about motivations of market participants and the limited incomes of the poor causes unease.

Another Side to Humans

• Humans have broader concerns than profit, money, and their own selves.

• Self interest is part human make up, but so are other things, including concern for the needs of others.

• Much evidence of this: charitable donations; volunteering; care for children, families, friends.

• Organizations in a free enterprise economy emerge in accord with these behaviors: charities, churches, families, clubs, circles of friends.

Nonprofit Organizations• Nothing dictates that an organization must be for-profit.

Nonprofits arise and survive in a free enterprise economy if they adequately serve their stakeholders.

• Nonprofits often compete with for-profits and “win.” Examples: religious services, the arts, hospital care, child care.

• Their goal is often to allocate goods and services to those who are most needy, e.g., food and counseling for the homeless; emotional support for friends who are suffering; and nurturing of children.

• Think of the family or the feed-the-homeless shelter as free enterprise institutions that adopt socialist practices.

The Non-Nirvana Approach

• What special problems does this type of organization face?

• How do private organizations deal with them relative to government organizations?

Fundamental Problems with Allocating by Need

• All organizations face these problems and must address them reasonably well to accomplish it goals.

1. Assessing Needs Consider a grocer who wishes to get food to the most needy customers. S/he must know details of many people’s lives. A difficult task, but failure to do so means an incorrect allocation.

2. Income As a Proxy for Need (or Ability)Is low income a sign of need or a desire for leisure?Is high income a sign of ability, luck, or hard work?

Fundamental Problems – cont’d.

3. The Complexity of NeedEmotional support, spiritual guidance, advice, commiseration, being held accountable are often needs of those in unfortunate situations. These have little to do with cash and are difficult to assess.

4. Incentives and DependenceGiving away goods and services induces more use. This: (a) stretches the resources of the organization; and (b) may cause an unwanted dependence on the organization.

How Private Organizations Address These Problems

• Close, personal knowledge of potential recipients normally occurs. Assessment of true needs more likely; less likely to be “gamed.” Does the homeless man need food or counseling?Does a friend who lost a spouse need cash or sympathy?Does the child with poor grades need a tutor or discipline?

• An expectation of quid pro quos. Providers set conditions and behaviors on recipients.Shelter users are expected to be sober, go to religious services.Kids are expected to behave and eat vegetables.Friends are expected to return favors.

Using S & D: The “Market” for Nonmonetary Exchange

• Recipients (demanders) receive a needed good or service. In return, they undertake some activity that providers (suppliers) wish them to do. This is the “compensation” for helping the recipient.

Nonmonetary Supply and Demand

Non- Monet. Price (NP)

S

Quantity Provided (Q)

D

Q1

NP1

• The assessment of needs works to assist the truly needy. If not done well, it does not serve fairness.

• The quid pro quo works to limit overuse and dependence.

How Do Government Programs Address these Problems?

• Programs to help the needy include food stamps, housing assistance, Medicaid, and TANF.

• Eligibility and receipt is based almost entirely on income. Little personal knowledge is sought or utilized.Errors in identifying and assisting the truly needy are likely.

• No quid pro quos are established. This leads to greater use and possible dependence.

Government Programs – cont’d• Moreover, incentives are lacking to improve screening and

establish quid pro quos. Few rewards for or discretion to undertake.

• Large, private organizations may have similar problems in motivating managers and employees. But: - they must compete for donors and supporters- donors and supporters expect evidence of success or funding will dry up- the organization must find ways to solve any motivation problems of

employees

• Public organizations are tax supported; “donors” cannot withdraw their funds if unsatisfied. Minimal competitive pressure.

Supply and Demand Illustration of the Outcome

Non- Monet. Price (NP)

S

Quantity Provided (Q)

D

Q1

Q1

NP1

Q0S

Q0D

NP0

• Think of the government program as lowering the nonmonetary price of receipt and supplying all comers at that price.

• Use of the provided good or service increases. Because of lack of screening/assessment, dependence is likely to rise.

• Private sector provision falls.• Government budgetary commitment picks up

the difference.

SR and LR Elasticities

• The short run effects of instituting a policy may look quite favorable due to low short run elastiticites.

• Higher long run elasticities cause much larger effects and generate less desirable outcomes.

• An “undoing” of the policy has unpleasant short-term effects, making reform politically difficult.

SR and LR Effects

Non- Monet. Price (NP)

S

Quantity Provided (Q)

D

Q1

NP1

QS0 QD

0

NP0

DSR

QDSR

SSR

A

E B C F

QSSR

The Free-Rider Problem

• Poverty programs and free riders. It’s often argued that there in a public good aspect with the underprovision result. Compelling payment through govt. alleviates this issue.

• This trades off with: - welfare cost of taxation/subsidization - ineffectual govt. provision.

Some Conclusions• Where would government programs have the least

problems?- needs are obvious; not subtle and complex- response to the lower nonmonetary price is small- examples may be natural disasters and accidents that are difficult to anticipate and avoid

• Normative conclusions about the effectiveness/ desirability of public versus private provision. • The hope is to assist instructors in addressing some issues –

fairness, needs, altruism – within the basic framework we normally use.

Some ReferencesClark, J.R. and Lee, Dwight, “Government Transfers and Inequality: An Anatomy of

Political Failure,” Public Finance and Management, 8(2), 2008, pp. 265-301. Clark, J.R. and Lee, Dwight, “Substituting Markets for Morality,” Cato Journal,

forthcoming.Garen, John, “On Fairness and Needs in a Free Enterprise Economy,” Journal of

Applied Economics and Policy, 29(1), Spring 2010, pp. 61-78.Heyne, Paul, “The Concept of Economic Justice in Religious Discussion,” in Geoffrey

Brennan and A.M.C. Waterman (eds.), Are Economists Basically Immoral? And Other Essays on Economics, Ethics, and Religion by Paul Heyne, Ch. 9, Indianapolis, Indiana: Liberty Fund, 2008.

Schansberg, D. Eric, “Common Ground Between the Philosophies of Christianity and Libertarianism,” Journal of Markets and Morality, 5(2), Fall 2002, pp. 439-457.

Also, Adam Smith and Ayn Rand views on morality, self interest, and markets.