Non-Profits: Letter to Barack #8

Dear President-elect Obama,
 
          Let me start my letter on working for nonprofits (the fourth of the five sectors in which we are creating jobs here in our town in Chile ) by defining two pure types: for-profit business and non-profit business.  I provisionally omit the businesses that do not fit neatly into one or the other of these two categories.
 
          The purpose of a for-profit business is profit.  (Academics will notice that I am not distinguishing profit properly so-called from return on capital; I do not think this distinction is needed here.)   The financial economy drives the real economy.  Investment decisions are made by calculating probable yields taking risks into account.  
 
          Question:  What goods and services will be provided?
          Answer:  Those that can profitably be sold.
 
          Question:  What determines whether the economy will go or stop?
          Answer: Confidence.
 
          Question: Confidence in what?
          Answer:  Confidence that consumers will spend, confidence that credit will be available; and in the end, in sum, in short, confidence that profits will be made.
 
          You have now chosen an economic team (Paul Volcker, Tim Geithner, Lawrence Summers, Christina Romer and others) and a security team (Hillary Clinton, General Jim Jones, Robert Gates, Admiral Mike Mullen, Susan Rice, and others) whose overall objective is to restore confidence.   I am suggesting that at least a major part of the nation’s military objective is the same as its economic objective.   Confidence.   In practice and in official declarations the military and its civilian chiefs seek a world in which business people will have confidence in the safety of  their investments, in access to markets, in access to energy and other inputs, and in being able to count on the normal working of the international economy. (See  www.dtic.mil. searching under “national interest”)
 
            I would suggest that if your advisors were to give nonprofits due weight in their deliberations they might well improve the quality of their advice.   Nonprofit business is the conceptual twin of for-profit business.  The cart becomes the horse.   The horse becomes the cart.  First the social entrepreneurs (people who organize nonprofits) are motivated by perceiving a need.   Then they raise funds to meet the need.   The real economy drives the financial economy.  
 
          Coraggio and his colleagues at General Sarmiento University have studied nonprofits in Argentina using a concept of “hybrid financing” developed by Brazilian socioeconomists.   The “club” is an emblematic Argentine nonprofit.  “Clubs” began as mutual aid societies bringing together people of one or another common ethnic origin who immigrated to Argentina during the 19th century.   Clubs have proliferated, evolved, and metamorphosed so that today they do many things, but one thing virtually all of them do is play soccer.   Diego Maradona got his start in a neighborhood club.
 
          Coraggio studied how Argentine nonprofits piece together their budgets drawing on hybrid sources.    Members pay dues.   Fans pay for admission to games.  Local governments provide subsidies.   Tenants pay rent on buildings the nonprofit owns.   For-profit businesses donate uniforms for the players.   The club runs a restaurant open to the public.   It runs a fundraising dinner dance.    It auctions off prizes at a silent auction, or conducts a raffle.    Decedents leave bequests to the nonprofit in their wills.   Much of the work of the nonprofit is done by volunteers who do not need to be paid.   Etc.
 
          In Argentina and elsewhere nonprofits have shown themselves capable of doing everything for-profits do.   They run schools and hospitals.  They run banks and insurance companies.  (e.g. the Caisses Desjardins of Quebec )   They farm.  (e.g. the farms of the Mormons)  They manufacture refrigerators.  (e.g. Mondragon in Spain )  They build houses.  (e.g. Habitat for Humanity)
 
          Could we then have an economy with no for-profit business at all?  Conceivably such an economy could come into existence if there were social entrepreneurs organizing nonprofits to meet every need.   Our plan here in Chile is not so drastic.   We think in terms of layered job creation.  We support the creation of as many jobs as possible in the for-profit sector.   We go on to support another layer of job creation in the people’s economy.   A third layer of jobs is contributed by government work.    A fourth layer by working for non-profits.   Anyone who still wants and needs a job can participate in a fifth layer, community service.
 
          (Correction:  We do not precisely maximize the number of jobs in the for-profit sector because we insist on decent wages.   Since firms unable to comply with labor legislation must cease to exist, employment in for-profit business falls short of its theoretical maximum.  The other four sectors pick up the slack.)
 
          I would like to suggest that the members of your economic team consider thinking in terms of layered job creation.    At present they seem mainly to think in terms of stimulus packages trying to promote consumer spending, making the government the spender of last resort, loosening credit, and making the government the creditor of last resort.    All of this aims to restore confidence in one sector of the economy, the for-profit sector; it aims to persuade investors and business people to advance funds and hire workers in the expectation that there are profits to be made.  It may well be the case, as the historical studies of one of your advisors (Ms. Romer) show, that increasing the money supply (especially due to the inflow of gold from politically turbulent Europe) helped to restart the U.S. economy during the Great Depression even before World War II.   Nevertheless, no monetary expansion policy is a substitute for a systematic effort to create jobs for everybody, while every monetary expansion policy brings with it the risk of inflation.
 
          I would also suggest to your security team that the currently dominant economic paradigm is not a perfect paradigm.   It assigns to the military the mission of protecting stability and order worldwide for the sake of establishing the confidence required by normal business as defined by the paradigm.      But the paradigm which defines and limits current mainstream thinking may not –I would indeed say it clearly does not— frame a normal science capable of providing  all the needed answers.   It may have something civil to learn from the radicals who at this point in time have been designated as military enemies.  (See www.dtic.mil searching under “radicalism.”)
 
Peace and all good,
 
Howard R.
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