Thursday, October 1, 2009

What’s missing in conventional economics wisdom?


Economics’ integration of firms that do not make profits.


Oliver Dreher


Working Paper




In economic analysis, a dynamic third sector of the economy has been grossly understudied, creating a hole in the critical debates on what, and how to produce goods within a society.

While the business sector makes up 80 percent of the economic activity in the United States, and the government sector accounts for an additional 14 percent of the gross national product, the independent sector currently contributes more than 6 percent to the economy and is responsible for 9 percent of the total national employment...The assets of the third sector now equal nearly half those of the federal government…(and) Although the third sector is half the size of government in total employment and half its size in total earnings, in recent years it has been growing twice as fast as both the government and private sectors (Rifkin, 1995, p. 240-241). 

 Integrated by a potentially powerful evolutionary forecast of a return to serviceable workmanship, contemporary realizations, consensus, and research points to good reasons for the rise of the third sector altering economic transaction habits and providing the increasing number of social and private goods demanded with a desirable balance between them.  Third sector industries have evolutionary mechanism advantages over public or private producers. Comprehending this uses assorted ideologies.  The thought experiment can be excited for 4 reasons. 

First, private goods production has evolved predatorily enough that serious externalities are detrimental to society, and cause an erosive imbalance in private versus public goods production.  Secondly increased balances in public goods production is ideal to keep a more beloved economy, however effective public goods consumption has not and will not, be achieved solely by the state.  Following that dichotomous framework, the Third important point is, non-profit or third sector production as an institution evolves to the benefit of conflicts between public state and private corp., and is dynamic with habitual sustainability traits.  Finally as predicted before, social balance changes due to collective action will cause cumulative causation toward suggestions of the welfare state. Using a third sector, in e macro-economic models problems disappear, further supporting and improving predictions.  This paper concludes on the need to integrate third or non-profit sector research, because of its potential ability as an institution, to solve current and future social tribulations by superiorly preceding the production control of government and business purposiveness.


The first reason for the eventual rise in the third sector is due to the evolution of for-profit businesses compared to non-for profit.  Private sector goods producers have become excessively predatory, in their demands for profit, hence Gotcha Capitalism (Sullivan, 2007).  Ideas of a bargaining transaction that would be associated with a true market system barely exists in private good production, leaving consumers and workers with managerial and rationing political transactions with no true economic choices.  With just this type of social capital network, superior and inferior, consumers’ demand is controlled through the propaganda, and for that reason private goods producers have securely pushed consumers and workers without help into a place of discontent causing unwanted social problems.  They do this chiefly through not fulfilling the very demand they tried to supply. 

Classic well known examples of these social problems are covered in one work of John de Graaf, David Wann, Thomas H Naylor and two from Juliet Schor in 2005, 1998 and 1992 respectively, Affluenza: The All-Consuming Epidemic, The Overspent American: Why we want what we don’t need, and The Overworked American: The unexpected decline of leisure.  They are, but are not entirely limited to, absenteeism, ageism, declining birth rates, unhealthy nutrition choices, debt dependence, discontent consumerism, unemployment, exhaustion, fatigue, stress, low education levels, dysfunctional families, shorter life spans, higher divorce rates, materialism replacing human nature, child neglect, underemployment, sexism, poverty, alienation, classism, and progressive unhappiness.  Schor shows empirically that these problems are perpetually getting worse since the comparative rise of private goods production in the industrial economy.  An example of producers trapping consumer and workers into a cycle of work and spend can be illustrated as follows, every well advertised time saving home making device except for the microwave, statically has shown to provide no reduction in hours worked, rather in most cases an increase.  A dishwasher or vacuum, has been advertised under the guise that not having the item means having a filthy, socially and ceremonially unacceptable home, therefore consumers feel obliged to incur debt and overwork to obtain the item, and then once obtained are compulsively felt to use it more frequently than a previous alternative.  The sale ability of products has been increasingly manipulated as the most predatory and profitable companies grow into conglomerates that have unchallengeable political and advertising influence.

The rise and concentration in private good production has been advantageous to predation of profits.  Thomas Palley points out in his 1998 book, Plenty of Nothing: The downsizing of the American Dream and the case for structural Keynesianism one of the largest problems caused is inequality in income distribution.  Stripping the lower ninety-five percent of earners from their collective action ability, and having the ability to sell them that neoclassical laissez faire economics is the answer to the problem, while this theory is not practiced at the top by business owners, has left a manipulated message of capitalism that most have not been able to uncover. 

According to laissez-faire, markets naturally ensure that people get what they deserve, unemployment is the result of high wages, and collective action by labor is bad because it interferes with the individual exchange on which the market process depends.  However, though both collective action by labor and labor market regulation are represented as unnatural distortions, the same is not true when it comes to the interests of business.  Thus corporate capitalism, predicated on the pooled holdings of capital and the legal protections conferred by the law of limited liability, is not represented in these terms (Palley, p. 22).

Clearly through increased control of the production process, greater influence and manipulation of consumers and workers has resulted in an inequitable share of profit for private good production owners, here capital controls production.  How else could we have come to the place were now both members of a family overwork and borrow to keep a spending standard of living not set by collective action, but by corporate profit seeking policy. 

The benefits to this cycle of work and spend for private goods producers create falsely positive social industrial complexes.  A common example is when private goods industries continually develop symptom cures and not cause cures, i.e. anti-nutritious fast food is sold under the guise of being an efficient or rational choice, while creating externality health problems that can be solved by the weight-loss industry, and of course this stresses one out by trying to pay for both, and can lead to anti-depressant and credit use.  Most processed foods, weight loss products, and pharmaceuticals obtain similar paired chemical ingredients from oligarchic market sources further increasing moral hazards. 

Private good production has evolved into a cannibalistic creature unaware of its externalities, manufacturing desires to the point of providing society solely with an abundance of nothing for pure profit at any inadvertently unknown short-term and long-term expense.  This predacious tendency sees public goods only as a competitive and a constricting entity to destroy.       



Much of the work of John Kenneth Galbraith assumes a simple dichotomy relationship between the production of private and public goods.  The respective analysis concludes on the importance of the state to produce social or collective goods for a society.  His case for plentiful social, or public goods is paramount to having equality and progress in a society, but Galbraith’s argument for governments to provide these goods is somewhat lacking due to the reliance on a simple dichotomy that does not really involve non-profits.  Given an evolved additional dichotomization, it is clearer that society will trend toward non-profit institutions.

Galbraith in his book The Affluent Society, advocates for a theory of social balance to solve social problems, this is largely built on balancing the simple dichotomy of public and private production.

Similarly, every increase in the consumption of private goods will normally mean some facilitating or protective step by the state.  In all cases if these services are not forthcoming, the consequences will be in some degree ill.  It will be convenient to have a term which suggests a satisfactory relationship between the supply of privately produced goods and services and those of the state, and we may call it social balance. (John Galbraith, 1976, p. 193) 

Most true in a fact we know so well, doubling cars on the road without building any roads creates this exact type of balance distress that is physical, and economically detrimental.  As or more determental though, is the question of, if we have privately funded public elections, is there legal corruption happening.  

“Predator State, which is just a coalition of the reactionary forces within business who seek to maintain competitiveness and profitability without technological improvement, without environmental control, without attending to product or workplace safety.  They are the forces behind deregulation, behind tort reform, and behind the assault on unions” (James Galbraith, 2008, p. 193). 


But more importantly, without corruption conditions non-profits will prove that government public goods production is not essentially ideal for reasons of timing presented by Burton A. Weisbrod in a 1972 discussion paper from the Institute for Research on Poverty titled Toward a Theory of the Voluntary Non-Profit Sector in a Three-Sector Economy. 

It is likely, however, that the government sector will not be the first to respond to consumer demands for collective goods.  The reason is that demands by all consumers do not generally develop simultaneously, and so the political decision rule will at first determine a zero level of government provision, leading the under-satisfied demanders to non-governmental markets (Weisbrod, p.15). 

There is also evidence to suggest this. 

Historical events provide one test of our view, which implies that before a political-majority comes to demand government provision, the minority that demands governmental provision of a good will be under-satisfied and will turn to voluntary organizations. Thus, provision by voluntary (non-profit) organizations is hypothesized to precede governmental provision historically (Weisbrod, p. 19)  


A further review of non-profits gives reason to reclassify government’s role.  Given the dichotomization of private and public goods production and a further dichotomization between centralized government social goods production and decentralized non-profit social goods production, their respective concerns and appropriate efficiencies should be taken into consideration when hypothesizing what collective actions will be taken.  By way of the evolutionary process, cumulative causation should lead to an increase in non-profits importance while allowing government to later provide social goods that are out of reach of the third sector.  This will increase efficiency of social goods production by facilitating complementary operations.


Cumulative collective action has led society itself to be the social institution for overall progress of humankind.  Differing intentions among various groups come about due to their respective problems and aptitudes with solving them, but despite these conflicts of intentions between cultures or struggles within class structure, all humans exhibit common instincts based off of the similarities we have biologically and the constraints we share living in the same physical world.  The most important instinct humans have is their instinct to join together for the betterment of the group that coordinatingly enriches each individual, and this collective action exists within an evolving world.  Regardless of the fact that some institutions were created and served purposefully to the benefit of society but continue despite their need, the most valuable institutions in economic analysis, are the non-profit institutions. 

The third sector tries through humane motives to offer goods well below private business’s market values.  Laid out in the book Marketing for NonProfit Organizations (1996) by David Rados, the idea that cost pricing is always the goal, but when uncertainty exists, a ‘just’ price system is created.  This markup is infinitesimal over cost to insure solvency.  The free or ‘just’ priced goods and services do not estrange anyone as a consumer, like price discrimination alienates consumer classes in the private goods market.  Philanthropic giving, volunteering, and paid work are all ways to be involved in this collective action from the production side, in fact, creating a non-profit for collective action is simple and the barriers to entry associated with it are incredibly low (Anosike, 1999 and Grobman, 2008), I checked out some books from the non-profit library, and used some non-profit websites, and found it very easy.

No other nation in the world even approaches the United States in the number and activity of non-profit organizations.  These organizations are based on the characteristic American tendency to form groups voluntarily, for the accomplishment of social, religious, educational, fraternal, economic, and other purposes.  Americans are the greatest “joiners” in the world.  American non-profit organizations, generally speaking, are a magnificent part of society, (Oleck, 1975, p. 2).

Given non-profits’ altruistic motives, society has rewarded them with privileges in the tax code, as well as discounts to government goods and legal immunities.  The accessibility by all parties involved in non-profit transactions and the pecuniary benefits are key evolutionary advantages in the struggle between sales of like goods between for- and non-profits. 

The third sector has always been one that has had to adapt, and is unsurpassed in terms of adaptability to the ever changing working rules.  “Our profession responds to changing societal conditions by innovating programs; reformulating problems and concepts; and altering, combining, and inventing methods of intervention.  New programs capitalize on community changes affecting common human needs.  (Lewis, 2003,p. 64) 

The reasons for society supporting the third sector can also be justified empirically with use of the Rodrik Model (Eggertsson, 2005, p. 54).  Simply put, change in growth equals external shocks multiplied by a relationship of latent social conflict compared to institutions of conflict management.  Societies with unresolved social conflicts due to lack of third sector conflict management institutions, will have a weak ability when handling negative economic shocks. Considering the adaptability and accessibility paired with Rodrik’s results that are absolutely externalized, non-profits are in a position to rise in relative importance compared to the other sectors of the economy, especially the private sector. 


The primary factor of technological and industrial change, which led to an increase in real output and a rising standard of living and which moved the western nations in the direction of economic progress, was accompanied by other factors that reacted in such a way as to accelerate technological and industrial change and to push society further along the path of economic progress.  These factors were the increasing rationality of human behavior, the democratization of society, the spread of mass education, the expanding participation of the masses in public policy determination and the development of a more egalitarian society (Gruchy, 1972, p. 184). 

Given this excellent analysis of where societies will continue to head, Gunnar Myrdal admits that there are three major deficiencies of the welfare state that cause potential problems for its existence, overcentralization, power oligarchy, and inflationary bias.  Given the advanced dichotomy framework of using non-profit local governments along with local social and public good producing third sector institutions, the overcentralization problem is defeated.  Furthermore the power oligarchy concerning Myrdal will not develop as his theory states that people will become more egalitarian.  More egalitarian people will choose to collectively act in favor of altruistic non-profit institutions and this nature can drastically reduce the type of people and oligarchic institutions that Myrdal feared.  Lastly, living in the type of state that Myrdal describes combined with the beneficial aspects of a strong third sector, the altruistic and egalitarian nature of this society does not immediately seem like one that would cause much inflationary pressure.  The idea Myrdal has about society seems like one that is more interested in goods and services that are more social than industrial, goods that are not judged by their scarcity.  Increased education and its corresponding social efficiency decrease many costs, like the low cost of investment borrowing from credit unions, micro-credit institutions and local governments.  Most egalitarian collective philosophies are built around requiring minimal purchases and reusing or recycling, reducing consumption and eliminating the very supply side pressures of scarcity.    


Problems in analysis are solved fully when the production of public goods are further expanded by a third sector or the decentralized not-for-profit sector. Through this analysis of advanced dichotomy, the third sector as an institution provides many missing answers to problems posed by institutional economists Myrdal and Galbraith.  Private good producers have come to the point in a predator prey model that is resulting in a crisis with their existence to grow.  Due to their predatory-ness if they do not grow they die.

Evident in the 2008 financial crisis a predacious ponzi scheme showed that unrestricted profit seeking eventually collapses.  Government’s attempt to solve the socially ill externalities of this financial crisis will be reactionary to profits, due to their condition shared with the private sector.  Dynamic third sector entities will be the ones that rise out of this crisis to solve social discontent, specifically credit unions and micro credit institutions.  Credit unions and micro-credit institutions, where never de-regulated, never desired exuberant profits, and have always been consistent in their goals to serve their members.  As more people seek lending and other financial services, these third sector institutions will be there for society to trust and utilize, somewhat crisis proof. 

The third sector consists ideally of trusted, small, community organizations, rising to power as needed in response to the over predation consequences of private good producers.  In this rise it will precede government directives due to the advantaged, accessibility and adaptability of its nature.  Hopefully “To call some urgently required action politically or socially impossible is the first (and sometimes the only) line of defense against unwanted change.” (John Gallbraith, 1996, p. 4) this is the case.  The 2007 book The Revolution Will Not Be Funded: Beyond the Non-Profit Industrial Complex, shows how some criticisms are correct but only because they are misguided.  True, a revolution from the third sector will not be funded, but that won’t matter, because an evolution will be.  Go ahead, save some money, be much more empowered, start the program soon.  Learn the ways of unconventional wisdom, and become a truly free person, within the Third Sector society.


Selected References


Anosike, Benji O. (1999) How To Form Your Own Profit or Non-Profit Corporation

Without A Lawyer, Newark: Do-It-Yourself Legal Publishers.


deGraff, John., Wann, David., Naylor, Thomas H. (2005) Affluenza: The All-

Consuming Epidemic, San Fransisco: Berrett-Koehler Publishers.


Eggertsson, Thrainn. (2005) Imperfect Institutions: Possibilities and Limits of Reform.

Ann Arbor: University of Michigan Press.


Galbraith, James K. (2008) The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too. New York: Free Press.


Galbraith, John K. (1976) The Affluent Society. Boston: Houghton Mifflin Company.


Galbraith, John K. (1996) The Good Society. Boston: Houghton Mifflin Company.


Grobman, Gary M. (2008) The Non-Profit Handbook: Everything You Need to Know to Start and Run Your Nonprofit Organization. Harrisburg: White Hat Communications.


Gruchy, Alan G. (1972) Contemporary Economic Thought: The Contribution of Neo-                                                                                                                                                                                                                  

Institutional Economics. Clifton: Augustus M. Kelley Publishers.


Klein, Phillip A. (1994) Beyond Dissent: Essays in Institutional Economic. Armonk:

M.E. Sharpe.


Lewis, Harold. (2003) For the Common Good. New York: Brunner-Routledge.


Oleck, Howard L. (1975) Non-Profit Corporations, Organizations, and Associations:

Third Edition. Englewood Cliffs: Prentice-Hall.


Munkirs, John R., Knoedler, Janet T. (Dec. 1987) The Existence and Exercise of

Corporate Power: An Opaque Fact. The Journal of Economic Issues XXI:



Palley, Thomas I. (1998) Plenty of Nothing: The downsizing of the American Dream and

the case for structural Keynesianism. Princeton: Princeton University Press.


Rados, David L. (1996) Marketing for NonProfit Organizations. Westport: Auburn



Rifkin, Jeremy. (1995) The End of Work: The Decline of the Global Labor Force and the

Dawn of the Post-Market Era. New York: Penguin Group.


Schor, Juliet B. (1998) The Overspent American: Why we want what we don’t need. New

York: HarperPerennial.


Schor, Juliet B. (1992).The Overworked American: The unexpected decline of leisure.

New York: Basic Books.


Smith, Andrea., Rodriguez, Dylan., Gilmore, Ruth W., Allen, Robert I., Ahn, Christine

E., King, Tiffany L., et al. (2007) The Revolution Will Not Be Funded: Beyond the

Non-Profit Industrial Complex. Cambridge: South End Press.


Sullivan, Bob. (2007) Gotcha Capitalism: How Hidden Fees Rip You Off Every Day and

what you can do about it. New York: Ballantine Books.


Veblen, Thorstein. (Sep. 1898) The Instinct of Workmanship and the Irksomeness of

Labor The American Journal of Sociology, Chicago: University of Chicago Press. Pp.187-201

No comments:

Post a Comment