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UNIT 4 PHILOSOPHY ND N TURE OFNONPROFIT ORG NIS TIONS

ontents4.0 Aims and Objectives4.1 Introduction4.2 Essential Attributes3 3 Transformation of Nonprofit Organisations4-.4 Theoretical Approaches to Nonprofit Organisations4.5 Nonprofit Organisations and the Market4.6 Future Prospects of Nonprofit Organisations4.7 Let Us Sum Up4.8 Suggested Readings and References4.9 Model Answers

4 0 IMS ND OBJECTIVESThe main aim of this unit is to acquaint you with nature and character of nonprofitorganisations in modem economy and society. We will describe the essential attributesand main characteristics of contemporary nonprofit organisations. You will learnabout the theoretical approaches to nonprofit organisations and the nature ofrelationship between nonprofit sector and market. At the end, we will also explainthe future prospects of nonprofit organisations. After studying this unit you shouldbe able to

identify the essential attributes of nonprofit organisations;describe the transformation of nonprofit organisations;depict the main characteristics of contelnporary nonprofit organisations;analyse the theoretical approaches to nonprofit organisations;differentiate between economic and sociological approaches;understand the relationship between nonprofit organisations and market; andexplain the future prospects of nonprofit organisations.

4 1 INTRODUCTIONThe existence of nonprofit organisations in modern societies is a unique phenomenon.The significance, role and contribution of these organisatioks is extremely valuableto the functioning of market economies. The structural location of nonprofit sectorvis-a-vis state and market and its advantageous positioning in the pluralistic welfaresystem (in provision of goods and services) has evoked considerable academic interestin recent times. In this unit we will explain to you the important aspects of nonprofitorganisations.

At the very outset, we will explain the essential attributes of nonprofit organisations.You will learn about the basic philosophical tenet that profit or personal economicgain is not the sole motivation that determines the economic behaviour of individualsin society. This philosophical tenet lies at the root of nonprofit organisations. Whileexplaining main attributes we will also explain the general definitional aspects ofnonprofit organisations.

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After that we will analyse the transformation of nonprofit organisations in the context Philosophy and Nature ofof the crisis of welfare state. Retreat of welfare state created vital space for the rganisationsgrowth of nonprofit organisations since they played vital role in meeting the demandof goods and services in society. In this process they also acquired new innovativecharacteristics suitable to their functioning in modem market economies. You willlearn about the main characteristics of contemporary nonprofit organisations.Next, we will discuss the theoretical approaches to nonprofit organisations. We haveanalysed the crucial issues inherent in the economic and sociological approacheswhich are of vital significance to the functioning of nonprofit organisations in amodern society. You will learn that Weisbrod s approach is rooted in state failureand Hansmann s approach that is based on the philosophical tenet of contractfailure . You will also learn that unlike rational-choice models inherent in economicapproaches, the sociological approaches give an entirely different treatment to notionsof trust and rationality while analyzing the existence and functioning of nonprofitorganisations.There is a unique relationship between nonprofit organisations and market structurein modern economies. We will describe the salient features of this relationship, morespecifically in the context of for-profit business organisations. We will also explainthe significance and relevance of regulatory environment, financial resources andlabour market to the functioning of contemporary nonprofit organisations. Lastly, wewill furnish a broad description of future prospects of nonprofit organisations. Youwill learn that there is a whole range of complex issues which may influence thefuture evolution of nonprofit organisations in a modern society.4 2 ESSENTI L TTRIBUTESIn this section, we will describe the essential attributes of nonprofit organisations.You will learn that the main attributes of nonprofit organisations are a formalorganisation; independence from state; self-governing; nondistribution of profit andvoluntarism. We will also acquaint you with the general definitional aspects ofnonprofit organisations.The existence of nonprofit organisations in a market economy is undoubtedly aunique phenomenon. The fundamental assumption inherent in such organisations isthat profit or personal economic gain is not the sole motivation for determiningthe economic behaviour of human beings. There are certain needs of individuals inmodern society which can not be satisfied through the self-interested pursuit ofprofit in market relations. Many a times markets do not respond or are simply notinterested in producing goods or services which are not economically rewarding toproducers. Sometimes, the special nature of goods or services requires such smallscales of production as are not profitable at all. Even at times, monopoly of marketproduces goods or services of substandard quality for the capitive clients; hencethere is always a craving for quality goods. On the other hand, there are always manyareas or services or goods which usually remain unattended or ignored by a modernstate. In such a situation interested people come together and establish non-profitorganisations to produce goods or services (not-for-profit) either for the benefit of itsmembers or for wider use of community or society. Nonprofit organisations whichproduce goods for more or less, exclusively, for the benefit of its members are calledmutual-benefit organisations. The others, which serve the broader interest ofcommunity or some vulnerable sections of society are called public benefitorganisations.A fundamental distinction between voluntary organisations (including NGOs) andnon-profit organisations is of critical importance in this context. One of the essentialcharacteristics intrinsic to voluntary organisations is that they are also non-profit

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Voluntarism, State and in nature. Non-profit organisations discussed here are those which directly enter intoSociety the process of production of goods and services. They also generate revenue from

sales af goods and services to its members or various sections of society. Theunderlying fundamental distinction is that non-profit organisations come into directcompetition with other for-profit organisations is the market. By adhering to socialethos of non-profit, non-profit organisations struggle to produce high quality goods andservices and are able to sell such goods and services at competitive price (at asubstantial lower price than those produced by for-profit organisations) to itsmembers or particular sections of society. Many a voluntary organisations (includingNGOs) also charge nominal fees for providing goods or services in society. Such anexercise pertains to only supplementing their resources and usually does not becomethe predominant means of generating resources. On the other hand non-profitorganisations have all the characteristics inherent in voluntary organisations exceptthat they come into direct competition with for-profit organisations in the market whilebeing engaged in the process of production and sales of goods and services in society.The production and sales of goods and services by directly competing withmarket forces, becomes the main source of revenue generation for non-profitorganisations.Nonprofit organisations display a diversity in regard to their structure, specifically, thesource of finance and the nature of control exercised to run an organisation. Anorganisation which is mainly dependent upon donations is characterized as donativetype. In case a non-profit organisation generates revenues from sales of goods orservices, it is characterized as a commercial type. Further, a nonprofit organisationwhich is controlled by its patrons (i.e. original members who joined together toestablish it) is described as belonging to a mutual type. In case an organisationexpands its production or services and in turn is controlled by board of directors, itis known as entrepreneurial type. Combining these essential criteria nonprofitorganis ations are categorised as donative mutual: donative entrepreneurial;commercial mutual; and commercial entrepreneurial. Notwithstanding thesedistinctions, according to Jeremy Kendall and Mastin Knapp (1993), a nonprofitorganisation must possess the following essential attributesi) Formal Organisation A Nonprofit organisation must have a formal organisationwith a charter, a constitution or sets of rules, formally registered with public

body (including tax authorities), possibly incorporated under company law andSO on.

ii) Independent of State nonprofit organisation should be constitutionally orinstitutionally independent of state. It should not be controlled by any for-profitorganisation or an institution of state. In practice the nature and extent ofindependence from state is essentially a dynamic relationship between state anda nonprofit organisation. Literature suggests that there is always some concernabout state control over nonprofit sector via the medium of funding or otherfinancial mechanisms. How to draw a line between independence and dependence?Ideally, it is argued that key indicator of independence is the way a nonprofitorganisation exercises control over its own constitution and makes decisionsabout resource allocations in consonance with its stated aims, objectives andgoals.

iii) Self-Governing Non-profit organisation must be a self-governing body havingits own internal decision making structures. Control by patrons (donors or clients)is the principal reason d etre for nonprofit organisations. However, as notedabove, some non-profit organisations are controlled by a self-perpetuating boardof directors and are called entrepreneurial in contrast to mutual which arecontrolled by patrons of the organisation.

iv) Non-distribution of Profit The most fundamental attribute of a nonprofit

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can not distribute its net profits among members, officials, directors or trustees Philosophy and Nature ofwho exercise control over such an organisation. No doubt, profits can be earned Organisationsbut such profits must be invested back in the nonprofit organisation. The trusteescan not display any interest in the profits since specific constraints on theredistribution of profits are usually imposed by the state.

v) Voluntarism Voluntarism is another significant attribute of a nonprofitorganisation. It means that individuals who come together to establish such anorganisation should become members according to their own choice and freewill. No person should be forced to become member, patron or participant. Themembers and office bearers should have the independence and autonomy tomake decisions. Further, ideally members or patrons must make voluntaryphilanthropic donations to the organisation. Even if a major share of incomecomes from state funding or from fees charged for services from clients, acertain degree of voluntary contribution from members must remain an integralpart of nonprofit organisation. This key attribute nurtures the trust and good willof community or society towards a nonprofit organisation.

4 2 1 Definitional AspectsThe above discussed attributes are crucial to the existence of nonprofit organisations.Peter Dobkin Hall (1987) furnishes a very broad definition of nonprofit organisationas a body of individuals who associate for any of the following three purposesi) to perform public tasks for which there is a demand that neither the state norfor-profit organisations are willing to fulfill;ii to perform public tasks which are usually delegated by the state; andiii) influence the nature and character of policies of the state, for profit sector or

other nonprofit organisations.Peter Dobkin Hall further noted that nonprofit organisations exist and flourish undercertain specific ideological, political, social and economic conditions which, in turn,are shaped by particular historical processes and experiences. By ideological, hemeans that individuals establishing a nonprofit organisation consider the will of stateas the collective will (general will) of the people. This view that sovereignty residesin the collective will of the people, finds political expression in institutional andlegislative forms such as grants of incorporation, tax exemptions and regulationswhich provide incentives to individuals for making donations to nonprofitorganisations. It further gets translated into various juridical devices (for instance,equity jurisdiction) that encourage collective action and creates scope for allocationand administration of property for future general good of society. Such ideologicaland political conditions can materialize only in a social context where individuals aresocialized to value responsible autonomy. And the modes of governance and authorityare conductive to compliance rather than coercion. Reinforcing all these conditionsis the economic system in which individuals can utilize their resources and productiveenergies according to their own discretion and choices in the free market relations.In this sense, nonprofit sector is a distinct phenomenon rooted in democracy andcapitalism. Hence in western democratic societies and capitalist economies there isa significant growth and diversity of nonprofit organisations. Nonprofit organisationsare most common in sectors as social services, health care, education and research,arts and culture and community development.

Check Your Progress INote: a) Use the space given below for your answers.

b) Check your answer with the model answer given at the end of thisUnit.

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State and I The following statements have been based on the text that you have alreadyread. Indicate whether these statements are true or false by putting tick-mark .\i in the relevant box.

True Falsea) The fundamental assumption inherent in nonprofit organisations isthat profit is not the sole motivation that determines economic behaviourof individuals. [ I [ ]b Nonprofit organisations which produce goods or services exclusively forthe benefit of its members are called mutual-benefit organisations.C) Nonprofit organisation which is dependent upon donations is calleddonative type . [ I [ ]d) A nonprofit organisation need not have a formal organisation. [ ] [e) A nonprofit organisation functions fully under the control of state.

[ I [ ]f A fundamental attribute of a nonprofit organisation is the non-distributiveconstraint . [ I [ ]g) Voluntarism is not related to existence of nonprofit organisations.

[ I l lh) Nonprofit sector is a distinct phenomenon rooted in democracy andcapitalism. [ [ ]

2 Explain in brief, the definitional aspects of a nonprofit organisation.(Hint : see the text)

4.3 TR NSFORM TION OF NONPROFITORG NIS TIONS

In this section, we will furnish, in brief, the process of transformation of nonprofitorganisations. We will explain to you the nature of change in the character of nonprofitorganisations with the rise of welfare state. Later, the crisis and retreat of welfarestate created social space for the expansion of nonprofit organisations in the provisionof goods and services in society. The process radically transformed the nature andcharacter of nonprofit organisations. We will describe the salient aspects of the maincharacteristics of contemporary nonprofit organisations.The characteristics of nonprofit organisations vary from country to country. Theconstitution, legal and judicial system, tax and regulatory institutions of a.countryinfluence the nature and character of nonprofit organisations. Further, factors such associal values, cultural attitudes, religious traditions and people s disposition towardsstate also shape the overall existence of non-profit sector in a society. Democraticsocieties have long-established philanthropic and voluntary traditions, laws and policieswhich generally encourage private nonprofit initiatives to enhance public interest and

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The fundamental tenet of nonprofit was very well inherent in traditional (religious) Pbilosoph~ nd Nature ofphilanthropic and charitable pursuits in history. The role of traditional philanthropy Nonprofit Organisationsand charities mostly remained limited to extending help to poor, destitutes, disabledand so on or providing relief during times of natural disaster. Nonprofit organisationsacquired innovative characteristics such as production or distribution of goods, value-addition, and improvement in quality of services with the rise of democracy, modemstate and capitalist mode of production. What is more, the true significance andrelevance of nonprofit organisations was realized during the crisis of the welfarestate.4 3 1 Welfare State and Nonprofit Organisations

perceptive analysis of transformation of nonprofit organisations is furnished byCarlo Borzaga and Alceste Santuari (2000) in the context of welfare state.Notwithstanding the details of their analysis, we will present the essence of theargument which brings out the innovative characteristics associated with contemporarynonprofit organisations.The rise of the welfare state in western Europe impinged on the existence of nonprofitorganisations. Since late 1940s state policies were generally formulated around theconcept of universal welfare of society. It was basically a system in which stateauthorities played a major role in delivery of collective goods and public services.Since the systems and institutions designed by state played a leading role in thewelfare of society, the not-for-profit organisations came under serious pressure tochange their basics for survival. The importance of not-for-profit organisationsdecreased. They increasingly started to concentrate their activities in fields havingleast economic or distributive implications. Consequences for nonprofit organisationswere as followsi) A large number of nonprofit organisations changed their character vis-8-vis their

original nature since they were compelled to exist within the public sector.ii) Some nonprofit organisations were incorporated in the welfare system. Theyformally and legally remained private organisations but were subjected toadministrative and bureaucratic controls, hence losing their autonomy.

iii Nonprofit organisations which had not become a part of welfare system, wereprevented from engaging in productive activities, i.e., production and distributionof public goods or services. Hence, role of non-profit organisations was reducedand remained more or less limited to advocacy functions.

4 3 2 risis of Welfare State Transformation of NonprofitOrganisationsSince 1970s. welfare state started facing financial and organisational crisis in westernEurope. In the beginning, the crisis was mainly fiscal in nature which resulted mainly

from decline in the rates of economic growth and the rise of unemployment in mostwest European societies. Most west European states reacted to overcome this fiscalcrisis by reforming and restructuring the welfare systems. Efforts were made to slowdawn or outrightly block the growth of public supply of social services. However,traditional economic solutions proved inadequate to respond to an ever-swellingdemand for social services which had by now became highly differentiated andattentive to quality. This give birth ultimately to the legitimacy crisis of the welfarestate.Welfare state attempted wider reforms in regard to the provision of welfare services.The reforms aimed at tailoring the supply of services to user s needs in order toreduce the impact on public budget of the state. Decentralisation of the process ofdecision making and implementation of policies, privatisation of services and shift

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Voluntarism State and from passive to active labour and employment policies were some of the importantSociety measures adopted by the welfare state.Privatisation of social services provision was implemented by separating financialresponsibility. The financial part was retained by public authorities. The servicesprovision was contracted out to private enterprises. Welfare state even outrightlyretreated from the production of some services. This resulted in substantial demandfor private prbd;cers of social services and consequently opening new spaces for thegrowth of nonprofit initiatives within society. Decentralisation and consequentshift in responsibilities to local bodies (closer to citizens s needs) conferred legitimacyon nonprofit initiatives in civil society. The growth of nonprofit sector was furtherboosted since it ventured into areas hitherto ignored by for-profit enterprises in themarket.To sum up As a consequence of the crisis of the welfare state in western Europesince 1970s an increasing number of nonprofit organisations started providing socialservices, especially for groups adversely affected by economic crisis and not coveredby public social policies. In the beginning, such initiatives were largely independentand voluntary in nature, autonomous from the state and often in contrast with thepublic policies of the state. However, during the decades of 1980s and 1990s, shiftin public policies resulted in an increasing collaboration between institutions of stateand nanprofit organisations. Systematic funding policies of state strengthened theexistence of nonprofit organisations in civil society. Notwithstanding the substantialgrowth and economic dimensions, the contemporary nonprofit organisations acquiredinnovative characteristics suitable to the welfare and developmental needs of society.4.3.3 Main Characteristics of Contemporary Nonprofit

OrganisationsThe chwacteristics of contemporary nonprofit organisations which have emergedsince 1970s in democratic societies are as followsi) They are predominantly engaged in entrepreneurial activities and production ofgoods and services.ii) While organizing a productive activity they generate their resources from volunteers,donations, public funds and other sources, and are market oriented.iii They display innovations while providing social services and production of goods

as for instance, rendering services to marginalized and vulnerable sections,empowerment of suppressed strata of society.

iv) They contribute to the creation of jobs and training opportunities especially forunemployed youth.

v) They establish strong linkages with well defined local communities and strive forthe upliftment.

vi) In principle, they do not distribute profits. However, they do not become blindvictims of non distributive constraint while striving to achieve clearly definedsocial goals. They give equal representations to stakeholders (members, patronsand others) and importance to democratic management and control of theorganisation.

Furthermore, as compared with traditional nonprofit organisations, the contemporaryorganisations are:i) more independent and display autonomy since they depend upon plurality ofresources, and relate with the state through contracts as independent organisations;ii) more sensitive to generate employment opportunities for disadvantaged sections;because of this reason they usually display keen interest in collaboration with for-

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iii) alert to demarcate ownership, hence ensuring the involvement of members in Philosophy and Nature ofself-management; Nonprofit Organisations

iv) usually small in size and completely embedded in local communities;v) interested in the creation of new services (ignored by other organisations) andwilling to innovate to meet the social needs; andvi) not inclined towards advocacy, or consider advocacy as a secondary function.The most significant innovation of contemporary nonprofit organisation is the creationof multi-stakeholder form of organisation. The administrationlmanagement, viz.,executive board and membership aspects are shared by volunteers, workers, consumersand even representatives of public authorities, considering the different interestsinvolved in the production of goods or services. Hence nonprofit organisations havetransformed not only in respect to their goals but also in terms of operational methodsand management of organisation.

Check Your Progress I1Note a) Use the space given below for your answers.

b) Check your answer with the model answer given at the end of thisUnit.

1 The following statements have been based on the text that you have alreadyread. Indicate whether these statements are true or false by putting tick-rk 4 in the relevant box.

True Falsea) Nonprofit organisations acquired such characteristics as production anddistribution of goods and services along with the rise of democracy

and capitalist mode of production. [ I [ ]b) The crisis of welfare state led to wider reforms in regard to the provisionof welfwe services. [ I [ ]c) Privatisation of services did not result in contracting out provision of

services to nonprofit. [ I [ ]d) The crisis of welfare state created space for the expansion of nonprofit

organisations in the provision of goods and services to society.[ ] [ ]e) Nonprofit organisations are not engaged in the production and distribution

of goods and services. [ I [ ]

f Nonprofit organisations usually generate their resources from volunteers,donations and membership fees, and other sources. [ I [ ]g) Nonprofit organisations do not create any employment and trainingopportunities for unemployed youth. [ [ ]h) Nonprofit organisations built strong linkages with local communities and

strive for their upliftment. [ I [ ]2 Compare the traditional and contemporary roles of nonprofit organisations.

(Hint : see the text)

................................................................................................................

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Voluntarism State andSociety 4 4 THEORETICAL APPROACHES TONONPROFIT ORGANISATIONSThe theoretical interest in nonprofit organisations is a relatively recent phenomenon.Till the end of 1970s, there were hardly any systematic studies on the dimensions ofnonprofit sector. The initial theoretical interest stemmed from the realization thatnonprofit had its own specific dynamics and considerable presence (number oforganisations) in the process of production of goods and services, and generatedemployment opportunities in society. Since then attempts have been made to analysethe objective basis, dimensions and social and economic relevance of nonprofitsector in various societies. In the following, we will acquaint you with some of theimportant approaches to nonprofit organisations.4 4 1 Economic ApproachesThe existing economic approaches to nonprofit organisations can be broadly classifiedinto two categories based on the concepts of state failure and contract failure .a) Weisbrod s Approach of State FailureThe concept of state failure as the basis for the emergence of nonprofit organisationis considered in the theory developed by Weisbrod (1977, 1988) which is also knownas public goods theory. The essential argument of Weisbrod is that it is generallynot possible for state to supply all the public goods in response to the demand insociety. The state will always make inadequate provisions as regarding the totalquality af goods required in society. Further, state shall never have the means, resourcesand wherewithal to produce a diverse range of quality goods and services requiredto satisfy the tastes, preferences and choices of individuals in society. Basically, statecan provide too few public goods and an insufficient range of them since the stateis subject to various social, political and economic constraints and limitations. Forinstance, the cause of shortfall is identified in the political expediency of state. Inorder to stay in office, a government must satisfy the demand for public goods andservices of the median voter . The government will raise taxes to cover the cost ofpublic goods and services. but there will always be people in society who will, bepaying more taxes for the production of public goods and services than they actuallywant to meet their needs. On the other hand, there will be others for whom there areinsufficient quality public goods or services available to suit their tastes, preferencesor choices. The overall scenario will lead to the shortfall in the supply of privategoods from government. According to Weisbrod, the unsatisfied demand will evokea response in the private sector for the production of goods and services. In the caseof public goods and services, it will be nonprofit organisations which represent amechanism to satisfy the residual demand by means of private production of publicgoods. Hence the existence of nonprofit organisations in democratic and capitalistsocieties. On the one hand, there will be nonprofit organisations which may producegoods to satisfy the demand of its members only. On the other hand socially motivatednonprofit organisations may produce goods or services to satisfy the particular demandsof disadvantaged, poor or marginalized sections of society.Weisbrod s theory is challenged with two major criticismsi) The services of goods produced by a large number of nonprofit organisations do

not subscribe to the domain of public goods and services. Rather, they representprivate goods and services bringing in picture a direct competition betweenstate, private for-profit businesses, and nonprofit organisations. Such competitionis difficult to reconcile with public goods theory which assumes a privilegedspace for nonprofit organisations in society.

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ii) It is not clear why demand for public goods in excess of their provision by state Philosophy nd Nature ofshould necessarily be met by nonprofit organisations rather than for-profit business Organisationsfirms. The issue at stake is why it is so compelling that public goods needs tobe supplied on private basis by nonprofit organisation. In modem societie3 whereindividuals can act rationally and employ efficient means to achieve desiredknds and assuming that free-rider problem can be overcome, public goods canbe very well supplied by for-profit enterprises.

Despite its limitations Weisbrod s model w as a significant conmb ution w hc h stimulatedfurther rational choice models of nonprofit organisations.b) Hansmann s Approach of Contract FailureHansmann (1987) was the first to develop a theory which took into account thecontract failure dimensions of market. Han sm ann considered contract failure asthe limitation of consumers to ascertain the quality of goods through ordinary

contractual deilices. Since consumers are generally unable to monitor and assess thesupply of goods at the desired level of quality (for which they have paid), thephenom enon represents a particular kind of market-failure. Contract failure takesplace when consumers have no means to determine the quantity or quality of goodsand services supplied to them. For instance, the quality of services can not normallybe ascertained in the case of medical care, nursing homes, day care centers forchildren and so on. In such situations for-profit business firms will attempt to supplylow quality/quantity services or goods for a given price, hence creating scope forappropriating (maximizing) profits. Since nonprofit organisations function on thefundamental assumption that no profits can be appropriated by members or patrons,customers feel assured about the qualitylquantity of products. Nonprofit organisationsare not motivated by any incentives (profit) in case of business firms to deceive thecustomers. In this regard, nonprofit organisations are more trustworthy than for-profitbusiness organisations.Contract failure approach has a direct bearing on commercial nonprofit organisationswhich generate their resources by selling of goods or services to clients. Further, thisapproach has a distinctive appeal for donative nonprofit organisations which areexclusively dependent upon philanthropy and donations. Now donations make senseonly if the donor is assured of the fact that funds will be properly utilized forachieving the purposelgoal envisaged by the donor. For instance, if the for-profitorganisation receives donations, it will naturally be tempted to appropriate it asprofit . O n the other hand, nonprofit organisation w ill be legally bound to utilize all

donations for the declared goals/purposes of the organisation. In the case ofphi lanthropy and donat ions, contrac t fa i lure approach considers nonprof itorganisations as a response to the trustworthy relationship between principal andagent principal being the donor and agen t being the entity entrusted to ma nage thefunds.Nonprofit organisations can correct a typical market failure, which results from theconsum ers inability to exercise control over for-profit business firms . Sin ce nonprofitorganisations are managed and controlled by m embers and patrons, the cl ~ en ts reassured of a sufficiently high quality of goods or services. However, in case wherethe priority is to minimize prices paid by clients, nonprofit organisations acquireresemblance to economic functions of cooperatives. On the other hand, the majorobjective regarding maintenance of high quality of products is achieved through theestablishment of mutual nonprofit organisations.The n ain criticisms of this approach are that the managers of nonprofit organisstionscan invent other nlechanisms to dishonestly appropriate arbitrarilyraising their salanes perks 2nd s o on. Further, clients generally are not aware whethera pmicular is nonprofit or for-profit organisation Lasly, to greater extent, i t

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Voluntarism tateand is quite apparent that people make donations to nonprofit organisations rather than forSociety profit business firms, however, contract failure theory does not explain why individualsat all want to make donations.4 4 2 Sociological ApproachesUnlike rational-choice models inherent in econom ic approaches, sociological approachesgive an entirely different treatment to notions of 'trust' and 'rationality' while analyzingthe existence of nonprofit organisations. In the following, we will acquaint you withessential aspects of the analysis of sociological approaches furnished by Helmut K.Anheier and Jeremy Kendall 2000). This analysis examines the implications ofsoc io logi~a lmeaning s and interpretations of 'rationality' and 'trus t' in the context ofnonprofit organisations.Sociological approach es lay considerable emphasis on an individual's ability to placeunequivocal trust in the motivation and behaviour of other fellow individuals insociety. It is argued that there is always pre-rational and pre-existing trust which liesat the root of all contracts. Intrinsic to every contact are a number of tacit argumentswhich are generally not concretized or given formal shape in routine contractualdescriptions. Such unstated argumqnts are usually assumed, understood and adheredto in contractual transactions by individuals. Hence a sociological understanding oftrust has an essence of presumed reliability, which is entirely different from'rationalistic' or 'risky' conceptions of trust inherent in rational-choice models, ofeconom ic approaches to nonprofit organisations. In econ omic models the conceptionof rationality is merely a subjective probability calculation in situations of uncertainty.The consumers simply try to make assessment whether or not suppliers will honourcontractual com mitm ent and deliver goods according to their expectations. Accordingto these authors (Anheier and Kendall. op. cit) In a sociological perspective, this kindof instrumental calculation is misleading since it devalues 'trust' to simply an exerciseof 'risk-assessment', thus missing the real imp ort of trust. In support they cite AnthonyGiddens (199 0) that ultimately all trust is in a certain se nse blind trust .Th is sociological interpretation has sign ificant implications for the understanding o ftrust and nonprofit organisations. The evolution of trust does not take place throughmutually benefit interactions mediated by market place. Rather, trust is seen asrooted in normative social structure. This social distinctiveness from the market isthe crucial dimension which facilitates the growth of trust. In fact, it is the absenceof market logic that permits the real evolution and strengthening of trust. Making aperceptive assessment and indepth analysis of a vast corpus of literature, Anheier andKendall, build the argument as follows:Trust is seen as a taken for granted assumption which determines social relations andtransactions among individuals. Trust and voluntary action are essential attributes ofnonprofit sector as interest and profit seeking are vital for business organisations.A cc or d~ ng o economic theory, nonprofi t organisations usually function in anenvironm ent influenced by extraneous considerations and information imb alances. Insuch a situation, pre-existing truqt may give preference to particular kind of providersof goods and s en ice s. Nonprotjt organisations turn out to be trustworthy intermediariesfavourably positioned between \upply and demand. For instance, many nonprofitorganisations are dependent upon religious philanthropy and chari t ies. Suchorganisations have an advantageous position to draw on resources of pre-existingtrust, which is usually not questioned in various transactions. Since trust becomesslmply a taken-for-granted expectation and eliminates the calculation of risk. Potentialclients consider such religions organibations as a priori trustworthy. A simultaneouscritical dimension associated with this kind of unequivocal trustworthiness is th tsuch nonprofit organisations are also highly fragile. Trust once violated cannot beeasilyrestored. Even modest\riolations may rewlt in far-reaching and unim.gnabie

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such nonprofit organisations. Another implication is that such highly Philosophy and ature ofonprofit Organisations

related to different kinds of trust:

Characteristic based trust is associated with a person depending upon suchattributes as background, and ethnicity.Process based trust is linked to past or present exchanges as evident in reputationor gift-exchanges.Institutionally based trust is based on institutional arrangements such ascertificates, form characteristics, and legal constraints.

economic behaviour was subjectedn extensive system of formal and informal sanctions. The system promoted and

characteristic based trust created through family, kin or friends).

cutting across ascriptive categories) generally display attributes of

ial parameters which determine its priorities, activities,

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Voluntarism State andSociety Check Your Progress I11

Note: a) Use the space given below for your answers.b) Check your answer with the model answer given at the end of this

Unit.1) The following statements have been based on the text that you have already

read. Indicate whether these statements are true or false by putting tick-mark 4 in the relevant box.True False

a) Weisbrod s approach to nonprofit organisations is based on the conceptof state and failure . [ 1 1 1

b) Weisbrod argued that a government usually strives to satisfy the demandfor public goods and services of the median voter . [ [ ]

c) According to Weisbrod, state failure does not evoke any response inthe private sector for the production of goods and services. [ ] [

d) Hansmann s economic approach is based, on the theoretical tenet ofcontract failure . [ I 1 1

e) Hansmann considered consumers are usually able to police the producersregarding the quantitylquality of goods and services supplied to them.

[ 1 [ 1f Since nonprofit organisations are not motivated by such incentive as

profit , they are considered more trustworthy than for-profit businessfirms. [ [ I

g) Unlike economic approaches, sociological approaches to nonprofitorganisations give an entirely different treatment to notions of trustand rationality . [ [ ]

h) According to sociological approaches, trust is not mediated by a marketplace, rather it is embedded in the normative social structure of society.

[ 1 [ 12) Describe the three types of trust considered in sociological approaches to

nonprofit organisations.(Hint see the text)

..........................................................................................................................

4 5 NONPROFIT ORG NIS TIONS ND THEM RKET

The functioning and performance s f nonprofit organisations is, to a greater extent,determined by the dynamics of market structure. On the surface, it appears thatnonprofit organisations are autonomous and functioning independent of market forces.They have a unique position in terms of legal status, taxation structure, sources of

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Philosophy and ature ofby the broader process of capital formation in the market onprofit Organisations

(1987) has furnished an indepth analysis of the functioning

Steinberg, a review of literature reveals that behaviour and performance

money since they wish to enhance the prospects of their

Regulatory Environment

are granted exemption from corporate income tax;receive tax deductible donations;are often exempted from local property and sales taxes;are subjected to differing standards of antitrust regulation;receive special consideration regarding social security, unemployment insurance,minimum wages and so on.

Financial Resources

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Voluntarism State and finances through gifts, dues, membership fees as well as sales of goods and services.Society Donations and charitable contributions are generally not made to for-profit businessconcerns because donors suspect their donations may be rnisutilised for increasingstockholder dividends. Sin ce nonprofit organisations a re subjected to 'nondistributiveconstraint', donors feel assured that their money will be utilized for promotingcharitable goals and purposes. The practice of raising financial resources throughdues, membershiplaffiliation fees adopted by nonprofit organisations is not analogousto the financial structure of for-profit sector.

significant difference between nonprofit organisations and for-profit sector is intheir potential to obtain financial capital. Nonprofit organisations can not have assessto equity cap ital because of the 'nondistributive constraint'. How ever, to some ex tent,they can obtain resources through debt financing. Since donations are not a verymuch certain and ad equate source of capital, nonprofit organisations are left with theonly option of retaininglreinvesting earnings for capital growth. Exemption fromcorporate income tax leads to further faster growth, since it allows nonprofitorganisations to retain and reinvest more earnings. Hence, both external constraintson borrowing and internal subsidization through tax exemption, act favourably toretain earnings and strengthening the capital structure of f on profit organisations.Regular banks are generally reluctant to lend initial capital to nonprofit organisations.However, they are able to obtain financial facilitylservices through grants fromfoundation s. Such grants generally m ake available long-term cap ital rather than initialfunds to nonprofit organisations. Furthermore, foun dations normally give seed moneyto new nonprofit organisations and also to new innovative programmes initiated bythe already existing nonprofit organisations.4.5.3 Labour-MarketThere are marked differences in terms of source and condition of labour between for-prof and nonprofit organisations. Firstly, a potential source of labour for nonprofitorganisations is voluntary labour, which is an unheard of practice in for-profitorganisations. Secondly, in case of paid labour, wage structures differ substantiallyfor comparable jobs in for-profit and nonprofit organisations. Thirdly, the consequencesof labour unions differ significantly for nonprofit and for-profit organisations.Generally, it appears that voluntary labour remains uncompensated and incurs nocosts to a nonprofit organisation. H owever, there are four main incentives and personalbenefits to volunteersi) pleasure and personal satisfaction drawn from the act of giving to community;ii) prestige attached to certain kinds of noble and good work in society;iii personal influence exercised over the functioning and distribution of charitablegoods and services;iv) acquiring of skills and knowledge which helps voluntary labour in futureemployment.Literature suggests that many a times donors working as voIuntary labour gatherinformation about the quality and efficiency of competing nonprofit organisationsbefore comrniting, their funds to a particular organ isation. Further, voluntary labourserves as role-model and motivates other individuals to contribute time, labour andmoney to services valued by society. In this sense, unpaid voluntary labour seems tobe compensated but not by direct payments from the nonprofit organisation.~ t e i r i b e r ~op. cit) argued, that voluntary labour is not a free resource available tononprofit organisations. Voluntary labour blocks the upward mobility of paid workershence redu cing their motivation and productivity. Moreover, a nonprofit organisation

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Philosophy and ature ofOrganisations

for-

FUTURE PROSPECTS OF NONPROFITORG NIS TIONS

Carlo Borgaza and

a hlgh degree of trust ,

organisations (including their management) still have a very Limited knowledge

fit organisations is to acquire isomorphc characteristics,

to convert into associated workers companies. The sole objective becomes to

redistribution character , hence making the future direction of nonprofit

9

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Voluntarism State and Social and labour public policies are still to a large extent incoherent in modemociety societies. The retreat of welfare state meant discontinuation of public provision ofsocial and community care services. The new state policies effected a separation offinancial responsibility from service provision. However, new policies have not yetput in place comprehensive contractual relationships and funding rules along with thegrowing requirements of nonprofit organisations. Old financing methods have becomeincreasingly irrelevant while contracting out rules (to nonprofit organisations) havenot yet crystallized. In this scenario of unclear mix of subsidies and uncertaincontracting rules (in the post-welfare state era) the future of nonprofit organisationsis riddled with uncertainties. Furthermore, hard contracting out practices usuallyignore the specific characteristics or local advantages of nonprofit organisations.Consequently, nonprofit organisations are operating in uncertain and insecureenvironments. Their functioning is substantially influenced by short-term contracts atthe cost of their own long-term planning and development.The legal structures suitable for the functioning of nonprofit organisations are stillinadequate in modern societies. Mostly, legal frameworks have been designed tofavour the existence of company forms. Legal provisions conducive to the growthof entrepreneurial nonprofit organisations have not yet been put in place by modemstates. The situation limits the scope of reproducing social enterprises. State policiesshould give full legal recognition to nonprofit organisations. The aim of such statepolicies should bei) to consolidate the most innovative nonprofit organizational solutions;ii) to promote the replication process of successful nonprofit organisations;iii) to encourage the spread of new nonprofit organisations;iv) to create legal structures for the protection of consumers rights; andV) to create conditions as to avoid isomorphism among nonprofit organisations.State policy should consist of well defined contracting out strategies. Such a policyshould recognize the specificities of nonprofit organisations and their redistributivepotential of goods and services. Nonprofit organisations are dependent upon a peculiarmix of resources and usually have a local dimension. Contracting out strategiesshould preserve these features and strengthen the already existing trust and communityrelationships with nonprofit organisations. Efforts should also be made to create suchconditions of trust where they do not exist. Competition is vital for efficiency, butcontracting-out strategies should not eliminate already functioning non-profitorganisations in the name of competition. Contracting out strategies should ensurecontinuity and development of already existing network relations which generatetrust and social capital. Local dimension must be incorporated in contracting outprocedures so as to minimize adverse effects of competition on community careservices.The evolution of nonprofit organisations as well as state social policies is far fromcomplete in modem societies. Nonprofit organisations are still searching for nautonomous space not only among social organisations but also in the entrepreneurialsector. However, social ethos of modern cieties and dynamics of contemporaryeconomic structures are not yet prepared to face this challenge. Regarding socialpolicy, modern states are making different attempts to evolve new strategies. Literaturesuggests none of such attempts is well defined and universally accepted. To a greaterextent, it can be said with certainty that nonprofit organisations will play a major rolein future in modern democratic societies. However, their future, form, characteristicsand contributions are subject .to the evolution of state policies and the dynamics ofpluralistic welfare system.

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Note: a) Use the space given below for your answers.Check Your Progress V

b) Check your answer with the model answer given at the end,-of thisUnit.

Philosophy and Nature ofNonprofit Organisations

1) The following statements have been based on the text that you have alreadyread. Indicate whether these statements are true or false by putting tick-mark 4 in the relevant box.

True Falsea) Nonprofit organisations have a unique position in terms of legal status,taxation structure, sources of finance and other features. [ ] [ ]b) The overall performance of nonprofit organisation is not influenced by

broader processes of capital formation in a market-situation. [ ] ]c) The behaviour and performance of nonprofit organisations cannot beadequately analysed by looking at their functioning in isolation.

[ I l ld) ~ a r k e ttructure determines the overall performance of nonprofit and

for-profit sectors. [ [ ]e) Non-profit, for-profit and public sectors compete in different markets

and are governed by same rules and regulations. [ I [ ]f) Nonprofit organisations receive tax deductible donations. [ ] [g) significant difference between nonprofit organisations and for-profit

sector is in their potential to obtain financial capital. [ I [ ]h) There are marked differences in terms of source and condition of labour

between for-profit and nonprofit organisation. [ I [ ]2 Explain briefly the four incentives and personal benefits enjoyed by voluntary

labour in nonprofit organisations.(Hint see the text)

I

LET US SUM UPa radical transformation in the post-welfare state era. The functioning

have explained that philosophical roots of nonprofit organisations lie beyond the

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Vuluntarism tate and structure. We have noted that a formal organisation, independence from state, self-Society governing, non-distribution of profit and voluntarism are the key attributes of a nonprofitorganisations. At this stage, we have also attempted a broad definition of a nonprofitorganisation.After that, we have depicted the transformation of nonprofit organisations in relationto the crisis of the welfare state. The space vacated by welfare state has to a greatextent, been occupied by nonprofit sector in meeting the demand of goods andservices in society. You have learned that this process effected a significanttransformation in the nature and character of nonprofit organisations. We havedescribed in detail the main characteristics of contemporary nonprofit organisations.Next, we have deliberated on the crucial issues involved in the theoretical approachesto nonprofit organisations. We have discussed the economic approaches andsociological approaches whlch are vital to the understanding of the existence andfunctioning of nonprofit organisations in market economy of a modem society. Wehave dascribed Weisbrod s approach of state failure and Hansmann s approach ofcontract failure since these are the landmark theoretical formulations in the

understanding of the economic characteristics of nonprofit organisations.Further, we have discussed salient aspects of important relationships between marketand nonprofit organisations. We have explained the nature and significance of aregulatory environment, sources and character of financial resources and relevanceof labour market in the functioning of nonprofit organisations. In the end, we haveanalysed the future prospects of nonprofit organisations in modem societies. Youhave learned that nonprofit organisations are evolving and still searching anautonomous space vis-h-vis state and market. Nonprofit organisations will continueto play a major role in modem democratic societies.4 8 SUGGESTED READINGS AND REFERENCESBen-Ner. Avner, Nonprofit.organisations Why do they exist in market economies?

in Susan Rose-Ackerman (ed.) Economies o Nonprofit organisations Oxford: ,Oxford University Press, 1986.

Carlo Borgaze and Alceste Santuari, The Innovative Trends in the Nonprofit Sectorin Europe The Emergence of Social Entrepreneurship, Conference Paper,OECDILeed Forum on Social Innovations, International Seminar on The Roleof the Nonprofit Sector in Local Development : New Trends; WashingtonOrganisation for Economic Cooperation and Development, 11 12 Sept., 2000.

Giddens, Anthony, The Consequence of Modernity Standford California : StanfordUniversity Press, 1990.

Hansmann H., Economic Theories of Nonprofit Organisations in Walter, W. Powell,(ed.), The Nonprofit Sector 1987

Helmut K. Anheier and Kendal, Jeremy, Trust and Voluntary Organisaitons: ThreeThdoretical Approaches, Civil Society Working Paper 5, Feb. 2000.

Kendal, Jeremy, and Martin Knapp, Defining the nonprofit sector The UnitedKingdom , Working Papers of the Johns Hopkins Comparative Nonprofit Sector,Project No. 5 (ed. By Lester M. Salamon and Helnlut K. Anheier. Baltimore:The John Hopluns Institute of Policy Studies, 1993.

Peter Dobkin Hall A Historical view of the private nonprofit sector , in Walter, W.Powell, (ed.), The Nonpro@t Sector 1987

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Walter, W. (ed.), The Nonprofit Sector Research Handbook New Philosophy and Nature ofHaven : Yale Universitiy Press, 1987. Nonprofit Organisations

rg, Richard, Nonprofit Organisations and the Market in Walter, W. Powell,(ed.), The Nonproft Sectoc 1987.

: The Social Value Approach,First European Conference of EMES and ISTR, Paris, France, 2005.

B, Towards a Theory of the Voluntary Nonprofit Sector in a Three-SectorEconomy in Weisbrod (ed.). The Voluntary Nonprofit Sector Lexington, M A :DC Health, 1977.

B, The Nonprofit Economy Cambridge, M A : Harvard University Press,1988.

9 MODEL ANSWERSheck Your Progress I

a True b) True C True d) False e) Falsef True g False h True

heck Your Progress I1 a) True b) True c) False d) True e) False

f True g False h) Trueheck Your Progress I

1) a) True b) True c) False d) True e) Falsef True E) l-he h) True

heck Your Progress IVa) True b) False c) True d) True e) Falsef True g True h True