Economics and the Nonprofit Sector - Essay Example

Economics and the Nonprofit Sector Essay Introduction At the core of economic theory is a conceptual explanation of rational decision. Very rational actors (e.g. individuals, families, companies, consumers) function in a very rational environment (e.g. ideally well-organized markets) buying and selling very rational items (e.g. totally private products). Every actor attempts at maximizing an indicator called ‘utility function’, whose worth lies in the catalogue of items or products owned by such actor (Kuratko, 2008). In the neoclassical economic model, rationality means a definite constancy of decision or choice. However, it has been argued that individuals’ economic behavior is not only influenced by rationality, but by culture and society (e.g. religion, language, family) as well (Borzaga & Tortia, 2006). Using the nonprofit sector and, more specifically, charitable activities, this essay tries to prove that people are not always rational in their economic choices. Since the 1950s, there have been attempts to widen the relevancy of the model to cover social, cultural, and political decision. Nevertheless, the core ‘economic man’ theory is undependable or irrelevant in the perspective of public goods (Borzaga & Tortia, 2006). The array of ideas about social choice that have developed from the economic model is surprising. A big portion of the most controversial work on ‘non-rational’ choice has been made by economists; and additional works have made by others who deal with the issue of social and cultural choice from an economic point of view. The Influence of Culture and Society on Economic Behavior Cultural and social factors are theoretically indefinable concepts. Numerous economists overlook cultural and social factors in their theories due to the belief that the concepts are very vague. But economic theories that omit social and cultural factors cannot completely explain the pattern or phenomenon that they try to understand. This has pushed numerous economists to hesitantly recognize cultural and social factors as a ‘residual element’ in their theories (Casson & Godley, 2000, 1). The residual function of cultural and social factors has been especially vital in the study of economic development. The behavior of the ‘economic man’ or the rational economic actor is clarified by the purpose s/he has and the limitations s/he believes on the ways s/he can fulfill such objective. The goal could be in connection with the actor’s lifestyle or living standards, the status of his/her family, or his/her idea of the public good. Economic thinkers characterize the goal in relation to a utility function that the actor capitalizes on. Numerous economic thinkers believe that actor’s goals are materialistic and self-centered; this implies that only measurable attributes of the actor’s consumption behavior go into his/her utility function. When exploring cultural and social factors from an economic point of view it is essential to take a broader perspective of human motivation (Tierney, 2012). It is vital to acknowledge that a rational actor who has a sense of right and wrong will prefer their goal to be legitimate. Values endow goals or objectives with acceptability or legitimacy. Thus different values will motivate actors to fulfill different goals, and thus to behave differently (Casson & Godley, 2000). If there were no limitations on utility maximization then all rational individuals would experience unconditional pleasure and happiness. It is the present of limitations that makes rational decision a utilitarian concern. Limitations reveal the shortage of resources. Nevertheless, it is not the limitations themselves, but how the actor sees them, that influence how the actor acts, decides, or behaves (Casson & Godley, 2000). The idea that an actor is rational does not imply that they have full knowledge or information about the circumstances they confront. They could be unclear about major facts. Actors will consult theory in order to deal with missing information. Theory proposes what the proofs would say if it were present. Nevertheless, there could be a number of theories about the way the environment works, each of which offers a different explanation of the existing proofs. Actors who resort to various theories will bridge the discrepancy brought about by missing information in their own ways. This will give them perceptions of various limitations, and thus they act or decide in their own ways. Hence individuals in a similar situation, and with similar data, could behave in a different way because their theoretical outlook pushes them to view the existing evidence in their own ways (Borzaga & Tortia, 2006). It implies that rational behavior is dependent not just on values, but on beliefs too. Most economic thinkers accept the influence of altruism in rational decision. In fact, recently, attempts to integrate altruistic tendencies within the traditional model have become quite widely known. Nevertheless, this does not mean that any major attempt has been initiated to incorporate discussion of altruism in the core aspect of economic theory (Tierney, 2012). The agents in economic theory are ‘essentially’ self-centered merely in the practical sense that they pursue the maximization of their own preferences. However, if the concern is private goods, it will largely be reasonable to avoid the issue of ‘motivation’ (Frijters, 2013). Yet so long as the concern is market stability for private goods, it is possible to make the analysis simpler by disregarding any particular preference some people have for helping others. Nonprofit Sector and Charitable Activities Nonprofit organizations offer goods and services that governmental agencies do not offer, and that privately run organizations do not sufficiently, or are incapable of, providing. Numerous nonprofit groups carry out essential tasks, like taking care of homeless people or advocating social justice. The nonprofit sector may not be “organized or operated for the benefit of private interests” (Tierney, 2012, 20). Obviously economic behavior, specifically entrepreneurial ones, is present in all sectors. But the nonprofit sector goes beyond entirely market-oriented situations. The nonprofit economic behavior is also identified within the market, but the purposes are distinct from those of for-profit economic actors. Schumpeter has introduced an image of entrepreneurial behavior which is rooted in other goals than what is observed often in ordinary business entrepreneurship (Anheier & Ben-Ner, 2003). Schumpeter has placed emphasis on the non-hedonistic form of economic choice, which in reality implies that entrepreneurs are not just influenced or driven by profit or rational goals. This argument is in line with the wide array of ‘organizational rationales’ (Anheier & Ben-Ner, 2003, 150) identified in the political science and sociological works on the nonprofit sector. Works on economic theories of nonprofit organizations offer a number of cases for entrepreneurial objectives in the nonprofit sector which are different from absolute maximization of profit. Earlier cases have been examined by Estelle James in her different works on cultural diversity and religious beliefs as major bases of nonprofit economic behavior. An excellent example has been demonstrated for preschools in Austria (Desai & Snavely, 2012). These preschools did not use possible cost benefits by having afternoon classes, because these classes would conflict with the traditional belief that children must be with their mothers for the rest of the day. If such behavior is considered ‘entrepreneurial behavior’ there is in fact substantial support for theories of entrepreneurship (Fayolle, 2008, 132). Many studies claim that individuals are not wholly philanthropic or selfless when giving. Individuals appear to obtain more values or advantages from being charitable than from the values that their charities give to other people. Nevertheless, the characteristics of such values are not conclusive. Donors may be concerned about the overall sum of goods or services that donations generate, or donors may gain pleasure from the sheer act of being charitable (Powell & Steinberg, 2006). They may also be interested in the prestige or recognition they get from the public for their charitable act. According to the ‘perfect altruism’ model, donors are interested mainly in charities obtaining an overall sum of money, irrespective of the origins (Frijters, 2013, 59-60). Andreoni and colleagues have developed other explanations for the reasons individuals give donations. Among such explanations is the ‘warm glow’ hypothesis, which claims that donors obtain an inner gratification from being charitable, even though their donations could be completely unknown or unrecognized (Frijters, 2013, 60). In this theory, contributors see the donations of others as inadequate extras to their own donations. Hence they would want that donations come from them instead of from other people. Another theory was introduced by economic thinkers Kai Konrad and Amihai Glazer (Powell & Steinberg, 2006, 578). They report that findings indicate that donors donate, at least in part, to show affluence and not only because they acquire inner gratification. Fondness toward such recognition or prestige suggests that nonprofit organizations can raise donations by publicly recognizing or exposing gifts or contributions. Even though a number of demographic attributes have been discovered helpful in determining charitable behavior, income is thus far the major determinant of charitable act, as stated by economic thinkers Arthur Brooks and Robert McClelland (Kuratko, 2008, 525). Charitable behavior in relation to income has a U-shaped form—those in the upper and lower socioeconomic strata allocate bigger portions of their earnings to charity than those in the middle stratum. A possible reason for this is that those in the lower stratum have a tendency to donate more to religious groups, whereas individuals in the upper stratum simply have greater disposable earnings. Brooks and McClelland discovered that this U-shaped trend continues even when taking into consideration other factors related to income (Kuratko, 2008, 525-6). This connection to income suggests that the nonprofit sector will keep on flourishing as the economy grows and progresses. Individuals usually freely offer time to nonprofit operations. Andreoni says that if individuals were totally selfless, there would be less giving. Unpaid work means an opportunity cost, as an individual could work and be compensated somewhere else and instead donate a portion of those earnings to charitable activities (Frijters, 2013). Nonprofit organizations appraise volunteer work at the market wage rates they would have to afford to recruit paid work. Apparently, the volunteers’ opportunity cost is greater that this attributed salary because individuals only offer unpaid work to those for which they are overly eligible (Frijters, 2013). If individuals were totally selfless and interested in the overall sum of their financial donations in addition to the attributed compensation for their time, they would favor working somewhere else for compensation and give a portion of it to charitable acts. This assumption is not confirmed by empirical findings. Individuals do freely offer their time to charities (Tierney, 2012). Hence, Andreoni argues, it is logical to view volunteering as having a certain extent of self-sustaining ‘warm glow’ element too (Frijters, 2013). Even though some individuals may be selfless when giving charities, economics argues that the governing motivation or purpose is the inner gratification that people get from being charitable. They obtain utility from being charitable much in a similar way they acquire gratification from eating out or purchasing new items; particularly when the number of contributors is huge, the social perspective of the charitable behavior of other people is outshined by the gratification of one’s own charitable act when taking into consideration how much to donate (Tierney, 2012). Sympathy, justice, and love organize societies, distribute goods and services, and motivate individuals. Families, the basic unit of society and affection, create and nurture children, hence generating most of growth and accretion. Markets and transactions depend on conformity to guidelines, rules, and rights, a great deal of which is natural or unstructured (Frijters, 2013). Sympathy mitigates sufferings and hardships communally through the help of public assistance, and individually by means of nonprofit organizations or private charity. Political decisions and voting are largely driven by ideas of the common good, justice, and public welfare, and they dictate the high tax rates (Desai & Snavely, 2012). Every organization needs some shared trust and assistance among its people. A number of nonprofit organizations are formed with the only objective of cooperating with one another or taking pleasure from the company of each other. Social life calls for respect of the rights of others, fundamental justice, and willingness to give or help. The pursuit of self-interest is generally a way to provide for the family, gain the respect of other people, and at times advocate causes or give to other people. Devoid of the needed concerns or compassion for other people, self-centered exchanges would bring about hardships, unproductivity, and conflict (Desai & Snavely, 2012). As argued by Andre Gide, if “you cannot make good literature with good sentiments, you can hardly make good economics with only poor ones” (Kolm & Ythier, 2006, 5). As stated by Marcel Mauss, respect, charity, or altruism are “human rocks on which societies are built” (Kolm & Ythier, 2006, 5). This involves the human economy. The most valuable outcome of the nonprofit sector or, altruism, in general, is perhaps the respect of others. This facilitates social freedom, order, peace, and the overall welfare of society. Such respect is specifically a requirement of a well-organized, efficient market structure. Furthermore, additional reciprocities and values create the natural rectification of different market weaknesses and of the same possible defects of organizations (Kuratko, 2008). Families are composed of a widely known array of emotions, sentiments, and behaviors at issue. The economic impact of family-driven education and inheritance are quite essential. Ultimately, altruistic assistance for mitigating hardships results in charity and the formation of the nonprofit sector, which is vital in a number of societies (Powell & Steinberg, 2006). One of the most frequently cited observations with regard to non-economic choice or behavior, as manifested by charitable and nonprofit organizations, was given by Adam Smith (Kolm & Ythier, 2006, 7-8): How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it. Of this kind is pity or compassion, the emotion which we feel for the misery of others, when we either see it, or are made to conceive it in a very lively manner. That we often derive sorrow from the sorrow of others, is a matter of fact too obvious to require any instances to prove it; for this sentiment, like all the other original passions of human nature, is by no means confined to the virtuous and humane, though they perhaps may feel it with the most exquisite sensibility. The greatest ruffian, the most hardened violator of the laws of society, is not altogether without it. The primary value of the nonprofit sector, reciprocity, charity, and altruism, is that they comprise fundamental realities of societies, which unite or consolidate them, are core features of them, build some of their major attributes, and affect all other factors. They seem on the whole sociality and the common respect of others and their civil liberties, in communities, in families, in charitable activities, and in public and political decision making (Frijters, 2013). They are essentially and at times significantly informed by their economic understanding, and they are important in the functioning and outcome of the economy. Even in view of the shallowest form—statistics or numbers—the nonprofit sector allocates roughly 5 percent of GNP in the United Sates (Kolm & Ythier, 2006, 8). Nevertheless, this collective charity or aid to the poor is a public good and people will witness the call of morality, democracy, and productivity for its actualization through public allocations or transfer. Furthermore, donations to children in schools and gifts comprise roughly 80 percent of savings, and thus of growth, technical advancement, capital buildup, and investment (Kolm & Ythier, 2006, 8). Discussion and Conclusion Basically, economic behavior and economic choice is not only influenced by rationality, as what neoclassical economists claim, but also by cultural, social, personal, and psychological factors. The economic decision of an individual or, for instance, the decision to buy a certain item, is strongly affected by psychological, personal, social, and cultural attributes. Cultural factors involve the social class, subculture, and cultural ideals of an individual. These traits are usually intrinsic in an individual’s decision-making tendencies and value systems. Social factors involve status, roles, and family. This sheds light on the external influences on individuals’ economic choices. Personal factors involve self-image, personality, way of life, economic conditions, occupation, age, and gender. And lastly, psychological factors involve attitudes, beliefs, and motivation. All of the abovementioned factors strongly influence economic choices and behavior. Therefore, it is safe to assume that the neoclassical model of the ‘economic man’ is limited in scope and applicability. As shown in the case of the nonprofit sector, some people choose to donate, not out of rationality, but of compassion, altruism, and love. These so-called ‘soft’ human attributes are not included in the neoclassical view of economic choices. The nonprofit sector demonstrates how socioeconomic factors, like social and cultural aspects, encourage an individual to take part in charitable work. However, there are suggestions that these altruistic economic behaviors can still be explained through the lens of the neoclassical theory. Whatever the case may be, it is clear that individuals do not always use their rationality in making economic decisions. References Anheier, H. & Ben-Ner, A. (2003). The Study of Nonprofit Enterprise: Theories and Approaches. New York: Springer. Borzaga, C. & Tortia, E. (2006). Worker Motivations, Job Satisfaction, and Loyalty in Public and Nonprofit Social Services. Nonprofit and Voluntary Sector Quarterly, 35(2), 225-248. Casson, M. & Godley, A. (2000). Cultural Factors in Economic Growth. New York: Springer. Desai, U. & Snavely, K. (2012). Three Faces of the State and the Nonprofit Sector. Administration & Society, 44(8), 962-984. Frijters, P. (2013). An Economic Theory of Greed, Love, Groups, and Networks. Cambridge, UK: Cambridge University Press. Kolm, S. & Ythier, J. (2006). Handbook of the Economics of Giving, Altruism and Reciprocity: Foundations. New York: Elsevier. Kuratko, D. (2008). Entrepreneurship: Theory, Process, and Practice. Mason, OH: Cengage Learning. Powell, W. & Steinberg, R. (2006). The Nonprofit Sector: A Research Handbook. UK: Yale University Press. Tierney, W. (2012). Governance and the Public Good. New York: SUNY Press. Read More