What Capitalism Can't Fix - Phil Buchanan - Harvard Business Review

by Phil Buchanan??|?? 9:00 AM January 23, 2013

Increasingly, I see people looking starry-eyed to business and markets to solve social problems. In so doing, they run the risk of dismissing the impact of nonprofits ? and diminishing the value of organizations that seek to make a difference without creating the potential conflicts that come with the profit motive. My view is that pretending companies and markets hold all the answers actually puts at risk our ability to deal with our most pressing societal problems ? and to help our most vulnerable citizens.

The rhetoric is everywhere ? from the trade press to the mainstream media to business school faculty to corporate titans to Silicon Valley entrepreneurs. Former GE CEO Jack Welch, writing in Business Week, characterized the nonprofit sector as a "foreign land" in which performance is not a priority and employees are guaranteed "lifetime employment." Alexis Ohanian, co-founder of Reddit, wrote last year on the Wired web site, "Let's be real: The nonprofit model is broken. The 20th-century way of "guilting" people into giving to an opaque, inefficient organization with massive overhead is no longer a viable model." In a recent blog post here on HBR.org, Dan Pallotta suggests that nonprofits should use the tools of capitalism such as high pay and providing returns to investors to increase charitable giving.

The rush to disparage nonprofits and the stampede to embrace the idea that for-profits ? or for-profit models ? can more easily combat our toughest social problems deny reality. Many crucial objectives simply cannot be accomplished while generating a financial return. Other objectives can but there is a price to be paid. In health care, for example, research indicates a decline in quality when non-profit hospitals switched to become profit making, as Eduardo Porter explained this month in the New York Times.

The laudable push for companies to commit more energy to dealing with social problems should not obscure the need for strong independent nonprofits that focus on mission not profit. And while nonprofits can learn from companies and companies can learn from nonprofits, it is a mistake to deny differences.

After all, there is a crucial distinction between an institution that reinvests surpluses in its mission and one that faces unrelenting pressure to distribute profit to shareholders. Consider higher education in the United States. Nonprofit universities frequently offer an education that costs more than actual tuition ? the difference made up through charitable gifts and endowment returns ? while for-profit institutions must cover their costs with tuition and create a profit margin. The results ? and the evidence from lawsuits, media reports, and congressional and GAO investigations of for-profit universities ? speak for themselves.

Despite this and many other cautionary tales, an increasing number of people both inside and outside the nonprofit world seem drunk on the Kool-Aid of business superiority. Too often people equate "business thinking" with effectiveness. Even those inside the world of nonprofits and philanthropy have internalized the idea that operating "like a business" means operating effectively (never asking which business: Countrywide Financial? BP? Enron?).

The stereotypes of nonprofits are just that: stereotypes. There are, of course, numerous examples of nonprofit influence and impact ? from work on environmental issues to citizens' rights to reductions in tobacco use to reductions in worldwide child mortality ? but also lesser known examples. Take the work of the Institute for Healthcare Improvement, a nonprofit whose 18-month campaign to reduce hospital mortality rates has saved an estimated 122,300 lives by inspiring and guiding hospital executives, physicians, and nurses to adopt six basic patient-safety practices. As Peter Fader, a University of Pennsylvania professor and director of the Wharton Customer Analytics Initiative, has observed: Nonprofits often excel at using "their data to better understand their 'customer base.' In this area, big companies with lots of resources really can learn from their cash-strapped nonprofit cousins."

The point is this: No type of organization ? government, business, or nonprofit ? has a monopoly on effectiveness. And nonprofits are typically tackling the most complex problems of all. If those problems could have easily been solved by government or business, they wouldn't exist at all.

I'm a huge believer in free-market capitalism. I have an M.B.A. and have worked as a corporate consultant. But I think we're better off being sober about what markets can and cannot accomplish.

I'd suggest three practical questions to ask in sorting through how to achieve important social goals.

• Does the pursuit of profit conflict with or facilitate the achievement of your goal? How likely are profit and social impact to be in tension? How will that tension be managed or resolved?
• What kind of choices and information do people have? Markets work best when people have choices and when there is good information, so ask, do those conditions apply? Are you looking at an opportunity ? like creating products or technologies that will help poor people in some aspect of their lives ? that lends itself to a free-market solution? Or are you looking at something, like the management of a prison or nursing home system for a state, where a provider is likely to have a virtual monopoly ? meaning management is free to prioritize profit over the social mission without paying any kind of price?
• Finally, are you addressing an issue that actually results from market failure, such as, environmental degradation? If you don't understand capitalism's role in contributing to a problem, you probably won't be able to rely on capitalism to chart a path to the solution.

Then decide what makes most sense, and don't assume that a pure nonprofit isn't the way to go.

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Source: http://blogs.hbr.org/cs/2013/01/what_capitalism_cant_fix.html

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