Toward a holistic nonprofit economics: insights from ...

Toward a holistic nonprofit economics: insights from institutionalism and systems theory Vladislav Valentinov

Journal of Bioeconomics ISSN 1387-6996 Volume 14 Number 1 J Bioecon (2012) 14:77-89 DOI 10.1007/s10818-011-9108-y

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Author's personal copy J Bioecon (2012) 14:77–89 DOI 10.1007/s10818-011-9108-y

Toward a holistic nonprofit economics: insights from institutionalism and systems theory Vladislav Valentinov

Published online: 26 May 2011 © Springer Science+Business Media, LLC. 2011

Abstract The main thrust of the current nonprofit economics literature is that nonprofit organizations exist to correct market failures. However, the methodological individualism of the market failure theories of nonprofit organizations makes these theories unable to take account of the complex institutional embeddedness of the nonprofit sector. To fill this gap, the present paper outlines an approach of holistic nonprofit economics by building upon the insights from Thorstein Veblen’s institutionalism and Ervin Laszlo’s contribution to the general systems theory. From the Veblenian dichotomy, holistic nonprofit economics benefits by recognizing the limitations of the profit motive in ensuring a high quality of community life. From the systems theory conception of the multi-level universe, holistic nonprofit economics borrows the insight that the key to a high quality of community life is in the integration between man, society, and nature. Accordingly, holistic nonprofit economics locates the role of the nonprofit sector in ensuring this integration by counteracting the profit motive. Thus, in contrast to the market failure theories of nonprofit organizations, holistic nonprofit economics generates a research program exploring the embeddedness of the nonprofit sector into the encompassing societal and natural systems. Keywords Veblen

Nonprofit economics · General systems theory · Institutionalism ·

JEL Classification

A13 · B52 · L31

V. Valentinov (B) Leibniz Institute of Agricultural Development in Central and Eastern Europe, Theodor-Lieser-Str. 2, 06120 Halle (Saale), Germany e-mail: [email protected] URL: www.iamo.de

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1 Introduction Recent decades are witnessing the growing awareness of the societal importance of nonprofit organizations which are seen as an increasingly useful supplement to both the public and private for-profit sector. Nonprofit organizations “play a variety of social, economic, and political roles in the society. They provide services as well as educate, advocate, and engage people in civic and social life” (Boris and Steuerle 2006, p. 66). The growing impact of the nonprofit sector on diverse aspects of social life across the world has been matched by significant advances in the nonprofit economics literature. Most of this literature is clearly framed by the new institutional economics paradigm (Steinberg 2006; Jegers 2008). Accordingly, it locates the role of the nonprofit sector in the correction of market failures primarily related to information asymmetries and the missing supply of public goods (ibid). Unfortunately, this type of economic explanation of the nonprofit sector has not been satisfactory to many non-economist nonprofit scholars, primarily because it overlooks the role of societal values in motivating the behavior of nonprofit organizations and their individual stakeholders. For example, many nonprofit missions, such as those related to protecting human rights, delivering humanitarian aid, and promoting social welfare are more meaningful when seen as expressions of societal values rather than as market failures. The same can be said about many acts of volunteering, donating, ideological entrepreneurship, and other forms of voluntary stakeholder commitment. The important phenomenon of mission-drivenness, while difficult to reconcile with the notion of market failure, is a straightforward behavioral implication of the pursuit of societal values. Even the so-called nondistribution constraint, traditionally seen as a market failure-correcting device (Hansmann 1987), can often be more advantageously explained as an expression of superiority, for specific nonprofit organizations, of nonpecuniary societal values over pecuniary ones (cf. Valentinov 2008). Furthermore, the methodological individualism of the market failure theories of the nonprofit sector makes them unable to explain this sector’s complex institutional realities. As noted by Smith and Gronbjerg (2006, p. 235), the nonprofit sector is necessarily shaped by its institutional environment, and it is this shaping that is largely overlooked in explaining nonprofit organizations in terms of market failure. To address this deficit of the market failure theories, Anheier and Salamon (2006, p. 106) advanced the socalled social origins theory that “emphasizes the embeddedness of the nonprofit sector in the cultural, religious, political, and economic realities of different countries. It thus views decisions about whether to rely on the market, the nonprofit sector, or the state for the provision of key services as not simply open to choice by individual consumers in an open market… Rather, it views these choices as heavily constrained by prior patterns of historical development and by the relative power of various social groupings that have significant stakes in the outcomes of these decisions”. The social origins theory, however, is centrally concerned with explaining the geographical variation in the characteristics of the nonprofit sector, rather than with this sector’s economic justification. What remains a desideratum in the economic justification of the nonprofit sector is an adequate account of the institutional embeddedness of the nonprofit sector as a causal determinant of this sector’s existence and operation.

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All these concerns about the market failure theories of the nonprofit sector call for a reorientation of nonprofit economics toward a more holistic approach that would be aimed to meet the above mentioned desideratum. The distinctive feature of this approach must be the emphasis on the encompassing societal system within which the nonprofit sector is embedded. By emphasizing the latter system, the holistic approach would explain the origin and relevance of societal values guiding the behavior of nonprofit organizations and their stakeholders. Moreover, almost by definition, the holistic approach would be well positioned to explain the institutional diversity of the nonprofit sector by integrating the encompassing societal system into the causal mechanism of the emergence and operation of individual nonprofit organizations. Sketching out this approach will be the main contribution of the present paper. The paper’s strategy is to utilize the insights from two theoretical strands that explicitly embrace the holistic perspective. One of these is institutionalism, a strand of heterodox economic theory continuing the traditions of institutionalist classics such as Thorstein Veblen, John Commons, and Clarence Ayres. Institutionalists regard society as a holistic entity engaged in the evolutionary process of self-provisioning with the material means of life (Gruchy 1987; Tool 2001; Adkisson 2010). To institutionalists, societal self-provisioning constitutes the main economic problem of society (ibid). What is particularly important to the present paper is that societal self-provisioning can only occur through the interaction between the market and the encompassing societal and natural systems. The importance of this inter-systemic interaction has been well recognized by institutionalists, many of which explicitly endorse von Bertalanffy (1968) open systems theory (e.g., Hayden 2006; Berger and Elsner 2007; Adkisson 2010). Indeed, it is this interaction between the market and the broader societal and natural systems that is at the root of a number of important institutionalist ideas, such as those of circular cumulative causation (Myrdal 1957) and social costs externalized by business firms (Kapp 1977; Berger and Elsner 2007). In view of these considerations, it is not surprising that another theoretical strand revisited by this paper is the general systems theory. This is a vast and heterogeneous literature, yet it does have a number of widely shared ideas, one of which is the multilevel conception of the universe (cf. Skyttner 2005). Some of the classic contributions to the general systems theory that explicitly develop this conception include Laszlo’s systems philosophy, Boulding’s ecodynamics, and Miller’s living systems theory (cf. also Vermeij 2009). In various forms, each of these contributions envisioned an intermediate level of human society in the hierarchical structure of the universe, i.e., saw the societal level as delimited by the encompassing natural system level “from above” and by the biological organism level “from below”. This paper will focus on the systems philosophy of Ervin Laszlo because he was most directly concerned with the problem of mutual adaptation among various levels, a problem that takes center stage in the present paper. The present paper will combine the perspectives of institutionalism and the general systems theory by exploring the problem of adaptation of the market, or of the private for-profit sector, to the encompassing societal and natural systems. The following section revisits the institutionalist critique of profit-oriented business behavior by building upon the Veblenian pecuniary-industrial dichotomy. This is followed by a reconstruction of Laszlo’s philosophical conception of the mutual adaptation being

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man, society, and nature being hindered by what he called the anthropomorphism problem. Finally, both arguments are brought together by establishing a link between anthropomorphism and profit orientation. It is shown that the for-profit orientation of the private for-profit sector may prevent it from delivering effective mutual adaptation between man, society, and nature. Accordingly, it is in ensuring this adaptation where a holistic nonprofit economics sees the distinct role of the nonprofit sector.

2 The institutionalist perspective on the profit motive The modern nonprofit economics literature is rooted in the neoclassical microeconomics paradigm that has been developed in order to understand the operation of the for-profit sector. The contribution of Veblen and other institutionalists is to lay bare the important limitations of this paradigm, particularly its teleological presumptions epitomized in the Smithian idea of the ‘invisible hand’. While Veblen did not deny the usefulness of Adam Smith’s ideas for understanding the eighteenth century beginnings of modern capitalism, he questioned their relevance for the twentieth century capitalism marked by absentee ownership, predatory business behavior, and ceremonial invidiousness. From the institutionalist standpoint, the for-profit sector tends to detach itself from the embedding society and comes to dominate it. The general causal mechanism of this detachment is revealed by the notion of the institutionalist dichotomy which is “a basic analytical tool of institutional economics” (Munkirs 1988, p. 1035). In Veblen’s work, the dichotomy refers to the contrast between pecuniary and industrial behavior; Ayres emphasized the contrast between ceremonies and technology, while Fagg Foster dichotomized ceremonial and instrumental behavior. Among the various definitions of the institutionalist dichotomy, the Veblenian one is particularly helpful in unearthing the difficulties involved in adapting the market to the encompassing societal and natural systems. The Veblenian pecuniary-industrial dichotomy emphasizes differential advantage as the driving motive of business behavior, and indeed, equates profit with differential advantage. Due to its orientation toward differential advantage rather than the common interest of the community, the for-profit sector fails to effectively enhance the quality of social life, or as institutionalists put it, to attain instrumental value. Thus, in The Theory of Business Enterprise, Veblen explained the tendency of businessmen to ‘play at cross-purposes and endeavour to derange industry’ (Veblen 1958, p. 23). In contrast to modern constitutional economists indicating the public virtues of competition, Veblen viewed competition as the basic obstacle in the way to a better societal self-provisioning with goods and services. As a result, businessmen fail to act in the best interest of the broader community. More specifically, for the businessman ‘the vital point of production for the vendibility of the output, its convertibility into money values, not its serviceability to the needs mankind. A modicum of serviceability, for some purpose or other, the output must have if it is to be salable. But it does not follow that the highest serviceability gives the largest gain to the businessman in terms of money’ (ibid, p. 30). Veblen drew the conclusion that the for-profit sector offers opportunities for capitalizing both serviceability and disserviceability to the community at large. Competitive

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differential advantage can be attained by both serviceable and disserviceable means, and Veblen’s major concern that the latter means come to dominate. It is for this reason that Veblen was sceptical about the ability of the for-profit sector to promote “usefulness as seen from the point of view of generically human” (Veblen 1994, p. 61), or in the words of Tool (2001, p. 293), to provide for “the continuity of human life and the non-invidious recreation of community through the instrumental use of knowledge”. The pecuniary-industrial dichotomy takes on, however, a new meaning in the context of the problem of adapting the market to the encompassing societal and natural systems. The phenomenon of differential advantage is internal to the market. By acting as a driving force of business behavior, differential advantage turns the for-profit sector into a self-referential system possessing a large degree of autonomy from the environment. A vivid illustration of this autonomy is given by Veblen (1958) explanation of the magnitude of business capital as a matter of folk psychology rather than of material fact. The self-referential character of the for-profit sector is likewise evident in Veblen’s explanation of the corporate managers’ business interest which “demands, not serviceability of the output, nor even vendibility of the output, but an advantageous discrepancy in the price of the capital which they manage” (1958, p. 79). It is thus the pecuniary logic that makes for the self-referential character of the for-profit sector and its concomitant detachment from the encompassing societal and natural systems. At the same time, the pecuniary-industrial dichotomy underscores the normative significance of overcoming this detachment and ensuring a meaningful integration between man, nature, and society. While Veblen himself did not refer to this integration, it presents one of the key themes of Laszlo’s systems philosophy, which is considered in the next section.

3 A systems theory perspective on the multilevel structure of the universe In a way, Ervin Laszlo can be said to have developed a systems theory reconstruction of the Veblenian pecuniary-industrial dichotomy. In Laszlo (1972, 1999) work, this dichotomy is reflected in the contrast between what he calls the atomistic and systems views of the world. The atomistic view of the world entails many of the normative concerns raised by the Veblenian dichotomy, such as the excessive pursuit of differential advantage, the identification of material production with progress, and the tendency to subordinate nature to human ends (Laszlo 1999, pp. 11f.). In contrast, the systems view of the world “perceives connections and communications between people, and between people and nature, and emphasizes community and integrity in both the natural and the human world” (ibid, p. 11). At the root of the systems view is the multilevel conception of the universe (ibid; Laszlo 1972). Laszlo believes the universe to be constituted by several hierarchical levels, starting from atoms (or still lower particles) and ending with the global system. Human beings are located at the level of organisms, i.e., above the level of cells and below the level of societal systems, which are themselves embedded into the broader ecological systems. Thus, in Laszlo’s multilevel structure, “man is not the center of the universe, nor is the universe built in his image, but he is a part of the overriding order which constitutes the universe” (Laszlo 1972, p. 12).

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Laszlo’s multilevel conception of the universe has a normative meaning that exhibits important parallels to that of the Veblenian pecuniary-industrial dichotomy. Based on this conception, Laszlo proposes the normative ideal of mutual adaptation of systems located at all hierarchical levels. While this adaptation is mutual, “the norms of proper systemic functioning can be discerned … by an analysis of the largest relevant whole” (ibid, p. 273). With respect to man, the inter-level adaptation signifies the state of physical and mental health and individual fulfilment, i.e., “the realization of human potentials for existence as a biological and a sociocultural being” (Laszlo 1999, p. 82). In terms of the Veblenian dichotomy, the inter-level adaptation evidently refers to the quality of social life, or above-mentioned “usefulness as seen from the point of view of generically human” (Veblen 1994, p. 61), while the excessive pursuit of differential advantage, engendered by the atomistic view of the world, constitutes the basic ethical problem to be overcome. Yet, in contrast to Veblen and other institutionalists, Laszlo explains the failures to attain a better quality of social life not in terms of vested interests, but in terms of a specific structural feature of human cognition which he designates as ‘anthropomorphism’. To Laszlo (1972, p. 165), anthropomorphism is a tendency to treat commonsense modes of thought as a reliable instrument of objective empirical knowledge. In the multilevel universe, this tendency is not warranted because human cognition is specifically tailored to operating at the reference level of individual human organisms and becomes increasingly disoriented at levels that are progressively distant from this reference level. More specifically, it is anthropomorphism that explains why people take an atomistic view of the world instead if seeing it systemically and holistically, while the adaptation of man to the encompassing societal and natural systems necessitates the systems view. The problem of anthropomorphism is that an uncritical reliance on commonsense modes of thought engenders difficulties of adapting man (as an organism) to societal and broader natural systems. Anthropomorphism is manifested in “acts of egoism, in which the individual places his particular interests, or even those of his immediate family or associates, above that of the wider social groups of which he is a part. Anti-social character and behavior patterns are the result, and these patterns are pathological, given the hierarchically integrated nature and situation of human beings” (ibid, p. 276). Laszlo’s insight about the inherent relationship between egoism and anthropomorphic thinking suggests that the human pursuit of differential advantage is rooted in the epistemological limitations of the human mind. Given these limitations, the for-profit sector indeed appears to be an institutional arena that is extraordinarily well-suited for people thinking anthropomorphically, for it provides significant scope for the pursuit of differential advantage. Curiously, a similar epistemological argument, but from the opposite normative perspective, was advanced by Hayek (1945). Hayek argued that the knowledge of individual market actors is necessarily limited and dispersed, and legitimized the market mechanism (and thus the for-profit sector) in terms of its ability to economize on this knowledge (cf. also Gifford 1999, p. 128). Yet, as follows from the systems theory conception of the multilevel universe, economizing on the limited knowledge and the concomitant pursuit of differential advantage are not at all helpful in realizing the normative ideal of the mutual adaptation between man, society, and nature. Both institutionalism and systems theory acknowledge the important

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advantages of the market in dealing with epistemological limitations of the human mind, yet both of these strands plead for the conscious efforts to counteract these limitations by adopting the systems view of the world. As argued in the next section, the important institutional arena for taking these efforts is the nonprofit sector.

4 The nature of holistic nonprofit economics 4.1 The rationale for the nonprofit sector As mentioned in the Sect. 1, the new institutional economics approach to the nonprofit sector explains this sector in terms of its ability to correct market failures. In contrast to this approach, the institutionalist and systems theory perspectives locate the relevant problem of the market in its failure to adapt to the encompassing societal and natural systems. Even if the attainment of competitive market equilibrium in a particular context could be assumed, this would have no bearing on the mutual adaptation between man, society, and nature. Indeed, Laszlo (1972, p. 43) generally defines systemic equilibrium as a state in which the system in question offers “maximal resistance to the forces which act on it in its environment”. Given that the environment of the market is constituted by the broader societal and natural systems, there must be a trade-off between the self-equilibration of the market and its adaptation to the encompassing systems. Moreover, while the market can be believed to possess the built-in self-equilibration imperative, it seems to have no comparable imperative to adapt to the encompassing systems. Thus, this adaptation cannot be left to what Gruchy (1987) called ‘the automaticity of the market’; instead, it requires the Deweyian ‘organized social intelligence’, which underpins an alternative, holistic, explanation of the nonprofit sector. The main idea of the holistic explanation is that the nonprofit sector exists not in order to correct market failures, but to effect a meaningful adaptation between man, society, and nature. More specifically this means that the role of the nonprofit sector is in reconfiguring the allocation of societal resources, as it is evolving in the for-profit sector, in such a way as to bring it in congruence with the broader societal values, such as those of human dignity, environmental preservation, and care for disadvantaged people. The for-profit sector needs to be supplemented by the nonprofit sector not because of market failures, but because of its failure to take due account of the relevant societal values. A bird’s eye view of these values is revealed by a listing of the major activity areas of nonprofit organizations operating in particular institutional contexts. According to the data of Anheier and Salamon (2006), the most important activity areas of nonprofit organizations worldwide are social services, education, health care, culture, professional representation, civic advocacy, and environmental protection. All these activity areas reveal specific directions for adjusting the resource allocation patterns, arising out of the operation of the for-profit sector, to the broader societal values. The holistic approach to nonprofit economics contends that the view of nonprofit organizations as (nonprofit) firms may not be appropriate. As firms, nonprofit organizations are seen as arenas for individual utility maximization by nonprofit managers

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and entrepreneurs. While this view is helpful for modelling nonprofit organizational behavior, e.g. in the area of pricing and output determination, it sheds little light on the important phenomenon of mission-drivenness which is central to many nonprofit organizations. Moreover, the Veblenian pecuniary-industrial dichotomy has established a clear linkage between business behavior and the pursuit of differential advantage. Designating nonprofit organizations as firms entails the implication of their engagement in business behavior and the concomitant pursuit of differential advantage. Yet, it is precisely by dampening the differential advantage orientation that the mutual adaptation of man, society, and nature can be sustained. As firms, nonprofit organizations can hardly be expected to successfully dampen this orientation. In modern nonprofit studies, similar concerns about the inappropriateness of the ‘firm’ view of nonprofit organizations have been voiced by Roger Lohmann (1992) who proposed to see these as “commons”, i.e. organizations based on voluntary participation, shared resources, and common interests. According to him, “the application of the norm of maximization to commons can produce amusing or reductionistic conclusions such as the conclusion that rational individuals engaged in religious endeavors are seeking to maximize their salvation” (ibid, p. 163). Lohmann (2001, p. 201) questions the relevance of the assumption of individual utility maximization in explaining “many rendered acts, such as baptisms, weddings, and initiation rites” that derive their very meaning from their collective nature. Lohmann’s designation of nonprofit organizations as commons underscores their social integration role rather than their function as an outlet for managerial utility maximization; it also reinforces the institutionalist idea that the differential advantage-seeking behavior is not helpful in realizing the common interest of the community. The systems theory conception of the multilevel universe supplements the commons view of nonprofit organizations by defining the main object of this common interest as consisting in ensuring mutual adaptation between man, society, and nature.

4.2 Three implications for current nonprofit economics The proposed holistic reorientation of nonprofit economics yields major implications for the current nonprofit economics literature, three of which can be mentioned here. One implication concerns the missing account of societal values in the market failure theories. As shown above, the holistic approach takes societal values, rather than market failure, to be the basic conceptual tool for explaining the rationale of the nonprofit sector. The impregnation with societal values provides the mechanism by which nonprofit organizations and their individual stakeholders are embedded in the broader society. Specific nonprofit missions and specific motivations and behaviors of nonprofit stakeholders, referred to in the Introduction, can thus be seen as expressions of the relevant societal values. Moreover, the holistic approach establishes a common frame of reference for the multitude of these stakeholders who are often very heterogeneous. Given this common frame of reference, it is no longer surprising that like-minded donors, volunteers, managers, employees, and customers identify each other and pool efforts in realizing their shared visions of a better future. To be sure, the heterogeneity of stakeholders likewise engenders centrifugal forces affecting the

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organization of the nonprofit sector. Yet these heterogeneities are not equivalent to the logical chasm between the motivations of nonprofit managers and entrepreneurs and those of nonprofit customers, which is plaguing the nonprofit economics literature already several decades (cf. Hansmann 1987; Steinberg 2006). The second implication of the holistic approach is related to unearthing the economic meaning of the nondistribution constraint of nonprofit organizations. The nondistribution constraint has attracted much attention from new institutional economists who explained it in terms of its ability to make nonprofit firms more trustworthy in the eyes of consumers (Hansmann 1987; Steinberg 2006; Jegers 2008). In contrast, the holistic approach interprets the nondistribution constraint as a mere indication of economic behavior being driven by broader societal values rather than by pecuniary profit, since realizing these values calls for dampening the differential advantage orientation implied in the profit seeking behavior. For the holistic approach, the relevant question is not why the profit orientation is dropped, but what the specific societal values are that nonprofit organizations are called upon to realize. The holistic explanation of the nondistribution uncovers the limitations of its modern American understanding as the basic definitional characteristic of the nonprofit sector. As an indication of the dominance of nonpecuniary societal values over pecuniary profit, the nondistribution constraint can fulfill its role also in its partial (or attenuated) form, i.e., as a specific restriction on the extent of profit appropriation without prohibiting this appropriation generally. The holistic perspective thus lends support to European concerns that the exclusive focus on the nondistribution constraint fails to do justice to the diversity of the nonprofit sector (Evers and Laville 2004). It is, in fact, for this reason that European scholars use the term ‘third sector’ that includes not only nonprofit organizations, but also cooperatives, social enterprises, and other types of social business that do not conform with the US notion of the nondistribution constraint but do effectively express nonpecuniary societal values (Becchetti and Borzaga 2010). While difficult to justify from the traditional trustworthiness theory of the nondistribution constraint, social business fits perfectly into the proposed holistic nonprofit economics framework. The third implication of the holistic approach is the shift of the nonprofit sector’s institutional embeddedness into the center of the analysis. One example of this shift is the explanation of the mission landscape of the nonprofit sector of a specific society in terms of this society’s values. The value structure of a particular society comes to bear on the nonprofit mission landscape through the process of what Geoffrey Hodgson (2007) calls the “reconstitutive downward causation”. Specifically, failures to attain certain broader societal values generate a societal problem awareness that is translated into individual motivation to support nonprofit firms seeking to pursue these values. This societal problem awareness becomes institutionalized and thus shapes the preferences of individuals. Through the reconstitutive downward causation, these preferences acquire a degree of social conformity that is reflected in distinct mission landscapes that differ across societies. The mechanism of the reconstitutive downward causation thus generates different substantive outcomes depending on the history, culture, and institutions of different societies. It is, however, a crucial argument of institutional economics that the reconstitutive downward causation is not deterministic in the sense that it necessarily leaves discretionary spaces to individuals (ibid).

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In the context of the nonprofit sector, these discretionary spaces are reflected in the discretionary decisions to provide support to specific nonprofit firms. The potential and actual stakeholders are thus confronted with ever-present choices regarding what nonprofit firm (if any) is worthy of support. By making these choices, stakeholders exercise their individual discretion, while at the same time being subject to the reconstitutive downward causation. In terms of empirical research, the holistic nonprofit economics is a research program that presents a generalization of Anheier and Salamon (2006) social origins theory. Both holistic nonprofit economics and the social origins theory seek to explain the nonprofit sector in terms of the encompassing social structure. Anheier and Salamon’s (ibid) typology of nonprofit regimes accentuates two indicators of that structure: nonprofit sector employment as a percentage of economically active population and public social welfare spending as a percentage of GDP. The holistic nonprofit economics suggests utilizing a much broader range of indicators that reflect culturally ingrained values in various parts of the world and the societal problems arising out of the for-profit sector’s failure to do justice to these values. It does not, however, generate a ready set of hypotheses suitable for unambiguous testing. Instead, it invites to explore the causal relationship between the societal problems to be solved and the operation of specific types of nonprofit organizations. In a programmatic article, Dennis Young (2010) identifies systematic roles of the nonprofit sector in solving economic, social, environmental, and political problems worldwide. It is the task of empirical research to determine how effectively the nonprofit sector tackles these problems. The important benefit of this empirical research is that it would shed light on the real-world roles of nonprofit organizations, e.g. as components of the mixed economy of welfare (Evers and Laville 2004), as institutional mechanisms of co-production of social services (Pestoff 2009), or even as fuzzy mixtures of the attributes of markets and states (Brandsen et al. 2005).

4.3 A caveat Finally, an important caveat is in order. The institutionalist and systems theory perspectives presented here suggest that the societal problem-solving role of the for-profit sector, i.e., this sector’s ability to effect the integration between man, society, and nature, is circumscribed by the differential advantage orientation of business behavior. It would be certainly wrong to deny the relevance of the differential advantage orientation to the behavior of many nonprofit organizations. Indeed, subject to the pressures of commercialization, many nonprofit organizations find themselves in competition with each other (and for-profit firms) and thus potentially become subject to the same criticisms that Veblen and other institutionalists raised in regard to the for-profit sector. The adverse implications for the societal problem-solving capacity of the nonprofit sector are well known to nonprofit scholars. In the words of Clemens (2006, p. 210), “as nonprofits become more dependent on external funding, they tend to become more bureaucratic and professionalized… As a general rule, the larger and richer and more formalized the organization, the fewer the opportunities for participatory governance and democratic socialization of members (to the extent that they exist at all)”.

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Yet, the commercialization pressures notwithstanding, nonprofit stakeholders are still able to make discretionary choices that help to preserve the distinct societal role of the nonprofit sector. In a recent article, Young et al. (2010) argue that the “missionmarket tension” in the operation of many nonprofit organizations can be effectively dealt with by using appropriate management tools. A tool that is proposed by Young et al. (ibid) allows analyzing mission impacts and financial implications of specific activities (programs) of nonprofit firms, thus enabling nonprofit managers to find out how the combination of various activities affects solvency and the level of mission achievement. Utilizing this and similar tools, nonprofit managers may still need to strike unavoidable compromises between mission and market requirements; yet they would be able to adjust these compromises with a view to maximizing the long-term mission achievement level.

5 Concluding remarks The need for a holistic nonprofit economics is motivated by the widely acknowledged failure of the market failure theories of the nonprofit sector to do justice to the sector’s complex institutional realities. This paper has explored the possibility of reorienting nonprofit economics along more holistic lines by building upon the insights from Veblen’s institutionalism and Laszlo’s version of the systems philosophy. From the Veblenian dichotomy, holistic nonprofit economics benefits by recognizing that it is the differential advantage orientation of business behavior that ultimately prevents the for-profit sector from ensuring a high quality of community life. From the systems theory conception of the multi-level universe, holistic nonprofit economics borrows the insight that the key to a high quality of community life is in the integration between man, society, and nature. Accordingly, from the holistic perspective, the role of the nonprofit sector is in ensuring this integration, with the nonprofit orientation being indicative of the dampening of the differential advantage orientation implied in the profit motive. The systems theory conception of the multi-level universe thus fits in perfectly with the normative institutionalist concern that the for-profit sector must not get out of balance with the broader societal values. In a way, the nonprofit sector presents a field in which both scholarly strands come to bear upon each other. The conventional market failure theories of the nonprofit sector are circular in the sense that they acknowledge the limitations of the real-world for-profit sector, yet retain the normative standard of the competitive market which, in turn, implicitly reinstalls the for-profit sector as the basic societal institution. A genuine explanation of the nonprofit sector must break out of this logical circle. The approach of holistic nonprofit economics contends that this can be done by paying attention to the multiple levels of the universe, and by viewing nonprofit organizations as a variety of intermediaries between these levels, rather than as firms operating strictly within one level. These research strategies are intended to stimulate an open-ended empirical research into how nonprofit organizations effect a better integration between man, society, and nature, and thus contribute to the resolution of pressing societal problems. These problems include market failure, but extend far beyond that, and it is this open-endedness that makes for the real-world relevance of the proposed holistic approach.

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Acknowledgment The author is grateful to two anonymous reviewers for helpful comments. This research has been supported by the Volkswagen Foundation.

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