WEBVTT NOTE Against the Third Sector as a Contrivance of the State 1 00:00:00.000 --> 00:00:06.000 My name is Kevin Hutchins and I am presenting a paper against the third sector as a contrarian of the state. 2 00:00:06.000 --> 00:00:17.000 So this is the paper that hopefully all of you will read and will be made available is on the historical foundations of modern non-profit firms. 3 00:00:17.000 --> 00:00:25.000 It's the first of four parts of my thesis for my Masters of Public Administration degree 4 00:00:25.000 --> 00:00:42.000 and in the thesis, review historical foundations, economic theories of non-profits, review of capital market theories, and then application of history and theory to a new equity-like capital market for charity and philanthropy. 5 00:00:42.000 --> 00:00:53.000 So today I'd like to set out and reframe the third sector of rubric, a notion that charity exists separately from the private commercial and government sectors. 6 00:00:53.000 --> 00:01:05.000 Second, I'll show some commonalities between the commercial and non-profit business firms and third, show the danger of increased government intervention in a historically independent sector of the economy. 7 00:01:05.000 --> 00:01:19.000 Okay, so let's talk about the modern third sector. Well, this was a concept that was really first introduced in 1975, so it's a very recent concept that has really just completely taken over, I think. 8 00:01:19.000 --> 00:01:26.340 Most of us have probably heard the terms either third sector or independent sector when talking about nonprofit institutions, 9 00:01:26.340 --> 00:01:33.140 charities, philanthropies, or what I like to say, private voluntary assistance for social needs. 10 00:01:33.140 --> 00:01:37.940 So this was put together by the Commission on Private Philanthropy and Public Needs, 11 00:01:37.940 --> 00:01:41.240 commonly called the Filer Commission for the Chair. 12 00:01:41.240 --> 00:01:48.980 The commission was put together by John Rockefeller III and presented their findings to Congress in 1971. 13 00:01:48.980 --> 00:01:58.980 So, in the commission report, the third or independent sector is reframed as separate from private commercial and governmental sectors of the economy, 14 00:01:58.980 --> 00:02:13.980 even though there is a thousands year long history, tradition of, of course the terms non-profit were unused, but a thousands of year tradition of private voluntary assistance for public or social needs. 15 00:02:13.980 --> 00:02:21.980 Also, the third sector in this paper said to basically live and die by the tax deductibility of donations. 16 00:02:21.980 --> 00:02:32.980 Again, we didn't have personal income taxes in the United States until the 20th century, so what the heck about all the money that we've been giving for thousands of years for social needs voluntarily? 17 00:02:32.980 --> 00:02:42.980 So, the third sector, not by the pilot commission report, but just generally, the third sector is primarily defined by a non-profit distribution constraint. 18 00:02:42.980 --> 00:02:48.580 So, you can make profits, you just can't give them out to owners. 19 00:02:48.580 --> 00:02:57.580 Recognition of special exemptions in tax law and the voluntary nature of its activities for a non-private or a public benefit. 20 00:02:57.580 --> 00:03:02.580 So why is the third sector important as a field of study? 21 00:03:02.580 --> 00:03:12.580 Start here and say, approximately 10% of US GDP comes from the third sector, from nonprofits and charitable institutions. 22 00:03:12.580 --> 00:03:19.140 7% of the civilian workforce, or if you include volunteer hours, 10% of the civilian workforce 23 00:03:19.140 --> 00:03:23.500 in the United States comes from this sector. 24 00:03:23.500 --> 00:03:29.780 They have over $3 trillion in capital assets on their books as of two years ago. 25 00:03:29.780 --> 00:03:32.860 So I'd say it went up, but it probably just went back down. 26 00:03:32.860 --> 00:03:36.780 So we'll say around $3 trillion in asset value. 27 00:03:36.780 --> 00:03:43.460 And interestingly, over the past two decades, they have seen double the growth rate in revenues, 28 00:03:43.460 --> 00:03:50.060 in asset values, and in the number of firms that the private commercial sector has seen. 29 00:03:50.060 --> 00:03:54.460 So that's kind of interesting, why all of a sudden have we had this explosion of nonprofit 30 00:03:54.460 --> 00:03:55.460 firms? 31 00:03:55.460 --> 00:03:58.660 Of course, I think we probably know some of the reasons. 32 00:03:58.660 --> 00:04:04.300 Another thing here that I'd like to say that I think is important about the third sector, 33 00:04:04.300 --> 00:04:07.460 Aristotle claimed that where there is friendship, 34 00:04:07.460 --> 00:04:09.780 justice is not necessary. 35 00:04:09.780 --> 00:04:12.980 And Aristotle friendship was in any association 36 00:04:12.980 --> 00:04:15.540 of mutual advantage where both parties 37 00:04:16.780 --> 00:04:18.500 contributed to the transaction. 38 00:04:18.500 --> 00:04:22.140 So the third sector is important because it helps build 39 00:04:22.140 --> 00:04:26.240 the kind of social trust that is necessary for commerce. 40 00:04:26.240 --> 00:04:31.240 Without private action or non-private means only, 41 00:04:31.240 --> 00:04:36.440 only, the trust that we have in society can be damaged, and then we can end up allocating 42 00:04:36.440 --> 00:04:42.680 more resources to defining trust, making sure that we're not getting built into transactions 43 00:04:42.680 --> 00:04:46.760 and just going on and committing commerce. 44 00:04:46.760 --> 00:04:49.680 So I'd like to talk a little bit about the sources of revenue. 45 00:04:49.680 --> 00:04:54.200 This is a chart from the NCCS, National Nonprofit Research Database. 46 00:04:54.200 --> 00:05:03.920 When we see that non-profit institutions receive about 44% of their revenue from fees and charges, 47 00:05:03.920 --> 00:05:09.560 that number is actually 71% if you include the regular fees and charges with government 48 00:05:09.560 --> 00:05:14.920 reimbursements for fees and charges, primarily from Medicare and Medicaid, other government 49 00:05:14.920 --> 00:05:15.920 programs. 50 00:05:15.920 --> 00:05:19.800 So, they actually receive 71% of the revenue from fees and charges. 51 00:05:19.800 --> 00:05:45.800 Most of us pay fees and charges to a non-profit institution to attend here Government reimbursements per charge is 27% Direct government grants, 9% Individual giving, 12.5% Investment income, 4% 52 00:05:45.800 --> 00:05:52.540 So this is interesting, where I received this graph from, it shows the 71% in the lowest 53 00:05:52.540 --> 00:05:58.820 number to talk about, you know, how a large percentage of the fees and charges came from 54 00:05:58.820 --> 00:06:00.500 government reimbursements. 55 00:06:00.500 --> 00:06:05.040 So in the literature, you want to go and see, you just see the full times where it only 56 00:06:05.040 --> 00:06:07.040 gives 9% in charities. 57 00:06:07.040 --> 00:06:12.040 Of course it's not, it's actually 36%. 58 00:06:12.040 --> 00:06:16.200 On this slide, I just want to show you a little bit more about the third sector, why it's important. 59 00:06:16.200 --> 00:06:23.560 So this is as a share of revenue, which of course approximates their economic impact. 60 00:06:23.560 --> 00:06:29.320 So healthcare makes up almost 60% of the nonprofit sector. 61 00:06:29.320 --> 00:06:38.360 And then education, so institutions of higher education and private schools make up about 16%. 62 00:06:38.360 --> 00:06:42.960 And then Human Services, what a lot of us traditionally think of as charity. 63 00:06:42.960 --> 00:06:48.560 The Human Services field and the public benefit field together is about 19 percent. 64 00:06:48.560 --> 00:06:50.460 And then we have a little bit more. 65 00:06:50.460 --> 00:06:54.560 This non-profit charity obviously does not include churches. 66 00:06:54.560 --> 00:06:58.860 We do have a little bit down here for religion, non-direct church hate, 67 00:06:58.860 --> 00:07:05.160 but churches are typically not included in regular discussions on the non-profits. 68 00:07:05.160 --> 00:07:11.720 The sectors contrived by the state. 36% of the revenue is derived from federal resources. 69 00:07:11.720 --> 00:07:18.680 Increased government grants and payments for service have led to a huge increase in the number of firms, especially over the past 50 years. 70 00:07:18.680 --> 00:07:33.080 Tax changes in the 20th century were specifically the change from a for-profit form, proprietary forms of organization for the firm, into non-profit, especially in health care and in research and in education. 71 00:07:33.080 --> 00:07:46.080 And we can see that less than 50% of the third sector that we have today actively exists in what is historically based charity and philanthropy. 72 00:07:46.080 --> 00:07:56.080 So now, that's interesting. Also, we take out that 50% and that double the growth goes back to the same growth rate as commercial firms over the past 20 years. 73 00:07:56.080 --> 00:08:03.580 which is also something that's seen throughout history that there are a lot of similarities between non-profit firms and for-profit firms. 74 00:08:03.580 --> 00:08:07.580 They grow together over time. They're highly interdependent on one another. 75 00:08:09.580 --> 00:08:18.580 So, now I'd like to move on and talk a little bit about what's actually in my paper, this first part, is on the historical foundations of charity and philanthropy. 76 00:08:18.580 --> 00:08:22.580 So, we find some universal themes reviewing the literature. 77 00:08:22.580 --> 00:08:32.580 First and most important is that voluntary assistance addressing social needs is absolutely consistent through history of time and place. 78 00:08:38.580 --> 00:08:51.580 So in the paper, which again I truly hope all of y'all will read and what I comment on, I take the reader through a journey through ancient China, Persia, into Judea, Greece and Rome, 79 00:08:51.580 --> 00:08:58.460 up into Christian Europe, Islamic Asia, into the colonial period and into the modern world. 80 00:08:58.460 --> 00:09:02.140 So I kind of trace the history of charity and philanthropy all the way through. 81 00:09:02.140 --> 00:09:06.940 Now there's some great books available and I have a 40-page paper so I tried to 82 00:09:08.940 --> 00:09:12.140 make it a little bit more concise as just a foundation for my thesis. 83 00:09:13.580 --> 00:09:19.740 Next, voluntary assistance is consistent regardless of state provision of resources 84 00:09:19.740 --> 00:09:27.740 to address social needs, early Christian church assistance is an example of this. 85 00:09:27.740 --> 00:09:34.740 In ancient Rome, when the church started, the state didn't provide any social services. 86 00:09:34.740 --> 00:09:37.740 They did, but very, very small amount. 87 00:09:37.740 --> 00:09:42.740 So the early Christian church on that side, I think some of the religious historical literature 88 00:09:42.740 --> 00:09:46.740 says that that's part of how the church was able to grow, is they were able to build these 89 00:09:46.740 --> 00:09:53.020 in the Community through Providing Assistance to Those in Need, Private Non-Religious Assistance 90 00:09:53.020 --> 00:10:00.940 during the period of Church dominance, so towards the 15th century when the Church in 91 00:10:00.940 --> 00:10:05.500 Europe was beginning to run into financial troubles and they were no longer able to appropriately 92 00:10:05.500 --> 00:10:11.820 support those in need, private parties came up and were able to support some of the needs, 93 00:10:11.820 --> 00:10:17.700 and also in the historical religious literature, that's given as part of the reason for the 94 00:10:17.700 --> 00:10:18.700 Protestant Reformation. 95 00:10:18.700 --> 00:10:26.380 And then of course there has been vitigating and socialist and dictatorial regimes as well. 96 00:10:26.380 --> 00:10:31.460 So we see that again this voluntary assistance is consistent regardless of state provision. 97 00:10:31.460 --> 00:10:36.380 Third voluntary assistance is entrepreneurial in addressing social needs. 98 00:10:36.380 --> 00:10:40.660 It was philanthropy that introduced the first savings banks. 99 00:10:40.660 --> 00:10:45.860 These banks would, of course, take in small savings subscriptions from regular people. 100 00:10:45.860 --> 00:10:51.180 Normally, with an income test, you couldn't join a savings bank unless you had under a 101 00:10:51.180 --> 00:10:55.500 certain amount of income, and then delay for this and donations to the charity. 102 00:10:55.500 --> 00:11:02.060 The savings bank would pay typically a 5% interest rate back on this. 103 00:11:02.060 --> 00:11:07.140 Mutual insurance, of course, was also started by a bill of private institutions, as was 104 00:11:07.140 --> 00:11:10.460 free education. 105 00:11:10.460 --> 00:11:40.460 entrepreneurial because many methods are used and tried by many different firms I mean this isn't like government provision of service where we say okay we're going to do it this way no we have many different firms doing many different things and to me that is part of the entrepreneurial approach trying to produce new combinations of goods and services to meet any also voluntary assistance was extremely instrumental in the very growth of the US commercial sector in the early republic these savings banks and mutual 106 00:11:40.460 --> 00:11:49.460 The financial insurance firms were huge capital aggregators, say under the largest of them, had over $100 million inflation adjusted in dollar assets. 107 00:11:49.460 --> 00:12:03.460 In a downturn in, I don't remember exactly when, maybe between 1817 and 1820, there was a real monetary crunch and there wasn't liquid capital available. 108 00:12:03.460 --> 00:12:06.460 These folks had liquid capital, they made it available. 109 00:12:06.460 --> 00:12:14.140 So they took the cash out of the bank and these things funded roads, canals, hospitals, schools, and commerce. 110 00:12:14.140 --> 00:12:22.300 The historian at the time in the 1830 something of Lowell Mills, so they had an on-site historian at the Lowell Mills, 111 00:12:22.300 --> 00:12:31.260 he said that Massachusetts Life, which was affiliated with Massachusetts General Harvard University, 112 00:12:31.260 --> 00:12:43.260 was the primary provider of intermediate capital for low mills expansion, and specifically said that without that capital, low mills would not have been able to expand at the rate it did. 113 00:12:43.260 --> 00:12:45.260 Two minutes, okay. 114 00:12:45.260 --> 00:12:59.260 Alright, so a couple more things here. We have, Voluntary Assistance has always been a first responder to new social needs. They've introduced free education. They were the first to address the needs of urban poor during a change from an agrarian to a commercial economy. 115 00:12:59.260 --> 00:13:16.260 There are first to address health care and medical research needs during periods of epidemics in play where some of our earliest great medical research comes from the Islamic world and these were funded by non-proprietary but private business firms that are like charities today. 116 00:13:16.260 --> 00:13:27.260 Voluntary assistance is especially adept during times of social upheaval so we see during the fall of the Roman Empire more charitable and philanthropic assistance was made available. 117 00:13:27.260 --> 00:13:33.660 was either in the Protestant English Reformation, this is really when the sector exploded, was 118 00:13:33.660 --> 00:13:37.380 during the Protestant English Reformation, because there was that need, and the need 119 00:13:37.380 --> 00:13:44.420 was met by private activity, and that's been changed from a very industrial age. 120 00:13:44.420 --> 00:13:47.740 Last universal theme here is the voluntary assistance, it's always acted as a buffer 121 00:13:47.740 --> 00:13:53.060 against state of Germany, so it's provided assistance to persecuted minorities in ancient 122 00:13:53.060 --> 00:13:57.940 in Rome, Medieval Europe, Pre-Civil War America, the modern world, of course we know agitated 123 00:13:57.940 --> 00:14:03.220 for the end of slavery, voluntary associational activity has helped to agitate for and fund 124 00:14:03.220 --> 00:14:04.940 the American Revolution itself. 125 00:14:04.940 --> 00:14:12.540 In a way, the original Continental Congresses that did not have charter from the King, they 126 00:14:12.540 --> 00:14:17.660 were voluntary associations, and the original funding came from voluntary subscriptions. 127 00:14:17.660 --> 00:14:25.220 and then last and no less important, the Mises Institute itself, that we here help provide 128 00:14:25.220 --> 00:14:28.220 love for Oregon State. 129 00:14:28.220 --> 00:14:39.220 Okay, so I'll run through these real quick, I didn't get the wrong one, sorry, alright 130 00:14:39.220 --> 00:14:47.020 in conclusion, basically everything I just said, go on to one more, I'm out of time, 131 00:14:47.020 --> 00:14:52.020 I want to talk just very briefly about the power of Austrian economics in studying the third sector. 132 00:14:52.020 --> 00:14:55.020 Being here this week has helped me a lot. 133 00:14:55.020 --> 00:15:02.020 I was very interested in the number of presentations that touched on social entrepreneurship or sustainable business development. 134 00:15:02.020 --> 00:15:05.020 The nonprofit sector isn't just nonprofits. 135 00:15:05.020 --> 00:15:12.020 To me, it's really those that are using private means to meet more than just a private end. 136 00:15:12.020 --> 00:15:15.020 There was a presentation yesterday on sustainability. 137 00:15:15.020 --> 00:15:21.020 And when we do that privately, it's great. When government forces us to do it, it's bad. 138 00:15:21.020 --> 00:15:28.020 But the Austrian focus on subjective pricing, individualism, entrepreneurship, firm, time value, and uncertainty 139 00:15:28.020 --> 00:15:34.020 has the ability to frame a voluntary private action for public gain within a holistic voluntary economy. 140 00:15:34.020 --> 00:15:40.020 What right now is solely being studied outside of nonprofit management and business schools 141 00:15:40.020 --> 00:15:44.020 is solely studied in schools of public administration like I'm in. 142 00:15:44.020 --> 00:15:48.060 So we are teaching people to help meet these great social needs. 143 00:15:48.060 --> 00:15:50.060 We're teaching them to do it the government way. 144 00:15:50.060 --> 00:15:55.700 We're teaching them to do it with poor economics that can't even model non-profit firms. 145 00:15:55.700 --> 00:16:01.260 The only reason non-profit firms exist in classical economics is because of market failures. 146 00:16:01.260 --> 00:16:03.260 It's not a market failure. 147 00:16:03.260 --> 00:16:05.260 I want to do what I'm doing. 148 00:16:05.260 --> 00:16:07.260 All of us want to.