Profit-seeking businesses ultimately are accountable to customers, and non-profits are accountable to donors

From today's Links to Consider by Arnold Kling.

In one section, he starts by quoting Scott Alexander.

Scott Alexander writes,

I agree that overall capitalism has produced more good things than charity. But when I try to think at the margin, in Near Mode, I can’t make this argument hang together.

…Compare this to a good charity, like GiveWell’s pick Dispensers For Safe Water. If I understand their claim right, per $1 million they can give 50,000 people clean water for ten years, which would probably save about 1,500 lives.

I get what Scott is saying, but I would not frame it as capitalism vs. charity.

My approach is to compare profit-seeking businesses with non-profits. The main difference is that profit-seeking businesses ultimately are accountable to customers, and non-profits are accountable to donors. I think that the incentives to produce benefits that exceed costs are much better in profit-seeking businesses. The incentive of a profit-seeking business is to solve the customer’s problem. The incentive of the non-profit is to keep the problem on the mind of the donor.

If, like many young people, you think that working for a non-profit is more morally righteous than working for a profit-seeking business, I think you have it backwards. Many non-profits are grifts. Many treat their employees badly, because they can. A profit-seeking business runs into trouble if good employees are unhappy and leave, but the head of a non-profit just has to stay in good graces with the donors, even he runs a dysfunctional organization. In terms of the previous link, an executive in a profit-seeking business has more incentive to care about his or her subordinates.

Next, we can compare donating to a non-profit vs. investing in a profit-seeking business. I’ll admit that old-fashioned charity, which finds needy people and helps them, is pretty compelling. Who would be against safe water dispensers? The only argument against charity is that it creates moral hazard—people who otherwise might go to work might choose instead rely on charity. I do not think that this is a practical concern with private charity, although it is with government handouts.

But old-fashioned charity seems to be a small and shrinking portion of the non-profit sector. If you just threw a dart at the non-profit sector, the chances are you would hit a grift, not a helpful charity. College graduates will donate to their alma mater, and do I have to tell you what happens to that money? I have many friends who work for think tanks, and I respect them, but I would not advise you to donate to think tank.

Economist always (or should always) think in terms of incentive systems and I think Kling is spot on.  

The incentive of a profit-seeking business is to solve the customer’s problem. The incentive of the non-profit is to keep the problem on the mind of the donor.

You want to be moral?  Solve other people's problems in a way that they want and consent to.  Everything else is coercion, corruption, self-serving, and moral hazard.  

That is perhaps not completely true, but I think it is usefully true.  I have seen few effective counter-arguments.