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To Profit, or not for profit?

Michael Sanders

As part of David Cameron’s commitment to building a “Big Society”, as well as to engaging in some of the most sweeping cuts to public spending in living memory, there has naturally been discussion about the outsourcing of public services to private-sector organisations.

At one end of this debate is a discussion about whether any non-governmental organisation should be involved in the delivery of vital public services. At the other, perhaps more reasonable end of the debate, is a discussion about what kind of organisations should step in to fill the gap left by the state’s withdrawal from service provision – in particular, whether these organisations should be allowed to make a profit.

In education, Michael Gove, the secretary of state, is quoted in this week’s economist[1] as saying “We don’t need the profit motive”, in what may well be regarded by some as a statement of political convenience more than firmly-held belief. Nick Seddon, from Reform, a think-tank, has said “It’s a fallacy to think you can choke off the profit motive without losing momentum and innovation”.

The evidence is somewhat less certain that Mr Seddon makes out. Two large areas of spending where the government stands accused either of outsourcing to private firms or conspiring to are Education and Health, where great weight is put on the tendency of the best practitioners to “go the extra mile”, be that in the form of higher quality pastoral care or extra tuition in schools, or unpaid overtime and a superior bedside manner in hospitals. In both cases, the provision of the extra-mile of care is time consuming and often uncompensated. Evidence from researchers at the CMPO (Gregg et al (2008))[2] , suggests that in non-profit “caring” environments, workers provide on average 75 minutes extra unpaid overtime a week than do their colleagues in for-profit caring firms.

Sloan (2000)[3], in his comprehensive review of ownership forms for hospitals in the United States, found that for-profit and not-for-profit hospitals were more alike than different across a number of dimensions. Importantly for the claim that ‘innovation’ would disappear along with the profit motive, he finds (although evidence is relatively sparse), that the rate at which hospitals adopt new technologies is influenced by the extent to which they are competing with other hospitals for patients, but not by their ownership type (for profit vs. not for profit).

If it is not obvious that not-for-profit hospitals or schools would perform worse (or indeed, differently), than profit-making counterparts, this may be driven by the similarities between the people running them. Glaeser and Schleifer (2001)[4] model the utility functions for individuals forming not-for-profit firms as the same as individuals starting for-profit companies. As not-for-profits are more trusted (as the response to the government’s plans would seem to suggest), a utility maximising agent may find it preferable to run a not-for-profit “free-school” or academy, and to extract their utility in the form of perks; more control over the curriculum and timetable than in a standard school, and more “Warm Glow” from having contributed something to society. In a hospital context, this resembles the possibility of “cartels” of doctors running (not-for-profit) hospitals efficiently so as to maximise their own utility, as suggested by Sloan.

In summary, the potential hazards of not-for-profit ownership of public services, when compared with for-profit ownership, may be overstated. This appears to be a confusion of the ‘profit motive’ for an ‘efficiency motive’ – there is evidence suggesting that the latter may be achieved without the former, and that not-for-profits have a lower incentive to sacrifice non-contractible quality for more profit. Perhaps, on this occasion, Mr Gove is correct.

[2] Gregg, Grout, Ratcliffe, Smith and Windmeijer (2008) “How important is pro-social motivation in the delivery of public services” CMPO working paper

[3] Sloan (2000) “Not-for-profit ownership and hospital performance”  Handbook of health economics, vol 1 pp1141-1174

[4] Glaeser & Schleifer (2001) “Not-for-profit entrepreneurs” Journal of Public Economics Vol 81 Issue 1 pp99-115

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