0:36 Intro. [Recording date: April 13, 2010.] Duke, basketball. Smoking ruins of what used to be benches on campus. Student Michelle Macadoo [sp?], project related to profits, non-profits, and their performance. Start by ignoring the legal distinction between for-profit and non-profit firms. Want to talk about two different business models. First business model uses money to motivate people; for-profit tries to make money for its investors and owners, charges as much as it can subject to the competition, pays as little as it can for its resources, employees, raw materials subject to the competition. Described that way, doesn't sound very attractive: but "subject to competition" brings out the best in businesses, forces them to treat the customer and employees well. Doesn't rule out pride or other non-monetary benefits to either the owners for supplying a great service or the employees for working for a great company. Not saying money is the only thing that motivates people, but it is the organizing principle and is what most businesses in America look like. Second business model uses something else. The product or service is going to be given away without charge, so none of the business's costs are going to be paid for by the customer. The resource costs of providing the product are either covered by volunteers--who work for a variety of motivations but nothing to do with money--or it could be covered by donations--philanthropy, foundations, donors, individuals who care about the activity for its own sake. First, ridiculous question: which model works better? Ask another question: isn't that leaving something out by describing those as the two alternatives? That description of non-profits--accurate description, Section 501 of the IRS code--the main justification for having non-profits is to have a social service or to solve some of society's problems. So, is it really that non-profits are an alternative to for-profit corporations, or are non-profits an alternative to government? Do non-profits do things that government might actually do? Not only do non-profits not charge for their service, but actually have negative profits in the case of giving out charitable donations, giving money to the homeless. They are providing these services as an alternative to government. Are non-profits really an alternative business model to for-profits or an alternative business model to government, and for that, how are we going to divide up? Venn diagram: What activities would we want these three ways of organizing human activity to specialize in? Or do we just stand back and see what activities emerge naturally? At least three business models; will add a fourth in a little bit--three organizational models. For profit--McDonald's, Macy's. Not-for-profit: give products away. Coercion through taxation; overlap: some of the things government spends its money on are things that would be provided otherwise. Hybrid model: will argue there are a lot of opportunities for overlap.

7:08 Basic motivational question: Walter Williams likes to say: If you want to get potatoes to NYC and you know somebody in Idaho has to get up really early, do you want them to be motivated out of love for the people of New York or for the profit the potato-maker can get. Out of love; besides the person who does it for profit is going to charge more because they are doing it for profit, right? Right. Two problems: wrong motivation. Love will get me better potatoes. Second, all these profits--we don't have to pay profits. Worse potatoes and more expensive. Doesn't work that way. Most economists and non-economists would understand that the profit motive has to pay a role to get people up in the morning. Essay example: on your way to the airport, 6 a.m. flight so you've got to get there at 4:30; say to sibling or colleague you've got to get there, who says "I can take you. That's kind of early, but you don't have to call a cab." They love you or like you. But a lot of people might say they like that cab driver showing up early because they don't want the cab driver to lose his job. Will forgive brother if he messes up and sleeps through the alarm clock, but maybe will just call a cab. We understand the power of monetary incentives. And yet we can think of lots of cases where love triumphs and maybe does a better job. Or at least a sufficiently good job. Hospitals--for profit and not-for profit. In a sense they compete with each other. They say they offer a different service. One says, you come in and we are going to charge you a price. The other, we're going to give this away because you are indigent. For-profit doctors often do charitable work. There are Idaho farmers who donate some of their potatoes to a food bank. Even attorneys do pro-bono work. Even economists do pro-bono work; often blog for free. In 19th century or early part of the 20th century, a hospital was a place people went to get medical care; often were indigent. No health insurance or it was minimal. For rich people, the doctor came to your house. The hospital was a degrading and unpleasant place, typically free or very inexpensive. Funded out of charitable donations, sometimes a religious organization, sometimes by ethnic groups or occupations--sailors, form of implicit or actual insurance. People would rather go to a doctor and money rather than go to the hospital where poor people go; the care there won't be as good. In today's world, weird hybrid system--puzzling--a university hospital where everybody says they want to go to, where in theory it's not for profit. Does generate revenue, but it need not. A hospital today--could be two kinds of hospitals: hospitals you go to where the doctors work out of love, volunteering; or their time is paid for by salary, not by the customer but by people who want to make sure they have health care. Two different products. May look a lot the same. In one case, being financed out of the selflessness of the donor, the doctor or the contributor. Isn't that different from fee for service arrangement where you are just comparing apples for oranges? Non-profit example is the EconTalk example--people out there who would presumably pay something, might be hard to collect--but Liberty Fund, the sponsor to me [Russ] pays me, the time of the engineer, the webmaster who helps put them up on the web, the webspace; the listeners pay nothing. As a result, there is a disconnect between the provider and the customer, which we ordinarily would say in economics is problematic. Want to talk about some of those issues in a minute. But if we think about a hospital, wouldn't it be better for the poor people served by the hospital to pay something, or for the donors to give the money to the poor people, and have the customers pay zero? Yet most people would say okay, that's what charities do; no charge, raise their money from people who care; and businesses raise their money. In the hospital if there were religious objections to some procedures, the hospital would not provide those because the donor would object. From the perspective of the indigent person who goes there, that's the procedure they'd want to have. Government example: different charities: handing out money with no questions asked--which is what governments do, handing out money through taxation--could imagine a private charity, uncle--charities earlier part of the 20th century, customized; donor has a lot of say, could be they wouldn't let the poor person use it for drink or alcohol or drugs.

16:47 Economist would say you should give vouchers money to the consumer, not to the producer, because then the consumer will spend it on what he or she wants to spend it on. That model interestingly not going to generate nearly as many donations nearly in money or in kind, because the donor has a specific thing. "They need health care. They need water." Fascinating: the donor is at least as concerned about improving the welfare of indigent people in a specific way. This is what you lack. If we just give the money to the indigent person, they'll spend it, but they might very well not spend it on what the donor wants them to spend it on. Funny kind of paradox. Presumably does make the donor better off. Non-constrained, but we want to constrain them. What non-profits do: we give money to the producer and not the indigent person is we want to constrain it because the donor thinks this is what we really need. Force in that direction. Earlier podcast, can view the charity as a middle man. Part of the reason I might donate is I might want them to fulfill my goals for health or aid. But I might not be able to find poor people or might be ignorant, might not know how to fulfill their goals. Economist's kind of view: Invisible Heart, friend's brother always carries around a V-8 Juice to give around to homeless person so he can give it to a homeless person so he won't spend it on drugs or liquor. Then he won't get breakfast and will only spend the money he'd have spent on breakfast on drugs or liquor. Second thought: fooling yourself. His life's miserable--he wants liquor and you give him a V-8 Juice? A certain kind of disrespect. Can make a bloody mary. Certain compassion there.

19:30 Hospitals in America today; universities in America today: state run, highly subsidized; private, somewhat subsidized by all kinds of things including donations, some of which are non-profit; also have for-profit universities, training schools. Which of those would you want to go to if you had a bad health problem: if the doctors were there out of their love and the donations of people who cared about you or the people like you, or where they just want to make a profit? As economists, don't have clear answer. Thought we did; but think about it some more. What's really different? Is there something lurking in the background? Is health care just different? Might very well choose a charitable or non-profit hospital as being better. Would depend on local path dependence, where a good hospital in my area for a very long time has had this tradition of being charitably funded. Are there other industries that are like that? Or is health care just unique? We actually see non-profit charitable farmers' co-ops. In North Carolina, the People's Republic of Carparo [sp.?}--really, really free market, bring stuff they have. Not a barter system. Can get free food there. Not sure health care is different. Food: for profit food has served the public really well by driving down the price of food. Could imagine a world where poor people got their food not the market place--putting aside food stamps, the government third alternative--but if worried about people going hungry at night, let's try to make food as cheap as possible. Works incredibly well. Obesity crisis in the United States because food is so cheap. Let's just raise money to give people free food. Pile up a bunch of food and let anyone take it who wants to. Let's videotape it so we can put it on some TV channel so if you saw your rich neighbor taking some it would be slightly embarrassing. Idea would be that people who have plenty of food probably aren't going to try to get free food; and for people who are truly hungry, no questions asked, minimal administration costs. But one of the things that make markets work so well is this Hayekian solution to the knowledge problem, which is the idea that we don't know what people really want. Pile up a bunch of Cheerios, turns out that's not what they really want; marketplace steers information, market sends signals, etc., etc. Yet a lot of people would assume that the free food would be the right way to help poor people. You motivate farmers to produce that free food by saying you are helping poor people not go hungry. Very concrete way of helping people. Why is it that so many people are willing to devote that effort, contributing their time instead of money? Many times, if you see a fund raiser. Cynical, an economist. Son, on crew team, asked if willing to come and spend four hours selling stuff. Would be one of four people selling stuff. People at the booth selling stuff might make $300; split that four ways in four hours, happy to give $100 not to do that. Not nearly as good as spending your time.

25:10 Idea that spending for charity--walk 25 miles, shoot 25 baskets. Why not just do something productive? Take the 1000 hours of basketball shooting, take the money, and pay cash to the charity. Why have to do this stunt--which obviously has some social benefit or it wouldn't exist? You go around and you ask people to sponsor you to do something meaningless, yet people do it. Shoot the baskets and they give people money. Obviously important that it is meaningless. Signal of love and affection, commitment to the cause. The world is about costly signals. Look how much I care. Important that it be nonsensical. If you give your wife a gift certificate, that's not as good as flowers, because flowers are going to wilt and disappear. Gift certificate, she gets to choose what she wants, and maybe she doesn't want flowers today. Maybe she wants to smack you upside the head for giving you a gift certificate. Conversation has a certain chaotic nature to it; disconnect between textbook on giving and money versus the cultural trappings around all these things. Gift certificates: book out showing Christmas is inefficient. Give gifts, better to give money. Only an economist could write a book like that. Fundamentally wrong. People disagree; it makes them less happy. Could argue about they're wrong for giving that gift. Having a gift which might not be precisely what you would have purchased is not as good--is worse--better--than giving money. Here's $25 for a bottle of wine; choose the one you like. Did you like red, white? Maybe don't even want a bottle of wine. But that's not what people do. Given the opportunity, that's never what people do. There are gift certificates. In many cultural settings they would be inappropriate. Wife's birthday, dinner guests--or cash, generally not done. Reason for it. Common argument is they don't know what you've paid for the bottle of wine, so instead of giving them $20, you can only spend $10. Absurd. People shop for wine, they know what it costs. If you were able to match what you know they like it's a much more charming gift even if it's cheap. Not a financial transaction; takes us into a personal relationship. The way charities are able to raise money is they are able to say here's why it matters, here's the personal connection. It is self-interest to be able to portray yourself--Joel Waldfogel. You can make more money by not caring about money. The reason non-profits can make money from donors is that they are saying we don't care about money and all the money is going to go to the recipients. So all of the people you care about: we are going to spend it efficiently and we ourselves live like monks, take a monastic vow. Money doesn't matter to us at all. Our doctors are motivated only by the desire to help people. If they can cultivate that reputation, they'll get far more money themselves. Self-interested from a non-profit perspective.

30:48 Mentioned as a non-profit phenomenon; put it back into the profit context, make it a little more confusing. Merck, used in book Invisible Heart, motto that Merck used to have, inspiration; drug company, pharmaceuticals. "We try to remember that medicine is for the patient. We try to never to forget that medicine is for the people. It is not for the profits. The profits follow.... The better we remember that, the larger they have been." Same idea. If you tell people in a for-profit organization that you are going to make as much money as possible, it generally doesn't do very well. If you tell people your goal is to help people, in a non-profit setting as well, make the most money. Difficult to make a credible commitment really to care more about consumers than about profits. Some of it is window-dressing, flim-flammery. Maybe the reason we see nonprofits is that it's a way of binding themselves to the mast. Give us your donations. In the modern setting, going back to the legal distinction: in the legal distinction, a non-profit can pay its employees a ton, can have lots of goodies for its employees that are non-monetary, influence prestige, etc. Unless you do not charge and do not collect any money that is a bit of romance rather than the real thing. There are rating agencies that give information about that and percentage cost. Information asymmetry. A few years ago, there were some non-profits flying around on Lear Jets; but that came out, and like in any asymmetry, lemons problem--you can't tell what quality you are getting--if just a few non-profits are wasting money they all of the contributions are going to dry up. Rating agencies saying you get 95%, only 5% administrative costs. May be some ways of trying to solve the problem. We see for-profits and non-profits in the same industry. Whether it's the same product is debatable, but serving some of the same group of customers. Hold that. Something about gifts: disagree that the best gift is the one you would have wanted anyway, wine I know you like or music you would have liked. Approximates money. The best gift is the one you didn't know you'd like. I find an author or band or movie you've never heard of, but I put enough time into the relationship. Sometimes that fails: color of the sweater is the color you don't like. Not that you never thought of the lime-green sweater. But I find you a movie or vase you never thought of yourself; what we strive for. That or maybe I do know about it but never bought it for myself because it seemed frivolous or self-indulgent, but when I get it I say I just love this. The other paradox: according to the Waldfogel analysis--textbook. St. Louis Cardinals. Mike likes the Cardinals, Albert Pujols, and one you won't like: Enos Slaughter. Suppose I'm such a good friend to you that I'm going to get you a piece of Enos Slaughter memorabilia that you would not buy for yourself. $300 and no way I would buy that. Don't think anyone who gets that gift says "I wish I'd gotten the money." Don't say it, and don't think it. Not even an economist thinks it. Waldfogel says you would pay on average 16% less, and that's why Christmas is no good. And from your Grandma, you would pay at least 40% less than what she paid for it. But I am so happy to have that Enos Slaughter photograph. You like it, but you don't like it $300 worth. Could be a lot of reasons--your wife could be upset you bought it; but that's not the case I'm talking about. Looking at the picture every day. If I bought it for myself, it would be self-indulgent. But as a gift, it's a sign of your esteem. Catalog number: I'll send you a check and you can buy it for itself--would offend you. But if it showed up on your doorstep, you'd be ecstatic.

38:35 Hospitals: the different ways of providing the service co-exist. It seems pretty stable. Both are expanding at about the same rate. There seem to be some advantages of non-profits: a way of inducing people to give more contributions but also genuinely out of the fact that people like the idea of providing this service at reduced cost to people who need it. A little bit of a red herring. Most hospitals charge for the service. The hospital thing confuses what is going on; should think about a model that is only a real non-profit: no fee for service, and the people who donate do so because they care about the mission of the hospital. We don't see that. The reason we don't see it: government provision of these things is crowded out. The truly non-profit way these would be provided--expansion of government in the 1930s at the federal level basically eliminated private charity to help the indigent, to help the hungry, to help the sick or poor. What most private charity goes to today--very little goes to the indigent--you will see a food kitchen for homeless people because they don't have food stamps, don't have an address, don't want to fill out a form, not integrated into formal bureaucracy--you can still collect money to fund a food bank or soup kitchen for homeless people, but very hard to compete with food stamps for poor people via private charity. Where do we see non-profits? We mostly see non-profits to supply subsidized services to rich people: museums, the opera. They are taking advantage of the tax system to provide services to themselves and claim credit at their big gala that they are being a contributor to their social class: Look at us, we are contributing to the opera. Window dressing around it, programs for city schools, bring the opera in to sing The Marriage of Figaro, but overwhelmingly the tax status of those institutions is helping rich people, which is bizarre. Different from the original rationale. True of education as well.

42:33 Guest last week, two weeks ago, Art De Vany. He has a website: used to be free but now it's not. If you want to get to the good stuff, you now have to pay a subscription fee; charges for the service. Some of the commenters were offended by that. Here he is, promoting his website on his podcast. Couple of thoughts. One is: that's what we all do. Reputation, brand name--not uncommon. We have lots of authors on here. No one complains: he's just trying to sell copies. True you don't make a lot of money selling books generally. We're all selling books, doing other things. Call it capitalism. If you don't like it, don't go to the site. But there is some hostility to this, partly because--don't want to overdo this--we have a sense of entitlement. We have free blogs--Cafe Hayek, Kids Prefer Cheese--we don't charge. Like it that way; don't have to post every day; busy, feel a little bit of guilt but take a break and it seems okay. Don't do that at George Mason. George Mason pays salary. Could have a different model: how dare somebody try to make money teaching, trying to help people understand economics? Could have some donations. We have something between a profit and a non-profit legally. Big disconnect between how much the students pay. But you keep writing stuff, trying to get a higher salary! You are a pig! You are interested in having your salary increase: valuable guy. Doing things publicly where you can say look at this thing that I've done.

45:37 Segue to the media. Right now, obvious problem newspapers have: not making much money. Old source of revenue was advertising. Now stripped away by Craig's List and other forms of information. Newspapers, Art De Vany's website, EconTalk, etc. all have something in common, which is that it's very inexpensive to expand the audience by one member. Really attractive thing about the fact that they're really cheap; costs are covered by people other than the customers. In the case of newspapers, it used to be advertisers, willing to pay to get their ads in front of those eyeballs. Now that they are having trouble doing that, they are going to have trouble collecting the money. But of course they could become charities. The New York Times could create a foundation, not charge for the NYTimes, give it away for free--which it does now and which almost all do, Wall Street Journal is the only prominent one that doesn't. Couldn't they just create a great newspaper using the model of National Public Radio [NPR], though it collects tax money--small amount. Could be funded by donations. Would that be an okay world? Not a paradox. But could finance themselves better by stopping charging for subscriptions and asking for donations. That's the opposite of the way we think about Samuelson's story about public goods. Excludable public good; all they need to have is a password. Newspapers that are going to survive are not going to say here's a password--you've got to sign in in order to look at our content. They are going to make the content free and then ask for donations. Presumably the reason is some relatively smaller number of people are going to donate proportionally more than a few of us paying a dollar a week. Seems like a paradox; opposite of usual story about public goods. Interesting, viable model. Viable besides the fact that people have nostalgia for a brand name like the NYTimes--others have negative nostalgia--want to curl up with the Sunday NYTimes puzzle or on iPad or holding it in the magazine, will fund these out of love. The fact that it's being distributed at zero marginal cost--no subscription, no fee--will allow people to collect more donations. Will say we can't charge for it, will just ask for money, but will reach a lot of people for that money because the out-of-pocket costs to the consumer are zero. That business model--is that a better model, maybe the only viable one, disconnect of who pays for it and who consumes it? Normally in economics, medical care, education Ravitch podcast--we give it away, don't treat it as value--but here we are talking about a situation like EconTalk because we'll get lots of listeners. Not to get more money from Liberty Fund but because that's what we're in the business for--encourage economic education. Want huge audience of interested listeners. Health care: is there something different about the internet? Get the WSJ, don't mind paying it; infuriated me to have to pay to get access to the NYTimes. Is there something about the Internet where we think it should be free? Are we going to get over that. Don't mind paying for software. It's just what's on the Internet. Why is it that we want stuff to be free on the Internet to the point it may harm ourselves? The NYTimes was about a dollar a week when they were charging. Made myself worse off by having a bizarre principle that they should be free. Why should they be free? Fell into that trap. Feeling of entitlement. Famous story: a lot of people over the age of 70 who hate the Red Cross. First encountered this in business school at Washington University; talking to charities, individuals--sometimes they would say that would be okay so long as we don't have the Red Cross involved. Usually you'd think of the Red Cross as some kind of positive. Turns out there is a significant group of people who have a visceral angry reaction. In WWII the Red Cross and some other groups used to give away donuts--not a joke, not an urban legend--to soldiers and whoever it was. At some point during the war they started charging for donuts. It was a nickel. Even heard people in the Red Cross today, when they encounter this--usually from veterans or veterans' families--sometimes come to a meeting and bring a box of donuts: "Here's a bunch of free donuts: let's not talk about the donut thing." This makes up for the 17 donuts we made you pay a nickel for. Sounds like a fake story but think it's a true story. They took something they were giving away--as you lower your price, your costs go up; each donut has a cost. In that case people were so angry--it wasn't even like they were profiting off the soldiers. Just looked this up on snopes.com. U.S. Army asked the Red Cross to charge for donuts, coffee, and lodging. Not to make a profit, but to make even. People valued this service. Quotes from Eisenhower. Not just the Internet--turns out it's the internet and donuts. You got it for free and then they start charging; what's wrong? No contract at all. If I have a new product and want you to try it and give you a free sample--sense of entitlement. Hard to put that genie back in the bottle. Steve Meyer podcast--for people who have stolen their music for many years, hard to go back. Forego transactions the value of which is less than the money you have to pay. Irrational but will persist out of this sense that it is wrong.

56:41 If it disappears--if news organizations disappeared and didn't exist without a subscription fee? Would have to be generational. 99 cents is not enough to worry about, but could forego it on the principle that it should be free. Or steal it. If I spent two hours stealing it, I should have paid the 99 cents. Evolution of information will take some twists and turns over the next few years. Would it be okay: posed a conjecture: The reason I don't want to pay the NYTimes is it's a for-profit company. If it became a non-profit, would it make it easier for me mentally to pay a subscription fee? Maybe that is the business model that will work. Fee for service non-profit, not a donation non-profit. Might that be more viable? Would be perverse. Full circle, medical issue. Back in the 1950s it was considered grotesque that people would get paid for giving blood. Economists weighed in on this: book The Gift Relationship, Richard Titmuss; piece in NYTimes with Michael Wolkoff, incentives of this. Alex Tabarrok podcast, kidneys: if you want people do donate out of love, you don't get very many. Our cultural attitudes have ebbed and flowed. Suppose you have two companies: for-profit that sells blood and a non-profit that gives away blood to people who need it. Which is more likely to make you go in and roll up your sleeve? Non-profit has an advantage. But the argument at the time--and still is--if you pay people for the blood you get people who are desperate for the money, more likely to be drug addicts, health problems, may give too often, can lie, hepatitis, AIDS. The two could co-exist. Plasma had a commercial market.