Peter J. Boettke and Anne Rathbone∗
The Philanthropic Enterprise Working Paper 8
2002
State and Civil Society
But, the view that conceives of civil society as the foundation for the effective operation of the state is flawed on several grounds in our opinion. We do not deny that a vibrant democratic society is grounded in a healthy civil society and institutions of self-governance. This is so mainly because it limits government from expanding its scope of activities. Such a limiting constraint on the scope of government is necessary to ensure that government is restricted to those because of the important distinction between finance through voluntary means and finance through the coercive means of taxation.
State- activities it can do well and avoids those tasks, which in fact it lacks the knowledge and incentives to accomplish effectively. The attempt to conceptualize the market as contrasted with civil society also commits two errors of commission and one error of omission. First, it underestimates the coercive nature of state action. The state, as Max Weber emphasized, is a geographic monopoly on coercion. The state is a powerful instrument through which some parties can gain by exploiting others. Second, it underestimates the role of civil society as an opposition force of self-governance against the coercive power of the state. It was this aspect of 19th century America that so captured the imagination of Alex de Tocqueville. Tocqueville saw America=s propensity for selfgovernance as opposed to reliance on the formal structures of state action as a defining characterization of that society. Self-governance was seen as alternative to the state, not as a prerequisite for a working state sector. Third, the contemporary juxtaposition omits a discussion of the importance of the self-enforcing norms and bonds of trust, which are evident in everyday economic life. Formal contracts and various less formal alternative institutional facilitators of voluntary cooperation are at work in the day-to-day operation of a market society. Benson (1990) suggests that in the United States, seventy five percent of commercial disputes are settled privately through arbitration and mediation. Rubin (1997) points out that in developed economies businesses have learned methods of doing substantial amounts of business without relying on contracts and the threat of legal enforcement makes private arrangements easier.
Civil Society – Market and non Market
In short, market activity is embedded within a larger context of rule-governed behavior. We suggest instead of the distinction that sees the profit motive as contrasted with civil society, that the more appropriate contrast would be the traditional state versus civil society dichotomy, where civil society is divided into non-market and market activity.
Market
In short, what spurs entrepreneurship is the lure of profit, and what disciplines entrepreneurs is the penalty of loss. The property rights structure provides the incentives and establishes the issue of the residual claimant, and the price system provides economic actors with the information to act on the bases of those incentives to utilize resources effectively.
State
But can we say anything in alternative contexts? First, lets consider the state sector and in particular because it is considered responsive let us consider the effectiveness of democracy in assuring that agents act in the interest of the principals. In this example the agents are elected officials, and the principals are the voting public. Is the vote mechanism as effective in disciplining the behavior of the agents in relation to the demands of the principals, as what we argued was the case in the market setting?
The voting mechanism is governed by the logic of concentrated benefits and dispersed costs. The interaction in democratic politics is one characterized by rationally ignorant voters, specially interested votes, and vote seeking politicians. The bias of this interaction is for the politician to concentrate benefits on the well-organized and well-informed special interest voters and to disperse the costs on the unorganized and ill-informed mass of voters.
Non profits
Does the non-profit sector avoid the pitfalls of the state sector? The non-market component of civil society certainly avoids the pitfall of coercion, but it does not have recourse to the institutions of property, prices and profit and loss to the same extent as the market component does. Instead, the non-market sector relies on face-to-face interaction and the disciplinary devices most appropriate for that sort of interaction, namely reputation.
Social Entrepreneurship
Our concern goes to the disciplining of the conjectures of social entrepreneurs. How does the social entrepreneur know if they are doing the right thing in their choice of project A, or project B? How does he calculate the use of scare time and financial resources? We contend that he can do this only by limiting those initiatives to those, which can be directly monitored and disciplined on the basis of face-to-face mechanisms of self-governance. The social entrepreneur does not have recourse the anonymous mechanisms of self-governance that exist in a market economy.
The problem faced by these entrepreneurs was twofold. The social entrepreneurs have to acquire capital from private organizations and must convince the donors that the money is necessary and will be directed to the goal of putting the neediest students through college. What makes this problem especially difficult is that United Student Aids Fund, Inc. was attempting to privately provide a service that the government was already in the business of providing. This makes the problem of convincing private donors to donate money all the more difficult. Thus the notion of reputational collateral is the method by which the social entrepreneur must attain capital. The social entrepreneur must convince the private donors that the government provided service has failed to meet the needs of low-income students to attain loans and additionally that the money donated to the United Student Aid Fund, Inc.would better enable the needy students to attain student loans and that the students would complete their education. Yet, the nature of any nonprofit is that it operates under the structure of a bureaucracy and as such is subject to “soft budget constraints” (Kornai, 1980). The private donors must be convinced that their money is necessary even though the government already provides such a service but also must be convinced that the money will not be misused in the traditional bureaucratic fashion but that it is making society better off or is reaching the neediest students in a manner that was previously
lacking.
The second problem is giving the money to the students who not only need the money the most but that desire the assistance thus the social entrepreneur must engage in not only establishing his own reputational collateral in an effort to acquire capital from private donors but must identify and acquire reputational collateral from the students who are receiving the assistance. This all occurs in the philanthropic arena under which there is no price mechanism because the market has been unable to facilitate exchange in the face of government provision of such services and thus assessing willingness to pay through the price mechanism is not possible. Market prices convey information among buyers and sellers. Without the price mechanism there are proxies for the exchange of information and the determination of willingness to pay. It then becomes the task of United Student Aids Fund, Inc. to assess which students want to go to college and which among them are most likely to finish. This is the only way to ensure future private donations. The government program need not prove the value added in the final product
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