It’s hard to criticize people who generously give away money in the hopes of improving outcomes for other people. But it is also important to recognize the limits and dangers of philanthropic activity. Non-profits can help alleviate particular suffering and they can help promote beneficial ideas, but they cannot effectively substitute for markets. Foundations, like the government, may try to engage in central planning, picking winners and losers in the market, but quite often they may end up perpetually subsidizing losers. The only difference is that at least foundations do not back losers with money they have forcibly taken from others. Even so, a common pitfall for foundations is to fantasize that they know what works and what doesn’t rather than encouraging market forces to sort that out.
This point is nicely illustrated by a new report released by Andrew Coulson at Cato today. Andrew examines academic progress by students in different charter school networks in California. He then looks at which charter networks receive the most financial backing from philanthropies. He finds:
The results are discouraging. There is effectively no correlation between grant funding and charter network performance, after controlling for individual student characteristics and peer effects, and addressing the problem of selection bias.
For example, the three highest-performing charter school networks perform dramatically above the level of conventional public schools on the California Standards Tests, but rank 21st, 27th, and 39th in terms of the grant funding they have received, out of 68 charter networks. The AP results are worse; the correlations between charter networks’ AP performance and their grant funding are negative, though negligible in magnitude.
The problem is not that foundations need to be smarter in their giving, although I have written a book chapter on how they could be smarter. The problem is that foundations are no substitute for market forces in identifying what works and what doesn’t for kids. Rather than focusing on picking winners and losers, foundations should focus on pushing the idea that we need stronger market forces. In particular, foundations could back the idea that we need a broader set of options for students (including charters); that whatever public subsidies exist for schools should be equal across all schools in this market; and that schools should be allowed to compete on price as well as quality. The last item could be achieved with something like educational savings accounts that were recently passed in Arizona, where families could keep any savings between the state subsidy and school costs in an account to be used for future educational needs. Another option is to allow families to top-off the state subsidy with their own funds.
The point is that foundations need to beware of the corruption that frequently follows the concentration of wealth and power, just like governments. There is a danger that foundation officials will begin to imagine that they know what people should want, just like government officials, academics, and D.C. pundicrats often do, rather than allowing people to figure out what works for them. Foundations, like government, can play a useful role by trying to create sensible rules for markets so that they can function efficiently. They can also alleviate particular suffering and misfortune. But if they start focusing the bulk of their money on picking winners and losers in the educational marketplace, they are very likely to get it wrong. Central planning doesn’t work any better for foundations than it does for governments.
I should add that profit-seeking corporations are as prone to corruption as they concentrate wealth and power as are non-profits and governments. The difference is that, absent government protection, corporations suffer the consequences of this hubris. If they stray from their mission and become swollen with power-seeking administrative bloat, they tend to lose in the marketplace to leaner, more focused organizations.
The danger for non-profits (and governments) is that there is no similar mechanism of accountability. If they back foolish ideas or suffer from administrative bloat, they never have to stop as long as they can continue to extract funds without demonstrating effectiveness.
Gigantism in the foundation world is a real problem. Organizations, including Gates, Ford, Carnegie have the funds to keep foisting foolish ideas on people for a long, long time without any accountability. And as they get big financially, they get even bigger in their staffing so that they become a self-perpetuating power-seeking bureaucracy, much like the government (except without taking funds by force).
For example, it is interesting to note that over the last decade the Gates Foundation doubled its assets, but it increased its staffing by almost ten-fold. Empire building afflicts the non-profit and university world almost as much as government. Wise foundations avoid building empires and focus on promoting sensible rules for efficient market operation as well as the alleviation of misfortune that occurs within markets.