Nonprofit Organization and the Division of Labor: A Theoretical Perspective

By Valentinov, Vladislav | Atlantic Economic Journal, December 2006 | Go to article overview
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Nonprofit Organization and the Division of Labor: A Theoretical Perspective


Valentinov, Vladislav, Atlantic Economic Journal


Introduction

The classical theory of the division of labor, dating back to Smith [1981], consists of two basic propositions [Locay, 1990; Tokumaru, 2003]. One is that the division of labor improves productivity due to the existence of scale economies; the other is that the division of labor is limited by the extent of the market. This theory has inspired substantial subsequent literature which focuses on the decisive role of the division of labor for economic growth and also documents some of the relevant evidence [Groenewegen, 1991]. The first proposition of Smith's theory has gone basically unchallenged, except for some disagreements over specific sources of productivity gains [Marglin, 1974]. The second proposition, though, has been extended to include other limitations on the division of labor such as coordination costs comprising the costs of transacting and communicating, as well as aligning incentives between specialized workers [Becker and Murphy, 1992; Yang and Borland, 1991]. The division of labor has been also recognized as being limited by the availability of knowledge [Becker and Murphy, 1992].

Groenewegen [1991, p. 901] differentiates between two types of the division of labor: manufacturing, which takes place within specific factories and industries, and social, which refers to the separation of employment and professions within society at large. This paper will be concerned with the second type, which can be generally characterized as a shift of productive activities from households to markets [Locay, 1990]. The question that this paper will address concerns the introduction of a distinction between for-profit and nonprofit firms in the logical scheme of the social division of labors. Indeed, specialized firms which take over certain productive activities from households can be organized in either a for-profit or nonprofit manner. The theory of the division of labor implicitly assumes that households delegate their productive activities to for-profit firms. Yet it is empirically known that a portion of these activities is performed by nonprofit firms, which are particularly important in more advanced economies in sectors such as culture, education and research, health care, social services, religion, advocacy, environmental protection, philanthropy, etc. [Salamon et al., 2003]. In 1995, these firms accounted for 6.9 percent of GDP and provided employment to 9.8 percent of economically active population in the US; in the 1995-1998 period, the respective figures constituted 5.1 and 4.4 percent for the total of 35 countries covered by the Johns Hopkins Comparative Nonprofit Sector Project [Salamon et al., 2003].

Nonprofit firms are sufficiently different from their for-profit counterparts that they can be regarded as belonging to the third sector as distinct from the governmental and for-profit business sectors. The crucial features of nonprofit firms include: nondistribution constraint, i.e., the prohibition of distributing profits to any of their stakeholders; bottom-up governance orientation; and a voluntary character, which presupposes that "they attract some level of voluntary contribution of time or money" [Salamon et al., 2003, p. 4]. These differences suggest that nonprofit firms have a different reason for existence than their for-profit counterparts. Hence, the social division of labor is more appropriately described as occurring between households, for-profit firms, and nonprofit firms, rather than only between the former two types of economic agents. Yet the received theory of the division of labor, even enriched by the concept of coordination costs, does not permit the identification of a unique role for nonprofit firms in this process, as the theory only focuses on the extent to which some productive activities can be shifted away from households.

The objective of this paper will, therefore, be to develop an extension of this theory, which would enable the unique role of nonprofit firms in the social division of labor to be delineated.

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