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I once worked at a place that spent a considerable sum of money (I’ll guess over $1,000) on a rock. Oh sure it was a lovely rock, and sourced locally as well. But really, we purchased a rock with our logo on it and rolled it out front of our building. This, I would remind you, is a building that sees very few outsiders in any given month, and is situated on a big piece of property that is not traversed by casual customers. In short, the rock serves no purpose aside from giving jollies to the person that commissioned it, and perhaps allowed a local to have his skids greased with money that is supposed to be directed toward advancing the educational mission of the organization.

Well, maybe it did have something to do with our educational mission.

And that is what is easy to see! If we were that blatant about directing resources to non-mission oriented activities, one might only imagine what is being done behind the scenes. In fact, a short time after, several of the lowest paid employees of the organization were fired – some who had been there for decades. Many worked in a printing press that ought to have been shut down years ago.  Could these workers have been profitably engaged elsewhere in the firm? If we were not spending money on rocks, could we have managed to develop our capabilities elsewhere? Who knows – there was never any reason to find out.

But what does economics tell us about this behavior. It should not be a surprise that this happens at a non-profit institution. In an organization where there is no residual claimant – there is little connection between the decisions made by the decision-makers and the benefits and costs of such decisions. Since this is the case, we end up seeing lots of silly things done in the non-profit sector that would simply not fly in the for-profit world. In the non-profit world, if customers are not being served well, but they pay low money prices – the total costs of the service are high – the customers endure a big burden. The problem is, the poor service is a total social loss – no one gains from the poor service (just as no one gains when lines form to deal with inefficiently low priced goods). In the for-profit world, high costs imposed on customers are still a burden to customers, but allow for suppliers to gain by doing something about the costs. Thus, we should expect to see much longer lines at the DMV than you see at Wegmans.

The lesson is important for thinking about the problems in education and health care. In education, virtually every school is organized as a non-profit. In health care, virtually no customers pay anywhere near the full costs of the services they require (on average less than 15%). Without the ability for a decision maker to capitalize on making good decisions and using resources wisely, resources will not be used wisely. There are certainly many other problems out there, but a major step forward in education, health care and even the charitable sectors would be to find a way to link the decision-makers to the consequences of their choices.

At my old place, that certainly was not happening.

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