The role of the voluntary sector

What we call voluntary sector is often referred to as NGOs, third sector, associative sector, non-profit sector, social economy and similar words aimed at differentiating it from capitalism. Non-profit sector would be a better label if it was not used by entities with special incorporation statutes (e.g. cooperatives) to claim preferential treatment under the pretence of being of general interest rather than for the self-interest of its members, promoters and sponsors.

It is important to understand the difference between self-interest and profit. The first can be achieved through cost minimization or service maximization for its members while the second is separate from the services delivered by the providing entity and can only be achieved through profit maximization.

Let me use as an example the motor associations we find in many countries. When I lived in the UK there were two such associations and I joined the AA after comparing the two in terms of their breakdown and other motor services. The price of these two services was bundled in a single annual fee. So, when assessing its value for money I had to weight simultaneously three different services the insurance premium for the cost of recovery and the quality of the recovery service and the extra services provided. The first I wanted it to be as low as possible and the other two as high as possible. So, the AA directors had no way of knowing how to maximize the members welfare except indirectly through their vote during elections. Indeed they probably did not know whether to maximize the number of members or the welfare of the existing members.

However, later on the AA decided to transform into a corporation and issued shares to its members. So I became a shareholder as well as a client subscribing to their services. Now, the directors had a clear mandate – to maximize my profits. Does it mean that they had an incentive to do it by charging me more or reducing the quality of my services. Quite the contrary. While they needed to focus on getting me profits they also had to keep me pleased to avoid losing a customer and attract more clients by offering a better value for money than AA’s competitors. I was also better off because, instead of being tied up to the AA, if I was not pleased with the profits I could sell my shares and still continue as a client as long as the service was worthwhile.

So, in general, whenever a service or product can be produced on a profit basis the capitalist option is preferable. The few exceptions usually involve cost-minimization situations where members are few and compete among themselves so that they may end up being served by a single monopolist service provider that they co-own. For instance, in the banking industry the banks in small countries may find it advantageous to set up a joint non-profit company to run a single national network of ATM machines. As long as this monopoly is not given any privileges by the state and can be challenged by anyone willing to set up a competing service free competition is preserved, despite the lack of profit-motive.

However, as the activity expands, sooner or later a profit-driven corporate will come to challenge the incumbent and non-corporate entities may find it necessary to transform into a profit-seeking corporation. This can be done overnight or through a long and tortuous process of transformation.

Due to economies of scale, bundling requirements and similar conditions, there is always a reasonable number of activities pursued for self-interest by non-profit entities which do not qualify as part of the capitalist sector. However, in a lively capitalist environment such organizations should aim to transform into corporations, instead of adopting an anti-capitalist stance and chasing state privileges. That is, like the informal sector, they should be a nursery for future capitalists.

Now, these non-profit self-serving entities should not be confused with truly altruistic (non-self-interest) organizations. We find these pursing activities where the state or the capitalist sectors are present and as well as in activities of no-interest for both. They use various institutional forms ranging from associations and clubs to charities and foundations. However, their real distinctive feature is whether they are self-serving or not, a differentiation that is not easy to define when they are active in the fields traditionally associated with the government or enterprise sectors.

From the middle ages we inherited charities and mutuals set up to aid the poor with medical, educational and financial services. Many remain to this day, even when their initial motivation has largely disappeared.

For instance, in the past the small savings of the children and poor were too meagre to be of interest for banks. So, when my first child was born I decided to open an account in a Portuguese mutual that gave children a nice money pig to save coins to deposit later with the bank and earn a little interest. Equally, it allowed its members to open a retirement savings account with as little as one Euro monthly and provides nice retirement homes for its members. All these services are subsided by sharing the profits obtained by a mortgage bank owned by the mutual.

However, a well-informed friend of mine, told me that the profits could be much higher if it was not for the fact the banking staff earned on average 30% more than their colleagues in the for-profit banking sector. Obviously, the staff and directors are strongly against the demutualisation of the institution, despite the fact that now all banks offer similar services to small savers. Moreover, I have noticed that many of the beneficiaries of the profit sharing products are indeed middle class. So, this institution is more properly qualified as an hybrid institution self-serving its employees and clients, but with a significant philanthropic activity.

Indeed, today there are an increasing demand for the state to outsource some of its functions to such hybrid organizations. This could be an alternative to the privatization of natural monopolies and other non-sovereign activities carried out by the state. However, this “third-way” has its own governance and agency problems. Although it is reasonable in aid programs one should be careful to avoid stimulating rent-seeking and anti-competitive behaviour.

In conclusion, there are a wide range of activities where cooperation may substitute market competition and humans may voluntarily mobilize to pursue selfless objectives. However, regardless of how well intended their objectives are, their activities and practices should be carefully scrutinized to avoid confusing self-interest with selfless organizations.

The coexistence of economic systems

In capitalist countries not all activities are conducted in the capitalist sector. There is usually a mix of economic systems that complement and compete against each other and also a competition among various forms of capitalism. This is normal and a permanent feature of capitalism. Nevertheless, the capitalist sector needs to be the leading sector for a country to be considered as capitalist.

Capitalism is probably the only economic system that does not rejects other modes of organization. In fact, it recognizes that some activities are not based on the profit motive while others cannot be carried out through markets. The first constitute the so-called voluntary sector and the second the state sector.

The voluntary sector, also called third sector or social sector, includes both purely altruistic activities and others that are or could be organized through markets but are conducted without a profit motive. Focusing only on self-interest activities let me show how these can contribute to human welfare through clubs and many other forms of associations that do not seek to incorporate.

For instance, consider the case of a choir or a similar activity. Most of us get utility from listening to songs, but only a few can or enjoy singing. The first usually pay to buy records or go to concerts but those in the second group have three options – pay to sing in a choir, sing voluntarily in a choir or be paid to sing in a choir. We may find examples for the three cases. However, there are very few, if any, profit-seeking entrepreneurs offering the first option to willing singers. Likewise, the last option is only available for the top singers. So, most eager singers choose the voluntary option as a hobby.

Now the satisfaction obtained through this hobby derives from three sources – the pleasure of listening and singing in a choir and the pleasure of having an audience. But to get a good audience they usually have to give free or low cost concerts, often at a personal cost in time and money. Even, when they manage to make a little money out their hobby its weight in their utility function is very small when compared with the pleasure of singing, the recognition of an audience and the comradeship of a choir. So, the profit making objective, if any, is negligible and this activity is certainly included in the voluntary sector.

Note, however, that the frontier between the voluntary and the for-profit sector is often fuzzy and shifting. For instance, a conductor in search of paid employment may create a choir to give him a job paid by the singers. Likewise an impresario may contract the singers to profit from their performances. But, an activity may be undertaken by some on a for-profit basis while others do it on a voluntary basis and yet all are pursuing their self-interest.

A similar situation arises in those cases where people join together to fulfil a common need, for example through consumer, housing and workers cooperatives or credit mutuals to provide goods and services that could also be procured from for-profit corporations. Some of these institutions even have corporations among its promoters and sponsors.


This said, the coexistence of economic systems and their fuzzy borders do not prevent us from distinguishing a capitalist from a non-capitalist country on the basis of the relative importance of the capitalist sector.