The economics of the nonprofit sector: Insights from the institutionalism of John R. Commons

While modern nonprofit economics is dominated by the neoclassical and new institutional economic paradigms, this paper develops an economic explanation of the nonprofit sector from the perspective of the original institutionalism of John R. Commons. Instead of focusing on the neoclassical conception of market optimality, John R. Commons’ theory of reasonable value draws attention to the nonprofit sector's role in attaining a reasonable quality of community life. In contrast to the new institutional economics conception of the superiority of full private property rights, John R. Commons’ theory of scarcity, efficiency, and transactions shows the specific property rights structure of the nonprofit organizational form to be well-suited for precisely that purpose. This argument is illustrated on the example of agricultural and rural nonprofit organizations, which make an important contribution to attaining a more reasonable quality of community life in rural areas worldwide.

► Modern nonprofit economics is dominated by the new institutional economics paradigm.
► This paper examines this sector from the perspective of original institutionalism.
► The societal role of this sector is shown to be in attaining a reasonable standard of living.