Dr. Lester M. Salamon, director of the Center for Civil Society Studies at the Johns Hopkins University, examines the role and importance of nonprofit organizations in American life. Salamon argues that active cooperation among the business, government and nonprofit sectors in addressing public problems is an essential component of civil society.

Few aspects of American society are more revealing of American character, or more central to American life, than the thousands of day-care centers, clinics, hospitals, higher-education institutions, civic action groups, museums, symphonies, environmental groups and related organizations that comprise America's private, nonprofit sector. Yet few also are more consistently misunderstood by the public and policymakers alike.

One reason for this is the sheer diversity of the entities that make up this complex sector. Many people question whether it is possible to consider small neighborhood associations and well-financed business associations, tiny soup kitchens and massive hospital complexes, elite universities and small day-care centers as parts of a single coherent "sector."

An accurate view of the nonprofit sector has also been clouded by the myth that government and nonprofit organizations are in constant and fundamental conflict. In fact, one of the central realities of the nonprofit sector today is its mutually beneficial involvement with government.

To understand the American nonprofit sector and its role in promoting civil society, it is necessary to sweep away some of this mythology and look carefully at the actual operations of this set of institutions.

BASIC DEFINITION

As a first step in this process, it is necessary to clarify exactly what the nonprofit sector is. In the United States, 26 different types of organizations are identified as worthy of tax exemption, ranging from business associations through charitable organizations and social clubs. Behind these 26 categories, however, lie five critical features that all these entities share. To be considered part of the nonprofit sector, therefore, an entity must be:

organizational, i.e., an institution with some meaningful structure and permanence;

nongovernmental, i.e. not part of the apparatus of government;

non-profit-distributing, i.e., not permitted to distribute profits to its owners or directors, but rather required to plow them back into the objectives of the organization;

self-governing, i.e., not controlled by some entity outside the organization; and

supportive of some public purpose.

While all organizations that meet these five criteria are formally part of the nonprofit sector in the United States, an important distinction exists between two broad categories of these organizations. The first are primarily member-serving organizations. While serving some public purpose, these organizations meet the interests, needs and desires of the members of the organization. Included here are social clubs, business associations, labor unions, mutual benefit organizations of various sorts and political parties.

The second group of nonprofit organizations are primarily public-serving organizations. These organizations exist exclusively to serve the needs of a broader public. Included here are a variety of funding intermediaries such as charitable, grant-making foundations; religious congregations; and a wide range of educational, scientific, charitable and related service organizations providing everything from nursing home care to environmental advocacy.

This distinction between member-serving and public-serving organizations is far from perfect. Nevertheless, it is sufficiently important to find formal reflection in American law. Thus, public-serving organizations fall into a special legal category -- Section 501(c)(3) of the U.S. tax code -- that makes them eligible not only for exemption from federal income taxation and most state and local taxation, but also for tax-deductible gifts from individuals and corporations, that is, gifts that the individuals and corporations can deduct from their own income in computing their tax liabilities. It is these organizations that most Americans have in mind when they think about the "nonprofit sector" and it is these that we will focus on here.

A MAJOR ECONOMIC FORCE

As it turns out, even this public-benefit portion of the American nonprofit sector alone turns out to be a major economic force. This is so, even when we focus only on the more formal part of this sector -- the organizations that formally register with the tax authorities or are otherwise known to exist -- and exclude religious congregations as well as the numerous organizations that choose not to register or formally incorporate.

Under American law, the formation of nonprofit organizations is considered a basic right that does not depend on governmental approval. Organizations are therefore not obliged to register with any governmental authority in order to claim nonprofit status and the tax privileges to which it entitles them. This is particularly true of religious congregations, which are specifically exempted from obligation to register and to file the annual reporting form that registered organizations are required to submit.

The approximately 750,000 organizations that comprise this core, public-benefit service portion of the American nonprofit sector had operating expenditures in 1996 of approximately $433 billion. If this set of organizations were a nation, its economy would thus be larger than all but about 10 national economies -- larger than those of Australia, India, Mexico and the Netherlands. What is more, if we were to add the volunteer labor that these organizations utilize, the total economic activity these organizations represent would rise by another $80-$100 billion.

Not all portions of this nonprofit sector contribute equally to the sector's economic scale, of course. By far the largest component is the health subsector. Health organizations alone account for over 60 percent of all nonprofit expenditures. Higher education is second with about 20 percent. The remaining 20 percent of nonprofit expenditures are split among all the other types of organizations -- social services, arts and culture, international assistance, advocacy, community development and many more.

THE NONPROFIT ROLE IN AMERICAN LIFE

That nonprofit organizations play such an important role in American life is due in part to historical accident. American society came into existence before government appeared on the scene. Frontier settlers therefore had to find ways to provide needed public services for themselves, without the aid of a pre-existing governmental apparatus. They did so by joining voluntarily with their neighbors to create schools, raise barns and build public facilities, as well as many other things.

When Alexis de Tocqueville visited America in the early 19th century, he was struck by the proliferation of such voluntary groups. "Wherever at the head of some major undertaking you are sure to find the state in France or a person of wealth in England," he observed, "you will find an association in America." The deep-seated hostility to centralized authority that many immigrants brought with them from their homelands made a virtue out of this necessity, reinforcing the prevailing voluntary spirit and creating a presumption in favor of "do-it-yourself" approaches to solving public problems.

Although historical circumstances have changed considerably in the intervening 150 years, nonprofit organizations continue to play an important role in American life. More specifically, these organizations perform four crucial roles:

The Service Role. Nonprofit organizations play a critical service role. Reluctant as they are to call government in to cope with a public problem until private solutions have been tried first, Americans tend to let nonprofit organizations lead the way in responding to critical public needs. The nonprofit sector has thus functioned as a first line of defense, a flexible mechanism through which people concerned about a social or economic problem can begin to respond, without having to convince a majority of their fellow citizens that the problem deserves a more general, government response. Nonprofit organizations are also available to subgroups of the population who desire a range of public goods that exceeds what the majority of citizens is willing to support. Reflecting this, nonprofit organizations operate in a wide range of public service fields. These organizations represent:

half of the country's hospitals

half of its colleges and universities

60 percent of its social service agencies

almost all of its symphony orchestras, and

most civic organizations

The Value Guardian Role. The nonprofit sector functions as a "value guardian" in American society, and exemplar and crucial embodiment of a fundamental national value emphasizing individual initiative for the public good just as private economic enterprises serve as vehicles for promoting individual initiative for the private good. In the process, nonprofits foster pluralism, diversity and freedom. These values go beyond the more instrumental purposes that nonprofit organizations also serve, such as improving health or providing shelter to the homeless. They are important in and of themselves, as expressions of what has come to be regarded as a central feature of the American society -- the protection of a sphere of private action through which individuals can take initiative, express their individuality, and exercise freedom of expression and action.

The Advocacy/Social Safety-Valve Role. Nonprofit organizations also play a vital role in mobilizing broader public attention to societal problems and needs. Indeed, they are the principal vehicle through which communities can give voice to their concerns. In fact, most of the social movements that have animated American society over the past century -- the women's suffrage movement, the labor movement, the civil rights movement, the anti-war movement, the environmental movement, the women's equality movement -- took shape within the nonprofit sector.

By making it possible to surface significant social and political concerns, to give voice to under-represented people and points of view, and to integrate these perspectives into social and political life, these organizations function as a kind of social safety valve that has helped to preserve American democracy and maintain a degree of social peace in the midst of massive, and often dramatic, social dislocation.

The Community Building Role. Finally, nonprofit organizations play a vital role in creating and sustaining what scholars have come to refer to as "social capital," i.e., those bonds of trust and reciprocity that seem to be pivotal for a democratic society and a market economy to function effectively, but that the American ethic of individualism would otherwise make it difficult to sustain. Tocqueville understood this point well when he wrote in Democracy in America in 1835:


Feelings and opinions are recruited, the heart is enlarged, and the human mind is developed, only by the reciprocal influence of men upon one another.... These influences are almost null in democratic countries; they must therefore be artificially created and this can only be accomplished by associations.

PARTNERSHIP WITH GOVERNMENT

Important as the nonprofit sector is, however, it would not have achieved its present scale in the United States had it been forced to rely solely on private charity and voluntary action. Rather, a significant partnership with government was crucial to the sector's growth.

This partnership was apparent in the earliest period of American history. For example, America's first nonprofit corporation -- Harvard College -- was founded with public subsidies in the mid-17th century. As urbanization and industrialization accelerated in 19th-century America, the limited capability of purely voluntary responses to human needs became increasingly apparent. The upshot was a growing demand for governmental assistance to cope with the serious poverty, ill-health, inadequate housing, recurrent unemployment and related problems that arose. Indeed, nonprofit organizations were often in the forefront of pressing these demands.

Given the country's hostility to exclusive reliance on government, however, the response to these pressures took a characteristically American route. Instead of switching from reliance on voluntary institutions to reliance on government, American policy pursued a middle course, mobilizing government-raised resources to support the provision of services by private, nonprofit groups. By the 1870s, in fact, charities aiding poor children in New York were already receiving well over half of their income from government, and similar practices were evident elsewhere as well.

This practice expanded greatly in the 1930s, and even more so in the 1960s and 1970s, when the national government finally entered the social-welfare field in a major way. Reflecting this, the most rapid period of nonprofit growth in the United States occurred precisely during this period of most rapid growth of government social-welfare spending.

A pervasive partnership was thus forged between government and the nonprofit sector, and this partnership fueled much of the nonprofit sector's growth. Contrary to widespread beliefs, government provides substantial financial support to the nonprofit sector, which it "contracts" to provide a multitude of social services. By the early 1980s, for example, government accounted for over 30 percent of nonprofit public-benefit organization income, compared to only 18 percent from all sources of private philanthropy (individual, corporate and foundation) and about 50 percent from fees and charges.

This widespread partnership between government and nonprofit organizations has not been without its problems. Nor does it eliminate the need for private charitable support if nonprofit organizations are to retain a meaningful degree of independence. At the same time, the American experience suggests that there is a highly promising "third route" between sole reliance on the state vs. sole reliance on private charity to cope with public problems. That route involves productive collaboration among the civil society sector and government and business at all levels.

TOWARD TRUE CIVIL SOCIETY

Civil society, in this sense, is not a particular sector. Rather, it is a relationship among sectors, a relationship that not only acknowledges the legitimacy of a civil sector, as well as business and government sectors, but encourages active cooperation among all of them in addressing public problems. Such a concept may not satisfy everyone, but it seems most conducive to the achievement of the democracy and development that the public claims to espouse. That, at any rate, seems to be the chief lesson -- still incomplete --of the American nonprofit experience.

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The Institute for Policy Studies at The Johns Hopkins University, where Dr. Lester Salamon served as founding director, produced the pamphlet, Nonprofits and Development: The Challenge and the Opportunity, on the role nonprofit organizations play in development. Its contents reflect the work of scholars and practitioners from over 32 counties who participated in the VIII Annual Johns Hopkins International Philanthropy Fellows Conference which took place in Mexico City in 1996.

For a printed copy of this pamphlet, please write:
Nonprofits and Development
Center for Civil Society Studies
Institute for Policy Studies
The Johns Hopkins University
3400 North Charles Street
Baltimore, MD 21218
USA

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Issues of Democracy
USIA Electronic Journal, Vol. 3, No. 1, January 1998