Economic activity comes from more than businesses

When our political leaders talk about economic development, I often think they have
a case of
“marketing myopia.” That term was coined in 1960 by Theodore Levitt in what is now considered a classic essay in the Harvard Business Review. Levitt studied why some industries failed and concluded that executives too often misunderstood what business they were really in.
In particular, Levitt examined the decline of the railroads. In the 20th century, as new technologies emerged and new forms of transportation developed (cars, planes), railroad companies were unable to benefit since their focus was train travel rather than transportation per se. Had industry executives taken a broader (i.e. less myopic) perspective they could have seized new opportunities as they presented themselves.
When it comes to the economy, our political leaders suffer from marketing myopia when they equate economic activity with business activity. Economic activity is far more than the latter. For example, paid employees exchange their time in the form of labor for a good in the form of a salary. Whether the employee is paid by a for-profit organization or a nonprofit makes no matter to government, since such transactions are all treated the same. Governments do obtain extra revenue from businesses by taxing profits, but otherwise they benefit no more or less if someone is employed in a nonprofit or business. Governments benefit either way, since they generate revenue by taxing all such transactions.
Thus, by focusing only on business development, many of our civic leaders fail to see our economy as a whole, a system that has three major components: private, for-profit businesses; nonprofits; and government. When it comes to economic activity per se, there is little difference between any of these sectors. The major difference between a business and a nonprofit is not that the latter can’t make profit, but that profit may not be distributed in the form of dividends to corporate shareholders. An example of the distinction between private and public organizations is the Rhode Island Lottery. Each year it generates excess revenue (i.e. profit) that goes into the General Treasury and is later dispensed in the form of grants (i.e. dividends) to cities and towns.
The aim of government is
to maximize the volume of
economic transactions. The increased flow of goods and services benefits society’s members while generating for government the funds to pay for basic services and infrastructure.
John Maynard Keynes was a British economist who recognized that government was more than the arbiter of an economic system but a participant in it as well. When government cuts jobs to reduce its expenses, it is also creating a drag on the economy by increasing unemployment. Government needs to recognize its role not just in promoting the conditions for organizations of any type to thrive but in being an essential member of it.
Similarly, state government spends so much time developing the for-profit sector, it fails to take advantage of the economic contributions and opportunities in the nonprofit sector. According to data published this summer in the Providence Business News, six of the state’s 10 largest employers are nonprofits. They provide much of the health care, education and social services available in the state, and unlike such traditional sectors as manufacturing, these are knowledge-based, “green” and growing industries. While it is true that nonprofits do not pay local real estate taxes, many rent space and/or make “fair share” payments in lieu of taxes. Another budding field of economic activity and opportunity among nonprofits is “social enterprise.” Nonprofits can set up or sponsor subsidiaries that are run like businesses. These organizations generate revenue that is then used either to fund core activities of the nonprofit or offer resources back to the community. Well-recognized social enterprises include Salvation Army thrift stores and Girl Scout cookies.
As a way to promote such economic activity here in Rhode Island, Social Venture Partners is sponsoring a conference on social enterprise at Bryant University in November. As an indicator that government sees its value, Providence Mayor David N. Cicilline is scheduled to be a keynote speaker.
Yet public support for the development of nonprofits remains weak. In my own town of East Greenwich, plans for the development of a new campus for New England Institute of Technology have been slow to move along.
New England Tech’s growth is constrained by the location of its current campus in Warwick. Moving to a new site would allow the school to expand enrollment by providing dormitories for students and by centralizing many functions now conducted in separate facilities. Town officials fail to appreciate the positive, economic impact that students have on retail and other commercial activity. While not-in-my-back yard (NIMBY) forces may be at play, resistance may just be another case of marketing myopia. •


Anthony J. DiBella is a professor of national security affairs at the Naval War College in Newport.

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