Foundations differ from companies in that, as long as they remain within what is generally a fairly broad legal framework, there are no very clear standards by which they, or anyone else, can judge whether they are succeeding.
An institution that makes profits in a market environment has a measure of its success in its profit rate. If it continually incurs losses, it will not survive; and if it makes profits, there is evidence that the institution is satisfying a need that can be expressed through the exchange economy. That is, it is satisfying a demand at least as well as anyone else could satisfy it.
Of course, this hypothesis leaves open the main social question of whether all demands are good. But at least within a certain restricted framework, there is a fairly clear indicator of success.
Foundations have no such indicators. Regardless of whom they give donations to, or for what purposes, as long as they remain within the law and manage their investments wisely, they will survive. There is practically no selective process that eliminates foundations with frivolous or unproductive purposes in the same way that there is a process to eliminate companies that do not produce something for which people are willing to pay.
Since the survival of a foundation does not depend on the feedback it receives about its decisions, it has less interest in obtaining that feedback. I have sometimes called this lack of interest “Edsel’s law.” When the Ford Motor Company produced the Edsel automobile, it soon discovered that demand was not sufficient to justify its production. There was very rapid feedback and, as a result, the mistake was corrected and production of the Edsel was discontinued.
By contrast, if the Ford Foundation produced an “Edsel,” in the form of donations for purposes that were not particularly useful to society or that did not produce the desired results, the Foundation might never find out, or might only realize it after a long period of time, and its policies would probably not change much once it had that information.
This absence of feedback in donations is a serious defect that could easily lead to pathological states in the grants economy. This is one point at which the exchange economy, where feedback tends to be rapid, direct and used, has a certain advantage.
Foundations may say, of course, that “success” consists in the fulfillment of the purposes established in their charters. However, these purposes are generally very vague, and the question of their social desirability remains unresolved.
There are many foundations, such as the famous one in St. Louis that provides covered wagons for settlers heading west, whose purpose is now obsolete. There are also many other foundations whose purposes may be criticized for their low social priority, but such criticisms are rarely made and are seldom effective even when they are made.
Nevertheless, there is something like a “market” for donations. When there is a large number of donors facing a large number of potential recipients, at least an analogy with the competitive market of the exchange sector begins to appear.
Something resembling this market exists, at least in the more developed countries, in the field of research grants. Research is widely recognized as an activity highly deserving of donor support. Scientific knowledge is a public good because, once a discovery has been made, it is available to anyone who can understand it.
Of course, this does not necessarily apply to trade secrets, classified research or patented processes, which more closely resemble private goods. Even so, the principle is widely applicable to the field of pure science. Because it produces a public good, science must practically be supported by the grants economy rather than by the exchange economy.
What is called “science policy” is largely a problem of who will give which research grants to whom and under what conditions. If there is only one donor, such as the state or a single state agency, there is a monopoly situation that may lead to an undesirable concentration of power in the hands of the donor.
Where there are many donors and many recipients, someone who does not obtain a grant from one donor organization may try to obtain it from another. Therefore, the recipient is less at the mercy of the whims of any particular donor and is much more likely to find someone willing to support their idea.
The case against monopolies is just as strong in the grants economy as it is in the exchange economy. It has even been suggested that we may need an “antitrust law” for foundations, and that there should be a maximum legal size for foundations, in which case large ones might have to be split into a certain number of smaller independent foundations.
In reality, state regulation of foundations has some of the characteristics of the regulation of private monopoly. Since donations are very closely tied to the political system, foundations could almost be considered a form of private state. It is therefore not surprising that the public sector observes them with a degree of apprehension and criticism.
