09/24/2013 10:08 am ET Updated Nov 24, 2013

Aristotle, Pallotta, and the Whole Enchilada

Click here to read an original op-ed from the TED speaker who inspired this post and watch the TEDTalk below.

Dan Pallotta in his TEDTalk, "The Way We Think About Charity is Dead Wrong," says our nonprofits could be a lot more effective if we weren't so puritanical about nonprofit overhead expenses: refusing to adequately fund compensation for talented executives or to invest in advertising or to allow sufficient time and capital up front to foster growth. Because puritanism is, as Pallotta rightly says, a moral philosophy, not a business strategy (in fact, he says, that's exactly the problem), it might be interesting to look at an investment prospectus from several years ago. I refer, of course, to Aristotle's Nicomachean Ethics. Aristotle may provide a clue as to why the public is so reluctant to adopt Pallotta's point of view -- and what might be done about it.

According to Aristotle, the kind of wisdom we need to decide how to act in a given situation is what he calls phronesis, usually translated "practical wisdom." Phronesis, Aristotle says, is two-fold: it involves the ability to decide the best means to achieve a desired end, as well as the ability to discern what the best ends are. Mr. Pallotta's TEDTalk concentrates on the first of these. He in effect says: Given that the end is to find cures for HIV/AIDS and breast cancer, the best means to achieve those ends is to maximize funding for research; and a good way to maximize funding for research is to take the fetters off of nonprofit overhead and allow non-profits to use the same entrepreneurial strategies that are so effective in the for-profit world. He makes a compelling case.

Pallotta is telling us what he thinks is the most skillful way to raise money for breast cancer research. However, the reluctance of the public to generously fund nonprofit overhead isn't totally due to our ignorance of skillful economic strategy. -- Thomas Cathcart

But if you leave out the second half of the definition of phronesis -- the ability to discern what the best ends are -- then it's no longer phronesis. It's what Aristotle called techne, or skill. Pallotta is telling us what he thinks is the most skillful way to raise money for breast cancer research. However, the reluctance of the public to generously fund nonprofit overhead isn't totally due to our ignorance of skillful economic strategy. It's also a moral problem. Solving it requires phronesis.

Why, after all, are we so puritanical about funding overhead for nonprofits? Perhaps partly it's because we haven't watched Pallotta's TEDTalk and haven't thought about how nonprofits need to spend money to raise money. (I'll plead guilty here; Pallotta opened my eyes.) But perhaps it's also because we haven't yet been sold on the idea that the end (say, curing breast cancer) is as valuable to us, right now as the other investments for which we are willing to take risks. Nor perhaps have we been sold yet on the implied connection between spending money on research and achieving the desired outcome, curing breast cancer.

I think Pallotta is onto something when he says that part of our bias against properly funding the overhead of nonprofits is short-sightedness about using entrepreneurial skills and methods in nonprofit organizations. He's probably also correct that our puritanism about charities is a moral barrier to our using these methods. But a moral barrier can be overcome only by moral suasion. If we are to be convinced that we should contribute to charities that spend 50 percent or more of their revenues on overhead, we need what Aristotle called "the full monty of phronesis." (Okay, he didn't really call it that, but he should have.) We need to answer all of the questions that potential donors ask when they apply their own "practical wisdom."

There are questions of ends: Why is curing breast cancer so compelling a cause that I should be willing to take a risk that my contribution may not actually make the revenue pie bigger? There are questions around other moral principles, like fairness and equity: When making an investment in the stock market, my goal is to make money, so I am happy to allow the executives of the company to make a lot of money too (although investor happiness with executive compensation may be reaching its limit in the for-profit world too). When I give to breast cancer research, however, my only motive is altruism (although Pallotta does hint that perhaps in a better world I would also make a profit). If I'm acting out of altruism, why should I be expected to generously concede that the executives should make a lot of money? If they don't believe in the cause enough to be motivated by altruism, why should I be? And, finally, there are questions of means: What is the evidence that further research will make a difference in curing breast cancer? What is the evidence that contributing to increased overhead will actually grow revenue?

Aristotle said that phronesis is concerned with particulars; it deals with how to act in specific situations. Pallotta has told us why we ought in general to lessen the constraints on nonprofit overhead. The tougher sell is why we should do it in a particular way, in a particular situation, for a particular charity. That requires phronesis.

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