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Voluntas: International Journal of Voluntary and Nonprofit Organizations, Vol. 11, No. 1, 2000

A Third Sector in the Third Millennium?

Ralph M. Kramer1,2

Three trends since the 1960s underscore the need for different ways of conceptu-
alizing the new mixed economy in the human services. First, there has been an
enormous increase in the number and types of nonprofit organizations, and greater
dependence on governmental revenue. Second, extensive growth in privatization
and commercialization in the human services. Third, this culminated in the con-
vergence and blurring of sectoral boundaries. Numerous metaphors have been
suggested to describe these new patterns, but more suitable concepts and theories
are needed. Four theoretical frameworks are analyzed for an intersectoral study of
organizations in the same industry: (1) political economy, (2) organizational ecol-
ogy, (3) neoinstitutionalism, and (4) mixed, open systems. As analytic paradigms,
these frameworks could supplement, complement, or be integrated with other re-
search models for third sector studies, and could contribute to theory building and
social policy.
KEY WORDS: sectoral convergence; research models; form of ownership.

INTRODUCTION

Two contrasting theoretical perspectives on the nonprofit sector have emerged

in the United States. The dominant perspective emphasizes the rapid institutional-
ization of a third sector as the primary partner with government in the following:
(1) provision of human services, (2) promotion of culture and the arts, and (3) ad-
vocate and core of the civil society. A second, less well-known view questions the
utility of a sectoral model based on form of ownership because it overlooks the
blurring of boundaries and the extensive interdependence among organizations.
However, at the same time, appropriate concepts and models for the description
and explanation of these processes are missing.
1 School of Social Welfare, University of California, Berkeley, California.
2 Correspondence should be directed to Ralph M. Kramer, 62 York Drive, Piedmont, CA, 94611; email:
ralphk1@socrates.berkeley.edu.

1
0957-8765/00/0300-0001$18.00/1 °
C 2000 International Society for Third-Sector Research and The Johns Hopkins University
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2 Kramer

Three almost parallel trends have emerged since the 1960s underscoring the
need for new approaches to the study of the expanding organizational universe
in the human services. First, a takeoff has occurred in the exponential growth
in the number and types of nonprofits, and their rapid and extensive dependence
on governmental funding to support their substantial role in implementing public
policy. Before the decline in federal funding beginning in the decade of the 1980s,
governmental organizations on all levels were the source of three times as much
revenue for nonprofit social service agencies as they received from their traditional
philanthropic sources, which dropped from 18 to 11% of their income (Salamon,
1993). By the mid-1980s, the human services industry was a major factor in the
political economy of the postindustrial society in the United States.
A parallel development was the recognition of a new entity, the third sector,
embodied since 1980 in the Independent Sector, the national professional and trade
association for over 1,400,000 nonprofit organizations (NPO)—up from about
50,000 in the late 1940s—representing more than 25 different types of tax exempt
organizations. The Independent Sector represents “. . . an effort to institutionalize
the idea that all charitable tax exempt organizations were part of a distinctive
and coherent domain of organizations—to, in effect, invent the nonprofit sector”
(Alford, 1992; Hall, 1992, p. 244).
A similar process has been underway in over sixty countries worldwide, and
is reflected in a substantial body of international research, the establishment of
over forty academic research centers in less than twenty years, the founding of
new scholarly journals, and the professional associations of ISTR and ARNOVA
(Gidron, Kramer, and Salamon, 1992, pp. 1–30).
The first efforts to account for the development and character of a third, or
nonprofit, sector were made by economists using neo-classical concepts of state
or market “failure,” or “trust,” as explanatory variables (Hansmann, 1987, 1996;
Ortmann, 1996; Steinberg, 1997). These macro-economic models failed, however,
to capture the critical dimensions of the third sector beyond some imputed compen-
satory functions. They also did not explain cross-national variations in the size and
composition of the third sector (Di Maggio and Anheier, 1990; Lifset, 1989, 141–
149). They have also been faulted by Hall (1998) for their reductiveness, empirical
weaknesses, conceptual circularity, and ethical obtuseness (see also VOLUNTAS,
8(2), Special Issue on Economic Theory, pp. 97–119).
More recently, Salamon and Anheier (1998) proposed a more comprehensive
“theory of social origins” to explain how a set of historical, political, and economic
variables can account for the differences in the size, composition, and funding
patterns of the nonprofit sectors in eight countries.
The second trend, occurring at the same time, has been a parallel growth in
various forms of privatization of many governmental functions, and, beginning in
the 1980s, rapid growth in commercialization and competition in fields formerly
dominated by nonprofit organizations in health care, education, and the social
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A Third Sector in the Third Millennium? 3

services (Adams and Perlmutter, 1991; Tuckman, 1998). Many nonprofits also
sought to compensate for the loss of revenue from government during the 1980s by
means of fees, sale of services, and other forms of income replacement, including
their conversion, in whole or in part, to for-profit status (Ryan, 1998; Salamon,
1993, 1998; Skloot, 1988). New structural forms have proliferated in which hybrid
or pseudo nonprofits have spun-off commercial subsidiaries (McGovern, 1989;
Scotchmer and van Benschoten, 1999). At the same time, numerous business and
industrial corporations have converted to nonprofit or have established nonprofit
subsidiaries (Claxton, et al., 1997; Gray, 1997; Kuttner, 1997; Weisbrod, 1998).
Although nonprofits still have about two-thirds of the market for health care,
for-profit companies captured almost all the growth in hospital and home healthcare
during 1977–96, as well as expanding their share of the social services market in
child welfare, including day care, and drug treatment (Clarke and Estes, 1992;
Geen and Pollak, 1999). In higher education, it is estimated that by the mid-90s,
at least two-thirds of the income of private colleges and universities, together
with philanthropic foundations, was derived from fees and other revenue from
commercial activities of close to a billion dollars (Hodgkinson and Weitzman,
1996; see also Weisbrod (ed.), 1998).
The third trend is that these processes of expansion and commercialization
have contributed to the recent but less recognized societal trend toward convergence
and blurring of sectoral boundaries in a new “mixed social economy,” a term
currently used in both the United States and Europe (Ferris and Graddy, 1999;
Knapp, Beecham, and Hallam, 1997). It reflects the fact that “. . . the borders that
once tidily separated governmental, for profit and nonprofit institutions are quickly
vanishing” (Hammack and Young, 1993, p. xiii). This blurring of sectoral borders
is not surprising because most social services are, or could be, provided by any
type of organization, particularly if there is an administrative separation between
public funding and service delivery (Billis, 1993; Kramer, 1995). As predicted
over a decade ago, “the future of the welfare state is the invention of institutions
that are not public and not private” (Rein, 1989, p. 70).

Critique of the Sector Concept

Despite these changes, there has been a tendency to reify the “guiding con-
struct” of the third sector so that it takes on more substance and coherence
(Abzug, 1999; Alford, 1992). Forgotten is the fact that, historically, the shifting
boundaries—conceptual, legal, political, economic and organizational—between
societal sectors have always been blurred, permeable, and interpenetrated (Brody,
1996a; Musolf and Seidman, 1980; Young, 1999). Other factors contributing to
the lessening of differences in the structure, roles, and performance of organiza-
tions are their increasing dependence on the same funding sources, public policies,
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4 Kramer

and regulations, as well as the diffusion of a common set of principles of the “new
managerialism” across sectoral lines (Bielefeld and Galaskowicz, 1998; Ferris and
Graddy, 1989; Locke, 1996).
From an international perspective, it was observed almost 15 years ago in
Europe that “There is a growing interdependency of both public and private actors
in economic and social policy that renders meaningless the old distinctions of ‘state
and society’ or of ‘public and private’ as separate domains” (Kaufmann, 1991,
p. 91; see also Kuhnle and Selle, 1992; Perry and Rainey, 1988). In the United
States, “The interpenetration of sectors is an established fact. The epistemolog-
ical problem is to devise methods that will enable us to grasp its extent and its
significance” (Hall, 1992, pp. 105–106).
Evidence of a pervasive societal trend toward institutional isomorphism,
through acculturation, assimilation, or imitation, is found in the proliferation of
the neologisms coined during the last 25 years. They reflect both the diminishing
significance of form of ownership, as well as the absence of more appropriate con-
cepts for a mixed, intersectoral network of organizations (Smith, 1975). Included
in this conceptual jungle, which has superseded the traditional public/private di-
chotomy, are as follows: the contract state, the enabling state, the shadow state,
welfare pluralism, the mixed, or new political economy, third party government,
and indirect public administration. These, in turn, have been seen as the outcome
of a phenomenon called “blurred boundaries,” which have also been described as
ambiguous, fuzzy, fading, dissolving, blending, merging, shifting, eroding, disap-
pearing, or overlapping (Ferris and Graddy, 1996; Kramer, 1998). They are also
embodied in an earlier metaphor used in public administration describing these
social processes as the shift from a layer to a marble cake (Grodzins, 1966).
While Hall (1992, p. 28) declared that “the sector is an artificial construct,
not an institutional reality,” Alford (1992, p. 42) noted the “symbolic function of
the political language used to lump together highly disparate organizational forms
with quite different societal roles and links to economic and political interests.”
Others have questioned whether “. . . the idea of ‘sector’ . . . is the most useful way
of making sense of the diversity of organizations in this field . . . in an increasingly
fragmented world . . . it is possible that social purposes will be served through
alliances and networks as through the notion of separate sectors” (Taylor, 1992;
Taylor and Lansley, 1992, p. 23).
Although there have been very few empirical, intersectoral studies of the
convergence and erosion of boundaries, numerous sociological explanations for
these trends have been proposed. Concepts have been borrowed from network,
ecological, exchange, open systems, coalition, contingency, resource dependency,
and even postmodern theories (Boje, Gephart, and Thatchenkery, 1996; Gronbjerg,
1993, pp. 309–310; Hatch, 1996; Powell, 1990). Among the independent variables
suggested for comparative intersectoral studies of organizational role and per-
formance in different industries are size, age, structure, fiscal resource systems,
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A Third Sector in the Third Millennium? 5

decision making and governance patterns, professionalization, and service tech-

nology (Perri 6, 1994).
However, studies of hospitals, nursing homes, schools, universities, and so-
cial services, such as day care and nursery schools, have shown that they have
much more in common with their counterparts in other sectors than with similar
organizations in their own sector (Kagan and Newton, 1989; Krashinsky, 1998;
Mauser, 1998; McGovern, 1989, pp. 168–182). “Ownership-related” differences
in hospitals are more closely related to the character of their external environment,
geography, and the industry itself, which is extremely competitive, professional-
ized, and commercialized (Schlesinger, 1998; Wolf and Schlesinger, 1998).
Further, all organizations, regardless of their type of ownership, are subject to
changes in their internal and external environments by the same forces of supply
and demand, resource dependency, and shifting patterns of interorganizational
collaboration or competition. These factors help account for the conclusion that
formal differences among organizations tend to be more of degree than of kind
(Brody, 1996b; Kramer, 1987).
While their form of ownership has contributed to the legitimacy of nonprofits,
differences in their performance, where they coexist with for-profit organizations,
may depend on the extent of competition, size, and isomorphism within the in-
stitutional and ecological structure of a particularly industry or field of service
(Hammack and Young, 1993, pp. 398–419).
There is considerable evidence that, as Anheier and Seibel (1990, p. 381) con-
cluded, “. . . the more one increases differentiation and complexity, the less useful
the whole concept of sectors becomes . . . the designation of organizations into
sectors may ultimately rest on research conventions rather than on strict empirical
grounds.”
That the traditional concept of sector has less meaning today is also supported
by the finding that social service systems in Europe, regardless of their organiza-
tional mix in different industries, have encountered the same problems of cost and
quality control, inequities, and inefficiencies such as over- or underutilization, and
fragmentation (Evers and Svetlik, 1993). This is also true in the Netherlands where
distinctive forms of privatization have been institutionalized for over forty years,
which weakens the case for any sector’s monopoly of service provision (James,
1989). Recent research shows clearly that the more a country is dependent on the
nonprofit sector (i.e., the greater its scope and responsibilities), the more it will
generate the same bureaupathologies usually associated with government (Kramer,
1981; Kramer, Lorentzen, Melief, and Pasquinelli, 1993).
If the form of ownership has become a poor predictor of organizational be-
havior, then new, alternative, or at least supplementary concepts are needed for
studying the mixed (intersectoral) industry of the human services on an interdisci-
plinary basis. There is, of course, no one best theory or metaphor for such a purpose
because interorganizational relations may be studied fruitfully from a variety of
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6 Kramer

perspectives (Milofsky, 1996; Reitan, 1998, p. 286). Accordingly, in the next sec-
tion, four current theoretical frameworks are analyzed and evaluated: (1) political
economy, (2) organizational ecology, (3) neoinstitutionalism, and (4) mixed, open
systems. Each could, in varying degree, serve as a set of lenses through which or-
ganizations from different sectors in the same industry or field of service could be
studied. As exemplars, they constitute a selective menu of four analytic paradigms
that focus on the organization as a whole, on internal structures and processes, and
on external relations. They need not displace current third sector research models;
rather, as a response to the convergence and blurring of sectoral boundaries, they
can supplement or complement single sector studies.

FOUR ALTERNATIVE OR SUPPLEMENTARY PARADIGMS

The Political Economy of Human Services

A political economy perspective in the human services has historical roots

in 18th century European accounts of the relationships between the emerging
nation-states and the dynamics of their economies. As the social sciences be-
came more specialized and various disciplines proliferated during the 19th cen-
tury, political economy eventually lost some of its centrality. It was revived in the
latter part of the twentieth century as one of the inter-disciplinary studies of the
growth and development of industrial societies (Benson, 1975; Walmsley and Zald,
1970).
Beginning in the 1970s, new programs of professional education and training
were also established for most of the components of this vast industry, together
with different job titles and even new career lines, particularly for persons who did
not have graduate or professional degrees (Anderson, Frieden, and Murphy, 1977;
Stein, 1986). Some of the newer concepts and principles of political economy
are related to the mixed governmental and business economy of post-industrial
societies, and, during the 1970s, specifically to the human services industry. Within
a few years, as part of the expansion of the personal social services, human services
rapidly became the most widely used term for the proliferating specializations
within the broad fields of health, education, and social welfare.
The scope of the professional and research publications in the burgeoning
human services includes close to a dozen specialized fields of service: education,
health care, behavioral (mental) health, personal social services, income main-
tenance, employment training, rehabilitation, housing, recreation, and social de-
velopment (Wernet, 1994). In addition, most definitions of the human services
industry include not only service agencies and their users, but also organizations
on different administrative and geographic levels that regulate, coordinate, plan,
supply resources, advocate, and adopt policies (Dickens, 1996). Each level has
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A Third Sector in the Third Millennium? 7

multiple stakeholder constituencies such as users, advocacy organizations, profes-

sional associations, funders, board and committee members, and regulatory and
legislative bodies. Finally, adding to the complexity is the inclusion of various
mixed and hybrid organizations that combine nonprofit and for-profit characteris-
tics; public agencies organized as free-standing nonprofit corporations; or others
that are subsidiaries of for-profit organizations.
As a measure of its importance, Austin (1988, p. 15), whose book can serve as
an exemplar of this paradigm, observed that in postindustrial societies, the scope,
structure, and financing of the human services has become one of the three most
critical societal concerns; the other two being the avoidance of war, and the man-
agement of the economy. Austin’s schema for human service programs starts with
the person-to-person transactions within an organizational program in which des-
ignated staff members use particular service technologies with specific groups of
clients. These program components are, in turn, elements in two types of more
complex social structures: the vertically organized human service organization
(HSO) and the horizontally organized local interorganizational service delivery
network. Both are parts of an industry (e.g., health care, rehabilitation, education)
that is embedded in the societal political economy environment, which often has
both national and international connections.
While most researchers have concentrated on organizations under govern-
mental and/or nonprofit auspices, for-profit providers have rapidly moved into
this field since the 1980s as part of the trend toward privatization. As a result, there
is increasing evidence for the belief that in the postindustrial society, any good
or service can be produced by any domain (i.e., households, market economy,
government or nonprofit organizations). Although they differ in their governance
structures and who controls their assets, “for profit firms have the technical capac-
ity to produce any type of human service which is produced by either nonprofits
or government” (Austin, 1988, pp. 236–237).
While this may be true in theory, however, a recent review of empirical studies
comparing nursing homes and day care under different auspices determined that the
findings were inconclusive, and that even the cost advantage of for-profit providers
faded when measures of quality were used (Gilbert 1995, pp. 135–137). Evidently,
one of the few generalizations that can be made from most comparative studies is
that relatively few generalizations can be made about the consistent, comparative
advantages of one type of auspice or another (Weisbrod, 1998, pp. 287–305).
The scope and primary focus of this framework is exceptionally broad, con-
sisting of selected political and economic interactions among organizations and
their external or task environment, which is composed of other organizations,
interest groups, and stakeholders that control important resources. One conse-
quence of a resurgence of interest in political economy has been a widespread
diffusion of its various components. As a result, the term political economy has
often been used for virtually any collection of concepts that focuses on selected
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8 Kramer

political or economic aspects of a social process (DeGennaro, 1988; Knocke,

1990). As used here, political economy is restricted to its meaning as an organiz-
ing principle in the work of exemplars such as Austin (1988) and Hasenfeld (1983,
1992).
As applied to organizations, political refers to the various processes through
which power and legitimation are acquired and maintained, goals and tasks de-
termined, and systems of governance and oversight established. Economic refers
to the processes by which resources (i.e., funds, staff, clients) needed for the or-
ganization’s service technologies are obtained and allocated, and a division of
labor established for the production and delivery of services (Hasenfeld, 1983,
pp. 31–32).
Within HSOs, institutional rules reflect the outcomes of negotiations and
other interactions among various interest groups such as boards, staffs, contribu-
tors, users, and their differential access to and control of power. Consequently, it
is the changing power and economic relations within the organization that deter-
mines which policies will be adopted, how service technologies are implemented,
and how decision-making authority will be distributed. To maintain their auto-
nomy in an intersectoral environment, organizations engage in a variety of po-
litical strategies—shifting from competition to co-optation and collaboration—to
cope with the forces that influence their resource acquisition and service deliv-
ery systems. These circumstances may explain why many of the interest groups
incorporated as nonprofit organizations have been described as “private govern-
ments.” From the perspective of political economy, an organization can be con-
ceived as an arena or open system in which the various interest groups, or stake-
holders possessing needed resources, compete in trying to optimize their particular
values.
While it is true that the form of ownership of a HSO is only one of many
factors to be taken into account in understanding its organizational structure and
performance, some problematic aspects of this model have been noted. These in-
clude the difficulty of distinguishing between political and economic factors; an
overly-abstract conception of power and other economic realities; and the prob-
lems in operationalizing and validating empirically complex organizational issues
(Hasenfeld, 1983, pp. 43–49). The concept of political economy has also been crit-
icized because of its underestimation of the importance of values and ideologies
that can transcend calculations of power and money in influencing organizational
behavior. In addition, there are intrinsic obstacles to empirical research in the hu-
man services, such as the imprecise technology in many fields, lack of consensus
about the definitions of outcomes, and the criteria for judging effectiveness. Most
of these weaknesses, however, are addressed in the list of feasible, intersectoral,
high priority research topics proposed by Austin (1988, pp. 240–244) and include
detailed mapping studies of human service industries, labor forces, public attitudes,
resource flows, professional networks within an industry, and interorganizational
service delivery systems.
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A Third Sector in the Third Millennium? 9

After reviewing seven other theoretical approaches to HSOs, and finding

them all more or less deficient on the prerequisites for a theory, Hasenfeld (1983,
pp. 43–49) concluded that the political economy perspective, as a synthesis or
“converging framework” of some of the major themes in the others, came closest
to meeting the required criteria. This perspective articulates more specifically than
the others the external and internal political and economic processes that shape
the organization’s character and influential interest groups. Political economy is
particularly useful, for example, in understanding how the external environment
and resource acquisition processes of organizations can influence their service de-
livery systems. It seems reasonable to conclude that as a paradigm for studying an
intersectoral industry characterized by interdependence and interpenetration, con-
cepts from political economy could be usefully incorporated in research designs,
which would contribute to both theory and social policy.

The Ecology of a Market Economy

In the theoretical framework explicated by Hammack and Young (1993),

which will serve as the second exemplar, organizational ecology displaces the
traditional three sector model, even one with permeable boundaries. Although
nonprofit organizations are considered part of the ecology of a market economy,
the increased commercialization of the third sector is not the source of this as-
sumption; rather, it is the resemblance of market economies to ecologies (i.e., the
relationships of organizations to their environments in which various institutional
interests occupy different niches).
While nonprofits have been the subject of recent research using ecological
concepts (Bielefeld and Galaskiewicz, 1998), this basic framework represents a
shift from the primary focus on nonprofit as a form of ownership, to a context, an
environment, or an overall ecological system in which organizations of different
types are embedded in the market economy. Ownership form, however, still serves
as a means of identifying the various organizational populations under study within
the market economy, which is defined as a complex, interactive, interdependent
mix of nonprofits, for-profit, and governmental institutions.
Until the 1970s only business and government were considered part of the
market economy, but beginning in the 1980s “. . . the realization had grown among
economists and others that private NPOs are a major part of the market economy
and integral to its functioning” (Hammack and Young, 1993, p. 399). Conceived
as highly interwoven and interdependent, the sectors are viewed as part of a single
piece rather than separate worlds existing side by side.
This holistic perspective is drawn largely from the pioneering work of Hannan
and Freeman (1989, pp. 13–14), who recommended the following use of ecological
analysis when: (1) there are strong inertial pressures to resist change (i.e., to
continue doing what is habitual); and (2) there is an uncertain environment, and
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10 Kramer

change is likely. Under these conditions, the basic assumption is that biotic and
organizational populations will behave in similar ways; hence, the focus is on large
populations of organizations from all sectors, rather than on only one.
Typically, ecological studies seek to identify the life cycle regularities that
shape the birth, mortality, and change rates of a variety of organization populations
that are internally homogeneous over long time spans. Curiously, in these studies,
there seem to be relatively few inclusions of the state’s role, or of ideological,
political, or economic influences on the life cycle of organizations. An exception
is Gronbjerg’s (1993) intensive study of 13 Chicago social service and commu-
nity development organizations. Her research showed how change occurred very
slowly and rarely in major ways, illustrating a key tenet of ecological theory:
once relationships with the environment are established, organizational structures
persist with few modifications in their basic character.
Social scientists have analyzed the rates of founding and dissolution of pop-
ulations of organizations, such as national labor unions, newspapers, phone com-
panies, wineries, and social movements over long periods of time, as well as the
founding, change, and dissolution rates in other mixed industries. One of the few
studies of the life cycle of a cohort of 451 nonprofit social service agencies in
Toronto from 1970–82—despite the relatively short time span—also illustrates
characteristic features of an ecological perspective and its assumption of simi-
larity between biotic and organizational behavior (Tucker, 1988). At the same
time, these researchers acknowledged that institutional forces, such as the state,
may be much more important than ecological forces in understanding the rates
of founding and disbanding of human service organizations (Hasenfeld, 1992,
pp. 38–39).
Based on an extensive body of empirical research, and the metaphor of bio-
logical evolution, four major social processes that affect long-term changes in pop-
ulations of organizations have been studied: (1) competition for funds, members,
and other resources; (2) legitimacy; (3) aging; and (4) environmental abundance
or constraints (Hannan and Freeman, 1989, pp. 13–14).
The particular mix of auspices within a population of organizations is, of
course, different in different countries and varies over time in response to political,
cultural, economic, and technological factors. The mix also varies within different
industries and within the nonprofit segments of particular industries. Historical
and societal forces (political, technological, and cultural) are invoked to explain
the particular mixes in a population of organizations and within industries. For
example, many of the important niches for nonprofit organizations in religion,
advocacy, and in the provision of educational, health, and social services under
sectarian auspices are the result of the historical separation of church and state in
the United States, as well as constitutional restrictions on the role of government.
Similarly, contributing to the continuity of many other nonprofit niches for
over a century has been the social policy of separating public funding from service
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A Third Sector in the Third Millennium? 11

provision by contracting with nongovernmental organizations to deliver services to

persons for whom there is some public responsibility. Other traditional niches for
nongovernmental organizations in the political and market economy have included
advocacy, innovation, and the promotion of voluntarism (Boris and Steurle, 1998,
3–30; Young, 1999, 31–70).
At the same time, isomorphic forces in the society have eroded some of the
claims to distinctive niches based on the legal form of an organization (Bielefeld
and Galaskowicz, 1998; Clarke and Estes, 1992). Whether public or private, most
universities and hospitals look and act much like each other, and in other ways,
they are similar to commercial enterprises. With the exception of recent attempts to
adapt some postmodern concepts to organizational behavior, the same set of man-
agerial principles and techniques are now widely promoted throughout the organi-
zational universe regardless of ownership form (Boje, Gephart, and Thatchenkery,
1996; Locke, 1996). Governmental contracts, grants, and subsidies are sought and
awarded to nonprofit organizations, for-profit corporations, quangos, and hybrid
organizations for similar purposes. In the field of child welfare, it is not generally
known that in less than two decades, for-profit organizations in the United States
have become the major contractors for state and county governments in the oper-
ation of residential treatment, day care, and group homes, in addition to being the
major providers of drug abuse programs (Geen and Pollak, 1999; Gilbert, 1995).
Until changes in legislation by Congress in 1996, governmental agencies could
only purchase such services from nonprofit organizations.
Under what conditions, then, is an organizational ecological model useful?
One of the prerequisites suggested is when most formal organizations in the same
industry or field, regardless of their form of ownership, have adopted similar pat-
terns of bureaucratic structure over a long period of time, and become, in varying
degree, more entrepreneurial, political, professional, or secular in their operations.
In general, the use of ecological models has been most productive where the envi-
ronment has been relatively stable for a network of organizations, and where the
rates of entry and exit have been low.
A vast field of opportunity exists for the use of these concepts because, with
very few exceptions, very little is known about the origins and characteristics of the
organizational mix in industries such as the human services (Billis and Glennerster,
1998). Similarly, few researchers have studied the relationships between the char-
acteristics of specific social and health services and the relative strengths and
weaknesses of different institutional forms at various stages in the processes of
funding and service delivery (Hammack and Young, 1993, pp. 401–402).
If, however, a population of different types of organizations from various
sectors is viewed as a mix or, in a more structured way, as a network (Powell,
1990), then ecology can be a source of concepts to study the origin, change,
decline, and dissolution of organizations in an industry, particularly from a macro-
or a mega-perspective.
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12 Kramer

From Social Economy to Neoinstitutionalism

From the mid-1970s through the 1980s, a growing number of social scientists
(Boulding (1973), Bruyn (1977), Perry and Rainey (1988), and Sharkansky (1979))
rejected the static public-private dichotomy, and increasingly referred, in a variety
of ways, to the blurring of boundaries between the sectors. An even earlier advocate
of similar views was Bruce L. R. Smith in his analysis in 1975 of the “new political
economy”—subsequently dubbed by Lester M. Salamon a decade later as “third
party government”—who declared: “So great is the interpenetration between the
‘public’ and the ‘private’ sectors, that this basic distinction—on which the political
rhetoric and dialogue of modern times has rested—has ceased to be an operational
way of understanding reality” (cited in Van Til, 1988, p. 95).
This blurring of sectoral boundaries usually has been regarded either as a cause
or as the effect of a process of structural isomorphism in which nonprofit organiza-
tions have become increasingly bureaucratized, professionalized, and commercial.
To Van Til, prevailing conceptions of the nonprofit sector could not explain this
process in American society, and it became part of his formulation of the “social
economy” as the broad, societal context for all forms of voluntary action (Van Til,
1988, p. 167).
In a subsequent discussion of some of the same issues, Van Til (1994) adopted
a holistic approach in describing nonprofit organizations as a social institution
surrounded and influenced by other institutions within an environment in which the
major elements consist of the following: givers, intermediaries (foundations, trade
associations, university-based research centers, regulators, monitors, etc.), other
nonprofit and charitable organizations, and their beneficiaries (clients, members,
staff, and customers).
This conception represents Van Til’s linkage to one of the few applications of
institutionalism to nonprofit organizations, and its subsequent development evident
in the paradigmatic volume edited by Powell and DiMaggio (1991). In the social
science literature, the concept of institutions has been used with an enormous array
of meanings, many of which could be summed up in an over-simplified way as a
concern with the three R’s: rules or routines, roles, and relationships; all of which
are socially constructed abstractions, rather than expressed in individual behaviors
or the informal structures of organizations.
Because of its centrality in the social sciences, each discipline has its own
version of institutions. While not necessarily the products of conscious design, in-
stitutions reflect the interconnections between the polity, the economy, and society
from a distinctive, taken-for-granted perspective (Meyer and Rowan, 1991, p. 8).
Beginning in the 1970s, an extensive body of empirical research has been
published by social scientists identified with a “new” institutionalism, much of
which builds on older forms of this intellectual tradition (DiMaggio and Anheier,
1991; Lowndes, 1996; Scott, 1995; and Selznick, 1996). Case and industry studies
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A Third Sector in the Third Millennium? 13

using this framework have been made of art museums, colleges and universities,
social service organizations, banks, newspapers, commodity markets, corporate
philanthropy, hospitals, schools, law firms, textbook publishers, and professional
organizations, among many others.
Gronbjerg’s 1993 Chicago study, cited earlier, could also be included as one of
the few examples of an open systems and intersectoral approach to the institutional
environment. Using concepts from ecological, contingency, resource dependency,
and institutional theory, Gronbjerg analyzed the diverse factors influencing the
structure and types of funding relations in the social services and community de-
velopment. Patterns of intersectoral dependence, competition, and collaboration
were found to be shaped by organizational reputations and resources, governmen-
tal regulations, and strategic adaptations to the changing funding environment.
Differences in the external environment of different types of nonprofits also took
on an institutionalized form, varying by the specific culture of populations of
organizations (Zucker, 1988).
In another urban research project, neoinstitutional concepts were applied by
Feeney (1996) to a case study of five nonprofit organizations confronting man-
agement problems. As an alternative to the traditional rational-bureaucratic model
of organization, institutional analysis was utilized as a more effective means of
identifying the distinctive character of nonprofit solutions to their management
problems. Similar to an ethnographic approach with its integrated picture of inter-
nal and external organizational behavior, the nonprofits were viewed as embedded
in larger organizational and community systems, together with various stakehold-
ers, in an environment that included both vertical and horizontal interorganizational
networks. When analyzed as social systems rather than as rational bureaucracies,
various cultural factors that shape organizational behavior could be taken into ac-
count. These factors included the ethnic or religious groups among constituencies
and the constraints and demands of funders, regulators, and members on all levels,
many of which had a coercive or constraining effect.
The value of this form of institutional analysis is akin to a set of tools to decode
complex and dynamic environments, mapping not only organizations, but different
layers of interpretation and interplay between internal and external factors in the
organization and the system. Multiple constitutencies or stakeholders, including
the governing body, can be analyzed with their different and often conflicting
cultures, values and role requirements, elements usually missing in a standard
organizational analysis.
Some principles of institutional behavior that have been derived from these
and other empirical studies are as follows: institutions persist even though they
may be less than optimal if maintained by ideology and the state; there is a strik-
ing homogeneity of arrangements in labor markets, states and corporations in
their taken-for-granted expectations and self-sustaining processes; regardless of
their form of ownership, most organizations tend to respond in a similar manner to
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14 Kramer

similar problems; structures and performance are shaped by vertical and interorga-
nizational networks for funding, goal setting, and regulations; regulatory processes
vary widely in different fields such as medical care and civil aviation reflecting
differences in the political, economic and organizational arrangements; the key
sources of institutionalized rules in modern society are the state, the professions
and their distinctive myths and ceremonies, public opinion, and the network of
organizations comprising an industry.
In general, therefore, institutional forces tend to shape organizational struc-
tures and practices, including the larger interorganizational systems—both locally
and nationally—in which they are embedded. Typically, many of the interorganiza-
tional studies of institutionalization have been based on the macro or societal level.
Institutional analysis, however, is not meant to supplant other approaches
to understanding organizational behavior; rather, it is more of an integrating ap-
proach that can better explain nonprofit organizations in their larger contextual and
operating environments. This feature is particularly useful because organizations
exist in social systems where their behavior is shaped by cultural influences, by a
variety of constituencies, and by coercive factors in their environment.
Underlying all of these paradigms is the basic assumption that the form of
ownership is less important than the institutional and ecological structure of a par-
ticular industry where the extent of competition and isomorphism would be more
influential (DiMaggio and Anheier, 1990). In many respects, neoinstitutionalism
is similar to political economy in not constituting a single or even a coherent body
of theory; rather, it contains a variety of perspectives, some complementary, while
others may conflict. These different versions reflect the varying significance of
formal and informal structures, change and stability, and the role of rationality and
norm-governing behavior in creating and sustaining institutions (Lowndes, 1996).
Studies using this approach, however, have been criticized for downplay-
ing the existence of change and conflict in institutional behavior, and the role of
individuals, while overemphasizing the extent of institutionalization, determin-
ism, and organizational isomorphism (Reiten, 1998, pp. 298–299). Nevertheless,
neoinstitutionalism can also serve as a source of concepts, theories, and empirical
studies relevant for a systemic or intersectoral view of the human services or any of
its components. Alone or in combination with political economy or organizational
ecology, its eclecticism and interdisciplinary character is also congruent with many
of the constituent elements of the third sector.

Mixed and Open Systems: An Intermediate Area

Drawing primarily on political sociology, the basic ideas of this paradigm

were originally developed during the 1980s in a series of volumes published by
the European Centre for Social Welfare Policy and Research in Vienna. Although
the research publications of Evers, Svetlik, Wintersberger, and their colleagues,
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A Third Sector in the Third Millennium? 15

particularly on services to the elderly, have had considerable influence in the United
Nations European Region, their work is not widely known in the United States.
Evers’ publications (1991, 1993, 1995) fortunately provide an accessible overview
of some of the leading ideas underlying this model, and it can be regarded as an
exemplar.
In discussing the goal of establishing a pluralist welfare state, the Commission
for Social Development of the United Nation’s Economic and Social Council, used
the concept of the welfare mix as its key organizing principle (Evers and Svetlik,
1993, pp. 220–221). In this Statement, human welfare is regarded as the outcome
of the complex interactions between four complementary sectors in society: state,
market economy, the civil society of voluntary organizations, and the community
of households. Overall welfare is generated in various combinations by all four of
these societal sectors, which need to be considered in planning, organizing, and
evaluating a pluralist welfare mix. These basic ideas are similar to the concepts of
the task environment and social economy employed in two of the other alternative
paradigms of political economy and the new institutionalism.
Because they are involved in the whole range of welfare services, nongovern-
mental or nonprofit organizations are regarded as part of an intermediate area (my
italics) “a dimension of the public space in civil societies, . . . rather than a clear
cut sector. It is within this intermediate area that organizations relate in one way
or another to all other sectors . . . (acting as) multifunctional organizations whose
social and political roles may be as important as their delivery of services” (Evers,
1995, p. 159). This intermediary area also includes many hybrid organizations that
intermesh resources and rationales from government, markets, and the informal
sphere of families, networks, and community organizations. Thus, it is within a
mixed economy that includes this intermediary area, where flexible, permeable
boundaries exist, linking the formal and informal, professionals and volunteers,
governmental and voluntary organizations.
In presenting this theoretical framework, Evers sought to distinguish his ver-
sion of the mixed economy of welfare from welfare pluralism as it emerged in
British social policy in the last thirty years. He draws on the current revival of the
19th century idea of the civil society, which includes nonprofits and other types
of organizations and associations, together constituting a mixed welfare regime.
While Evers tends to minimize the significance of the nonprofit/for profit dis-
tinction, it is not on the basis of the increased commercialization of the nonprofit
sector. Instead, organizational size, among other variables, is regarded as a more
salient differential than nonprofit-ness, at least in Europe (Evers, 1991, pp. 167–
168). In addition, exclusion of the informal sphere and the neglect of quasi-formal
organizations at the community level are regarded as serious deficiencies of the
U.S.-led debates on the third sector (Evers, 1995, p. 170).
In evaluating the core concept of the welfare mix, Evers proposed four policy
and research functions: (1) as an analytical, historical, and sociopolitical approach
to the sources of responsibility for welfare problems, not all of which necessarily
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16 Kramer

involve the state, and as a reminder of the changing welfare mixes; (2) as a de-
scriptive tool for identifying the empirical advantages and disadvantages of var-
ious organizational combinations in different countries and their historical roles
in each sector; (3) for evaluation of the potentials and limits of different organi-
zational forms and how they can be combined. For example, while government is
best for equity and uniformity, it is slow in responding to specific needs, or, while
nonprofits are sensitive to the needs of cultural-social subgroups, they are usually
ineffective in reducing regional inequalities; and (4) as an expression of different
political concepts in social policy, such as the changing responsibility between dif-
ferent actors in the social service sector, and in the formal and informal production
and delivery of social services ([Evers and Svetlik?, 1993, pp. 1–50]).
Presumably, another advantage of the welfare mix concept is the avoidance
of ideological bias and the stereotype of a public-private dichotomy. Because of its
flexibility in the selection of variables for study, mixed, open systems are similar in
this respect to the political economy framework. This leads to the conclusion that
studying an organizational universe in terms of the conventional sectors would
be less useful than a more comprehensive, pluralistic, and synergistic approach
that would include the cultural context, particularly for comparative studies. As
an example, governmental support of nonprofits makes sense in the United States,
but in Germany, and to a lesser extent in Norway, nonprofits simply reproduce
the conformity of state-based rules and a rigid professionalism (Evers and Svetlik,
1993, p. 25).
Despite some of its ambiguity, this European conceptualization of a mixed
economy of welfare has been applied productively in extensive research on services
to the elderly (for example, see Evers and Sverlik, 1993); hence, its usefulness in
revealing some of the problems in developing alternatives to a traditional sectoral
view of organizations. By “de-throning” third sector organizations and redefining
them as an intermediary sphere, the schema directs attention to the mixed and inter-
dependent auspices of organizational networks in the society and in a community.
The following six distinguishing features can be identified:

1. As a short-hand term for a pluralistic political economy of welfare, mix can

serve as a corrective to the assumption of the state as a single actor with no
administrative separation between financing and service delivery. This be-
lief is still assumed in most international comparative studies of the welfare
state, despite the increasingly widespread use of different types of non-
governmental organizations to implement public policy (Kramer, 1994).
2. The concept of a welfare mix could also highlight the presence of new en-
tries into a field of service or industry. Although there has been a dramatic
growth of privatization in the public sphere, with the exception of Weisbrod
(1998), relatively little has been published about the performance of the
increasingly numerous for profit organizations in various industries in
the welfare economy where the state or nonprofit agencies have been the
dominant elements.
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A Third Sector in the Third Millennium? 17

3. The concept of a mix within an industry could also direct attention to

some of the social policy choices available to governments in implement-
ing their multiple functions of standard setting, regulation, monitoring, and
the evaluation of the delivery of public services under different auspices.
4. Such studies could also contribute to a better understanding of the con-
straints and potentials of different organizational forms, as well as how
they could be interwoven in a community environment, which would also
include the informal elements of family, neighbors, and other volunteers.
5. Furthermore, a comparative international dimension could be added by
analyzing the changing roles and responsibilities among different types
of organizations in the same industry (e.g., the particular advantages and
limitations of commercial enterprises, nonprofits, and informal networks
when they substitute for, complement, or supplement the state in different
countries.
6. Finally, the concept of mix—or pluralism—can encourage research and
debate on the advantages and disadvantages, structural limits and poten-
tials for different patterns of functional responsibility of government, non-
profits, for-profit companies, or the informal sector.

SUMMARY AND CONCLUSIONS

Between the state and the economy, a third sector evolved during the 1980s as
a new subject of social policy. Originating in the changing economic and political
conditions associated with the “crisis of the welfare state,” an enormous increase
in the number and types of nonprofits began in the 1970s in more than 60 countries,
and a takeoff in their utilization and funding by governments to implement public
policy. Within a few years, a parallel growth in privatization and commercialization
occurred, mainly during the 1980s, in fields formerly dominated by nonprofits who
faced increasing competition and declining governmental support.
The most recent trend is the convergence and blurring of lines between the
sectors, resulting in the emergence of two contrasting perspectives. The dominant
and prevailing one celebrates the rapid institutionalization of the third sector as a
primary partner with government in the delivery of services, and as an advocate and
core of the civil society. The other view is skeptical about the validity of a sectoral
model based on type of ownership in the face of a convergence of boundaries and
extensive interdependence.
Although it is widely believed that legal form is one of the most important
determinants of organizational performance, little empirical evidence supports
the belief that the type of ownership can account for the major differences in
the same industry where nonprofit and for-profit organizations exist. Most of the
research findings are at best equivocal, with costs and quality varying with the
industry, time, context, and scale (Kamerman and Kahn, 1989, pp. 34–35). Where
significant differences have been found in the performance of organizations from
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18 Kramer

different sectors, they can be more reliably explained by variables in the external
and internal environment rather than by the form of ownership. Among the most
likely would be size, age, competition, supply and demand, and service technology.
The form of ownership (i.e., its auspices) may, however, influence organizational
behavior by serving as an incentive for administration and staff, by the perception of
users/clientele, and as the basis of treatment by regulatory bodies (Weisbrod, 1998).
Because more suitable concepts and theories for these new patterns of in-
terorganizational relations in the human services industry are missing, there is a
need to develop more appropriate analytic paradigms for a mixed economy where
sectoral lines may have less significance. While not necessarily designed to sup-
plant other research models based on the nonprofit form, a group of four current
theoretical frameworks were analyzed: political economy, organizational ecology,
neoinstitutionalism, and mixed, open systems.
When evaluated according to criteria based upon the organization as a whole
in relation to its environment, as well as its internal structures for decision making,
service delivery, and change (Hasenfeld, 1983, p. 43), each of the four paradigms
could, in varying degree, contribute to the reconceptualization of a mixed-sector,
organizational universe in the human services industry.
In practice, ecological and institutional concepts and theories have been uti-
lized more extensively than those from political economy or open systems, al-
though very few of these studies have included nonprofits. A major exception is
the work of Austin, who developed an exemplary, comprehensive political econ-
omy model for the human services that deserves greater recognition and utiliza-
tion. At the same time, it should be acknowledged that its considerable breadth
and depth and its high level of abstraction, formidable scope, and complexity may
have discouraged its use even on an intra-industry basis. While there is already
a considerable body of research on different aspects of the human services, uti-
lization of a political economy framework could be used productively in studying
specific industries (Austin, 1988, pp. 240–244).
Concepts derived from political economy are particularly well-suited to study
the various strategies used by organizations to obtain resources that influence the
character of their service delivery systems. Because of the importance of power in
organizational behavior, political economy concepts can help reveal the distinctive
ways in which various external and internal interest groups compete and otherwise
influence the resources that enable organizations to strive toward their goals. As a
model, it is adaptable to studies of a single organization, to an industry, or to its
components.
Perhaps because organization theory has had relatively little to say about ori-
gins and dissolution, concepts derived from ecology have been used to study a wide
variety of organizational populations on an intersectoral and a macro-perspective.
Employing a technical and specialized methodology with a specific concentration
on birth, death, and change processes, organizational ecology is particularly ap-
propriate for use in studying external environments that are relatively stable, or
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A Third Sector in the Third Millennium? 19

where there is a tendency toward equilibrium among a population of organizations

cutting across sectoral lines. It is also more productive when restricted to a lim-
ited range of questions regarding the leading factors contributing to the rates of
founding and decline, or adaptive strategies for organizational change.
Neoinstitutionalism has probably been the most frequently applied of the four
research models, although its use in the nonprofit world is still at an early stage.
Because it can be combined with other modes of analysis, institutional concepts
can serve as part of an integrating approach to studying organizations in their larger
contextual and operating environment, as well as on a more limited scope. It is the
source of a large number of concepts that could be applied to different types of
human service organizations, and is reflected in the extensive institutional literature
consisting largely of various case studies of governmental, business, and industrial
organizations. In general, however, it seems to be better for explaining stability or
gradual, incremental change than the dynamics of organizational transformation.
Finally, mixed, open systems as used in the research design of the European
Centre in Vienna in its studies of services to the elderly also has considerable poten-
tial for further refinement and applications in other fields of service. In many ways,
it seems to be the most promising of the four analytical frameworks, particularly
for smaller-scale studies of various fields of service. The research publications of
Evers and his associates contain numerous examples of how policy questions can
be reformulated on the basis of a mixed welfare economy, and then reframed in
terms of the range of social policy choices in a specific industry, field of service, or
problem area. By directing attention to the presence of for-profit and various hybrid
organizations, the concept of a mix within an industry can provide a more compre-
hensive picture of the constraints and potentials of different forms of ownership.
The mix concept could also reveal the role that auspices may play in affecting
and being influenced by other organizational variables such as size, age, service
technology, competition, and others.
As Svetlik (1991, pp. 11, 14) stated: “The right question for social policy
is . . . not the choice between one sector or another, but how to combine them most
effectively in economic and social terms . . . (therefore) . . . The task for experts,
administrators, policy makers and interest groups is to find suitable forms of spon-
soring, coordinating and regulating different sectors, and providers which will
allow and encourage both a democratic public and effective personal control of
care services.”

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