Efficiency is often used as a proxy for discussing nonprofit charity effectiveness, but such ostensibly objective measures can limit any true understanding of charities’ potential. Although efficiency is the hallmark of many theories of charitable tax exemption and is sometimes useful, the conceptual framework falls short as a way to judge a nonprofit charity’s worth or legitimacy.

I would argue that the role of a nonprofit charity is to build contextual diversity in society and to continuously seek inclusion and justice. This role is a basic facilitator of the nation’s democratic ideals. But facilitating justice may sometimes require that charities disrupt current norms and even act inefficiently. The third sector, as it is sometimes called, is supposed to continually recreate “the commons,” or provide for public benefit. And clearly, this focus on collective benefit doesn’t serve the best interest of individuals; it serves the public at large or a disenfranchised minority.

This discussion proposes a concept called “contextual diversity” as an alternative understanding of the charitable tax exemption. The concept is based on two theoretical constructs that better fit as justifications for the charitable tax exemption and for the value of nonprofit work in general: (1) law and market theory and (2) critical race theory.

The premise of traditional economic analysis is that efficiency leads to wealth maximization. It is all about exchanging value for value. In the for-profit sphere, this commonly emerges as a quid pro quo. I give money, and I get something of comparative value in return.

But the output of nonprofit charities is not always immediately quantifiable, and so the shorthand for efficiency among charities is “no waste.” Taken to extremes, this idea is counterproductive and ends up squelching the real value of the sector.

By the same token, the charitable tax exemption is not simply a financial “free pass” from the obligation to pay income tax. It must be based on gained societal value. Some theorists have posited economic justifications for nonprofits’ tax-exempt status, such as the cost savings of providing services that benefit the public.

But this doesn’t get at the heart of the charitable sector’s true value in society. The many benefits that flow from the work of charities often have nothing to do with efficiency. Noneconomic benefits include social justice, fairness, equality, political authority, and other normative principles. Still, these noneconomic consequences provide benefit because they are essential to the economic health of society and because they create contextual diversity.

Thus, efficiency is a useful concept but also a highly insufficient indicator of nonprofit charity effectiveness. Professor Robin Paul Malloy of Syracuse University has developed law and market economy theory—which addresses the relationship between law, markets, and culture—and the construct offers a better fit to explain nonprofit charity value. The premise of the theory is the need for collective, sustainable wealth formation rather than the maximization of individual wealth. According to Malloy, collective, sustainable wealth formation necessarily involves inclusion, diversity, and creativity, which is more in keeping with the traditions of the nonprofit charity sector.

Malloy echoes a similar theme as that advanced by Nobel Prize–winning economist Amartya Sen; efficiency and individual wealth maximization are inadequate measures for assessing social well-being. Malloy explains the market as a place of value formation in which real value emerges from the continuous process of human exchange. He argues that the process of sustainable wealth formation is difficult to measure in traditional efficiency terms, because it relies on creativity and on the dynamic nature of inclusive, diverse patterns of human exchange.

According to Malloy, efficiency is grounded in the static notions of habit, convention, and continuity. Creativity, on the other hand, is far more dynamic and grounded in notions of unproven potentiality. Creativity is by nature indeterminate, habit-breaking, and convention-challenging, and it relies on transformational relationships that permit the discovery of something new. While economic efficiency is certainly relevant in market theory, it cannot account for the process of creativity.

Since it cannot be observed directly, creativity can be examined only by looking contextually at the communities that foster it. As Malloy explains, “One must identify the types of communities which, by ethics and social values, tend to foster diversity, experimentation, and unconventional networks and patterns of exchange.” These communities embrace inclusion and diversity and think about the market process in broader terms.

Even in for-profit markets, emphasizing efficiency at the expense of creativity is a no-growth strategy. Markets need to seed creativity to stay viable. And creativity happens when diverse ideas collide and fuel one another.

The business of many nonprofit charities is to develop new and diverse approaches to social issues. Some of these approaches necessarily fly in the face of convention. But that is the point of contextual diversity; when nonprofit charities act as disruptive forces, it’s a good thing for civil society. Differing interpretations of a problem or situation lead us to question preconceived truths and pro forma ways of knowing a thing. Contextual diversity promotes other ways of understanding and the protection of nonmajoritarian interests.

In this way, charitable activity can be understood as a representation of particular values. In some contexts, for example, charitable activity means fulfilling a public purpose for those truly in need and carries no pejorative connotation. In other contexts, however, charitable activity denotes a paternalistic propping up of subordinated, lesser people. But regardless of how we view the motivations of philanthropy, we cannot understand charitable activity only in light of sheer economics; it’s also about contributing to the public, social good.

If contextual diversity is important to collective sustainable wealth development, inclusion of groups that are now largely excluded is critical. Critical race theory provides an additional lens through which to understand the power of contextual diversity and is characterized primarily by its opposition to three mainstream beliefs: (1) that color-blindness will eliminate racism; (2) that racism is the function of isolated acts, not a systemic problem; and (3) that racism can be addressed apart from other forms of societal injustice such as sexism, homophobia, or economic exploitation.

One of the central concepts of critical race theory is that race is a social construct—an idea. Racism is a societal invention, not an organic phenomenon. Critical race theory asserts that race itself is contextual. As law professor Kimberlé Crenshaw explains, the theory posits that racial identities are intersectional and that racial minorities’ vulnerability to discrimination is a function of specific intersecting identities.

Malloy’s law and market economy theory shares many attributes with critical race theory in terms of challenging traditional law and economic analysis. Both law and market economy theory and critical race theory reject the primacy of efficiency as a metric. Malloy’s challenge to efficiency comes from a market perspective, while critical race theorists challenge efficiency from an equality perspective.

Professor Malloy, for example, asserts that creativity, not efficiency, is the primary source of wealth creation in the market. Similarly, critical legal scholars explain that racism is not just a problem of individual choice but the result of a systematic condition of racial subordination. Thus, both law and market economy theory and critical race theory reject the notion that legal structure should be based on the calculus of individual choice; it should focus the diversity of societal structures that create the circumstances leading to the choice.

Another fundamental idea behind these two frameworks is that markets are not objective or neutral avenues of exchange; they are the product of human practice and culturally informed values. In fact, law and market theory suggests that the scope of charitable activity is naturally diverse, dynamic, and transformative. Charitable activity may be consistent with or run completely contrary to established public policy as currently conceived.

As defining frameworks for the nonprofit charitable sector, critical race theory and law and market economy theory view nonprofit charities as change agents, especially on issues involving social justice—a central role of the sector. They can effect change through the sometimes inefficient process of including nonmajoritarian voices into public dialogue, creating contextual diversity. Insisting on efficiency as a primary measure of nonprofit charity legitimacy can only squelch the purpose of the sector.

David A. Brennen, “A Diversity Theory of Charitable Tax Exemption: Beyond Efficiency, Through Critical Race Theory, Toward Diversity,” Pittsburgh Tax Review, Vol. 4, 2006.

Additional references here .

David A. Brennen is a professor of tax law at University of Georgia School of Law.