This morning I read a blog post by Paul Katsen. He argues that nonprofits should fall into one of two buckets:

1. Solve human needs that will never be profitable

2. Push an unprofitable need along until it becomes 'market ready'

Everything else can be solved with a for-profit company riding the wave of market forces.

I worry about this viewpoint, and I also think it's not quite right. For one thing we're leaving out the role of government. (To be fair, Paul does casually mention the government once, but lumps them under the same umbrella as nonprofits). But let's just be crazy libertarians for a hot minute and pretend we don't need a government. If we limit the role of nonprofits to these two options we risk finding ourselves, as a society, stuck in a local maximum. There are probably many ways this could happen, but I have in mind one particular cause rooted in a flaw of human nature. It happens all the time, and in fact, this is why we started Nymbus.

When presented with a yes or no choice where the benefits of saying yes outweigh the costs, we would rightly choose yes. But given the same choice except now it's revealed the cost of some of us saying yes exceeds the benefits for everyone else, we almost always still say yes. We are terrible at this kind of decision. Business models based on this type of choice never factor the cost to everyone else into their price otherwise they would go out of business. But the benefit to society would be greater if we could eliminate these obviously broken business models on move on to something better. Take environmental regulation as an example. Until we regulated businesses, they were happy to ruin the environment and pass the savings on to customers. It took decades of educating regular people, largely the work of nonprofits, to get us to where we are now.

Therefore if we rely on consumers to factor in the total cost to society when making a decision, (which is what happens in a for-profit model), in most cases we will never discover the optimal solution for the market because of this basic flaw of human nature. Our reliance on for-profit entities means we often find ourselves stuck in a horrible equilibrium where each individual transaction seems to be worth making, for both parties, but the real net cost far outweighs the benefit.

The business model of collecting user data and reselling it to advertisers has already discovered this horrible equilibrium. We all know everything we do is being tracked across the web and fed back into an advertising machine designed to manipulate our buying decisions. None of us particularly likes this solution, but the benefit of clicking "Connect with Facebook" for instant access or searching through the entire history of human knowledge on Google, easily outweighs the marginal cost of giving the giant system yet another data point. So we'll always click the button. What we're losing, slowly but surely, is our privacy and, less obvious but still costly, the ability to conceal who we are. The cost of using our "real" identity everywhere is the loss of pseudonymity -- the cornerstone of creativity and meritocracy. What's at risk is watching this slowly fade away as we're left with our real identities and society's traditional methods of measuring the merit of an idea. The loss would be incalculable.

We can't rely on market forces to save our privacy. What rational, for-profit company would create a solution to the problem that charged users to log in? If you asked people to pay for a single sign-on solution instead of forfeiting a small piece their privacy, it's a very small niche indeed that will think the price is worth it. Most people think, "I don't have anything to hide, I'm not one of those privacy nuts." Many of us are irritated when asked to use Facebook Connect, but still we fail to calculate the cost to society of this one, small decision. This isn't a suprise, it's just human nature.

Many people think a distributed identity system, like OpenId, WebId, BrowserId, etc. are the solution. Ultimately I think they are right. But these systems have always and inevitably failed to gain traction. In the short history of the web, standards have always won the day. But we can look back and remember, sometimes there is a dark time preceding the eventual victory -- remember IE6 anyone? It took a nonprofit company, (backed by open source programmers and a thriving community), to create a superior open source browser based on standards and then market the hell out of it. The advent of the modern browser spurred a massive wave of value on the web. Microsoft could never justify making something like Firefox to its shareholders -- it makes no sense.

And so we find ourselves repeating history. Facebook Connect and its ilk succeed because they have massive mindshare and it's easy for everyone to understand. Plus they offer tremendous value to users and businesses and they have the force of a massive profit engine behind them pushing to collect as much user data as possible. And they have absolutely no rational reason to dismantle their monopoly on identity. How do you create this much value and slay a monopoly with a completely decentralized identity service that nobody understands how to use?

You can't. Someone needs step up and start a nonprofit to wave the banner of standards and forge a path ahead, just like Mozilla Foundation did with Firefox. This is exactly what we're doing at Nymbus, right now.

So, back to the original impetus for this post.

Paul proposes that nonprofits exist to:

1. Solve human needs that will never be profitable

2. Push an unprofitable need along until it becomes 'market ready'

And everything else should fall under the umbrella of a for-profit company.

Providing the infrastructure for online identity is obviously profitable. And a distributed identity system will never be "market-ready". You can't use the market forces to drive this change, it would never happen. So I propose a third purpose for nonprofits: discovering, exposing and then disrupting business models that rely on hidden costs to society.