Public goods

Public goods are goods said to be non-excludable, so that suppliers cannot withhold them from non-payers, and non-rival in consumption. Where both properties hold, the standard argument runs, everyone has an incentive to wait for someone else to pay, too little is produced, and the state must supply the good out of taxation. National defence is the usual example, and most economists treat it as settled.

The Austrian response is not that public goods are rare. It is that the category does no work: it cannot be applied without knowing what it is supposed to establish, and the conclusion drawn from it does not follow even where it applies.

The standard argument

Take education. Learning to read benefits the reader, which makes it a private good, and it is also said to benefit everyone else through a more productive and better-governed society. Those spillover benefits are not captured by whoever paid for the schooling, so fewer people buy education than would if they were paid for everything they produce, and education is undersupplied.

Paul Samuelson formalised this in 1954, at a point when demonstrating any divergence between a market outcome and a theoretical optimum was widely taken to justify state action on its own. Harold Demsetz named the habit the nirvana approach: an idealised state, costless, omniscient and benevolent, was assumed available to correct whatever the market got wrong.

That assumption has since been abandoned by most economists. Showing a market failure is no longer thought sufficient; one must also show that the political process would do better. What follows is the Austrian case that it cannot, and the prior case that the failure was not established in the first place.

The categories do not survive inspection

Excludability is a variable, not a property of the good. Whether non-payers can be excluded depends on available technology and on the prevailing arrangement of property rights, both of which change. Roads were excludable when turnpike companies put gates on them and became non-excludable when governments removed the gates. Broadcast signals were non-excludable until encryption, lighthouses until harbour dues, and city streets until the private residential community charged for access through the deed. A category whose membership shifts with the state of the art cannot bear the weight of a permanent argument about who should own what.

Almost everything has spillovers. A well-kept garden benefits the neighbours, an honest merchant benefits people who never trade with him, a vaccinated person protects the unvaccinated. If uncompensated benefit to third parties made a good public, nearly every good would be public and the concept would select nothing.

There is no way to identify the right quantity. This is the objection Murray N. Rothbard pressed hardest, and it is not a complaint about measurement difficulty. The only evidence of what people value is what they choose, and a good that was not purchased generated no such evidence. The claim that consumers "really want" more defence or more lighthouses than the market supplies is therefore a claim about preferences nobody has demonstrated, which is precisely the interpersonal comparison the Austrian critique of welfare economics rules out. Having no benchmark, the theory cannot say whether a given level of state provision is too much or too little, and in practice its conclusion is always the same one.

Hans-Hermann Hoppe made the further point that the argument, taken seriously, licenses far more than its users intend. If a good's uncompensated benefits justify compelling payment, the same reasoning applies to flowers in a front garden and to a pleasant face in the street, and there is nothing in the theory to stop it. He also observed that the argument is never run in reverse: nobody proposes that goods with uncompensated third-party costs be forcibly reduced by the same authority.

The theory does not describe what governments do. Randall Holcombe's survey found that most of what states actually produce fails the definition, being both excludable and rival, while several goods that fit the definition are supplied privately without difficulty. A theory that neither explains the observed pattern of state activity nor predicts it is not doing the explanatory work claimed for it.

The free rider cuts both ways

The decisive structural objection is that free riding is not a feature of markets. It is a feature of any situation where a benefit cannot be withheld, and political processes are full of them.

Suppose a large group would gain from repealing a tax. If enough of them contribute time and money to the campaign it succeeds and all are better off. But the repeal, once won, benefits everyone who did not contribute just as much, so each individual's interest is to let others carry it. If enough act on that interest the tax is never repealed. Jeffrey Rogers Hummel calls this political failure, and it is the exact analogue of the market failure the theory is built on.

Two consequences follow, and together they reverse the conclusion.

First, the free-rider problem systematically favours small concentrated groups over large diffuse ones, because a small group can monitor its members and each member's share of the gain is large enough to be worth pursuing. So the political process finds it easy to deliver large benefits to small groups and hard to deliver small benefits to large ones, which is the opposite of what the public goods justification requires.

Second, when a group obtains a good through the market it pays for the good. When it obtains one through the state it pays only the cost of influencing policy, and the good itself is financed by taxation from people who may not want it at all. This makes it profitable to lobby for goods whose cost exceeds what any beneficiary would pay for them, and Hummel's term for the result is bogus public goods: things supplied because obtaining them is cheap for the beneficiaries, not because they are worth their cost.

Roy Cordato added that the theory's picture of society is wrong in a way that matters. It imagines people as atomised individuals, unable to observe or influence each other, and it imagines the public good supplied in isolation. Real people live in communities that apply social pressure to free riders and bundle non-excludable goods with excludable ones, which is how residential associations, clubs, churches and shopping centres have always financed shared amenities.

Private provision in practice

The historical record matters here because the theory makes a prediction about it: goods with these properties should not have been supplied privately. They were, routinely, until the state displaced the arrangements.

Roads and bridges

Turnpike companies built and operated a large part of the American road network between 1792 and 1916, financed by tolls and by subscription from merchants and landowners along the route who expected indirect benefit. Daniel Klein's studies of the sector found that many turnpikes never paid a dividend and were not expected to, being financed by people who gained from the traffic rather than from the toll, which is a solution to the free-rider problem that the theory says should not exist.

The same pattern appears in the American colonies more broadly, where incorporated and unincorporated associations supplied churches, schools, hospitals, water supply, insurance and harbour improvement, most of them promoting ends described at the time as of general public utility and almost all of them privately controlled.

Railroads

The transcontinental railroads are the standard case for subsidy, on the argument that private capital would never have financed them. James J. Hill's Great Northern was built without land grants or federal aid, was the most efficiently constructed of the transcontinentals and the only one that did not go bankrupt. New Hampshire and Vermont granted no railroad aid at all, and refused even eminent domain, and a privately funded line was built across both.

At sea

Larry Sechrest examined the maritime cases most often cited as inherently public, including lighthouses, harbour works and protection against piracy, and found private and club provision throughout the historical record, financed through shipowners' associations, port dues and insurance underwriters with an interest in the loss rate.

Defence

Defence is the hardest case and the one the theory rests on, so it deserves the concession that it is hard. Hummel's contribution is to separate two things the argument runs together. A national good is one whose benefits fall on everyone within a territory whether or not they want it; a public good is one that cannot be withheld from those who want it and will not pay. Defence of a territory is a national good, and the fact that its benefits are unavoidable is not an argument that the people receiving them value them at what they cost. The essays collected in Hoppe's The Myth of National Defense pursue the alternative arrangements, and see private defense.

See also

• Free rider problem
• Market failure
• Externalities
• Private alternatives to public goods
• Private roads
• Private defense
• Welfare
• Education

Links

• A Theory of the Theory of Public Goods by Randall G. Holcombe, RAE 10:1, 1997
• Public Goods and Private Solutions in Maritime History by Larry J. Sechrest, QJAE 7:2, 2004
• The Myth of National Defense edited by Hans-Hermann Hoppe
• Power and Market by Murray N. Rothbard
• The Role of Private Transportation in America's 19th-Century "Internal Improvements" Debate (pdf) by Thomas J. DiLorenzo
• Education: A Bad Public Good? (pdf) by Jane S. Shaw, Fall 2010
• Public Goods by Tyler Cowen, from The Concise Encyclopedia of Economics
• Public goods at Wikipedia