Public Goods

Today in Economics 155 we covered public goods. In theory, a public good is any good that is both “non-excludable and non-rivalrous” in that individuals cannot be effectively excluded from use and where use by one individual does not reduce availability to others (Krugman & Wells 2012:481). By that definition, however, there are ever fewer goods that fit the standard definition.

Image result for tap water

Our Urban Economics textbook offers an alternative definition:

 The crucial feature of a public good is that consumption of the good (the protection offered by a policeman) is “shared” among consumers. Given this property, the “social” benefit from an added unit of the public good is found by summing the additional benefit from the extra unit across all the residents, who share consumption of the unit. The social benefit is then compared with the cost of the extra unit. When the two are equal, the level of provision of the public good is socially optimal (JK Brueckner 2011:160).

Curiously, both Krugman & Wells and Brueckner treat individuals who benefit from public goods as though they were private consumers. This, however, leads to a category error. And, unfortunately, this category error is commonplace, specially in the US.

The terms public and private come to us from Latin: publicus and privatus. But their meanings go back much further to the Greek πολιτεία and οἰκονομία. Politeia is the public space where citizens (πολιτης) govern both public and private lives. Oikonomia (in case it was not clear) is the sphere of private production and consumption, from οἶκος, meaning “household.” The οἶκος is the private sphere; the πολιτεία is the public sphere where citizens govern over both private and public goods.

The category error arises because we want to treat public goods as though they were produced and consumed privately. Thus JK Brueckner’s unconscious pairing of a “shared” good with — not citizens — but consumers.

Happily, most western European nations have overcome this category error. Citizens — all citizens — enjoy the full range of public goods: not just clean water and an effective constabulary; but health care, education, housing, and a pension. These public goods are not subject to the vagaries of the market. They are public goods, governed by and shared among the public.

Obviously, this was not always the case. In an age when monarchs and nobles governed subjects and serfs, the public was completely identified with the household of the lord of the manner. Two world wars convinced much of Europe that the privileged status of the lord — and the subject status of royal subjects — had given rise to citizens ill-equipped to face the rise of fascism. A well-educated, healthy, secure, and reasonably leisured public would not have followed Mussolini, Hitler, or Franco down the road of fascism. Western Europe learned the hard way.

The US did not. Indeed, it was the European war itself and the unprecedented public debt created by that war that generated a level of economic growth among working families never seen before or since. This growth also saved the US from political extremism. FDR was followed by a series of Presidents and Congresses who tended to steer a path down the middle. But the war itself — its devastation, loss, and complete elimination of productive capacity — barely touched the US, or where it touched the US touched it in positive ways. The US therefore never really learned the difference between public and private spheres, or between citizens and consumers. To the contrary, until it was eclipsed by Japan and Germany, the US became a consumer’s paradise, and citizenship became synonymous with consumption.

Back to public goods. I have often had occasion to recall Aristotle’s off-hand remark:

And if they cannot procure it through money-making, they try to get it by some other means, using all their faculties for this purpose, which is contrary to nature : courage, for example, is to produce confidence, not goods; nor yet is it the job of military leadership and medicine to produce goods, but victory and health. But these people turn all skills into skills of acquiring goods, as though that were the end and everything had to serve that end (Pol. 1257-1258).

So, what is a public good? In classical terms a public good is any good upon whose supply to citizens is sufficient to maintain a healthy republic. This understanding of public goods is reproduced in the preamble to the US Constitution: “We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.”

It is what makes (or made) the US a member of the growing list of uniquely republican nations: res publica, Latin for “the wealth we hold in common.”

A public good is any good that promotes and preserves republican values and institutions. When these goods are subject to private markets and private institutions, it necessarily creates a category error.

So, can economists — whose very method and outlook is necessarily shaped by the private household economy, however big or small the private household — can economists truly come to terms with a public good, not on their terms, but on its own terms?

Yes they can, but only if they hold public goods constant. This is what the grandfather of neoclassical economics, Alfred Marshall, did. In his Principles of Economics (1891), Marshall showed how and why public goods held a privileged place among all goods. Such goods were set aside by publics for no other reason than that these publics found them necessary in order to maintain their own public character. Did public goods give rise to deadweight loss and a misallocation of resources? Some did. Some did not. But, according to Marshall, the very question itself was inapposite. Public goods did not aim at efficiency or productivity or marginal benefit. A well-educated individual is not more or less efficient, as though the only way to measure public good was through private efficiency. Education is a good in and of itself. The same held true for health, safety, and security. These are not goods in the normal sense, thought Marshall. If we subject them to marginal analysis they lose their character as public goods; they are transformed into private goods.

Is economics then blind to public goods? No. Not entirely. First, economics has the capacity to measure the effects that public goods have on private markets. They can, for example, measure the effects a highly educated public have on the labor market. Yes. A highly educated labor market gives rise to higher wages. But it also shifts production towards higher end goods. So, for example, a recent study found that Germany was hard-pressed to fill manual labor and service labor positions from a population of Germans educated and trained in the German education system. Part of the push in Germany to embrace more immigrants was that it needed individuals not trained and educated in Germany to fill the ranks of manual and service worker positions. Second, economics has the capacity therefore to measure the marginal benefit (and loss) of public goods. A healthy workforce is uniformly more productive; whether it is always more productive in excess of the cost of healthcare is still an open question; although not in countries where healthcare is a public good. Private-public healthcare schemes, because they measure “success” in terms of marginal efficiency of capital/labor, tend to place downward pressures on service and give rise to higher costs. Fully public schemes by contrast measure “success” solely by health outcomes. Such schemes are able to keep costs down for the simple reason that increasing marginal returns is nowhere an incentive within the system. Doctors become doctors and nurses become nurses not because there is money in the game, but because they are driven to ever greater health outcomes. But the benefits of a healthy population, like an educated population, go beyond the marginal benefits these goods offer to private investors. Being healthy and being educated are goods in their own rights.

Finally, economists can measure the value of public goods in terms of the institutional arrangements they help to create, maintain, and protect. Here the US has performed very badly indeed. Like Europe in the 1910s and 1920s, the US today appears bent on sending its marginal efficiencies up the income hierarchy to the very top — where, in purely economic terms, these efficiencies perform least efficiently. Yes, this holds factor costs down and so, on paper, enhances the marginal efficiency of capital/labor. Yet, at the high cost of 80M lives. This was the lesson that Europe learned but that the US did not. Strong republican institutions preserve deep republican values. But the reverse also holds. Where republican institutions are compromised by private markets, their days are numbered; which is surely the case in the US today. Economists can measure this drift with pinpoint accuracy. Moreover, they can identify the mechanisms that give rise to this drift towards fascism and away from republicanism. And they can identify, again with pinpoint accuracy, how these mechanisms would have to change in order to preserve, maintain, and rebuild republican institutions.

But they can no more trigger these mechanisms than can a physicist generate a black hole — even though she understands why it appears where it does and as it does. The public alone can create these conditions. At the same time, economists do not help when they offer definitions of public goods where such goods are only private goods in disguise. That actually makes the problem worse. We can do better. And now we absolutely have to.



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