Public Goods and the Role of the State

Frances Woolley has a good post in reaction to this Olbion fire department situation reminding us that (1.) fire fighting is not a public good and (2.) actual public goods are very, very rare. I think this is important to highlight and think about because so many people have this automatic reaction that public goods in some sense provide the economic justification for what the state does, and anything that's not a public good is (according to economics) not an appropriate area for state action.

I've never really thought of it that way (although perhaps that's because I've never taken an official "public economics" class). I've always thought about the rivalry/excludability cross-tab more as a pricing strategy typology than a blueprint for a political philosophy. "Club goods" gravitate towards a different pricing strategy than private goods - they introduce innovations on how to price goods. "Common pool goods" usually gravitate towards different rationing or supply strategies than private goods. A good resource for this is of course Elinor Ostrom (her Nobel Prize lecture is a good start).

But you'll notice I don't usually talk about "public goods" when I talk about the government - usually what I'm talking about is an externality. That's not to say I don't think public goods are important when thinking about the government, they simply aren't exhaustive. Externalities introduce a situation where the market has no ability to right itself (contra Jonathan Catalan) because the problem is in the nature of the property rights regime. You could always pay BP not to pollute the ocean, but then you would be paying them not to impose a cost on you when they should be paying you if they want to impose a cost. You could argue that tort law forces BP to take these externalized costs into account, but then BP would still get to decide whether to act or not - it would not be a mutual choice between you and BP - that's coercion. So externalities provide some basis for state action even when we're talking about externalities in non-public goods. But obviously an externality on its own doesn't give the state license to act (see Coase on this point) - it's not sufficient. But large, extremely generalized externalities that can be addressed adequately by the government and inadequately by some other institution provide a strong case.

The other thing that affects the role of the state is humanitarianism and the ability to pay. I'm no welfare economist, and I haven't looked at this in detail (I know others have), but on the face of it the problem with a Walrasian approach to welfare economics is that because a person's income is commensurate with their marginal productivity, their ability to satisfy their utility is going to be constrained by their productivity. Human welfare, in other words, is proportional to human productivity. There's a point where this is unavoidable, of course. We don't see it as a crime that less productive humans a thousand years ago lived in a poorer state than we do. That's just how it goes. But for our contemporaries, does this raise any ethical issues for us? It probably should. A child is born to a poor family, and doesn't get adequate nutrition or education, to say nothing of an inheritance. That child will be less productive and will earn less money. Market capitalism, for all it's allocative efficiency, will by virtue of its dependence on the property rights regime constrain that child's ability to live as well as another child born under better circumstances.

So how do we react to this? First - we don't react in a radical way. The allocative efficiency of market capitalism still provides this child with the opportunity to use whatever productivity it does have to better effect than any other system we have come up with. It also provides the child with the best opportunity to enjoy the fruits of the productivity of others in an efficient way. The only real problem is that it imposes limits or obstacles to the child's fulfillment as a human being because of the same property rights regime that drives all the good things we like so much about markets.

If we have an ethical framework where we think that human beings are essentially equally worthy of living a reasonably comfortable life, this may suggest that we have a social imperative to augment market outcomes. I have a fridge full of healthy food and a roof over my head. I believe people should receive only what they earn, but I also believe that any human being without healthy food and a roof over their head is living an unjustifiably unfulfilled life. Providing them with a basic amount of food and shelter does not change the fact that they should earn their marginal productivity and set those earnings equal to the marginal benefit they get from consumption. So far this is only a justification for charity, but if these ethical standards are sufficiently generalized and agreed upon, private charitable intuitions can naturally evolve into public agreement on basic standards and public provision. This is natural - after all, the state is the ideal way to equally spread the pain of poverty which we think of as being somewhat random and not determined by a person's own life choices. The state is not some alien institution. It's an emergent institution just like any other human institution. Presumably what the state might provide in this case - food, medical care, shelter, etc. - is not a public good at all! Which brings me full circle back to the point that we need to be careful when we talk about "public goods". The concept of a public goods tells us something about viable and unviable pricing strategies, but it doesn't furnish us with a political philosophy.

My view is that political philosophy should be done with the property rights regime in mind. The property rights regime is largely artificial - natural rights are "nonsense on stilts" after all. They are useful and even justifiable and legitimate, though. The fact that they're artificial doesn't mean they're contestable. But we have to have a political philosophy that recognizes the limits of the framework of rights that a given society has evolved: hence my emphasis on externalities and ability to pay, rather than public goods.