Tuesday, January 24, 2012

A somewhat stunted understanding of what free people ought to be free to do collectively

Readers know I think externalities are a very important concept, and probably also know that I prefer talking about externalities to talking about public/private goods (because true public goods are quite rare, public goods can be provided privately, and there are important externalities associated with private goods... so the public/private thing just seems less helpful). But most people treat them similarly.

Public goods/externality arguments have always been an important part of the argument for free government, going at least as far back as Adam Smith. It's an important argument, but is it the only argument?

I was reading Coyne and Lemke's new article on polycentricity and disaster relief (HT Peter Boettke on the new issue of SIEO - Ostrom's work on polycentricity has interested me for a while, which is what piqued my interest in this article), and they seemed entirely focused on these efficiency/welfare maximization/incentive/calculation questions in talking about government and disaster relief. Take this passage for example:

"To date, those writing in the political economy tradition have focused on three categories of arguments related to the government provision of disaster relief. The first is how relief fails to fulfill the traditional defining characteristics of a public good. The traditional theory of public goods requires that a good be non-rivalrous in consumption and non-excludable in order to be considered public. If the good meets these criteria the market ‗fails‘ to supply the optimal amount of the good due to issues of pricing and free riding. In order to correct this market failure, it is argued that government intervention must intervene to increase production to move closer to the optimal level of output.

However, as argued by Shughart (2011), disaster relief fails to meet the necessary criteria because many components of disaster relief are scarce and, as such, rivalrous. The teams and tools needed to rescue survivors are in limited supply, and emergency provisions, such as drinking water and medical care, are also only available in finite quantities. These same goods are also easily excludable, which means that whole swaths of disaster relief efforts immediately fail to meet both criteria for being considered public goods (Shughart 2011). One particularly memorable example from Katrina is the purchase of trailers as substitute residences. Trailers are both non-excludable
[sic] and non-rivalrous [sic], positioning them soundly as private rather than public goods."

There's more in the paper about knowledge and incentive problems too, but that all also falls under standard microeconomic conceptions of the role of government.

What was surprising to me about reading their paper was that I would have never even thought to justify federal disaster relief on the basis of an externality/public goods point, in the same way that I don't think I'd justify welfare on that basis (well - I may talk some in that case about the externalities imposed on children growing up in poor families against their will).

Think about what you're saying when you point out that goods and services needed in a disaster are private goods (they are - I agree on that), and therefore should be provided by the market. People who get goods in the market are those with the willingness and ability to pay the market price. Normally we think those two things are a pretty good indicator of where the good should be allocated, right? We want people to have the good who have the highest opportunity cost of not having the good.

But in a disaster situation (particularly in poor areas) you have major constraints on the ability to pay the market price, particularly if supplies are limited and there's a lot of income inequality. It's not clear at all that traditional market allocation is ideal in these situations. Maybe until things settle down everyone should have (1.) dry clothes, (2.) food, (3.) water, (4.) medical attention, and (5.) some kind of shelter regardless of their willingness and ability to pay a market price. If that's the case, it's unclear what the fact that these are private goods has to do with anything. They are private goods, but the market won't allocate them in the way that we probably think is best in these situations.


Two other points:

1. Obviously that doesn't mean you shut down markets. That should go without saying, but in case someone thinks I'm advocating shutting down markets I want to clarify this point. Nobody who knows their economics should get upset at "price gouging" in a disaster. But there's also no reason to act like the government and the market are any more in contradiction with each other than charities and the market are. When government and charities have distributed all the supplies they have on a non-market, equitable basis that source of egalitarian supply is unlikely to have fulfilled everyone's demand. So you don't want to outlaw price gouging or anything like that - the market offers another avenue for fulfilling people's needs. Liberal governments, liberal private organizations, and liberal markets are complements to each other.

2. I haven't really gotten into the polycentricity discussion of the article (which is what I was really reading the article for), but that point is important too. One of the great strengths of the United States is that government and governance here are decentralized. We could have more of that. In addition, we have a lot of non-profit, humanitarian, NGO, and other organizations with overlapping missions and capacities. That polycentric response makes disaster relief a lot more robust than it otherwise would be.


In summary - what could possibly justify limiting our view of government to such a weak concept as "public goods"? That just seems strange to me. You could argue that national defense is a public good, but personal and local security certainly isn't. We don't provide that because it's a "public good" or because it can't be provided on the market. We provide that because we believe that all men and women should have secure lives and property. There's lots of things that the government does besides providing public goods. It's very risky to let welfare economics dictate your political philosophy.


  1. Maybe they have something like a privately provided disaster relief in combination with an insurance in mind (like a private fire department that requires you to pay an annual fee).

  2. There are lots of reasonable institutional arrangements. What seems odd to me is to consider the public goods point as relevant to the question of the role of government in a situation like this.

    I would have never thought to justify government here on a public goods basis.

  3. I would have never thought to justify government here on a public goods basis.

    I don't have much time here.. but are you SERIOUS?

    You ALWAYS justify government on a public goods basis. In fact, that's your only argument for it at all.

    1. What is the public goods argument for giving away water?

      Externalities/public goods are a very important part of government. I'm with Smith on that. But they're hardly the only thing to consider, and they're one of the last things I would consider in this case.

    2. I don't know what the public goods argument is for giving away water. I don't think in those terms very often. I was just making the comment that your whole defense of the state is essentially a public goods/externalities argument: Individual actors suffer from some cognitive errors and therefore the private provision of adequate security is impossible, so a state is necessary (edit some if needed).

  4. "Individual actors suffer from some cognitive errors"

    No, public good dilemmas are the result of actions of perfectly rational agents.

  5. In almost all circumstances secure lives and property aren't provided by the state; and they certainly aren't provided in low income communities in the U.S. (if anything, it is the reverse).

  6. Daniel

    let me help you on disaster relief.

    It is nothing more or less than collective self-insurance.

    We could tax ourselves and pay a big premium each year to Travelers for disaster relief.

    Or, we can just pay as we go (the current fault is that we don't force taxes to be currently collected for disaster relief).

    Of course, you don't understand the concept of insurance and it is beyond your keen to understand that, at lot, maybe even mostly, gov't is nothing but insurance. You really should read Smith. Much of the Wealth of Nations is premised on the concept of insurance.

    In fact, if you really want to learn read an 1805 opinion by Justice Peters in Thurston v. V Koch, 4 Dall. xxxii (1805) which considered the insurance in the following terms:

    I believe with Professor Smith, in his 'Wealth of Nations,' cited in this cause, that distributing the burthen of losses, among the greater number, to prevent the ruin of a few, or of an individual, is most conformable to the principles of insurance, and most conducive to the general prosperity of commerce. The wisdom and experience of the British nation, grown out of their more modern and extended state of commerce, have given additional value to this opinion. Whatever respect (and it is not slight), I may entertain for the laws of other nations, I deem myself bound to follow, what was the established law and custom of merchants in England, at the time of our becoming an independent nation: not because it was the law merely of that country; but because, it was, and is, our law.

    Disaster relief is self-insurance. Learn by repeating.


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