Public Goods and the Commons
Public Goods
Demand Side as elaborated upon here makes a special point of Public Goods. They are one of our "big words." Public Goods account for an immense portion of the well-being of our citizenry, and at the same time generate immense wealth to private economic actors.
A brief definition: Private goods - those which our society creates and consumes in such abundance - are marked by two primary characteristics. They are excludable and they are depletable.
Excludable means that to a greater or lesser degree the use or enjoyment can be limited to a person, household, or group. This is important. My use of an item excludes your use. Autos, houses, durable goods, food, electronics, air travel, and on and on.
Depletable means the benefit of the product can be limited, focused, monopolized. The entire economic benefit is consumed, or can be consumed by the buyer, wearer, user, and so on.
Public Goods, by contrast, are to a greater or lesser degree not depletable and not excludable. For example, a road is not depletable: No matter how many cars use a road today (and recognizing that there are limits to everything) cars will be using it tomorrow as well. It is not excludable. Who will be able to collect a toll for every road, or collect the cost of the service if the road is plowed free of snow?
Not being depletable means in their own way Public Goods are the goose that lays the golden egg. Not being excludable means the private market is unable to isolate the benefit sufficiently to be efficient producers of Public Goods. The private market requires payment in an amount approximating value; such a payment which will not be forthcoming if one party does not monopolize the benefit and enjoy the predominant value of the good.
When one party does not monopolize the benefit, it is difficult for the private market to exist. Remember, the market itself consists of nothing more or less than the moment of purchase and sale. The classic example is national defense. If the nation is defended from attack, I am defended, even if I do not choose to pay for the service. I am defended because my neighbor is defended. This is known by the technical term, the free rider problem. This is the downside of not being excludable, and it is the major reason that we have a universal coercive means of financing - taxation. There ought to be no free riders on Public Goods. The cost of the road, national defense and education ought to be shared by all, since their benefits are shared by all.
Public Goods as exemplified by roads are obviously a good deal. MacDonald's founder Ray Kroc once asked his protégé, "What business am I in?" The unsurprising answer was, "The restaurant business." "No. The Real estate business." The value of his fast-food outlets depended on their location. The success of his fast-food outlets depended on their locations. The value of a location depended on the access from streets and roads. A new highway or bridge may increase property values immensely. In rare instances part of the gain may be captured for public use. Most often it becomes wealth to private landowners.
Does the same sort of benefit attend other Public Goods, such as, say, education? Public education has an immense value, but that benefit is not monopolized by the individual. An education not expressed in family, community, or workplace is essentially valueless except as a source of amusement (or edification, to the more serious) to its owner. But when it is expressed in job, earnings and spending, community and family, its benefits extend far beyond the individual - to the employer, the children, the neighbors and fellow citizens, and to the providers of goods and services. This benefit can be very great. The diffusion of beneficiaries is matched by a diffusion from the spectrum of time over which an education is used. A lifetime. It is easy to see that an education's value is not excludable, or in a sense, depletable.
The same analysis can be applied with similar results to other Public Goods, such as national defense, public safety and public health. The total return is far greater than the cost or than the benefit returned to the individual, but it is impossible to isolate and capture that larger return in a transaction. The market requires a relatively simple transaction to operate efficiently. It cannot deal well with multiple beneficiaries or variable benefits or extended or uncertain periods of time. A good which returns enormous benefits over costs will not be produced by the market unless the purchaser commands enough of the benefit to match the seller's price.
A clear understanding of taxation and the value of Public Goods is essential to remove the obstacles to growth. Taxes are simply the means of purchasing or financing Public Goods, in the same way mortgages finance houses. The great success of the anti-government Right Wing in the United States has arisen from their ability to separate taxes from the goods they purchase in the minds of the electorate. Taxes have become an evil in themselves, the fangs of a vampire government, money which disappears into the bloated bureaucracy, a theft of the necessary incentives to private activity. This is nonsense. If you want a car with a smooth ride, you get a car loan for a BMW or Lexus. If you want a road with a smooth surface, you pay taxes. Nobody can buy a road with a credit card, any more than it would be appropriate for the government to purchase a BMW for an individual. The hysteria associated with taxation is little more than political charlatanism, and is not borne out by either rational thinking or experience.
Instead of a clear understanding, however, a double-think has occurred. Taxes are evil and the goods and services produced by government - one-third of all expenditures - are given. As if deposited by God or nature. In fact, taxes are the source of funding for Public Goods. Public Goods which have a high multiplier at the front end, being expenditures of government, and so stimulate economic activity. They often produce immense value over their cost and create wealth for many private economic actors.
The Commons
The Tragedy of the Commons is a problem that confounds solution. The archetypal Commons of Scotland gave us this metaphor. Because all cattle had equal right to the resource of the common pasture, the Commons was overgrazed. Users had no incentive to personal responsibility. Because it was overgrazed, the Commons did not provide sustenance enough for healthy cattle. Thus the resource was overused and the users eventually were impoverished. The problem was solved by enclosing the Commons and giving property rights to the local lord. This captured the incentive to manage the pasture responsibly. Of course, this was hollow comfort to those in the community who now had no resource whatsoever.
The modern Commons - the air, the water, and other resources, in all their forms - resist enclosure. Even if enclosed, that is, controllable and leasable, the possibility of misuse by the lords should give us pause. For example, the airwaves now under control of media moguls have not produced the highest good and often seem to have invited predation of the common mind. Demand Side solutions exist, but require a public ownership of the resource that does not now exist.
Understanding economic goods
We cannot accept mere activity as a measure of health, but this "activity" is precisely all that GDP measures. Whatever bubbles up is not always good. The very acts that destroy the future - wars and profligacy and destruction of the environment can rank high on a "growth" scale that is measured in a "product" that is merely monetized activity. In the measurement of GDP, a home is the equivalent of jail, nutrition the equivalent of alcoholism, education the equivalent of pornography. "Goods" and "bads" are counted equally. More accurate measures of economic and social health exist, and we will look more closely at the measurement of economic goods in a later chapter.
Examples of those public goods:
Rail. Because our current private goods automobile-centered transportation consumes so much space and so many resources and produces planet-strangling pollutants and greenhouse gases, it is a good demonstration of the private goods to public goods move we need. In rail we have the opportunity to replace imported oil with domestic infrastructure, reduce pollution, free physical space for other uses, and create a stable jobs-producing industry. Unfortunately, the public good of rail is captive to the rail industry which cannot capture all its benefits and so seeks to maximize its return on capital and minimize its investment by concentrating on modular, long-haul and bulk freight, rather than passengers or short-haul freight that would reduce or replace freeway expansion.
New non-polluting fuels. Methanol, fuel cells, and other advances into a clean energy future can be developed by private corporations for profit if the government will only guarantee a market for the product. This is called "advance commitment procurement" and involves no public expenditure on the development of products, only the commitment to buy such a thing if it is developed. At a specific, not open-ended price. Or, as California has done with its pollution restrictions, the market can be described and those who want to participate in it have to meet the guidelines. The catalytic converter and tens of billions of dollars in private R&D have been generated without a dime of public money by these kinds of guarantees.
Clean Energy and Conservation. The green energy sources are essential, and developing the technology for clean energy can give Americans the growth industry of the next century. This is more well described by others. At the same time, simple conservation and building retrofitting is a no-brainer in terms of financial payback. The government need only provide a financing mechanism that can capture the savings and private contractors will do the work. Such activity, of course, provides a big new market for conservation in housing, urban design, and building products. Again, the markets can be produced by both incentives and disincentives.
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