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The Basics: Anarchy and Public Goods

Summary:
Should Socrates have drunk the hemlock? Should you obey the state? What is the state for? The economic concept of “public good” is crucial for economics and political philosophy and for answering that sort of question. Here’s a short introduction (with some further questions). A public good (sometimes called “collective good”) is something for which all members of a group are willing to pay some price but for which it is impossible (or too costly) to charge a price to consumers. Whether or not the state is required for the production of public goods is what makes James Buchanan a limited-government liberal and Anthony de Jasay an anarchist, even if other considerations play a role (such as the effects of political competition). The theory of public goods as today’s

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Should Socrates have drunk the hemlock? Should you obey the state? What is the state for? The economic concept of “public good” is crucial for economics and political philosophy and for answering that sort of question. Here’s a short introduction (with some further questions).

A public good (sometimes called “collective good”) is something for which all members of a group are willing to pay some price but for which it is impossible (or too costly) to charge a price to consumers. Whether or not the state is required for the production of public goods is what makes James Buchanan a limited-government liberal and Anthony de Jasay an anarchist, even if other considerations play a role (such as the effects of political competition).

The theory of public goods as today’s economists understand it was first elaborated by Paul Samuelson in two articles of the Review of Economics and Statistics: a mathematical exposition in “The Pure Theory of Public Expenditure” (Novembre 1954), and a graphical and less technical presentation in “Diagrammatic Exposition of a Theory of Public Expenditure” (November 1955).

A public good can also be seen as something that transmits positive externalities to (literally) all individuals in a group. An article by Bryan Caplan in Econlib provides a good and short explanation of the concept of externalities. Although externalities and public goods are often thought as distinct concepts, their overlap has been noticed in the economic literature—from identifying “public good externalities” as a sort of externalities (Francis M. Bator, “The Anatomy of Market Failure,” Quarterly Journal of Economics [1958]), to noting that, between the two concepts, “there are no purely formal differences as far as necessary and sufficient conditions for top-level optimality are concerned” (E.J. Mishan, Introduction to Normative Economics, Oxford University Press, 1981, p. 433). A public good exists when its production for the benefit of paying customers automatically creates positive externalities for those who do not pay.

Externalities are a more complex concept than many imagine. As noted by Mishan, they extend to the mere “an awareness of what is happening to others” (p. 135). You transmit a negative externality to me if you privately do (or even think about) something I don’t like. This follows from the definition of externalities combined with the subjectivity of individual preferences. In a sense, public goods are a simpler concept because, by definition, they are unanimously liked.

There is little doubt that public goods exist—protection against nearby and far-away aggressors is the paradigmatic case—but the question is whether they exist for a group defined over a country, that is, for everybody in the group occupying a large territory dominated by a central state. Most if not all public goods are “public” only for a specific group of individuals (as Robert Sugden notes in The Economics of Rights, Cooperation and Welfare, Basil Blackwell, 1986). So, is it true that the state is necessary for the production of public goods? Only a certain number of individuals would be willing to pay for, say, enforcing a national ban on drugs, tobacco, e-cigarettes, or imports from China.

Are there public goods that justify the domination of a state over a territory? De Jasay answers negatively. For Buchanan the answer is positive: individuals contract to form a country because there are some public goods such as national defense that they want, but also—and this is often ignored—because they want certain goods to be defined as public. In The Limits of Liberty: Between Anarchy and Leviathan (1975) (Liberty Fund, 2000), Buchanan writes:

The dividing line between private and public goods depends, in part, on how the property rights of persons are defined.

In this sense, it would be by definition that public goods justify the social contract and the state that enforces it. This opens a Pandora box.

Other questions remains. On the one hand, what have the signatories of the implicit social contract really “signed”? How can the state, if it is necessary, be limited? On the other side, how can anarchy maintain something resembling a free society with formal individual rights and the rule of law?

Can we avoid choosing between de Jasay and Buchanan by rejecting the relevance of public goods in social theory and framing the social problem in terms of coordination by evolved rules? This is the approach of Friedrich Hayek, David Hume and the Scottish Enlightenment, and Sugden as well. But it is not sure that this avoidance manoeuvre works. De Jasay himself was close to the Humean approach. And Buchanan suggested, in his review of the Sugden’s book, that “evolutionary and contractarian explanations can be complements rather than substitutes” (Economic and Philosophy 4 [1988]).

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