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The Myth of Public Goods

An explanation as to why the socialist theory of public goods is fallacious.

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By Mason Mohon | USA

When the size and scope of government are discussed, it is usually assumed, even within groups of libertarians, that certain goods cannot be produced by the free market because they are “public.” These public goods are goods that non-financiers still reap benefits from, such as a public park, or lighthouse, or a fire department, or maybe even a police station. The socialist will claim that there is no way in heaven or hell that goods which fall under the criteria above could ever be privatized. This line of reasoning, at first, seems like it is a very clear and sensible one. People who reap the benefits from something they do not pay for will never pay for it, and as people who do pay see this happening, they will proceed to not pay. Extend this line of reasoning to a fully free market, and you can see that the parks have fallen into shambles, for nobody will pay the cleaning man. The ships are lost, for nobody is upkeeping the lighthouse. The homes are burning down, for nobody was willing to fund the fire station. Burglary and mugging have become rampant, for the police station has run out of funds to patrol the neighborhood. Obviously, these public goods must be state funded, right? Well, no, for this line of reasoning holds within it multiple logical jumps that should immediately raise numerous red flags.

Gustave de Molinari, a notable Belgian economist, wrote a bit about this idea when it came to the production of security in particular. This article’s intent is not to prove that security should be privatized (although it may if read in the correct manner), but rather it is to show the socialist errors of the theory of public goods. Molinari wrote the following:

[I]n all cases, for all commodities that serve to provide for the tangible or intangible need of the consumer, it is in the consumer’s best interest that labor and trade remain free, because the freedom of labor and trade have as their necessary and permanent result the maximum reduction of price… [T]he interests of the consumer of any commodity whatsoever should always prevail over the interests of the producer. Now, in pursuing these principles, one arrives at this rigorous conclusion: That the production of security should in the interest of consumers of this intangible commodity, remain subject to the law of free competition.

Molinari outlines two economic laws, first that free markets tend to lower prices for consumer and increase the quality of a good, and that the interests of the consumer prevail over the interests of the producer. Both of these are very true economics principles, the first one being proven by the profit-loss structure of free-enterprise and competition. Firms within the private sphere will have the tendency to cut costs as much as they can so that they can offer a lower price for potential consumers and make more money for themselves. They will not cut the cost at the expense of quality, though, for that would also drive consumers to competing firms. Economic reasoning proves to us that producers of goods or services within the free market will push prices down while pushing quality up. Furthermore, the interests of the consumer must take priority over the interest of the producer, and this is because of demand. I have discussed the consumer’s benefit through demand in some of my previous articles. In short, firms seek to make profit, and the only way to do this is to sell a good or service to a consumer. To do that, the consumer must want whatever they are trying to sell, otherwise, they will not be able to enter into a mutually beneficial and consensual transaction. This means that producers of goods and services are required to look at what people want or need to make profit, making this seemingly selfish profit motive an ultimately selfless act. These two economic laws are without a doubt fundamental within the economic sciences. Because of these conclusions drawn, the free market seems like a great mechanism for making the world a better place, which is true. Now, we must look to Molinari’s conclusion from this line of reasoning: security (or any other important good, which are usually the “public” ones) should be privatized.

Either this is logical and true, or else the principles on which economic science is based are invalid.

This is where we must begin looking at the socialist arguments in favor of state-provided public goods. The socialist would first claim that these goods are the important ones, so they must be provided by the state, but this is untrue. If we look at the economic lines of reasoning above in the context of state industry, we see that state ownership and production of just about anything is not beneficial. First, quality would not go up and the price would not go down. Rather, the opposite happens. In governments industries, there are no competing firms, so the prices tend to increase (so the person at the head of the agency can increase current income) and the quality tends to decrease because they do not have to fear losing consumers to another industry. I wrote about this before in my article titled The Problem of Bureaucracy. At the same time, because taxes are coercively collected, and not directly by specific bureaucracies, but rather sent to them by a higher agency, the bureaucrats will never feel the immediate impacts of not serving consumer needs, and sometimes they never will. The result is that the interests of the producer supercede those of the consumer. The socialist claim that “the more important the good or service, the more likely it should be state produced” is fundamentally flawed, for state industry only will ruin goods. Rather, the more important the good or service, the more likely that it should be provided by a private firm or some other free-market entity.

Socialists will then begin to make claims that there are certain instances where economic law does not apply, then. This would be a completely unfounded claim, especially because of the logical flaws of the public goods doctrine. The theory ultimately boils down to inexcludability: if you cannot exclude people from it, they will begin to free ride off of it. First, this criterion for state control over the public good creates the issue of not finding sensible solutions to real economic issues. It allows the arguer to jump around the economic reality and use shallow thinking. Moreover, the criteria for what is and is not a public good in the current order of things is somewhat hard to apply. It is not obvious how many state-owned industries within the status quo actually fall under the heading of a public good. Many things that the state currently does, such as protecting the consumer on the internet, paying for roads, or even providing security seem to be excludable services that the consumer should be able to take care of on their own.

The problem manifests itself in an even greater way when we look at items within the private sphere which could fall under this category. For example, I may begin to create a fragrant rose garden on my property, but I cannot effectively exclude people from it. My neighbors may be able to smell the roses, and passersbys will also be treated to the enjoyment of their beauty. They are a public good, from the socialist criteria of non-financer enjoyment. A street musician can play in the street, and every man woman and child walking by will experience his tune, yet not all of them will drop a dollar in his hat. These people are simply free-riding on the street musician’s melody. If I wear deodorant on the subway, all those around me free-ride on my non-stink. All of these instances include free-riders, that cannot be effectively excluded, benefitting from something that they have taken no part in financing. If we were to follow the public goods thesis to its logical end, rose gardens, street musicians, and my deodorant would all be seized and provided by through the state. This is a senseless proposition, though, and nobody will ever consider such a proposition legitimate or sensible, yet many still uphold the line of reasoning that leads to this conclusion. The idea that things that sit under the banner of being a “public good” cannot be privatized in phenomenally untrue.

Now, another issue is brought into focus when subjective value is brought into view. First, the myth that value can be determined objectively must be dispelled. Professor Jordan Peterson from the University of Toronto took a psychological approach to value. Economists in the Austrian tradition prove value is subjective in a purely economic function, but to get to the heart of how humans act, we must look at things psychologically. In his book Maps of Meaning, he makes clear that there are many goods and bads in life that can be defined and when defined will seem reasonable to others. Food is generally seen as a good as long as it nourishes. A blow on the head is usually and reasonably seen as bad in proportion to the force of the blow. The list of goods and bads can be extended with very little effort. The goodness and badness of most things is usually seen as fixed, yet subjective interpretation comes in to complicate this picture. We work and overcome the obstacles of the world to attain something good or avoid something bad, but sometimes we don’t work towards the end immediately. We won’t work for more food if we have a necessary amount for the foreseeable future, and generally, we would embrace the would-be-badness of hunger if it means being able to see the enemy starve. Our desires, predictions, and expectations mean that we cannot make a concrete final objective judgment value of what ends are good or bad. Things have no fixed significance, even though we can generalize their value. It is our personal preferences that govern the significance of the world.

Taking a more economic approach to this, for something to be valued at all means someone must treat it as scarce. This someone will assign a value to a good, but the value of said good can change from person to person. Nothing is a valued good unless someone subjectively values it as such. Because goods are valued subjectively, and no physical or chemical analysis can determine any sort of objective value, there is no objective way to identify any good as public or private. Whether or not something is to be considered public or private entirely depends on individual evaluations of said good. Seemingly excludable items (excludable, so they are private) can become public goods once another individual begins to value it. If nobody cares what my shirt color is except me, nobody is assigning value to it aside from myself, the financier, so it is “private,” until someone takes enough notice to care. Then it is “public.” This phenomenally poor system of goods definitions shows that no decision whatsoever can be made based on whether or not a good is considered public or private.

If the public goods theorists were to get past this problem, it would require the development of a framework of what ought to be produced. They would have to develop a norm of what kind of good must exist and be created. At this point, though, the socialists would have left the realm of economic thinking and will have entered into the world of moral and ethics. Hans-Hermann Hoppe developed what the norm of the socialists advocating for this theory would be.

The norm required to reach the [conclusion of the public goods theorists] is this: Whenever one can somehow prove that the production of a particular good or service has a positive effect on someone else but would not be produced at all or would not be produced in a definite quantity or quality unless certain people participated in its financing, then the use of aggressive violence against these persons is allowed.

This is the only norm that could be developed to provide a moral or ethical obligation that permits the state to provide such goods to the population, but the norm is very clearly flawed. An institution of this norm upon reality would result in genuine chaos. It amounts to saying any individual can attack another whenever they feel like it. This norm is not praxeologically valid, though, and it would be and any advocate for such a norm would be engaging in a performative contradiction. Dr. Hoppe expands in the following statement:

For only if everyone is free from physical aggression by everyone else could anything first be said and then agreement or disagreement on anything possibly reached. The principle of nonaggression is thus the necessary precondition for argumentation and possible agreement and hence can be argumentatively defended as a just norm by means of a priori reasoning.

One could not advocate for such a norm and remain in valid standing. The norm does not even stand the test of any other moral outlook, such as utilitarianism. It has a permissiveness for constant violence. But one may turn a utilitarian outlook and claim that the benefits of state production of these goods outweigh the state violence. This falls apart for two reasons: we have no a priori reason to take this moral framework as a necessity, and even if we did, the economics outlined above show that state control is going to cause more harm than good.

The final point is that the public state provided goods compete with goods in the private sphere. The money taken from individuals to finance said goods is money that would have been spent on what consumers value more highly. The value of these state provided public goods is necessarily lower than the value of private goods the consumer may have wished to spend their money on because if it were not, no coercion would have been necessary to fund these public goods in the first place. The resources used on public goods are wasted because they provide consumers with goods that they otherwise would not have spent their money on, causing less happiness across the board and filling the world with goods of secondary, or worse, importance. The only way to discover what goods are truly valued highly among consumers looking out for their own needs is to put them into the market, and into the hands of the consumers who are looking out for their own well being. Goods need to be subject to the rationality of the individual, not an impersonal arbitrarily defining third party.

Murray Rothbard made it clear in Man, Economy, and State, that the free market “is optimal…from the standpoint of free, voluntary actions of all participants in satisfying the freely expressed needs of consumers. Government interference…will necessarily and always move away from that optimum.” The optimal order of things is that which puts power into the hands of the people. One must be free to choose what they wish to do with their money. The idea that some goods are “public goods” and must be provided by the state is fallacious in nearly every way imaginable. It is best that we move away from such irrational statements and instead focus on discovering what the free-market solutions are.

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