Thursday, December 27, 2012

Fallacies of the Public Goods Theory and the Production of Security by Hans-Hermann Hoppe

In 1849, at a time when classical liberalism was still the dominant ideological force and "economist" and "socialist" were generally-and rightly so-considered antonyms, Gustave de Moliiari, a renowned Belgian economist, wrote, "If there is one well-established truth in political economy, it is this: That in all cases, for all commodities that serve to pmvide 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. And this: That the interests of the consumer of any commodity whatsoever should always prevail over the interests of the pro- ducer. 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. Whence it follows: That no government should have the right to prevent another government from going into competition with it, or require consumers of security to wme exclusively to it for this commodity."~And he comments on this whole argument by saying, "Either this is logical and true, or else the principles on which economic science is based are invalid."

There is apparently only one way out of this unpleasant (for all socialists, that is) conclusion: to argue that there are particular goods to which for some special reasons the above economic reasoning does not apply. It is this that the so-called public goods theorists are determined to prove.) However, I will demonstrate that in fact no such special goods or special reasons exist, and that the production of security in particular does not pose a problem any different from that of the production of any other good or service, be it houses, cheese, or insurance. In spite of its many followers, the whole public goods theory is faulty, flashy reasoning, ridden with internal inconsistencies, nonsequiturs, appealmg to and playing on popular prejudices and assumed beliefs, but with no scientific merit whatsoever.'

What, then, does the escape route that socialist economists have found in order to avoid drawing Molinari's conclusion look like? Since Molinari's time it has become more common to answer yes to the question of whether there are goods to which different sorts of economic analyses apply. As a matter of fact, it is almost impossible to find a single contemporary economics textbook that does not make and stress the vital importance of the distinction between private goods, for which the truth of the economic superiority of a capitalist order of production is generally admitted, and public goods, for which it is generally denied.' Certain goods or services-among them, security-are said to have the special characteristic that their enjoyment cannot be restricted to those who have actually fmanced their production. Rather, people who do not participate in their fmancing can also draw benefits from them. Such goods are called public goods or services (as opposed to private goods or services, which exclusively benefit those people who actually paid for them). And it is because of this special feature of public goods, it is then argued, that markets cannot produce them, or at least not in sufficient quantity or quality, and hence compensatory state action is required.

The examples given by different authors of alleged public goods vary widely. Authors often classify the same good or service differently, leaving almost no classification of a particular good undisputed, which clearly foreshadowsthe illusory characterofthewholedistinction.' Nonetheless,someexamplesthatenjoypartic- ularly popular status as public goods are the fire brigade that stops a neighbor's house from catching fire, thereby letting him profit from my fire brigade, even though he did not contribute anything to fmancing it; or the police that, by walking around my property scare away potential burglars from my neighbor's property as well, even if he did not help finance the patrols; or the lighthouse, an example particularly dear to economists,' that helps a ship fmd her way even though the ship's owner did not contribute a penny to its construction or upkeep.

Before continuing with the presentation and critical examination of the theory of public goods, let me investigate how useful the distinction between private and public goods is in helping decide what should be produced privately and what by the state or with state help. Even the most superficial analysis could not fail to point out that using the alleged criterion of inexcludability, rather than presenting a sensible solution, would get one into deep trouble. While at least at first glance it seems that some of the state-provided goods and services might indeed qualify as public goods, it certainly is not obvious how many of the goods and services that are actually produced by states could come under the heading of public goods. Railroads, postal services, telephone, streets, and the like seem to be goods whose usage can be restricted to the persons who actually fmance them, and hence appear to be private goods. And the same seems to be the case regarding many aspects of the multidimensional "good security": everything for which insurance could be taken out would have to qualify as a private good. Yet this does not suffice. Just as a lot of state-provided goods appear to be private goods, so many privately produced goods seem to fit in the category of a public good. Clearly my neighbors would profit from my well-kept rose garden-they could enjoy the sight of it without ever helping me garden. The same is true of all k i d s of improvements that I could make on my property that would enhance the value of neighboring property as well. Even those people who do not throw money in his hat can profit from a street musician's performance. Those fellow passengers on the bus who did not help me buy it profit from my deodorant. And everyone who ever meets me would profit from my efforts, undertaken without their financial support, to turn myself into a most lovable person. Now, do all these goods-rose gardens, property improvements, street music, deodorants, personal improvements-since they clearly seem to possess the characteristics of public goods, then have to be provided by the state or with state assistance?

As these examples of privately produced public goods indicate, there is some- thing seriously wrong with the thesis of public goods theorists that public goods cannot be produced privately, but instead require state intervention. Clearly they can be provided by markets. Furthermore, historical evidence shows us that all of the so-called public goods that states now provide have at some time in the past actually been provided by private entrepreneurs or even today are so provided in one country or another. For example, the postal service was once private almost everywhere; streets were privately fin beloved lighthouses were originally the result of private enterprises. private police forces, detectives, and arbitrators exist; and help for the sick, the poor, the elderly, orphans, and widows has been a traditional concern of private charity organizations. To say, then, that such things cannot be produced by a pure market system is falsified by experience a hundredfold.

Apart from this, other difficultiesarise when the public-private goods distinc- tion is used to decide what and what not to leave to the market. For instance, what if the production of so-called public goods did not have positive but negative consequences for other people, or if the consequences were positive for some and negative for others? What if the neighbor whose house was saved from burn- ing by my fire brigade had wished (perhaps because he was overinsured) that it had burned down; or my neighbors bate roses, or my fellow passengers find the scent of my deodorant disgusting? In addition, changes in the technology can change the character of a given good. For example, with the development of cable TV a good that was formerly (seemingly) public has become private. And changes in the laws of property-of the appropriation of property-can have the very same effect of changing the public-private character of a good. The lighthouse, for instance, is a public good only insofar as the sea is publicly (not privately) owned. But if it were permitted to acquire pieces of the ocean as private property, as it would be in a purely capitalist social order, then as the lighthouse shines over only a limited territory, it would clearly become possible to exclude nonpayers from the enjoyment of its services.

Leaving this somewhat sketchy level of discussion and looking into the distinc- tion between private and puhlic goods more thoroughly, we discover that the distinction turns out to be completely illusory. A clear-cut dichotomy between private and public goods does not exist, and this is essentially why there can be so many disagreements on how to classify a given good. All goods are more or less private or public and can-and constantly do-change with respect to their degree of privateness/publicnessas people's values and evaluations change, and as changes occur in the composition of the population. In order to recognize that they never fall, once and for all, into either one or the other category, one must only recall what makes something a good. For something to be a good it must be recognized and treated as scarce by someone. Something is not a good as such, that is to say; goods are goods only in the eyes of the beholder. Nothing is a good unless at least one person subjectively evaluates it as such. But then, when goods are never goods-as-such-when no physicochemical analysis can identify something as an economic good-there is clearly no fixed, objective criterion for classifying goods as either private or public. They can never be private or public goods as such. Their private or public character depends on how few or how many people consider them to be goods, with the degree to which they are private or public changing as these evaluations change and ranging from one to infinity. Even seemingly completely private things like the interior of my apart- ment or the color of my underwear can thus become public goods as soon as somebody else starts caring about them.1° And seemingly public goods, like the exterior of my house or the color of my overalls, can become extremely private goods as soon as other people stop caring about them. Moreover, every good can change its characteristics again and again; it can even turn from a public or private good to a public or private had or evil and vice versa, depending solely on the changes in this caring or uncaring. If this is so, then no decision what soever can be based on the classification of goods as private or public." Infact, to do so it would become necessary to ask virtually every individual person with respect to every single good whether or not he happened to care about it-positively or negatively and perhaps to what extent-in order to determine who might profit from what and who should therefore participate in the good's financing. (And how could one know if they were telling the truth?) It would also become necessary to monitor all changes in such evaluations continuously, with the result that no definite decision could ever be made regarding the production of anything, and as a consequence of a nonsensical theory all of us would be long dead.

But even if one were to ignore all these difficulties, and were willing to admit for the sake of argumentthat the private-publicgood distinction does hold water, even then the argument would not prove what it is supposed to. It neither pro- vides wnclusive reasons why puhlic goods-assuming that they exist as a separate category of goods-should be produced at all nor why the state rather than private enterprises should produce them. This is what the theory of public goods essentially says, having introduced the aforementioned conceptual distinction: The positive effects of public goods for people who do not contribute anything to their production or financing proves that these goods are desirable. But evidently they would not be produced, or at least not in sufficient quantity and quality, in a free, competitive market, since not all of those who would profit from their production would also contribute financially to make the production possible. So in order to produce these goods (which are evidently desirable, but would not be produced otherwise), the state must jump in and assist in their production. This sort of reasoning, which can be found in almost every textbook on economics (Nobel laureates not excluded'~is)completely fallacious and fallacious on two counts.

For one thing, to come to the conclusion that the state has to provide public goods that otherwise would not be produced, one must smuggle a norm into one's chain of reasoning. Otherwise, from the statement that because of some special characteristics they have. certain goods would not be produced. one could never reach the conclusion that these goods should be produced. But with a norm required to justify their conclusion, the public goods theorists clearly have left the bounds of economics as a positive, wertfrei science. Instead they have moved into the realm of morals or ethics, and hence one would expect to be offered a theory of ethics as a cognitive discipline in order for them to do legitimately what they are doing and to justifiably derive their conclusion. But it can hardly be stressed enough that nowhere in the public goods theory literature can there be found anything that even faintly resembles such a cognitive theory of ethics." Thus it must be stated at the outset, that the public goods theorists are misusing whatever prestige they might have as positive economists for pronouncements on matters on which, as their own writings indicate, they have no authority whatsoever. Perhaps, though, they have stumbled on something correct by accident, without having supported it with an elaborate moral theory?
It becomes apparent that nothing could be further from the truth as soon as one explicitly formulates the norm that would be needed to arrive at the conclusion that the state has to assist in the provision of public goods. The norm required to reach the above conclu- sion 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, either directly or indirectly with the help of the state, and these persons may be forced to share in the necessary fiancial burden. It does not need much comment to show that chaos would result from implementing this rule, as it amounts to saying that anyone can attack anyone else whenever he feels like it. Moreover, as I have demonstrated in detail elsewhere" this norm could never be justified as a fair norm. To argue so, in fact to argue at all, in favor of or against anything, be it a moral, nonmoral, empirical, or logico- analytical position, it must be presupposed that contrary to what the norm actually says, each individual's integrity as a physically independent decision-making unit is assured. 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 precondi- tion for argumentation and possible agreement and hence can be argumentatively defended as a just norm by means of a priori reasoning.

But the public goods theory breaks down not only because of the faulty moral reasoning implied in it. Even the utilitarian, economic reasoning contained in the above argument is blatantly wrong. As the public goods theory states, it might well be that it would be better to have the public goods than not to have them, though it should not he forgotten that no a priori reason exists that this must be so of necessity (which would then end the public goods theorists' reasoning right here). For it is clearly possible, and indeed known to be a fact, that anarchists exist who so greatly abhor state action that they would prefer not having the so- called public goods at all to having them provided by the state.  In any case, even if the argument is conceded so far, to leap from the statement that the public goods are desirable to the statement that they should therefore be provided by the state is anything but conclusive, as this is by no means the choice with which one is confronted. Since money or other resources must be withdrawn from possible alternative uses to fmance the supposedly desirable public goods, the only relevant and appropriate question is whether or not these alternative uses to which the money could be put (that is, the private goods which could have been acquired but now cannot be bought because the money is being spent on public goods instead) are more valuable-more urgent-than the public goods. And the answer to this question is perfectly clear. In terms of consumer evalua- tions, however high its absolute level might be, the value of the public goods is relatively lower than that of the competing private goods because if one had left the choice to the consumers (and had not forced one alternative upon them), they evidently would have preferred spending their money differently (otherwise no force would have been necessary). This proves beyond any doubt that the resources used for the provision of public goods are wasted because they provide consumers with goods or services that at best are only of secondary importance. In short, even if one assumed that public goods that can be distinguished clearly from private goods existed, and even if it were granted that a given public good might be useful, public goods would still compete with private goods. And there is only one method for finding out whether or not they are more urgently desired and to what extent, or mutatis mutandis, if, and to what extent, their production would take place at the expense of the nonproduction or reduced production of more urgently needed private goods: by having everything provided by freely competing private enterprises. Hence, contrary to the conclusion arrived at by the public goods theorists, logic forces one to accept the result that only a pure market system can safeguard the rationality, from the point of view of the consumers, of a decision to produce a public good. And only under a pure capitalist order could it be ensured that the decision about how much of a public good to produce (provided it should be produced at all) would be rational as No less than a semantic revolution of truly Onvellian dimensions would be required to come up with a different result. Only if one were willing to interpret someone's "no" as really meaning "yes," the "non-buying of something" as meaning that it is really "preferred over that which the nonbuying person does instead of non- buying," of "force" really meaning "freedom," of "noncontracting" really meaning "making a contract" and so on, could the public goods theorists' point be"proven." But then, how could we be sure that they really mean what they seem to mean when they say what they say, and do not rather mean the exact opposite, or don't mean anything with a definite content at all, but are simply babbling? We could not! M. N. Rothbard is thus completely right when he comments on the endeavors of the public goods ideologues to prove the existence of so-called market failures due to the nonproduction or a quantitatively or qualitatively "deficient" production of public goods. He writes, "such a view completely misconceives the way in which economic science asserts that free- market action is ever optimal. It is optimal, not from the standpint of the per- sonal ethical views of an economist, but from the standpoint of free, voluntary actions of all participants and in satisfying the freely expressed needs of the con- sumers. Government interference, therefore, will necessarily and always move away from such an optimum.

Indeed, the arguments supposedly proving market failures are nothing short of patently absurd. Stripped of their disguise of technical jargon all they prove is this: A market is not perfect, as it is characterized by the nonaggression principle imposed on conditions marked by scarcity, and so certain goods or services that could only be produced and provided if aggression were allowed will not be produced. True enough. But no market theorist would ever dare deny this. Yet, and this is decisive, this "imperfection" of the market can be defended, morally as well as economically, whereas the supposed "perfections" ofmarkets propagated by the public goods theorists cannot.  It is true enough, too, that a termination of the state's current practice of providing public goods would imply some change in the existing social structure and the distribution of wealth. And such a reshuffling would certainly imply hardship for some people. As a matter of fact, this is precisely why there is widespread public resistance to a policy of privatizing state functions, even though in the long run overall social wealth would be enhanced by this very policy. Surely, however, this fact cannot be accepted as a valid argument demonstrating the failure of markets. If a man has been allowed to hit other people on the bead and is now not permitted to continue with this practice, he is certainly hurt. But one would hardly accept that as a valid excuse for upholding the old (hitting) rules. He is harmed, but harming him means substituting a social order in which every consumer has an equal right o determine what and how much of anything is produced, for a system in which some consumers have the right to determine in what respect other consumers are not allowed to buy voluntarily what they want with the means justly acquired by them and at their disposal. And certainly, such a substitution would be preferable from the point of view of all consumers as voluntary consumers.

The Myth of National Defense

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