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How would anarchists handle the public goods problem?

by Bryan Caplan

Modern neoclassical (or "mainstream") economists — especially those associated with theoretical welfare economics — have several important arguments for the necessity or desirability of government. Out of all of these, the so-called "public goods" problem is surely the most frequently voiced. In fact, many academics consider it a rigorous justification for the existence and limits of the state. Anarcho-capitalists are often very familiar with this line of thought and spend considerable time trying to refute it; left-anarchists are generally less interested, but it is still useful to see how the left-anarchist might respond.

We will begin by explaining the concept of Pareto optimality, show how the Pareto criterion is used to justify state action, and then examine how anarchists might object to the underlying assumptions of these economic justifications for the state. After exploring the general critique, we will turn to the problem of public goods (and the closely related externalities issue). After showing how many economists believe that these problems necessitate government action, we will consider how left-anarchists and anarcho-capitalists might reply.

The concept and uses of Pareto optimality in economics

The most widely-used concept in theoretical welfare economics is "Pareto optimality" (also known as "Pareto efficiency"). An allocation is Pareto-optimal if it is impossible to make at least one person better off without making anyone else worse off; a Pareto improvement is a change in an allocation which makes someone better off without making anyone else worse off. As Hal Varian's Microeconomic Analysis explains, "[A] Pareto efficient allocation is one for which each agent is as well off as possible, given the utilities of the other agents." "Better" and "worse" are based purely upon subjective preferences which can be summarised in a "utility function," or ordinal numerical index of preference satisfaction.

While initially it might seem that every situation is necessarily Pareto optimal, this is not the case. True, if the only good is food, and each agent wants as much food as possible, then every distribution is Pareto optimal. But if half of the agents own food and the other half own clothes, the distribution will not necessarily be Pareto optimal, since each agent might prefer either more food and fewer clothes or vice versa.

Normally, economists would expect agents to voluntarily trade in any situation which is not Pareto optimal; but neoclassical theorists have considered a number of situations in which trade would be a difficult route to Pareto optimality. For example, suppose that each agent is so afraid of the other that they avoid each other, even though they could both benefit from interaction. What they need is an independent and powerful organisation to e.g. protect both agents from each other so that they can reach a Pareto-optimal allocation. What they need, in short, is the state. While economists' examples are usually more elaborate, the basic intuition is that government is necessary to satisfy the seemingly uncontroversial principle of Pareto optimality.

Anarchists of all sorts would immediately object that the very existence of deontological anarchists shows that Pareto optimality can never justify state action. If even the slightest increase in the level of state activity incompensably harms the deontological anarchist, then obviously it is never true that state action can make some people better off without making any others worse off. Moreover, virtually all government action makes some people better off and other people worse off, so plainly the pursuit of Pareto improvements has little to do with what real governments do.

Due to these difficulties, in practice economists must base their judgments upon the far more controversial judgments of cost-benefit analysis. (In the works of Richard Posner, this economistic cost-benefit approach to policy decisions is called "wealth-maximisation"; a common synonym is "Kaldor-Hicks efficiency.") With cost-benefit analysis, there is no pretence made that government policy enjoys unanimous approval. Thus, it is open to the many objections frequently made to e.g. utilitarianism; moreover, since cost-benefit analysis is based upon agents' willingness to pay, rather than on agents' utility, it runs into even more moral paradoxes than utilitarianism typically does.

In the final analysis, welfare economists' attempt to provide a value-free or at least value-minimal justification of the state fails quite badly. Nevertheless, economic analysis may still inform more substantive moral theories: Pareto optimality, for example, is a necessary but not sufficient condition for a utilitarian justification of the state.

The public goods problem

The "public goods" argument is certainly the most popular economic argument for the state. It allegedly shows that the existence of government can be Pareto optimal, and that the non-existence of the state cannot be Pareto optimal; or at least, it shows that the existence of government is justifiable on cost-benefit grounds. Supposedly, there exist important services, such as national defence, which benefit people whether they pay for them or not. The result is that selfish agents refuse to contribute, leading to disaster. The only way to solve this problem is to coerce the beneficiaries to raise the funds to supply the needed good. In order for this coercion to work, it needs to be monopolised by a single agency, the state.

Public goods arguments have been made not only for national defence, but for police, roads, education, R&D, scientific research, and many other goods and services. The essential definitional feature of public goods is "non-excludability"; because the benefits cannot be limited to contributors, there is no incentive to contribute. (A second definitional characteristic often attributed to public goods is "non-rivalrousness"; my own view is that this second attribute just confuses the issue, since without the non-excludability problem, non-rivalrousness would merely be another instance of the ubiquitous practice of pricing above marginal cost.)

The concept of externalities is very closely connected to the concept of public goods; the main difference is that economists usually think of externalities as being both "positive" (e.g. R&D spill-overs) and "negative" (e.g. pollution), whereas they usually don't discuss "public bads." In any case, again we have the problem that agents perform actions which harm or benefit other people, and the harm/benefit is "non-excludable." Victims of negative externalities can't feasibly charge polluters a fee for suffering, and beneficiaries of positive externalities can't feasibly be charged for their enjoyment. Government is supposed to be necessary to correct this inefficiency. (As usual, it is the inefficiency rather than the injustice that economists focus upon.)

Left-anarchists and anarcho-capitalists would probably have remarkably similar replies to this argument, although doubtlessly the tone and emphasis would vary.

Objection #1: The behavioural assumptions of public goods theory are false

It is simply not true that people always act in their narrow self-interest. Charity exists, and there is no reason to think that the charitable impulse might not be cultivated to handle public goods problems voluntarily on an adequate basis. Nor need charity as such be the only motive: In Social Contract, Free Ride, Anthony de Jasay lays out an "ethics turnpike" of possible voluntary solutions to serious public goods problems, moving from motivation from high moral principles, to "tribal" motivations, to economic motivations. As de Jasay writes, "On the map of the Ethics Turnpike . . . three main segments are marked off according to the basic type of person most likely to find his congenial exit along it. The first segment is primarily for the type who fears God or acts as if he did. The second segment has exits to suit those who are not indifferent to how some or all their fellow men are faring, and who value only that (but not all that) which people want for themselves or for others. The third is for homo oeconomicus, maximising a narrowly defined utility that varies only with the money's worth of his own payoffs."

In short, much of the public goods problem is an artificial creation of economists' unrealistic assumptions about human nature. Anarchists would surely disagree among themselves about human nature, but almost all would agree that there is more to the human character than Hobbesian self-interest. Some people may be amoral, but most are not. Moreover, charitable impulses can even give incentives to uncharitable people to behave fairly. If the public boycotts products of polluters, the polluters may find that it is cheaper to clean up their act than lose the public's business.

Interestingly, many economists have experimentally tested the predictions of public goods theory. (Typically, these experiments involve groups of human subjects playing for real money.) The almost universal result is that the central prediction of public goods theory (i.e., that no one will voluntarily contribute to the production of a public good) is totally false. While the level of contributions rarely equals the Pareto-optimal level, it never even approaches the zero-provision level that public goods theory predicts. Summarising the experimental literature, Douglas Davis and Charles Holt write "[S]ubjects rather persistently contributed forty to sixty percent of their token endowments to the group exchange, far in excess of the zero percent contributions rate . . . " Subsequent experiments examined the conditions under which voluntary provision is most successful; see Davis and Holt's Experimental Economics for details.

Objection #2: Government is not the only possible way to provide public goods

Even if individuals act in their narrow self-interest, it is not true that government is the only way to manage public goods and externalities problems. Why couldn't a left-anarchist commune or an anarcho-capitalist police firm do the job that the neoclassical economist assumes must be delegated to the government? The left-anarchist would probably be particularly insistent on this point, since most economists usually assume that government and the market are the only ways to do things. But thriving, voluntary communities might build roads, regulate pollution, and take over other important tasks now handled by government.

Anarcho-capitalists, for their part, would happily agree: While they usually look to the market as a first solution, they appreciate other kinds of voluntary organisations too: Fraternal societies, clubs, family, etc. But anarcho-capitalists would probably note that left-anarchists overlook the ways that the market might take over government services — indeed, malls and gated communities show how roads, security, and externalities can be handled by contract rather than coercion.

Objection #3: Public goods are rarer than you might think

Anarcho-capitalists would emphasise that a large number of alleged "public goods" and "externalities" could easily be handled privately by for-profit business if only the government would allow the definition of private property rights. If ranchers over-graze the commons, why not privatise the commons? If fishermen over-fish the oceans, why not parcel out large strips of the ocean by longitude and latitude to for profit-making aquaculture? And why is education supposed to create externalities any more than any other sort of investment? Similarly, many sorts of externalities are now handled with private property rights. Tort law, for example, can give people an incentive to take the lives and property of others into account when they take risks.

Objection #4: Externalities are a result of the profit-oriented mentality which would be tamed in an anarchist society

Left-anarchists would emphasise that many externalities are caused by the profit-seeking system which the state supports. Firms pollute because it is cheaper than producing cleanly; but anarcho-syndicalist firms could pursue many aims besides profit. In a way, the state-capitalist system creates the problem of externalities by basing all decisions upon profit, and then claims that we need the state to protect us from the very results of this profit-oriented decision-making process.

While few left-anarchists are familiar with the experimental economics literature, it offers some support for this general approach. In particular, many experiments have shown that subjects' concern for fairness weakens many of the harsh predictions of standard economic analysis of externalities and bargaining.

Objection #5: The public goods problem is unavoidable

Perhaps most fundamentally: Government is not a solution to the public goods problem, but rather the primary instance of the problem. If you create a government to solve your public goods problems, you merely create a new public goods problem: The public good of restraining and checking the government from abusing its power. "[I]t is wholly owing to the constitution of the people, and not to the constitution of the government, that the crown is not as oppressive in England as in Turkey," wrote Thomas Paine; but what material incentive is there for individuals to help develop a vigilant national character? After all, surely it is a rare individual who appreciably affects the national culture during his or her lifetime.

To rely upon democracy as a counter-balance simply assumes away the public goods problem. After all, intelligent, informed voting is a public good; everyone benefits if the electorate reaches wise political judgments, but there is no personal, material incentive to "invest" in political information, since the same result will (almost certainly) happen whether you inform yourself or not. It should be no surprise that people know vastly more about their jobs than about their government. Many economists seem to be aware of this difficulty; in particular, public choice theory in economics emphasises the externalities inherent in government action. But a double standard persists: While non-governmental externalities must be corrected by the state, we simply have to quietly endure the externalities inherent in political process.

Since there is no incentive to monitor the government, democracies must rely upon voluntary donations of intelligence and virtue. Because good government depends upon these voluntary donations, the public goods argument for government falls apart. Either unpaid virtue can make government work, in which case government isn't necessary to solve the public goods problem; or unpaid virtue is insufficient to make government work, in which case the government cannot be trusted to solve the public goods problem.

David Friedman has a particularly striking argument which goes one step further. Under governmental institutions, he explains, good law is a public good and bad law is a private good. That is, there is little direct personal incentive to lobby for laws that benefit everyone, but a strong personal incentive to lobby for laws that benefit special interests at the expense of everyone else. In contrast, under anarcho-capitalist institutions, good law is a private good and bad law is a public good. That is, by patronising a firm which protects oneself, one reinforces the existence of socially beneficial law; but there is little incentive to "lobby" for the re-introduction of government. As Friedman explains, "Good law is still expensive — I must spend time and money determining which protection agency will best serve me — but having decided what I want, I get what I pay for. The benefit of my wise purchase goes to me, so I have an incentive to purchase wisely. It is now the person who wishes to reintroduce government who is caught in a public goods problem. He cannot abolish anarchy and reintroduce government for himself alone; he must do it for everyone or for no one. If he does it for everyone, he himself gets but a tiny fraction of the 'benefit' he expects the reintroduction of government to provide."

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