Appendix B: “Collective Goods” and “External Benefits”: Two Arguments for Government Activity

0:00Appendix B, Collective Goods and External Benefits, Two Arguments for Government Activity One of the most important philosophical problems of recent centuries is whether ethics is a rational discipline, or instead a purely arbitrary, unscientific set of personal values. Whichever side one may take in this debate, it would certainly be generally agreed that economics, or praxeology, cannot by itself suffice to establish an ethical or politico-ethical doctrine. Economics per se is therefore a vert-frei science, which does not engage in ethical judgments.

0:49Yet while economists will generally agree to this flat statement, it is certainly curious how much energy they have spent trying to justify, in some tortuous, presumably scientific and vert-frei manner, various activities and expenditures of government. The consequence is the widespread smuggling of un-analyzed, undefended ethical judgments into a supposedly vert-frei system of economics. One venerable example used constantly in texts on public finance, an area particularly prone to camouflaged ethical judgments, is The Cannons of Justice for Taxation, propounded by Adam Smith.

1:37The analysis of the economic nature and consequences of government ownership in this book is wertfrei and does not involve ethical judgments. It is a mistake, for example, to believe that anyone, knowing the economic laws demonstrating the great inefficiencies of government ownership, would necessarily have to choose private over government ownership, although of course he may well do so. Those who place a high moral value, for example, on social conflict, or on poverty, or on inefficiency, or those who greatly desire to wield bureaucratic power over others, or to see people subjected to bureaucratic power, may well opt even more enthusiastically for government ownership.

2:28Ultimate ethical principles and choices are outside the scope of this book. This of course does not mean that the present author deprecates their importance. On the contrary, he believes that ethics is a rational discipline. Two favorite seemingly scientific justifications for government activity and enterprise are a. what we might call the argument of external benefits and b. the argument of collective of Goods or Collective Wants. Stripped of seemingly scientific or quasi-mathematical trappings, the first argument reduces to the contention that A, B and C do not seem to be able to do certain things without benefiting D, who may try to evade his just share of the payment.

3:25This and other external benefit arguments will be discussed shortly. The collective goods argument is, on its face, even more scientific. The economist simply asserts that some goods or services, by their very nature, must be supplied collectively, and therefore, government must supply them out of tax revenue. This seemingly simple existential statement, however, cloaks a good many unanalyzed politico-ethical assumptions. In the first place, even if there were collective goods, it by no means follows either, one, that one agency must supply them, or two, that everyone in the collectivity must be forced to pay for them.

4:18In short, if X is a collective good needed by most people in a certain community and which can be supplied only to all, it by no means follows that every beneficiary must be forced to pay for the good, which incidentally he may not even want. In short, we are back squarely in the moral problem of external benefits, which we shall discuss. The collective goods argument turns out, upon analysis, to reduce to the external benefit argument. Furthermore, even if only one agency must supply the good, it has not been proved that the government, rather than some voluntary agency or even some private corporation, cannot supply that good.

5:12Secondly, the very concept of collective goods is a highly dubious one. How first of all can a collective want, think or act? Only an individual exists and can do these things. There is no existential referent of the collective that supposedly wants and then receives goods. Many attempts have been made, nevertheless, to salvage the concept of the collective good, to provide a seemingly iron-clad scientific justification for government operations. Molinari, for example, trying to establish defense as a collective good, asserted a police force serves every inhabitant of the district in which it acts, but the mere establishment of a Bakery does not appease their hunger.

6:07But on the contrary, there is no absolute necessity for a police force to defend every inhabitant of an area, or still more, to give each one the same degree of protection. Furthermore, an absolute pacifist, a believer in total nonviolence living in the area, would would not consider himself protected by or receiving defense service from the police. On the contrary, he would consider any police in his area a detriment to him. Hence, defense cannot be considered a collective good or collective want, similarly for such and such projects as dams, which cannot be simply assumed to benefit everyone in the area.

6:59Antonio Daviti de Marco defined collective wants as consisting of two categories, wants arising when an individual is not in isolation and wants connected with a conflict of interest. The first category, however, is so broad as to encompass most market products, There would be no point, for example, in putting on plays unless a certain number went to see them, or in publishing newspapers without a certain wide market. Must all these industries therefore be nationalized and monopolized by the government? The second category is presumably meant to apply to defense. Defense.

7:44This, however, is incorrect. Defense itself does not reflect a conflict of interest, but a threat of invasion, against which defense is needed. Furthermore, it is hardly sensible to call collective that want which is precisely the least likely to be unanimous, since robbers will hardly desire it. Other economists write as if defense is necessarily collective because it is an immaterial service, whereas bread, autos, etc. are materially divisible and saleable to individuals. But immaterial services to individuals abound in the market.

8:30Must concert giving be monopolized by the state because its services are immaterial? In recent years, Professor Paul Samuelson has offered his own definition of collective consumption goods in a so-called pure theory of government expenditures. Collective consumption goods, according to Samuelson, are those which all enjoy in common in the sense that each individual's consumption of such a good leads to no subtraction from For some reason, these are supposed to be the proper goods, or at least these, for government, rather than the free market to provide.

9:18Samuelson's category has been attacked with due severity. Professor Steven Encke, for example, pointed out that most governmental services simply do not fit Samuelson's classification, including highways, libraries, judicial services, police, fire, hospitals and military protection. In fact, we may go further and state that no goods would ever fit into Samuelson's category of collective consumption goods. Julius Margolis, for example, while critical of Samuelson, concedes the inclusion of national defense and lighthouses in this category. But national defense is surely not an absolute good with only one unit of supply.

10:09It consists of specific resources committed in certain definite and concrete ways, and these resources are necessarily scarce. A ring of defense bases around New York, for example, cuts down the amount possibly available around San Francisco. Furthermore, a lighthouse shines over a certain fixed area only. Not only does a ship within the area prevent others from entering the area at the same time, but also the construction of a lighthouse in one place limits its construction elsewhere. In In fact, if a good is really technologically collective in Samuelson's sense, it is not a good at all, but a natural condition of human welfare, like air, superabundant to all and therefore unowned by anyone.

11:06Indeed, it is not the lighthouse, but the ocean itself, when the lanes are not crowded, which is the collective consumption good and which therefore remains unowned. Obviously neither government nor anyone else is normally needed to produce or allocate the ocean. In his reply to critics, Samuelson, after hastening to deny any possible implication that he wished to confine the sphere of government to collective goods alone, asserts that his This category is really a polar concept. Goods in the real world are supposed to be only blends of the polar extremes of public and private goods.

11:56But these concepts, even in Samuelson's own terms, are decidedly not polar, but exhaustive. Either A's consumption of a good diminishes B's possible consumption, or it does not. These two alternatives are mutually exclusive and exhaust the possibilities. In effect, Samuelson has abandoned his category either as a theoretical or as a practical device. Charles Thibault, conceding that there is no pure way to establish an optimum level for government expenditures, tries to salvage such a theory specifically for local government, Realizing that the taxing and even voting process precludes voluntary demonstration of consumer choice in the governmental field, he argues that decentralization and freedom of internal migration renders local government expenditures more or less optimal, as we can say that free market expenditures by firms are optimal since the residents can move in in and out as they please.

13:10Certainly it is true that the consumer will be better off if he can move readily out of a high-tax and into a low-tax community, but this helps the consumer only to a degree. It does not solve the problem of government expenditures, which remains otherwise the same. There are indeed other factors than government entering into a man's choice of residence, And enough people may be attached to a certain geographical area, for one reason or another, to permit a great deal of government depredation before they move. Furthermore, a major problem is that the world's total land area is fixed, and that governments have universally pre-empted all the land, and thus, universally burden consumers.

14:02At one point, Thibault seems to admit that his theory would be valid only if each person could somehow be his own municipal government. In the course of an acute critique of the idea of competition in government, the Colorado Springs Gazette Telegraph wrote as follows, Were the taxpayer free to act as a customer, buying only those services he deemed useful

15:00The rules are never free to refuse the services of the products of the ruler. Instead of trying to see which government could best serve the governed, each government began to vie with every other government on the basis of its tax collections. The victim of this competition is always the taxpayer. The taxpayer is now set upon by the federal, state, school board, county and city governments. Each of these is competing for the last dollar he has. We come now to the problem of external benefits, the major justification for government activities expounded by economists.

15:47The problem of external costs, usually treated as symmetrical with external benefits, is not really related. It is a consequence of failure to enforce fully the rights of property. If A's actions injure B's property and the government refuses to stop the act and enforce damages, property rights, and hence the free market, are not being fully defended and maintained. where individuals simply benefit themselves by their actions, many writers concede that the free market may be safely left unhampered, but men's actions may often, even inadvertently, benefit others.

16:42While one might think this a cause for rejoicing, critics charge that from this fact flow evils in abundance. A free exchange where A and B mutually benefit may be all very well, say these economists, but what if A does something voluntarily which benefits B as well as himself, but for which B pays nothing in exchange? There are two general lines of attack on the free market using external benefits as the point of criticism. Taken together, these arguments against the market and for governmental intervention or enterprise cancel each other out, but each must, in all fairness, be examined separately.

17:29The first type of criticism is to attack A for not doing enough for B. The benefactor is, in effect, denounced for taking his own selfish interests exclusively into account, and thereby neglecting the potential indirect recipient waiting silently in the wings. For some unexplained reason, the benefits worried over are only the indirect ones, where B benefits inadvertently from A's action. Direct gifts or charity, where A simply donates money to B, are not attacked under the category of external benefit. The second line of attack is to denounce B for accepting a benefit without paying A in return.

18:21The recipient is denounced as an ingrate and a virtual thief for accepting the free gift. The market, then, is accused of injustice and distortion by both groups of attackers. The first believes that the selfishness of man is such that A will not act enough in ways to benefit B. The second, that B will receive too much unearned increment without paying for it. Either way, the call is for remedial state action, on the one hand, to use violence in In order to force or induce A to act more in ways which will aid B, on the other to force B to pay A for his gift.

19:07Generally, these ethical views are clothed in the scientific opinion that in these cases free market action is no longer optimal, but should be brought back into optimality by corrective state action. 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 standpoint of the personal ethical views of an economist, but from the standpoint of the free voluntary actions of all participants, and in satisfying the freely expressed needs of the consumers. Interference, therefore, will necessarily and always move away from such an optimum.

20:00It is amusing that while each line of attack is quite widespread, each can be rather successfully rebutted by using the essence of the other attack. Take for example the first, the attack on the benefactor. To denounce the benefactor and implicitly call for state punishment for insufficient good deeds is to advance a moral claim by the recipient upon the benefactor. We do not intend to argue ultimate values in this book, but it should be clearly understood that to adopt this position is to say that B is entitled peremptorily to call on A to to do something to benefit him, and for which B does not pay anything in return.

20:50We do not have to go all the way with the second line of attack on the free rider, but we can say, perhaps, that it is presumptuous of the free rider to assert his right to a post of majesty and command, for what the first line of attack asserts is the moral Compulsory thrift, or attacks on potential savers for not saving and investing enough, are examples of this line of attack. Another is an attack on the user of a natural resource that is being depleted. Anyone who uses such a resource at all, whatever the extent, deprives some future descendant of the use.

21:41Conservationists, therefore, call for lower present use of such resources in favor of greater future use. Not only is this compulsory benefaction an example of the first line of attack, but if If this argument is adopted, logically no resource subject to depletion could ever be used at all, for when the future generation comes of age, it too faces a future generation. This entire line of argument is therefore a peculiarly absurd one. The second line of attack is of the opposite form, a denunciation of the recipient of the gift. The recipient is denounced as a free rider, as a man who wickedly enjoys the unearned increment of the productive actions of others.

22:34This too is a curious line of attack. It is an argument which has cogency only when directed against the first line of attack, that is, against the free rider who wants compulsory free rides. But here we have a situation where A's actions, taken purely because they benefit himself, also have the happy effect of benefiting someone else. Are we to be indignant because happiness is being diffused throughout society? Are we to be critical because more than one person benefits from someone's actions? After all, the free rider did not ask for his ride. He received it unasked, as a boon, because a benefits from his own action.

23:24To adopt the second line of attack is to call in the gendarmes to apply punishment because too many people in the society are happy. In short, am I to be taxed for enjoying the view of my neighbor's well-kept garden? As one commentator on this issue has put it, One striking instance of this second line of attack is the nub of the Henry Georgist position, An attack on the unearned increment derived from a rise in the capital values of ground land.

24:21We have seen that as the economy progresses, real land rents will rise with real wage rates, and the result will be increases in the real capital values of land. Growing capital structure, division of labor, and population tend to make site land relatively be more scarce, and hence cause the increase. The argument of the Georgists is that the landowner is not morally responsible for this rise, which comes about from events external to his landholding, yet he reaps the benefit. The landowner is therefore a free rider, and his unearned increment rightfully belongs to society.

25:09Setting aside the problem of the reality of society and whether it can own anything, we have here a moral attack on a free-rider situation. The difficulty with this argument is that it proves far too much. For which one of us would earn anything like our present real income were it not for external benefits that we derive from the actions of others? Specifically, the great modern accumulation of capital goods is an inheritance from all the net savings of our ancestors. Without them, we would, regardless of the quality of our own moral character, be living in a primitive jungle.

25:54The inheritance of money capital from our ancestors is, of course, simply inheritance of shares in this capital structure. We are all, therefore, free riders on the past. We are also free riders on the present, because we benefit from the continuing investment of our fellow men and from their specialized skills on the market. Certainly the vast bulk of our wages, if they could be so imputed, would be due to this heritage on which we are free riders. The landowner has no more of an unearned increment than any one of us. Are all of us to suffer confiscation, therefore, and to be taxed for our happiness?

26:41And who, then, is to receive the loot? Our dead ancestors, who were our benefactors in investing the capital? There is justice as well as bluntness in Benjamin Tucker's criticism. What gives value to land? asks Rev. Hugh O. Pentecost, a Georgist, and he answers, the presence of population, the community. Then rent, or the value of land, morally belongs to the community. What gives value to Mr. Pentecost's preaching? The presence of population, the community. And Mr. Pentecost's salary, or the value of his preaching, morally belongs to the community. An important case of external benefits is external economies, which could be reaped by investment in certain industries, but which would not accrue as profit to the entrepreneurs.

27:40There is no need to dwell on the lengthy discussion in the literature on the actual range of such external economies, although they are apparently negligible. The suggestion has been persistently advanced that the government subsidize these investments so that society can reap the external economies. Such is the Pigou argument for subsidizing external economies, as well as the old and still dominant infant industries argument for a protective tariff. The call for state subsidization of external economy investments amounts to a third line of attack on the free market, that is, that b, the potential beneficiaries, be forced to subsidize the benefactors a, so that the latter will produce the former's benefits.

28:38This third line is the favorite argument of economists for such proposals as government-aided dams or reclamations, recipients taxed to pay for their benefits, or compulsory schooling, the taxpayers will eventually benefit from others' education, etc. The recipients are again bearing the onus of the policy, but here they are not criticized for free riding. They are now being saved from a situation in which they would not have obtained certain and Benefits, since they would not have paid for them, it is difficult to understand exactly what they are being saved from. The third line of attack therefore agrees with the first that the free market does not, because of human selfishness, produce enough external economy actions, but it joins the second line of attack in placing the cost of remedying the situation on the strangely Unwilling Recipients.

29:43If this subsidy takes place, it is obvious that the recipients are no longer free riders. Indeed, they are simply being coerced into buying benefits for which, acting by free choice, they would not have paid. The absurdity of the third approach may be revealed by pondering the question, who benefits from the suggested policy? The benefactor, A, receives a subsidy, it is true. But it is often doubtful if he benefits, since he would otherwise have acted and invested profitably in some other direction. The state has simply compensated him for losses which he would have received, and has adjusted the proceeds so that he receives the equivalent of an opportunity foregone.

30:34Therefore, A, if a business firm does not benefit, as for the recipients, they are being forced by the state to pay for benefits that they otherwise would not have purchased. How can we say that they benefit? A standard reply is that the recipients could not have obtained the benefit even if they had wanted to buy it voluntarily. The first problem here is by what mysterious process the critics know that the recipients would have liked to purchase the benefit. Our only way of knowing the content of preference scales is to see them revealed in concrete choices. Since the choice concretely was not to buy the benefit, there is no justification for for Outsiders to assert that B's preference scale was really different from what was revealed in his actions.

31:34Secondly, there is no reason why the prospective recipients could not have bought the benefit. In all cases, a benefit produced can be sold on the market and earn its value product to consumers. The fact that producing the benefit would not be profitable to the investor signifies that the consumers do not value it as much as they value the uses of non-specific factors in alternative lines of production. For costs to be higher than prospective selling price means that the non-specific factors earn more in other channels of production. Furthermore, in possible cases where some consumers are not satisfied with the extent of the market production of some benefit, they are at perfect liberty to subsidize the investors themselves.

32:32Such a voluntary subsidy would be equivalent to paying a higher market price for the benefit, and would reveal their willingness to pay that price. The fact that in any case such a subsidy has not emerged eliminates any justification for a coerced subsidy by the government. Rather than providing a benefit to the taxed beneficiaries, in fact, the coerced subsidy inflicts a loss upon them, for they could have spent their funds themselves on goods and services of greater utility. As Mises states, the means which a government needs in order to run a plant at a loss, or to subsidize an unprofitable project, must be withdrawn either from the taxpayers' spending and investing power, or from the loan market.

33:28What the government spends more, the public spends less. Public works are paid for by funds taken away from the citizens. If the government had not interfered, the citizens would have employed them for the realization of profit-promising projects, the realization of which is neglected merely on account of the government's intervention. Yet this non-realized project would have been profitable. That is, it would have employed the scarce means of production in accordance with the most urgent needs of the consumers. From the point of view of the consumers, the employment of these means of production for the realization of an unprofitable project is wasteful.

34:16It deprives them of satisfactions which they prefer to those which the government-sponsored project can furnish them. Howard S. Ellis and William Fellner, in their discussion of external economies, ignore the and the primordial fact that the subsidization of these economies must be at the expense of funds usable for greater satisfactions elsewhere. Ellis and Felner do not realize that their refutation of the Pigou thesis, that increasing cost industries are over-expanded, destroys any possible basis for a subsidy to the decreasing cost industries.