Part Two of my essay on the way of looking at the world I’ve worked out over the last few years and published on Evonomics can be found here. So many years, so few words :(
Part one of this essay showed how two dimensions of free riding define what we call “public goods” – things that often fall to governments to supply because markets frequently can’t: Things like defense forces, suburban roads and public fireworks displays.
The ‘non-excludability’ of such goods creates a free rider problem for market provision. It’s hard to charge prices because, once provided, people can free ride on such goods, whether or not they pay. So we invented government to fund public goods through taxation.
But as well as being ‘non-excludable’, public goods are also ‘non-rival’. This article is a public good. Your reading it doesn’t prevent others from doing so. So once they’re provided, public goods provide a free rider opportunity.
Despite our culture’s hostility to free riding, the opportunity has always outweighed the problem. Most prosperity we’ve achieved since our days on the African Savannah arose from people copying others’ good ideas, most of which weren’t and shouldn’t have been patented because they didn’t need to be patented to come into existence. Or they were patented and the relevant patents have expired, such as the patent on James Watt’s eighteenth century refinements to piston engines.
Free rider opportunities now so dominate free rider problems that some of our most successful companies provide their wares as public rather than private goods. Google and Facebook could have marketed their products behind a pay-wall to monetize more of the value they generated. But seizing the free rideropportunity and, instead, providing their services as free, public goods, led to such vast value creation that monetizing a small fraction of that value via advertising has lifted their combined market capitalization to over three quarters of a trillion dollars.
But there are areas where the free rider problem must be solved in order to seize the free rider opportunity. Take 23andMe. It provides you with a partial analysis of your genome and identifies the health issues it detects and tips on your ancestry. But the genomic analysis on which it is built is sufficiently costly that it can’t easily be covered by advertising. So it operates as a private good behind a paywall. I’ve sketched a way of generating vastly more value by providing the site as a free public good. But it probably needs some government subsidy – at least initially – and some ‘nudges’ from the health system to really thrive.
If you’re thinking that this isn’t the normal story in which innovation and productivity is a matter of more and better private goods flooding the market, you’re right. As I explain in the next section, that way of thinking was always simplistic. But the internet is consigning it to the dustbin of history.
History is a co-evolution of public and private goods
Modern economic development is far more compellingly represented as the co-evolution of new private and public goods: And new ecologies between them.
Thus, for instance, as the eighteenth century dawned, the seas weren’t properly navigable. Sailors kept dying of scurvy. And ships couldn’t work out where they were and so kept bumping into continents. We didn’t need more competition amongst shipbuilders. We needed the generation and/or application of knowledge. In fact, citrus fruits’ efficacy in solving the scourge of scurvy had been known for centuries but made it into public circulation with the first ever clinical trial (another public good) in 1747. And Harrison’s clocks famously solved the longitude problem to win the British Admiralty’s £20,000 prize (though the British themselves were free riding on the idea of a longitude prize from earlier prizes offered by the Spanish and then the Dutch). Continue reading