Both economic pedagogy and broad political discussion are based on what I’ve come to think of as anorectic understanding of public and private goods – which boils down to the idea that for things to go on well (let’s say in an economy) you need a mix of public and private goods with the former provided by government, the latter provided by markets.
I have a theory, or perhaps it’s better to call it a ‘framework’ or ‘paradigm’ in which all things of any complexity and value in life – whether economic, political, social, aesthetic or whatever – are the product of an ecology of public and private goods or to put it another way an ecology between collective and competitive activities. I think that’s a much more interesting way to think about things because it captures the potential multidimensionality and subtlety of the issues.
And though they don’t use the language I’ve used above, both Adam Smith and Friedrich Hayek painted a picture of the private activity of trading co-evolving with public goods.Thus, the public good aspects of markets (a marketplace, the ‘miraculous’ information system of market prices and liquidity) all co-evolve with the private trades that occur within the market. Governments usually turn up fairly late in the day to validate various collective arrangements and institutions that already exist or are coming into existence. The same ecology of public and private goods is necessary in information. These ideas were elaborated a little in this recent Lateral Economics paper (pdf).
Public and private goods are richly interdependent. Though he did not use the terminology we use here, one might restate Hayek’s argument by saying that it was about the quality of public goods. Hayek was arguing that the spontaneous order that arose through markets was a public good. We can be more specific and say that (given certain conditions) the prices that emerge in a free market are an emergent public good operating as a free, economy-wide information system available to all to use. A central planning apparatus could be described as a public good as well. Yet Hayek’s point was that it was of very poor quality because it could not take into account all the disparate information that is captured in a well-functioning price system. By contrast in the right circumstances, a market price system provides an incredibly efficient single quantitative indicator of the relative value of a given commodity (its price) considered as a function of its utility to each and every potential buyer and its cost of production to each and every potential seller.
In fact [while the free rider problem bedevils economic activity in various respects] the miracle of the price system is an example par excellence of a free rider opportunity. Price information between buyer and seller is privately known to them and indeed in thin markets can be tightly held as a secret between them often enforced by contractual obligations. However, in the kind of markets Hayek was considering, it was either impossible to conceal prices or the parties did not seek to. In either event the free riding opportunity was taken. The figure below illustrates the cumulative causation by which private and public goods grow together. Private goods when traded help build a market which generates the public goods of price discovery and liquidity which makes the market more useful for private transactions which further reinforces the emergent public pubic goods being generated by the market – with improved price discovery and deeper liquidity.
- Public and private goods co-evolve in a market for goods and services
There is a similar ecology between public and private goods in the way non-price information circulates in markets. Information is encoded in standards and these standards are public goods. We discuss their significance below. Further as trades take place, non-price information that was not strictly necessary for transactions to be completed is acquired. Buyers discover aspects of the quality of what sellers are offering and/or vice versa. Like price information, this information is a potential public good. Thus for instance, if I need knee surgery, I can benefit from knowing which surgeons and hospitals have performed knee surgery best. But there may be no standard way in which such things are reported, or the standard may not surface information in a way that is useful to me.