Public goods: the column

I’ve been talking about this kind of stuff for a fair while in presentations and intimated similar things in some longer pieces and a column or two on Adam Smith and Web 2.0, but I’ve not done a column on Web 2.0 as public goods privately built. But I have now.

THERE’S a revolution going on in the provision of public goods. We need to do some rethinking.

Economists define public goods around two characteristics – which are often illustrated with the classic public good – the lighthouse. There’s no way to stop passing ships benefiting from a lighthouse’s light whether or not they pay. This non-excludability creates the classic dilemma in which everyone waits to free-ride off others’ efforts so no one funds the lighthouse. Enter government, which taxes people to fund such public goods.

As well as being non-excludable, public goods are also non-rival. Consumers are rivals when they buy physical things, such as food, cars, or labour services such as taxi-driving or dentistry. One consumer can only get more of what’s on offer if others get less. By contrast, the ships consuming the lighthouse’s light aren’t rivals – light enough for one creates light enough for all.

Knowledge is a classic non-rival good.

And if non-excludability creates a free-riding problem, non-rivalrousness discloses a great free-riding opportunity. Our modern world dates from around the time these insights emerged. Thomas Jefferson effused about the free rider opportunities abounding as the knowledge economy came wheeling into view:

He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me. That ideas should freely spread from one to another over the globe, for the moral and mutual instruction of man, and improvement of his condition, seems to have been peculiarly and benevolently designed by nature.”

Still, many aspects of our knowhow – for instance our discovery and testing of useful drugs – require heavy investment. In this situation, a free-riding opportunity only exists once the initial free-rider problem of funding the research is overcome. However, some public goods actually build themselves – and where they do they create free-riding opportunities without free-rider problems.

While ideologues bicker about which is more important, in healthy systems private and public goods each reinforce the other. Free market economic philosopher Friedrich Hayek made this point – though without using the language of public and private goods.

For Hayek, the marvel of the market was that it produced as a byproduct a set of market prices known to all. As Hayek said, it was “more than a metaphor” to describe the price system as akin to a “system of telecommunications” by which the increasing scarcity of a commodity becomes known to all from its rising price. “Without an order being issued, without more than perhaps a handful of people knowing the cause, tens of thousands of people whose identity could not be ascertained by months of investigation, are made to use the material or its products more sparingly.”

The price system is thus an immensely valuable piece of public information – a public good on which we all free ride. Yet it is what I call an “emergent public good”, not built by government, or any conscious collective, but arising spontaneously from life.

The ultimate emergent public good is language – upon which we’ve been free-riding as a species since well before Adam was a lad. Adam Smith, that is – the 18th century founder of modern economics who, remarkably enough, left us a paper describing the evolution of language in terms remarkably similar to his exposition of the way markets and market prices emerge spontaneously from economic life – an exposition that Hayek built on.

We’ll always have free-rider problems to overcome, but our language instinct is now loose on the internet and it’s spawning a whole new world of free-riding opportunities. Google, Facebook, Twitter, Wikipedia and open-source software are all emergent public goods. None of us are rivals in our access to them. Indeed, because they establish co-operative networks, their value to each user actually grows as more people use them. And no one is excluded from accessing them.

In fact they are excludable. They could charge for their services by requiring users to log in and then excluding those who don’t pay. But it turns out that free access generates so much more value for all that it also works better for those who own the platform – whether their motives are philanthropic as is Wikipedia’s, or for profit as is Google’s and Twitter’s.

So they’re not true public goods by the textbook. But that’s only because economists have built their definition of public goods around the dismal way they’ve approached them – as presenting “serious problems in human organisation” to quote Nobel laureate, the late Elinor Ostrom. Ostrom’s insight and the definition around it remain valid for those many public goods which still require governments to overcome the free-rider problem.

But it is blind to the free-rider opportunities on the internet which now burgeon before us.

 

18 thoughts on “Public goods: the column

  1. Nicolas, it seems like tosh to me to describe Google as a public good when the price is the accompanying adverts for the search. I accept the general premise of your piece though – it certainly applies to Wikipedia. However – rather than a public good, perhaps a better description is a free good or even altruistic good. Why i would suggest altruism is that there is an element by which people devote knowledge for zero gain to Wikipedia.

    I also don’t think this Web 2.0 should be about governments as is your general advisory role. It seems to me that in a world of FoI that requests for sensitive material are not improved by the web. It certainly communicates travel advice well through DFAT but governments simply don’t encourage debate forums on policy and in my view that would be a task better done by private groups and blogs, think tanks and others.

    It seems to me that Web 2.0 could be government touching domains it doesn’t do well. For example, you will never cover off the tension that exists between private gain from public funded research and how that will be shared. Indeed pure open access to use of research would simply make an offshore flight of knowledge more likely.

    • Corin,

      Since when did the definition of a public good come with the rider that it can’t be supported by advertising?

      On Web 2.0 and governments, you seem to be misunderstanding me. I’ve never said that because many Web 2.0 platforms are public goods that that requires governments to be involved in their provision – any more than I think they should be involved in the defence of our language – with apologies to the French.

      • Nicholas, it seems to me that Google is not ‘free’ from its influence by advertising. I suppose you could say that public goods are not free from governmment oversight when run by Govt – so that is a reasonable point on your side.

        I just think that Govt is pretty poor at web based ‘public goods’ and they are better done privately. I also think this stuff happens without you or me or anyone else trying to influence it (aside from the business angels etc). That is, one could observe the rise of such altruistic goods in the public domain on the web but not really have any real say about how or why or when they develop. That is their strength – no?

        What I am suggesting is that Govt are obstacles – in the main – by trying at time to ‘help’ develop these things. They rarely know what they should ‘help’.

        Govt is a good provider of information on the web but rarely does it do anything that strengthen the public debate on what Govt does etc. Nor should it … (exception being public broadcaster in a narrow sense with independence)

        Universities with their streak of independence are also an exception – but again they have massive tensions between open access and profit maximisation from research.

        • Nicolas, are you also suggesting that Channel 7 is a public good? is it therefore about what it does? i.e. Channel 7 produces television for a largely commercial audience and with an ultimately limited viewing base? … are you describing the quality of results?

        • Corin,

          I’m not too sure where you got the idea that I was suggesting that governments get involved in running things like Google or anything else for that matter, but you certainly seem to be sticking to it. I simply said that the se things confirm to the technical definition of a public good. It’s a commonplace of economics textbooks that free to air television is a public good – and it’s usually supported by advertising.

          I think you might be being misled by the term ‘good’. Perhaps you’re thinking I’m saying that these things are ‘good’ in some way. I have to admit to being confused about what you’re saying and what you think I’m saying.

        • Nicolas, it seems to me that you have made a late career advising Govt on Web 2.0 which given your answer indicates you think Govt is generally poor at this stuff as well.

          I am only confused by the article because it seems to saying or stating the obvious. that the obvious needs to be said is a bit weird – i.e. that the web is one free good after another.

          BTW – I don’t think that Channel 9 or 7 etc produces a public good just because you don’t ‘pay’. A public good does have a wider public benefit than them – i.e. a light house is clearly distinguishable from Channel 9!

  2. Nicholas, you might find this paper interesting; I certainly did and it seems relevant, to me anyway, to your argument above. The authors call ‘free-riders’ imitators and say they were not a problem, but were essential for human success in adapting to all the environmental conditions that foragers encountered.

    http://www.pnas.org/content/108/suppl.2/10918.full#sec-2

    They also explain that individuals no matter how intelligent, are not “nearly smart enough to acquire all of the information necessary to survive in any single habitat. In even the simplest foraging societies, people depend on a vast array of tools, detailed bodies of local knowledge, and complex social arrangements and often do not understand why these tools, beliefs, and behaviors are adaptive. We owe our success to our uniquely developed ability to learn from others.”

    They “suggest, instead, that our uniquely developed ability to learn from others is absolutely crucial for human ecological success. This capacity enables humans to gradually accumulate information across generations and develop well-adapted tools, beliefs, and practices that no individual could invent on their own.”

    Another quote: “Cognitive mechanisms underlying cultural transmission coevolved with improvisational intelligence, distributing the costs of the acquisition of nonrivalrous information over a much greater number of individuals, and allowing its cost to be amortized over a much greater number of advantageous events and generations. Unlike other species, cultural transmission in humans results in a ratchet-like accumulation of knowledge.

    • Thanks Julie – great stuff, very pleased to have been pointed in that direction. My thinking of the ‘micro-foundations’ of this were from a chapter of Jonathon Haidt’s new book which talks about group selection (and lots of similar stuff about) but that reference looks v interesting.

  3. It’s probably not surprising that predating Google etc. as electronic public goods, but perhaps more purer (i.e no “ad” price) are computing languages. These include languages created by corporations but openly licensed (like Java), or things like HTML or R. Without the former two so much of the examples above would not be possible. Then we have things like Unix which leads to both open source Linux and proprietary and highly profitable MacOS, or the USB standard which was almost a kumbayah moment for big companies.

    It’s all very interesting.

    • The Unix component of MacOS is BSD and not proprietary at all. You can very easily run BSD with or without Apple as you may choose.

      The investment to build BSD came partly from the University of California, Berkeley and partly from the many people (including UCB students) donating their time and energy to contributing.

  4. As Ronald Case pointed out in his 1974 paper, “The Lighthouse in Economics”, lighthouses are not a good example of public goods. He notes that between 1710-1765, no lighthouses were erected in England by Trinity House, the statutory authority chartered to do so, but at least 10 were built by private individuals and operated profitably.

    Coase concludes his paper with: “… economists wishing to point to a service which is best provided by the government should use an example which has a more solid backing”.

    • Thanks Mike, I was aware of the paper, and it makes a good point. Alas I needed a simple example, so lighthouses it was. As a simple example they work fine, and yes, private lighthouses have existed – but they have strong public good characteristics. Besides, there is a revisionist literature around the Coase article which suggests that he overdid it a bit.

      PS – have just seen the next comment – rendering this one a little redundant.

  5. Open standards are an excellent example as the standard creates or turbo-charges a market for the goods and services that rely on the standard.

  6. I’m not sure if I’m flowing with the focus of your post here, or hanging off the edge of it. Regardless, I’ll respond and if it isn’t relevant, then we can all ignore it.

    I’ve been researching how to produce and market cartoon eBooks, only to discover there’s a whole heap of FREE cartoon eBooks out there for the taking.

    Sure, I would expect the quality of many of them would be very bad compared to mine, but the potential purchaser doesn’t know that, and may eventually judge “all” cartoon eBooks to be low quality, and hence not buy mine.

    So, do I pursue my eBook project, or look for some other way of earning money from my cartoon/illustration talents?

    http://cartoonmick.wordpress.com/humorous-illustration/#jp-carousel-226

    http://cartoonmick.wordpress.com/about/

    Cheers

    Mick

  7. As with others here I see the value of this quiet, neat thread starter and I think it goes to the heart of why Americans turned against Romney in the end, in the US election.
    The last generation has been dominated by neo lib concepts of “reform” and with US society faced with a “Handmaid’s Tale” society, the wider public, emerging as if from a fog, finally cried, “enough”, as to the machinations of populist demagogues and lurking Gordon Gecko vultures.
    It can’ t be ALL about “self” when it is society that gives opportunities hardly seen before in history to a given individual. President Obama’s speech hinted at the the concept of the responsibilities that go with freedom: the notion that people do need to decentre occasionally and ( hopefully) humbly and gratefully “pay their dues”.

    • The swing was actually towards Romney, so actually they turned against Obama, but not enough to make Romney win. Obama’s win in 2008 was by a much more convincing margin.

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