The social world as a nested ecology of public and private goods: Part Two

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 provisionIt’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).

The arteries of modern commerce couldn’t have developed without the public goods of central banking and the joint stock company, both of which developed through the eighteenth century. But they really came of age in the mid nineteenth century which saw the maturation of a vast slew of modern public goods – public education, public health and sanitation, a public service chosen on merit, central bank notes, ‘integrity’ institutions like the Auditor General. Standards for weights and measures are public goods and identified as a core function of the sovereign way back in Magna Carta, but the nineteenth century saw standardisation with a vengeance as local customs were displaced by national regimes for weights, measures and time zones in the Anglosphere and by Napoleonic metrication throughout Europe.

Emergent public goods

Even this trawl through history underplays the ubiquity and foundational significance of public goods not just to economic, but to all forms of human social life. Because of their preoccupation with the marketplace and thus with public goods as a problem, you’ll not see them mentioned in an economic textbook, but there are three archetypal, foundational emergent public goods.

The first is human culture. In tribal societies, culture enables groups of up to around 150 people to cooperate closely with each other, specializing and sharing the proceeds of that specialization, protecting each other from the hazards of nature – and from other tribes. As David Sloan Wilson has argued citing Hayek, group level selection rewarded cooperative cultures. Tribes with more ‘Hobbsian’ and internally competitive cultures were less likely to prosper and grow in size beyond the family groups that typify other primate species.

And as Robin Dunbar has argued, integral to that development was the second archetypal public good – language. Today, miraculously, the language instinct has taken wing again – transfigured on the internet as open source software: Executive, eternal, endlessly extended and enriched.

As we shall see, the third foundational emergent public good that made us, certainly in the modern world, is the market itself!

A nested ecology of public and private goods

The idea of some organic relation between public and private goods then plays out for all institutions. Within a family, it is understood that each person has his or her private interests – and rights. And each is part of a larger entity – the family – with everything that brings about. Ditto for clubs, charities, associations and firms.

And this pattern is replicated throughout human life. Indeed as those at the cutting edge of human evolution now argue,[1] this capacity for shared intentionality focused around some abstract artifact of our choosing – a sporting team, a working bee, a political campaign, a firm, a nation – is one of those crucial things that distinguish us from the other great apes.

Outwardly, sporting teams and firms are obsessed with competition – with other teams and firms. But as a means to that end, they’re obsessed with solidarity and cooperation within. Likewise, our political governance is arranged in concentric circles of proximity – from local shires and councils to state or provincial governments to national governments and finally to configurations of international cooperation from simple international agreements to institutions like the World Bank, IMF and, of course, the United Nations. Each level provides free public goods of benefit to all its members or constituents, though each of those – each citizen, county, state or nation – may compete within that framework.

Adam Smith: theorist of the co-evolution of public and private goods

Remarkably enough, the patron intellectual saint of all this is Adam Smith. However much the apparatus of modern economics – the discipline he set in train – has contrived to forget it all, Smith was the original theorist of emergent public goods and the organic co-evolution of public and private goods.

His Theory of Moral Sentiments explains how human culture emerges from the vicissitudes of life itself. Homo economicus appears nowhere in Smith’s work, except perhaps a baby who begins its life as a blob of purely self-interested infantile ego – infans economicus if you like.

Smith sought to build his two great books according to what he called “the Newtonian Method” of rhetoric.[2] He aspired to explain human society as Newton had the heavens in such a way that “an immense chain of the most important and sublime truths, all closely connected together” were explained “by one capital fact, of the reality of which we have daily experience”.

And as Smith explained, the fulcrum of his system was the innate human capacity for ‘sympathy’. In Smith’s hands, just as gravity is the fulcrum of Newton’s celestial mechanics, so our innate capacity for ‘sympathy’ becomes Smith’s the singular foundation of society – a fundamental engine of social knowledge and connection. He wrote with great feeling of how, in our defenselessness as infants, we crave the physical and emotional necessities of life. We quickly discover those actions that attract approval and disapproval, and adapt our expression of our growing personality accordingly.

As we develop, we must understand others and can only do so indirectly – by imagining ourselves in their shoes. Twigging that it’s the same for everyone else, draws us into a lifelong dialectical social drama in which we understand ourselves as both spectators of others and the subject of their gaze.

We keep an eye on our own conduct contemplating what others might think of us. And so the fabric of sympathetic understanding is laboriously woven, initially amongst intimates and then radiating out. The first and most primal bond is woven between infant and mother, but weaker bonds grow, initially with family and then with people progressively more distant from us. Thus the social world is built of ‘circles of sympathetic understanding’, the strength of which depends on social, geographic and cultural proximity.

As we mature, as we are socialized, we begin to crave not just others’ approval, but their deserved approval. For Smith, these are the psychological roots of virtue and of how we come to live the values embodied in human culture, rather than just pretend. Thus, even in large communities, culture enables each person to behave in broad accord with others’ social expectations.

Order without design

Today, Smith is most famous for his explanation of the market as the third foundational emergent public good – an inadvertent by-product of life itself – the paradigm case of order without design from which Darwin built his own theory of evolution. As people meet their private needs in trade, that congregation grows in usefulness to others. This emergent public good of physical proximity is mirrored in the growth of another emergent public good. Market liquidity enables people to trade at will to satisfy their changing needs – with each trade further deepening liquidity.[3]

The next emergent public good thrown off by the market – perhaps the most remarkable of all – is the price system. As Hayek explained, it’s a kind of telecommunications system broadcasting the relative opportunity cost – that is the relative scarcity – of all goods to all people. Not only can we all free ride on this spontaneously generated information, but, when markets work well, the great human dilemma of reconciling private and public wellbeing is solved! In optimising his own interests, the merchant optimizes that of his community.

Finally, Smith also published a Dissertation on the formation of languages. And the mechanism by which language was built was the same as for all the other emergent public goods from human culture to commercial markets. Human beings went about their private business seeking to advantage themselves and, over time, repeated patterns in their attempts to communicate with one another and the habits of speech and interpretation that emerged, built as a residue the coded symbolic social intelligence that became language.[4]

Conclusion

So next time textbooks or political zealots privilege the private over the public, competition over collaboration, you’ll know you’re encountering the ideological echoes of a culture unmoored and drifting ever further from the world as best we can apprehend it. As Smith showed over two centuries ago, it never made sense. But as public goods burgeon before us, privately provided in the digital world, it becomes less apposite with every passing day.

You’ll know the answer to all this is not simply to assert the converse – collaboration over competition, public over private – unless your ultimate purpose is to restore some balance between extreme perspectives. You’ll know you’re competing against your opponent in the argument. But then the debate makes no sense if it isn’t also a fundamentally cooperative struggle – to higher ground in which agreement is forged, if only to more precisely narrow the source of irresolvable disagreement. In other words, if you can’t forge a healthy ecology of public and private in that very argument, you’ll be wasting your time – going through the motions.

It was ever thus.

For human life is built on a nested ecology of public and private goods.

To be continued .…

[1] Michael Tomasello, 2014. A Natural History of Human Thinking, Harvard University Press, Cambridge, Massachusetts.

[2] Smith’s first academic role was as a lecturer in “Rhetoric and Belles Lettres”.

[3] As we discovered in the financial crisis, the public good of liquidity can dry up with frightening speed. Today, the public good of Facebook is built in a similar way. Each person on Facebook, each post, comment, message, poke and ‘like’ deepens the experience for others. Each builds the public good as they address their private desires. Adam Smith would have understood.

[4] James R. Otteson, 2002. “Adam Smith’s First Market: The Development of Language,” History of Philosophy Quarterly, 19, 1, January

2016 May 23

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2 Responses to The social world as a nested ecology of public and private goods: Part Two

  1. paul frijters says:

    Hi Nick,

    your arguments are very similar to those you see in endogenous growth models, so no need for you to feel so alone in this thinking! Can you explain to me though how you think the market is a public good?

    ‘The market’ of course doesn’t exist: it is an abstraction. No two oranges are the same, even on the same physical market :-). And no two prices on an actual market need be the same, nor do the prices have to openly advertised, meaning that only some markets create price information (which is a public good). Nor can I see how markets are non-rival or non-exclusionary. It is openly advertised information that is a public good, but markets are often better thought of as clubs. Even when markets are relatively open (like internet fora), is it not the case that participation is non-rival. Too many crooked car dealers dont exactly help the ‘car market’! And both buyers and sellers are rival with each other. Only when combined with all kinds of club-goods (accreditation, contracting abilities, money, enforcement) do open an infinitely expandable markets start to look like public goods. No functional competition without some form of cooperation!

    So what you mean is rather that nearly all human production, socialisation, and consumption activities come with externalities on others that they do not usually own, but which they can try to own.

    You seem to write this mainly with an eye on these zealots you mention at the end. Who are they?

  2. Nicholas Gruen says:

    Thanks Paul,

    All interesting points, but it’s hard to know where to start – just because we’re speaking across a language chasm.

    Firstly of course there’s nothing logically unusual about what I’m saying. But then the apparatus of economics has no problem expressing logical relations of various kinds. That’s however all it ever does. Everything that can’t be reduced to logical relations is invisible, however commonsensical it is.

    It’s true that pretty much everything I’ve called a public good, you can quibble with and say ‘its really got some private good characteristics, or club good or common pool characteristics, so it’s not a pure public good’.

    It’s also true that markets can suppress public knowledge of prices being paid, as we’re seeing in ‘dark trading’. Yet the paradigm case for the ‘miracle’ of markets made out by the likes of Adam Smith and Friedrich Hayek and most economic models assume that that doesn’t happen.

    It seems to me that subject to these qualifications the facility the market provides – for people to find others with whom to make trades – is a public good. It’s a free facility for all comers.

    The other thing about the description I’ve offered is that public goods very often have an organic relation with life, not a mechanical one as is implied in most economic thinking and models.

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