Mr Gruen goes to Washington (again)

Here’s my presentation at the O’Reilly Government 2.0 Summit last week.

And a copy edited transcript is below the fold.

Good afternoon everyone!

I’m going to talk to you about public goods. Informally we all have the idea that a public good is something that is – well . . . public and it’s a good thing. A public hospital, or a road for instance. Another informal idea is that a public good is something that the government builds, or perhaps has to build – because no-one else will.

Slide 2 shows you a formal explanation of what a public good is. And a public good is something which is non rivalrous so it’s like the remote control I’m holding. I’ve got it. You haven’t got it. As opposed to this speech I’m giving which the people on my left can hear. But their hearing it doesn’t stop the people on my right hearing it.

In addition, a public good is non excludable. Look at the ships travelling past that lighthouse in slide 2. Each ship can benefit from the lighthouse. Noone can stop a stray ship benefiting from the lighthouse so it becomes very difficult to charge for the lighthouse. And that explains why governments typically build public goods. The market won’t build them because who’s going to build them if they can’t charge.

But there’s something very wrong with that explanation which appears in an economics textbook. And we’ve known that it’s wrong since economics got founded by Adam Smith. We all know that Adam Smith is the author of The Wealth of Nations. But Adam Smith’s fundamental intellectual project was to determine the public goods that were social pre-conditions for the market.

I don’t have time to go into what he wrote in The Theory of Moral Sentiments but the most striking example of a public good – it’s perhaps the most important public good there is, is language itself. And it wasn’t built by the government. And it’s not enforced by the government (unless of course you’re in France where the government suffers from a certain misguided grandiosity about its role in such matters).

So we’re in a world where public goods always have been those built by governments and those which are emergent. Just a quick diversion there are some ideologues who go around and say that if only we could privatize more things everything would work out. Adam Smith had something to say about that and looking around one can see experiments in different countries. Places where there are no public goods are called failed states.

One way of understanding web 2.0 is that it is an explosion of public goods and none of them are built by the government, by the government. All of those web 2.0 platforms are public goods in a technical sense that I showed you. They are non-rival and non-excluded.

So now we have a new kind of public good landscape to think about. On the one side we’ve got the public goods from the economic textbook and on the other side we’ve got these emergent public goods which someone like Adam Smith always knew were at the heart of what makes us such as incredible species. Linux open source software is basically built on a model of language – that is people doing things for their own purposes which gradually build an accumulation of things that are benefit to the whole species or at least to the species that’s speaking that particular language.

And then we have a bunch of other public goods that are built on ‘platforms’. Platforms like Twitter, Facebook and almost all web 2.0 platform. So we’re moving from a world in which we think of public goods as a problem into a world in which this capacity to build public goods is an incredible opportunity.

I was, on the way, walking to this conference this morning I thought to myself “What is the value of the concept of a Twitter hash tag?” Because that concept is a public good. Well, maybe if you think about how much use the hashtag can be in a natural disaster, of in fighting political oppression, perhaps its one thousandth or 0.1% of GDP. If it is, that’s 50 billion dollars per annum.

Once somebody came up with the idea that’s it, $50 billion. Bang. If it’s only one ten thousandth of .01% it’s only 5 billion dollars per annum. So that’s the world we’re living in and that’s an important change to the opportunities available to us all. Further, there needs to be a bit of redefinition of a public good. Because all those builders of those platforms were building platforms that were excludable. Google and Facebook could close their platforms and charge you for access to them. But guess what? They wouldn’t be anywhere near as socially valuable if you were charged – because participants add value on social networking platforms. In fact they add so much value that private profit seeking builders of such platforms leave them open to all. They generate such vast social value that way that if the builders can monetise just a small fraction of that value they can become rich beyond their wildest dreams. So it’s a remarkable world that we’re in as public goods assemble themselves from autonomous undirected for profit and not for profit private endeavour.

But there must be a space between the traditional, publicly funded public goods and emergent public goods. There must be public goods that are a bit like emergent goods – tools on the web and so on that are not viable for private firms to build. That’s the arena for a new kind of public private partnership – and that’s what the rest of my talk is about. A new way of thinking about public private partnerships which is really again about the ecology of public and private sector interaction. But again when we think of the private sector it’s more than just profit seeking firms.

The picture on the right is a bridge that I traveled over a few weeks ago in Perth, Western Australia. Some time after they built the bridge they realised they needed a bicycle path. What did they do? They didn’t build a new bridge for bicycles, they just hang a new bicycle path off an existing bridge. We don’t tend to do that with the intangible economic infrastructure the governments have built.

In Australia, we have built an income contingent loans, student loans and hung them off the tax system. And we’ve been copied all around the world. So university students can get a loan. And then when their income rises above a certain level the principal and interest is then deducted as an additional tax payment to the government until the loan is paid off. We do exactly the same thing with alimony. It works through the tax system rather than the ramshackle court system. And there are any number of ways one could develop the tax system in this way further – some have suggested using it for repayment of the dole, others for repayment of drought loans and grants to farmers, and I’ve discussed the idea of using it to collect traffic and parking fines with a Federal Government minister who shortly afterwards mentioned it in a speech.

The ABC like the BBC is a national broadcaster and the ABC has just made all of its 53 regional stations multi-media hubs. If there’s someone in Mildura (a city in one of our regions) who wants to make a documentary about farmers and drought or any other topic they can ring up their local ABC and get assistance, learn how to do it and then produce a program – a public good which can then populate the ABC’s platform ABC Open.

This is the National Library’s newspaper digitization site. We’ve digitized all the NLA’s newspapers back to 1802. And as you can see they’re not easily digitized by computers, the computers make lots of mistakes. There’s a mistake that I hope you can see in the digitization screen. And anyone who goes on to the site can simply click on the line where the mistake is and fix the mistake. And the result has been that the site was never really launched but it’s never been inactive. Right now it’s got someone on it, perhaps hundreds of people on it reading for interest and correcting mistakes when they find tehm. 20 million lines of text will have been corrected by October and there’s someone who’s corrected 2½ percent of them. And don’t try and match it with Julie Hempenstall of Bendigo because she’ll just work a bit harder.

Some of you may know of Justin McMurry who works as a volunteer. He’s retired and there he is working on a helpdesk. The surprise is that the helpdesk is for Verizon, an American multi-national telecommunications company you will be familiar with. If he is prepared to do that for Verizon, what kinds of contributions can governments get with their mission which is so much more compelling to citizens.

Let me show you a company of which I’m the chairman – Kaggle. It launched only a few months ago. It’s a platform for global data competitions. Some of you may have heard of the Netflix price. We post up data a company or a government agency gives us as part of a competition and competitors need to forecast sales or forecast revenue or some other task using the data to build a model. People will compete for the prize from all over the world. We asked people to predict the HIV viral load based on a given dataset. The state of the art modeling in academia over the years generated 70% predictive accuracy. After a week and a half on the site someone had build a model which achieved 70.8% accuracy. And when the competition closed a couple of months later, the accuracy of the algorithm was up to 77%. That was with the US $500 prize.

Here are some of the ways that governments use data to predict outcomes. But in a week and a half, we’ll be able to work out whether your model is kind of ok or whether it could be blown away by some taxi driver in Belarus who can’t get himself a job in a data analysis company even though he really knows what he’s doing.

Let’s think about the state giving to private entrepreneurs some of the facilities that the state has. There’s RateMyProfessors website which you’ll be familiar with. I think you’d be familiar with Paul Krugman, a Nobel Prize winner and a marvelous lecturer. But he isn’t rating all that well and that’s because it’s a free for all in there. Anyone can come on and claim to be a student and then rate Professor Krugman, and my guess is that a fair few Republicans – including Republicans who’ve never been in his lectures – make their way onto the site to rate Professor Krugman – badly.

The state has the ability to provide an infrastructure for the integrity of ID, of identification. One could build the back end to RareMyProfessors through the universities to ensure that those claiming to be professors’ students really were. And just to summarize what one might be able to do in the end, apart from improving the integrity you might be able to ask the site not just who’s the best professor but what do students like me think is the best professor. So then you have a public private partnership in which the state lends something that it has – authentication – and the private sector contributes what it has to contribute – entrepreneurialism around some clear conception of need.

Finally, many people would be aware of FixMyStreet which started it all of in many ways in the UK. If you notice a pothole in your way home from work you can get on to FixMyStreet and say exactly where it is. There’s a back end for local council something like 20% of all maintenance cost goes to Fix My Street now.

How do we generalize, how do we say what kind of progress is made there? Because if we can generalize and then we can apply the same principles elsewhere. I think we can generalize it by analogy with utility reform. What did we do with utility reform like telephones? We said that providing the network is quite a tricky business but providing the handset is something in which the market can do perfectly well. So we let the government be the wholesaler. It can compete as retailer if it wants by selling handsets, but the regulation and heavy government involvement shrinks back into where there are clear economic problems.

What FixMyStreet does, I think, is that it generalizes that. Utility reform opens space for for profit competition with essentially economic motives and Government 2.0 can pull in energy from for profit and not for profit endeavor with motives being economic, social and democratic. There’s an American for-profit version of FixMyStreet called SeeClickFix.

Recently I was looking for the details of a cabinet reshuffle brought about by a change in Prime Ministers in Australia. I couldn’t find it on the government site. I went to a volunteer site OpenAustralia and there, one hour after the changes had been made not only were the cabinet changes up but the relevant minister’s profile had been updated.
Lesson is that if you let people do what they want to do they’re likely to do it very well, perhaps even better than those who are paid to do it.

Thank you.

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13 years ago

From Coase, Ronald, “The Lighthouse in Economics”, The Journal of Law and Economics, 17(2), 1974:

The lighthouse appears in the writings of economists because of the light it is supposed to throw on the question of the economic functions of government. It is often used as an example ofs omething which has to be provided by government rather than by private enterprise. What economists usually seem to have in mind is that the impossibility of securing payment from the owners of the ships that benefit from the existence of the lighthouse makes it unprofitable for any private individual or firm to build and maintain a lighthouse […]

After explaining how private individualsestablished and successfully operated Britain’s lighthouses during the 17th and 18th centuries, Coase asks:

…how is it that these great men have, in their economic writings, been led to make statements about lighthouses which are misleading as to the facts, whose meaning, if thought about in a concrete fashion,is quite unclear, and which, to the extent that they imply a policy conclusion,are very likely wrong? The explanation is that these references by economists to lighthouse sare not the result of their having made a study of lighthouses or having read a detailed study by some other economist. Despite the extensive use of the lighthouse example in the literature, no economist, to my knowledge, has ever made a comprehensive study of lighthouse finance and administration. The lighthouse is simply plucked out of the air to serve as an illustration. The purpose of the lighthouse example is to provide “corroborative detail, intended to give artistic verisimilitude to an otherwise bald and unconvincing narrative”.