Below the fold is the Ockham’s Razor lecture that went to air yesterday. Since the trolls have already come out in force on the ABC thread (The ABC’s illustration doesn’t help!), I’ve reproduced it for your delectation below.
Nicholas Gruen: Both popular commonsense and economic textbooks teach that government provide public goods. That’s because of the free rider problem. It’s difficult to charge for things that you can’t stop people using even if they don’t pay – like local roads or lighthouses. Public goods are public goods because no-one wants to build them privately. That’s why economists like Nobel Laureate Elinor Ostrom describe “public goods as a big problem”. If only they were more like private goods!
Problems, problems! But Nobel Prize or not, Elinor Ostrom’s intuition is wrong – and getting more so every day. To understand what she’s missing, we’ll take a brief tour of information economics with two eighteenth century tour guides who understood these issues better than most do today.
Here’s Thomas Jefferson explaining why information is always a potential public good:
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, when she made them, like fire, expansible over all space . . . and like the air in which we breathe . . . incapable of confinement or exclusive appropriation.
In contrast to contemporary anxieties about free rider problems, Jefferson’s point was that the costlessness of sharing ideas creates a monumental free-rider opportunity. That free ride we enjoy when we share each others’ ideas has transformed us from weakly primates on the African Savannah to planetary overlords.
At the heart of modern economics is Adam Smith’s assertion of the miracle of the price system. As one of Smith’s self-styled disciples, Friedrich Hayek, pointed out, prices operate like a telecommunications system, enabling the whole world to respond to some new scarcity – for instance a scarcity of wheat after a drought. Here’s Hayek:
Without more than . . . a handful of people [even] knowing the cause,. . . thousands of people whose identity could not be ascertained by months of investigation, are made to use the material . . . more sparingly.
This is remarkable enough, but unlike the physical telecommunications system, we get this one for free. Prices emerge as a simple by-product of commercial life.
That’s why I call the price system an ‘emergent public good’. Just like the lighthouse or suburban road, it’s free to all comers. But the government didn’t build it. It emerged, spontaneously, from life itself.
And having named emergent public goods, suddenly I saw them everywhere! If prices are the central emergent public good of an economy, our very humanity is defined by – built from – two even more fundamental emergent public goods. The culture and shared expectations within a community operate like road rules on our roads realising harmony and cooperation where things might otherwise slide towards violence and anarchy.
And like culture, but even more fundamentally, language is an emergent public good.
Remarkably enough, Adam Smith put the evolution of social mores and shared expectations at the heart of The Theory of Moral Sentiments, the treatise in which he set out his theory of man in society on which was built the economics he expounded 17 years later in The Wealth of Nations. And one of very few papers Smith saved from the comprehensive bonfire he ordered on his death was his treatise on the evolution of language.
Smith was the original theorist of my subject – emergent public goods – explaining how language, culture and markets are all public goods; how they are an emergent property of life itself.
Since Smith’s time, the industrial revolution saw markets burgeon and become increasingly sophisticated. And alongside them has been an institutional revolution in the provision of new traditional – largely government provided – public goods enhancing public order, financial stability, scientific knowledge, public health, transport and communications and standards like weights and measures.
So, ideological debates about the relative merits of governments and markets are too caricatured to be helpful. Rather, the world as we know it is the product of a grand ecology of private and public endeavour in which civil society, the market and public goods, provided both by governments and as an emergent property of life itself all coalesce to an extent that would surely have astonished our tour guides, Adam Smith and Thomas Jefferson.
And today the internet provides us with a new burst of free-rider opportunities. Open source software is assembling itself as I speak these words – an entirely new emergent public good – our language instinct rendered into executive code!
And Google illustrates a new kind of emergent public good, in which even the search for profit sees some entrepreneurs turn away from solving the free-rider problems so as to seize the free-rider opportunities burgeoning before them. Rather than charge users a large slice of a modest amount of value behind a paywall, Google’s services are free to users. Each year this generates up to a trillion odd dollars of value to all comers, with Google funding it all by eking out a tiny proportion of that, a lousy sixty billion bucks in advertising revenue.
Wikipedia seizes the free-rider opportunity quite differently, with a few million philanthropic dollars funding the platform and the crowd donating its time and expertise I’d say it generates somewhere between $50 and $500 billion in value each year. What was that about the problem of free riding on others’ effort?
It’s just as well the emergent public goods of the internet – Google, Facebook, Twitter and Wikipedia – didn’t need government funding, because building them required the acumen of our finest entrepreneurs. But what about all those public goods that would benefit from that kind of entrepreneurialism but which can’t raise sufficient funds to thrive through advertising, philanthropy or some other makeshift?
Public-private partnerships (PPPs) have acquired a bad name in Australia because, in building physical infrastructure, they’ve played to the weaknesses of both the pubic and private sectors. But property configured, PPPs could help build the missing public goods of the information age.
Having chewed over these ideas for some years, I listened to Anne Wojcicki at a health conference in San Francisco. For $99, Wojcicki’s company, 23andMe, will partially profile your genome from a saliva sample. 23andMe can help identify some of its user’s genetic susceptibilities. And scientists have used its database to replicate 180 genetic associations with medical conditions that had previously been documented in the medical literature – a method that represents a 10,000 per cent productivity improvement on traditional methods.
But, however entrepreneurial, the private sector is making heavy weather of it. 23andMe’s prices have fallen tenfold, it has $50 million in the bank, but it has fewer than one million of the two billion odd wealthy people in the world.
Reconfiguring this kind of service as a PPP could put Australia in the express lane to the future. Patient genetic profiles have an immediate capital value to our health system enabling it to better target screening – for bowel and breast cancer for instance – and improve diagnoses and vigilance against allergies and drug reactions, in each case improving health and lowering costs. That’s worth the cost of the sampling right now.
So Medicare could ‘bulk bill’ genetic profiling, while the health system ”nudged” people to take advantage of it. On your next visit, your doctor could ask if you wanted to give a saliva sample right there, though you’d be free to opt out.
Whichever private firm won the tender to partner with government on such a venture would have to open their database to researchers, duly anonymised and subject to privacy safeguards. But they could also provide value-added services as 23andMe does, engaging their customers in the surveys that enable genetic associations to be made and building social networks between those with like conditions and between hitherto unknown relatives.
As the genomic database grew, so, too, would its power as a diagnostic and research asset. Could there be a more powerful way to kick-start the personalised medicine revolution just coming into view, or a better way to put our researchers, our companies, our health system at the forefront of that revolution?
That’s just one example of how we could build a new world of public goods of the information age through public private partnerships.
Here’s another. CultureAmp, a Melbourne based startup, markets a browser based web app to enable firms around the world to measure their employees engagement with their work. An enterprising State or Federal Government could negotiate to transform this private service into a public good. It could pay CultureAmp or a competitor firm that won a competitive tender to provide suitable employee engagement software free of charge to all small firms within the jurisdiction.
Free to users, the engagement questionnaire would become a standard, which would facilitate comparisons between firms. Some firms – the ones doing best in the survey – would then have an incentive to publicly report their performance creating a genuine market in workplace satisfaction.
Again the private partner would be required to open their data – anonymised to protect firm and employee privacy – greatly improving private firms’ and policy makers’ understanding of human resources management and its link to firm performance more generally. It would strengthen the service providing firms’ position in seeking similar strategies offshore.
If we did the same thing with accounting software, the anonymised data would enable our macro-economic managers to ‘take the pulse’ of the economy in real-time rather than steer while looking in the rear view mirror.
So now, suitably chastened by the disappointments of infrastructure funding PPPs brandished by financiers and signed off by the credulous and the self-serving and which simply drive up costs as we play to the weakness of each sector, we can pick some of the PPP fruit hanging low on the net.
And, of course, the repertoire necessary to build the hybrid public goods foreshadowed here can drive progress outside the digital world. Perhaps one day we’ll be less enamoured of set piece battles between the market versus government and focus on the more fruitful question of how we configure the interface between them.
As part of that process, and reflecting on relative successes and failures as we go, just as we did during the industrial revolution, we’d forge and endlessly refine a set of principles to help guide us in cultivating the rich ecology between public and private endeavour that’s always powered our journey toward a better future.