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Wednesday, March 7, 2018

National Defense and the Fundamental Problem With “Public Goods”

The idea of public goods has been around since Adam Smith, but what are they and what do they cost?

The competitive market economy is a powerful institutional mechanism for bringing human ingenuity, energy, and creativity to bear, to improve both the material and cultural circumstances of multitudes of people around the world. Wherever relatively free-market capitalism is operating, it succeeds in ending human poverty and brings about rising standards of living for hundreds of millions, indeed now billions, of people. Yet, it is argued that there are some things—“public goods”—that only government can effectively supply to everyone in society.

Private property has long been understood to be a great incentivizing force to motivate individual self-interest in the form of peaceful and productive work, savings, and investment. Under the social system of division of labor, each participant sees the chance for personal gain and profit by directing his efforts to produce those goods and services that others may want so as to obtain through exchange what they can reciprocally provide.

Indeed, many of the classical economists of the 19th century considered private property to be the fundamental and most essential institution for a peaceful and prosperous society. For instance, John R. McCulloch (1789-1864) explained in his widely-read Principles of Political Economy (1864):

“Let us not, therefore, deceive ourselves by supposing that it is possible for any people to emerge from barbarism, or to become wealthy, prosperous, and civilized without the security of property … The protection afforded to property by all civilized societies, though it has not made all men rich, has done more to increase their wealth than all their other institutions put together …

“The establishment of a right to property enables exertion, invention, and enterprise, forethought and economy to reap their due reward. But it does this without inflicting the smallest imaginable injury upon anything else. …Its [property’s] effects are altogether beneficial. It is a rampart raised by society against its common enemies—against rapine, and violence, plunder and oppression. Without its protection, the rich would become poor, and the poor would be totally unable to become rich—all would sink to the same bottomless abyss of barbarism and poverty.”

The market order is a social arrangement for “positive sum” outcomes in which every participant in the market network of voluntary exchange betters his own circumstances in the transactions into which he enters as both producer and consumer. As a producer, the individual participates in the manufacturing and marketing of various goods that earns him the financial wherewithal to reenter the market as a consumer.

But since the time of Adam Smith in his The Wealth of Nations, it has often been argued that there may be some goods for “which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expense to any individual or small number of individuals, though it may frequently do much more than repay it to a great society.”

This has been the basis for what has become known in the jargon of the economist as public goods. They have usually been defined as goods that have especially two distinctive qualities: Non-excludable access and non-rivalrous consumption or use. What do these terms mean?

Public Goods: Non-Excludability and Non-Rivalrous Use

A non-excludable good is one that someone does not pay for, or can avoid paying for, to use or consume. It is said to be highly difficult or costly to exclude such an individual from having access to it even though he’s not paying for it. Thus, such an individual can benefit from its supply without having paid anything to cover some portion of its production costs in making it available on the market.

There is no way to exclude Pierre from that protection in case of foreign attack.

The standard example given is national defense. A “defense shield” of military aircraft, missiles, and naval ships protect large portions of the United States from foreign attack. Such a military shield provides protection not only to the citizens who may have contributed to pay for it but all others who may not have contributed to cover its costs but who live under its protection.

If Pierre is visiting from France, for the time he is in the U.S. that defense shield protects him from any potential foreign military attack, though the American taxpayers have paid the costs of providing it to themselves and to Pierre. There is no way to exclude Pierre from that protection in case of foreign attack. A hole cannot be left in the defense umbrella in the sky into which an incoming missile can vaporize poor Pierre but no one else who has helped pay for the system.

Non-rivalrous consumption refers to the idea that the number of those who benefit from the use or enjoyment of such a public good does not necessarily affect the cost of providing it. For instance, an increase in, say, an extra 10,000 people living in the United States does not impact the marginal cost of providing that defense shield to that addition to the country’s population.

If people are watching a fireworks display in a large open field on the fourth of July, an extra person standing in the field enjoying the display does not impact the cost of supplying the fireworks or the launcher equipment, given the planned size of the display. Assuming a relatively large field with unimpeded vision of the sky, whether twenty people are watching the illuminations or two hundred does not influence the cost of providing the holiday entertainment to the viewers.

The Problem of the “Free Rider”

Limited government classical liberals since the time of Adam Smith have taken for granted that such things as “national defense,” “police,” and the “justice system” are examples of public goods for which government funding by compulsory taxation is essential.

If the remaining 25 million citizens had not decided to free-ride on the contributions of the others, the government would have had an additional $2.5 billion.

A primary reason, it is argued, is that, otherwise, there is created a “free rider” problem, the result of which is an “undersupplying” or less-than-optimal production of defense, police, or justice. Suppose that there are 100 million people in a country, but payment for national defense is a matter of voluntary contribution by the citizens. Since a resident of the country is not forced to pay for being militarily protected from a foreign attack, he might conclude that he won’t send in a voluntary contribution and, yet, enjoy whatever degree of funded national defense ends up being supplied; after all, he can’t be excluded from its production though he will not have contributed to its provision.

Furthermore, suppose that each citizen is asked to pay a voluntary contribution of $100, and 75 million of them actually send in that sum, resulting in the government having $7.5 billion to spend on national defense. If the remaining 25 million citizens had not decided to free-ride on the contributions of the others and had also sent in respective $100 contributions, the government would have had an additional $2.5 billion for defense spending for a total of $10 billion. It is argued that this shortfall reflects and measures the degree to which there has been an undersupply of national defense in that country.

No Way to Know a Free Rider’s Valuation of a Public Good

The theory of the free rider assumes an ability to estimate or calculate the amount of undersupply there is of a particular public good. However, there is no accurate way of knowing by how much such a public good may be undersupplied since there is no way of knowing what value the free rider would have placed on this good if he had to actually pay for access and/or use of it.

Of course, it would be possible to ask such free riding individuals what value they might attach to this good if they had to pay for it. But the problem is: talk is cheap. That is, a person could say anything in the abstract about by how much he values this good, and some hypothetical price he might be willing to pay for it if he had to gain access to it. How you imagine or publicly state you might spend a million dollars if you won it in a lottery and how you would end up actually spending that million dollars if you did win a lottery could be two very different things.

There is no way of determining this because there is no market for the direct buying and selling of defense services or security against terrorist threats.

An individual only demonstrates his actual valuation for a good when he is confronted with the need to make a choice and shows whether he really wants to buy this good and the price he would be willing to pay for access and use of a particular quantity. Contrary to how some economists think about such things, people do not formulate and walk around with a clear and formalized “preference map” of their wants and desires in their head that traces out all the possible exchange opportunities and situations that might confront them.

Unless there is an actual market from which interested buyers, some of who may have been free riders, can be excluded if they do not pay some price for access and/or use of this good, there is no way of knowing whether or not this good is, currently, undersupplied or oversupplied or is just right.

Informed observers and economic policy analysts can have very different and inconclusive interpretive judgments about any such claims. For instance, is there too much or too little spent on national defense and homeland security? And what would be the real market-determined value of them as expressed in a competitively generated price system? There is no way of determining this because there is no market for the direct buying and selling between citizen-consumers and supply-side producers of defense services or security against terrorist threats.

Central Planning Qualities of Government-Supplied Public Goods

As a result, government-provided national defense and homeland security suffer from an aspect of the famous Austrian critique of socialist central planning as made by Ludwig von Mises, Friedrich A. Hayek, and others. It is true that in a “mixed” or interventionist economy, government still has to purchase on a market the goods and services it wishes to employ in its activities, including national defense. Thus, the government may be able to make reasonable estimates of the monetary costs required to undertake a certain level and type of national defense or homeland security.

But is any government-chosen amount and type of national defense and homeland security worth it? We don’t know. In a free-market economy, there is two-sided competition. Demanders must decide how much they are willing to pay to purchase desired goods in competition with other buyers also interested in purchasing them. Suppliers judge what monetary costs they might be willing to incur to bring certain types and amounts of goods to market in competition with other supply-side rivals also interested in purchasing or hiring some of the scarce resources, capital, and labor services.

They are the joint central planners deciding on the quantity and forms of such public goods.

But with a public good such as national defense or homeland security, it is a group of politicians, bureaucrats, and private-sector special interest groups interested in benefiting from such government spending who interactively decide how much and what type of national defense and homeland security will be provided at taxpayers’ expense. They are the joint central planners deciding on the quantity and forms of such public goods.

It is not the actual citizens of the society demonstrating their preferences about the amount and types of these public goods they think are needed by choosing how much they want to spend. There is no way, therefore, to be certain how much defense and security are reflective of the citizenry’s preferences since they do not vote for them in the same way that they do as everyday market participants. In the marketplace, we vote with our voluntarily spent dollars, with each of us choosing the types and combinations of the goods and services that serve our purposes, even when this differs noticeably from the market choices of many others in society.

That is what makes the market an arena of real and actual diversity and inclusiveness. In a functioning free-market economy, minority and majority choices can be and are satisfied, all the way down to niche desires. As long as those wanting some marketable good are willing and able to offer some minimally sufficient price to make it profitable for some producers to specialize in its provision, then it gets produced and supplied. Multitudes of diverse demands are satisfied, and each of these is included in the production mix of goods produced out of the available scarce resources in the society.

The Politics and Economic Irrationality of National Defense

Now, it may be the case that only government can provide national defense (setting aside in this discussion the argument of those advocating non-governmental provision of such “public” goods and services). But if this is true, then there is an inherent and inescapable economic irrationality in the provision of national defense compared to the producing and buying of normal market-supplied goods and services.

Defense and foreign policies become the outgrowth of the ideas central-planners who claim they know how to manage America’s place in the world.

In the case of a country such as the United States, defense spending becomes a matter of government central planning, albeit one in which the politician planners have been democratically elected. And it is one-size-fits-all for the nation as a whole. To the extent that voters have given attention to the foreign policy portions of the platforms politicians have run on, those who disagree with the foreign policies initiated by the winning presidential and Congressional candidates are forced to both pay for them and bear the risk of their implementation.

The citizen-voter may consider that he is being taxed too much or too little, given the global defense threats he thinks are facing the country. He may disagree with sending troops abroad for foreign interventions, and he may want to end the stationing of any American armed forces in other countries. Or he may think there needs to be on-going foreign interventions in the name of national security or “building democracy” in other lands but disagree with the types of such interventions undertaken by the administration in power in Washington. Other than his individual vote in the next election—and its minuscule impact on any outcome as a single voter—he has no way to try to bring about any other “supply” of national defense other than the one in place.

Instead, it is the “experts” in foreign affairs and national security who advise presidents and congressmen. And which of these is “right” about threats to America and the appropriate stance and response? In effect, defense and foreign policies, and the accompanying tax-funded spending, become the outgrowth of the ideas of ideological and “strategic” central-planners who claim they know how to manage America’s place in the world. Whether they are “hawks” or “doves,” or proponents of “realpolitik” or global “idealism,” they all claim to know how to plan America’s global presence.

At the same time, these “experts” interact with or are part of the defense, national security, and foreign policy bureaucracies in the government. At the end of the day, those in these bureaucracies may view themselves as trying to do good as they see it, but underlying this is a self-interest in the maintenance and growth of the bureaucratic structures upon which their incomes, positions, and chances for promotion and influence are based.

The politicians and bureaucratic procurement departments determine how much will be spent on defense and national security.

You do not demonstrate the importance of your place in the bureaucracy, and why you should be promoted up the civil service chain, by being non-interventionist. That stance easily could lead to no promotions and reassignment to dead-end tasks. You are not showing that you’ve gotten “on board with the program,” without which that bureaucratic department or agency has no rationale for existence or funding.

And, finally, there are the private-sector corporate and business interest groups whose profit margins and market shares are often heavily dependent upon government contracts for military and national security equipment and tasks. Their “consumers” are not the citizen-taxpayers, but the politicians and bureaucratic procurement departments that determine how much will be spent on defense and national security, and on which particular goods and services those tax-based dollars will be spent.

Foreign policy and national security threats are their bread and butter in the form of tens of billions of dollars of revenues from the federal government. Non-intervention or demonstrations of a “threat-free” world are not the ways to maximize the potentials from doing business with the defense and national security parts of the government.

Costs of Public Goods Like National Defense

Classical liberals and conservatives strongly believe, as did the Founding Fathers and Adam Smith, that there are some goods or services, such as national defense, that must be supplied by government through compulsory taxation due to their claimed “public goods” qualities. And this may be correct, as most others in society also believe.

The results from public goods are reduced individual freedom of choice, persistent inefficiency and waste, and the arrogance and corruption of politicians.

But, nonetheless, if the buying and selling of any goods or services are taken out of the arena of competitive free markets, then the decision-making passes into the central-planning hands of those in and around political power.

Inevitably, like all other forms of central planning, the results from public goods such as national defense are reduced individual freedom of choice, persistent inefficiency and waste, and the arrogance and corruption of politicians, bureaucrats, and the interest groups living off government spending as their interactions determine the direction of the country. Plus, in the case of national defense and homeland security, this also includes a threat to the lives, property, and privacy of the entire population of the country.

  • Richard M. Ebeling is BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel in Charleston, South Carolina. He was president of the Foundation for Economic Education (FEE) from 2003 to 2008.