Physical Goods, Immaterial Goods, and Public Goods

Originally posted on Notes On Liberty

Public goods in economics have been a contentious theoretical issue since Paul Samuelson introduced the concept in 1954. The main sources of contention are what real world things are public goods, and who should provide them. In this post I propose a new way of looking at goods that will shed light on why public goods have posed such a problem. In particular, I propose that there is an important distinction between physical goods and immaterial goods; that public goods can only be immaterial goods; and that this unique feature of public goods does not preclude the market to provide the “socially optimal level.

Introduction

Economists define a public good as something that is “non-rival” (meaning that one person’s consumption does not affect another person’s), and “non-excludable” (meaning that one person cannot stop another person from consuming the good.) Public goods are often contrasted with private goods, which are rival and excludable.

The implications are that public goods cannot be provided by a free market, because no one would have to pay for such a good, and so there would be so incentive to produce it. Therefore, the argument goes, the government ought to provide public goods.

Features_of_goods

Continue reading “Physical Goods, Immaterial Goods, and Public Goods”

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The Economics of Hard Choices

Originally posted on Notes On Liberty

In economics, there are two types of numbers that we use. Cardinal numbers express amounts. For example, “one”, “two”, “three”, etc. are all cardinal numbers. You can add them, subtract them, or even take them to an exponent.

Money prices are cardinal, which is why you can calculate precise profits and loss.

On the other hand, ordinal numbers express ranks. For example “first, “second”, “third”, etc. are all ordinal numbers. It doesn’t really make sense to talk about adding (or subtracting or exponentiating) ranks.

Almost all economists believe that utility is ordinal. This means your preferences are ranked: first most preferred, second most preferred, and so on. Here is a made up value scale: Continue reading “The Economics of Hard Choices”

A Tax is Not a Price

Originally posted on Notes On Liberty 

According to The Economist, the latest US federal budget includes incentives for “congestion pricing” of roads.

Ostensibly, this is about reducing congestion. But some municipalities like the idea of charging for roads because it represents a new revenue stream. This creates an incentive to charge a price above cost. When a firm does this, we call it a “monopoly price.”

But when a government monopoly forces you to pay a fee to use a good or service, do not call it a price. It is a fee that a government collects by fiat. In other words, it is a tax.

A price is a voluntary exchange of money for a good or service. The emphasis on voluntary is important, because it is this aspect of the price that enables economic calculation for what people really want.  Even a free market “monopolist” (however unlikely or conceptually vague it may be) engages in voluntary exchange. Continue reading “A Tax is Not a Price”

Are Austrian Criticisms of Mainstream Economics Still Relevant?

[Originally published on Mises.ca]

RothbardOccasionally, when Austrians try to distinguish their brand of doing economics from the mainstream, they get hit with accusations that they are attacking straw men; that no one believes what Austrians claim is the mainstream approach.

Is this true? Are Austrians attacking enemies that don’t exist anymore? I say no. While it might be true that many of the top economists may in general agree with broad Austrian methodological conclusions, the typical economist is much more likely to either (a) explicitly deny the Austrian criticisms, or (b) implicitly or casually invoke these fallacies during their analyses for reasons I shall explain below. Let’s look at the evidence. Continue reading “Are Austrian Criticisms of Mainstream Economics Still Relevant?”

In Defence of Rodney Bowers

Originally posted on mises.ca on January 29, 2013

On page 4 of last Monday’s Metro Toronto, journalist Jessica Smith detailed the heroic actions of Toronto chef and restaurateur Rodney Bowers, as he joined Vancouver chef and restaurateur Mark Brand’s effort to address poverty in his community.

The Brand-Bowers plan to address this great social ill is simple: They sell tokens for $2.25 at their restaurants, which can be exchanged for a free sandwich. The people who buy these tokens then give them away to those in need. The reason Bowers is bringing this program to Toronto is because of its immense success in Vancouver: according to Brand, he’s redeeming 120 tokens a day.

But no good deed goes unpunished. Apparently, other activists have spoken out against this program as “demeaning” and–horror of all horrors–doing the government’s job.

One such critic is York University’s Ilan Kapoor, who is a professor of critical development studies (which involves critiquing economic development from post-Marxist, feminist, etc. perspectives). He brushes off Bowers and Brand as providing merely “a Band-Aid kind of solution, because it doesn’t address the broader problems of hunger and, larger than that, joblessness and inequality.” He says the problem with private charity is it allows “private individuals–celebrity chefs in this case–to decide (how to feed people in need) and we as the audience who buy these meal tickets should not be making decisions on who we want to give them to based on our whims and fancies.” He offers as his solution “a state-funded, fair system of distribution.”

The problems with Kapoor’s criticisms are two fold. First is his dismissal of Band-Aid solutions seemingly in general. But Band-Aids still serve an important function. Bowers easily dismisses Kapoor here. “Some critics are going to say it’s dehumanizing or degrading; but what’s dehumanizing and degrading is that those people are still hungry.”

Second, Kapoor commits the fallacy of ascribing action to a collective. Put simply, only individuals act. If a group of people were to stand naked before you, you could not, merely by looking, assert that you were looking at the Ontario Legislative Assembly, or the Toronto City Council, or just group of strangers with no connection to each other. We can only ascribe identity to collectives once we understand what the individuals that make up collectives themselves understand about their condition.

So when Kapoor says he is in favour of “a state-funded, fair system of distribution” as opposed to private individuals distributing their money how they please, he is fact favouring a system where arbitrarily chosen individuals (the state) decide how to spend other people’s money. What he is saying is that arbitrarily chosen individuals can somehow avoid the follies and weaknesses of everyone else, and will not succumb to the twin demons of “whim and fancy”.

Recently deceased Nobel Laureate James Buchanan spent his entire career demonstrating that just because you are an arbitrarily chosen manager of other people’s money, does not mean that your heart becomes hardened with indifference. It does not mean you become immune to persuasion. And surely you do not suddenly become a nonemotive, friendless, dispassionate, calculating robotic bureaucrat concerned only with the attainment of the elusive “greater good”.

Politicians are people before entering office, and remain human beings while they are in office. They build relationships and owe debts of gratitude, like the rest of us. They also, like the rest of us, try to help out their friends whenever they can. They make a lot “friends” when they’re in office, too.

The only difference between us and them is that, unlike private people, every bit of help a politician offers a friend through the state is at the expense of every single other member of the community.

And because the state has vastly more resources at its disposal than any private entity, politicians are actually more susceptible to be bribed, co-opted, blackmailed, and tempted & tantalized with promises of great riches and glory in order to game the system to advantage of themselves and their “friends”.

Private charity should be embraced with open arms, precisely for the reasons that Professor Kapoor decries it so. It is precisely because private charities allow individuals to determine for themselves how to help others, that makes private charity more judicious, economical, creative, and just a little bit more human.