Ideer om frihet
Defining the public good
- or: bridging the gap between individual action and the common good
Hans Christian Garmann Johnsen
'Normal' science exists. It is the activity of the non?revolutionary, or more precisely, the not?too?critical professional: of the science student who accepts the ruling dogma of the day.
Karl Popper
The distinction between public and private goods is taken for granted by most economists. According to economic theory, public goods are goods that nobody will supply in a free market because their consumption can not be restricted and therefore the goods can not be sold. The economic theory of public goods indicate that individual action and choice will not give a sufficient supply of goods of this sort. Some sort of collective choice and collective action have to be introduced to correct the individual action.

I don't intend to challenge this conviction altogether, but I should like to point out some problems in defining public goods, and some implications of these problems. The issue is not as innocent as it may seem. The theory of public goods is one of the foundations of the welfare theory, and it forms a basis for much of the applied economic theory, therefore influences political policy.

I shall also try to say a little bit about the philosophical discussion that preceded the economic theory of public good. Next, I will try to present the present interpretation of the public goods theory and finally say something about the recent critics of public good theory.

Throughout my discussion I will use a broader concept of public goods than the obe which normally is found in economic literature, and I will also extend my discussion to cover not only material goods but all things that are generally good.

Philosophical background
I think the origin to the idea of public goods came from the idea of the common good. The idea of the common good, which has followed social science through all times, indicate a belief in something that is common and good for everybody. Behind this belief, there is the idea that we as human beings are basically equal in at least some respects, and that on this basis there is something that we share and will all have an equal benefit from. I put this deliberately so vaguely, at this point.

There is a certain tension in the economic literature between this common good perspective on the one hand and the utilitarian concept of maximizing individual happiness on the other. This tension was already present in John Locke's writing. While Locke was pioneering the theory of utility by linking it to the individual experience of pleasure and pain, he quite clearly stated that the purpose of the political society was no other than the promotion of the common good.

So, while Locke is generally regarded as the one who introduced the hedonistic concept of utility, he was at the same time influenced by the aristotelian eudaemonian concept. For Locke, this doesn't seem to create any problems. The individualized concept of happiness is related to the idea of utility as an end outside the individual, through to basic functions.

The first of these is the basic concept of human nature. As humans we share some common characteristics, at least on a very fundamental level. The other function that linked the hedonistic and the eudaemonian level of utility, was the general tendency to equilibrium in social and economic matters.

Both these functions was elaborated in the literature that followed Locke, especially within the empiricist tradition. Francis Hutcheson elaborated the theory of natural human good. Adam Smith developed both the theory of equilibrium and the theory of natural benevolence. Even John Stuart Mill, made use of both theories when he argued for a basic harmony between individual pleasure seeking and the common good.

The harmony was destroyed by Arthur Pigou when he i 1917 published Wealth and Welfare. His modified version The Economics of Welfare from 1928, became the founding work in welfare theory. Here Pigou argued that welfare could be increased if wealth was taken from the rich and given to the poor (Pigou, 1932, p90). He also pointed at inefficiency in the market economy, monopolistic supply, externalities, incomplete use of resources, etc. All in all, his argument was, contrary to Locke and Smith, that individual pleasure seeking through the market economy did not maximize the public good. Some sort of state action was necessary to fill the gap.

Pigou's way of thinking can be illustrated like this:
private goodcommon good
individual choicefree market
collective choicestate

It was in the discussion following Pigou`s book, that the modern economic theory of public good was developed.

The economic theory of public good
The first objection to Pigou came from Lionel Robbins who argued against the interpersonal comparison of utility that was involved in Pigou's reasoning (Robbins, 1932). Robbins argument was part of a broader theory in favor of scientific neutrality towards ethical issues, and against normative statements in economics. Although Robbins accepted normative statements, he did not regard them as scientific.

Robbins classical statement about economics is that: "It is incapable of deciding between the desirability of different ends. It is fundamentally distinct from ethics. Wherein, then, does its unquestionable significance consist? Surely it consists in just this, that, when we are faced with choice between ultimates, it enables us to choose with full awareness of the implications of what we are choosing" (Robins, 1932, p152).

In a way, the Hicks/Kaldor solution to Pigou's problems is within Robbins program. By focusing on the relative change in utility involved in transactions, and introducing Edgwourth's indifference curves, they demonstrated that the total utility could be increased by a system of taxes and compensations. If everybody would be better off by a change in demand or supply of certain goods, those who suffered from the change could be compensated and those who gained could be taxed.

Robbins objected to the Hicks/Kaldor solution stating that he would only accept it if an actual compensation took place. This means that the Hicks/Kaldor solution presupposes the market, since transactions can only take place in a market. Again this implied that the argument of public goods could not be used as an argument for a general redistribution of wealth. And on the other hand, it implies that there is a relation between the solution to the Hichs/Kaldor problem and the social structure.

Later, Ronald Coase was to argue in his famous essay about Problems of Social Costs (Coase, 1960) that there are at least two distinct solutions to externalities; on the one hand a transaction solution within the market whose practical implication is dependent on the legal structure of society, and on the other hand a political solution whose implications are a matter of political priority. Coase's argument is that these two solutions are distinct and based on two different approaches. They are not comparable as principles since their practical implications will differ from one situation to another.

It seems that the Hicks/Kaldor approach was too naive as to the possibility of constructing a social utility function. If such a function involves ethical considerations, or if measures necessary to increase social utility have to be decided by political bodies that in itself involves decision?making processes, then we need more insight into these processes before we can choose between different systems.

Introducing the political system
The Public Choice School took up the challenge of discussing the relation between the economic system and the political system. James Buchanan had, before developing the Public Choice theory, studied the work of among others the swedish economists Wiksell and Lindahl's work on public finance (Buchanan/Tulloc, 1962). It showed that these economists were aware of the complex effects different policies would have on the market. Buchanan argued that people in principle make the same kind of decisions whether they operate in the market economy or in the political market; they try to maximize individual utility. The difference between the two is the difference in structure and the difference between buying power and voting power.

In Buchanan's analysis, which has many different implications, one conclusion seems to be that what we will have to do is not to choose between different policies, but to choose between different decision making processes. Thomas Sowell has discussed different decision making processes in relation to different types of decisions. In his analysis, he tries to decide which process is the most efficient to solve different types of conflict. The main types he discusses, can be illustrated like this:
Formalcontractpolitical decisions
Informalsocial relationsgeneral obligation

All these different kinds of decision making operate in society. The message from the public choice school was that some decisions should be established in the constitution, others decided by political bodies and the rest left to the market. It is the type of problem, and not the individual problem that will be decisive for what decision making process should be used. Typical for Buchanan was his heavy involvement in favor of fixing the growthrate of money and of balanced budgeting in the constitution so that inflation should be avoided.

Another criticism of the idea of constructing a social decision function, came from Kenneth Arrow and Amathya Sen. What Arrow called the "Impossibility Theorem" and Sen called "The Liberal Paradox" both show that it is impossible to construct a social decision function. As Sen remarks: "all Pareto?inclusive, nondictatorial, irrelevant?alternative?independent rules of going from individual welfare functions to a social ordering will fail to generate a social ordering if cardinality is combined with noncomparability" (Sen, 1970, p124).

Sen's conclusion is not surprising. Although the discussion about the liberal paradox has continued for over 20 years, I feel that some implications from Sen's argument are very obvious (Seidl, 1989). What Sen is pointing out is basically the nature of the questions that can be decided by collective choice. The type of choices that can be made collectively are typically choices where it makes a difference whether we make them collectively or individually, as is the case with the establishing of laws and norms.

In Sen's model, this difference is not apparent. In Sen's model, individuals decide between pairs of goods. If an individual can decide between any pair of goods, purely by individual (hedonistic) choice without any reference to how other people choose, then what we are talking about are typically private goods (since this is how we define private goods) and there is no need for collective choice.

The argument of Sen and Arrow really doesn't alter the conclusions of John Locke since what Locke called the common good was something very different from private goods.

Does this bring us closer to defining the public good? I think it does. At least it tells us a little bit more about the nature of the public goods. In the economists' definition the public goods are something that should be decided by collective choice because public goods are something that can not be consumed or chosen independently of other people's choices when at the same time their supply will make everybody better off.

My argument is that the sort of goods that will have these characteristics are not necessarily material goods but rather the system of rules and norms according to which society functions.

Criticism of the public good theory
There are in the economy and in society in general, many things that contribute to the wellbeing of all people without anybody being rewarded for it. Indeed, that is what makes society possible. The concept of market and the concept of private goods give the wrong impression that only tradeable goods are part of the market economy. In fact there is a big grey area of society which Hayek calls "the independent sector" (Hayek, 1976), where individuals contribute with their values and interests to make up what we could call the social life. Much of what I have called collective choice appears within the independent sector.

The independent sector contributes to the invisible structure of society like value formations, norms, arts, culture, etc. The independent sector also takes care of many visible aspects of society, so called non?profit activities.

Most people contribute to the well?being of society both through their participation in the independent sector and also through their normal economic activity. When individuals through individual action seek individual ends, they do it within the social environment and also contribute to this environment. It is this environment that gives the opportunity to creativity and development.

My point is that it is the nature of the social environment that is important for whether individual action will contribute to the common good. At the same time, I argue that individuals when they take part in society, make both individual and collective choices.

Some economists, among them Agnar Sandmo, have argued that individuals when choosing, only consider those effects that are purely private (Sandmo, 1990). The same people may wish that everybody, including themselves, made a different choice. Driving a private car that pollutes the air, might be one example. Sandmo argues that it is rational for these individuals to drive private cars themselves, and at the same time if they were to make a collective choice through political decision, would vote against the use of private cars.

The problem with this argument is that similar examples could be made for almost all individual choices. It therefore does not tell us whether collective choice is better than individual choice, only that it is different. The strength of the market economy is exactly that it shows which choices people actually make and therefore it is more related to reality than hypothetical collective decisions.

Another aspect of this discussion of private and public goods can be illustrated with an argument that Hayek has used (Hayek, 1976). Hayek talks about the "mirage of social justice". By this he means that the idea of justice that we all share, and which we apply to the people and the situations that form our immediate surroundings, can not be applied to the great complex whole that forms society. We can know of the effects of our actions in our immediate environment, but very little about the effect on the total complex social order. That is why we in our immediate surroundings care for each other, while we for society as such, rely on rules and norms that we regard as fair. I can not say what will be the best good for somebody to receive, say, in another country. But I could have an opinion about fair rules and fair norms in that country.

All these examples point at the same perspective, that what we look for as the common good is not particular goods but general structures and norms that help individual action contribute to the common good.

Other discussions of the common good idea
As was already present in Locke's discussion, the dichotomy of individual choice and collective action represent a tension. Either one can try to introduce a basic harmony between the two (as Locke did), or one can separate the two in a private sphere and a public sphere, as Adam Smith did when he talked about the social surplus.

The two epochal works in the early seventies, Robert Nozicks Anarchy State and Utopia (Nozick, 1974) and John Rawls A Theory of Justice (Rawls, 1972) use each of these arguments. Nozick argues for a basic harmony between individual choice and a minimal state. The minimal state of Nozick is a state that only protects what Nozick calls negative rights. That is, the state does not interfere with the individuals' choice, but rather protects and creates an environment where individuals are free to make choices. Security and protection of negative rights are the basic objectives of such a state.

Nozick argues that negative rights are not a matter of collective choice in the way Amarthya Sen uses it. Sen later admitted this (Sen, 1976). However, Nozicks argument is very dependent on the existence of two distinct types of rights, called negative and positive rights. And even if this distinction is correct, I do not think that Nozick has solved the basic dilemma between individual action and collective choice.

Rawls introduces an ethical approach to collective choice theory. His principle, justice as fairness, is a discussion about a fair way to distribute the social surplus. Although his proposal is sympathetic, it doesn't avoid Robbins' criticism of ethical theory. There are also some impossible practical problems of identifying and measuring the social surplus.

What we are looking for is a way to define the public good. The two theories of Nozick and Rawls try through deduction to outline such a definition. They both make deduction from individual choice, and they both attempt to bridge the gap between individual choice and the common good. None of them succeed because the one is more than the sum of the other.

What we try to define is something that is more than the sum of individual action. We are looking for something that is basically different from individual action.

Revival of the Aristotelian theory of the common good
In recent literature, there has been a revival of the aristotelian theory of the common good, what we have called the eudaemonian utility theory (Murray, 1988. Novak, 1989, Lomasky, 1987).

Instead of trying to deduce the common good from an individual, hedonistic utility theory, the aristotelian approach is to define the characteristics of the common good. As already mentioned, this theory presupposes that human nature has some basic characteristics so that it is possible to discuss what is a good life.

The purpose of much of this recent discussion of the aristotelian common good principle, has been about how to avoid a conflict between individual choice and the common good. One of these discussions is Charles Murreys book In Pursuit of Happiness and Good Government (Murray, 1988). In his book, Murray discusses several aspects of the good life. From his and other discussions there seems to follow one conclusion: that one of the most basic of all goods is the possibility of making individual choice. What Murray call self?actualization and Douglas Rasmussen (1989) called self?directed action, is one of the most common of all human values.

By establishing this relation between individual choice and the common good, it is easier to understand what Locke had in mind when he talked about these two principles. The common good is not decided from individual choice, but individual choice has to be implicit in a social structure that generates the common good.

This brings us to one sort of conclusion in the sense that we have restored the basic relation and harmony between individual choice and the common good.

What does this mean exactly? What kind of social environment will convert individual action to a common good. I don't think there is a scientific answer to that question. I think that an exact specification of the social structure that will encourage individual action in a productive way, will be a matter of political and social process. It will be a result of historical experience, the sort of experience that now has brought Eastern Europe away from communism and on the road to a market economy.

I am not stating that economic theory can not guide us in that question; it can. However, economists have been too naive in assuming that the common good can only be established by collective and compulsory action (through state action).

The recent debate over the aristotelian concept of common good has shown that individual choice is defined as fundamental in all the processes by which the common good is established. In this context, the theory of public goods is connected to the principles of individual choice and the common good. It is this dual obligation that defines the nature of the phenomena that we call "public goods".

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Hentet fra Ideer om frihet nr 3, 1992.