Review of Austrian Economics

National Goods Versus Public Goods: Defense, Disarmament, and Free Riders

Jeffrey Rogers Hummel*

Of all the functions of the State, the one generally considered essential above all others is national defense. According to the popular ideal, national defense is a service provided by the State to its citizens. This service entails protection from aggressors outside the State’s jurisdiction, usually foreign States. The most sophisticated theoretical justification for State provision of this service is the public-goods argument. Economists have called many things public goods and then endlessly debated whether the label really applies, but national defense has remained the quintessential public good. Although rarely discussed in detail, it is universally invoked as the classic representative of the public-goods category.1

As the public-goods argument has been refined by economists, two characteristics distinguish a pure public good from a private good. The first is non-rival consumption. One customer’s consumption of a marginal unit of the good or service does not preclude another’s consumption of the same unit. For example, in an uncrowded theater, two patrons’ enjoyment of the same movie is non-rival. The second characteristic is non-excludability. The good or service cannot be provided to an individual customer without simultaneously providing it to others. The owner of a dam, for example, cannot provide flood control separately to the individual farmers residing downstream.2

Although these two characteristics frequently come in conjunction with each other, they do not necessarily have to. The non-excludability from the dam’s flood-control services is accompanied by non-rival consumption of the services among the various farmers, but the owner of a nearly empty theater can still exclude additional patrons. Yet, according to the public-goods argument, either characteristic alone causes “market failure”—that is, an allocation of resources that is less than Pareto optimal. Thus, either can be sufficient to justify State intervention.

Much of the literature on public goods has conceded that, strictly speaking, very few actual goods or services exhibit either of these characteristics in their polar form. Instead, in the real world, we encounter a range of goods and services, for which the potential capacity and quality of non-rival consumption is increasing or for which the costs of exclusion are increasing.3 Indeed, some economists have gone so far as to suggest that these characteristics are almost never physically inherent in any good or service, but are rather nearly always a consequence of choosing one out of many feasible methods for producing the good or service.4

While I believe that this argument has much merit, I am not going to challenge the validity, realism, or relevance of the public-goods concept. On the contrary, I think that the core service within national defense captures the essence of a public good more fully than economists have ever appreciated. But this essential feature, rather than providing a solid justification for State provision of the service, offers one of the most powerful objections to such provision.

National defense as it is provided by the State certainly exhibits both public-good characteristics to a substantial extent. True, Americans in Alaska and Hawaii could very easily be excluded from the United States government’s defense perimeter, and doing so might enhance the military value of at least United States conventional forces to Americans in the other 48 states. But in general, an additional ICBM in the United States arsenal, insofar as it truly protects one American, can simultaneously protect everyone else within the country without diminishing its protection. In that respect, consumption of national defense is non-rival. Moreover, a technique that defends just a single American from the Soviet State without necessarily defending his or her entire community and perhaps the entire nation is difficult to visualize. That makes national defense non-excludable as well.

I am going to focus, however, only upon non-excludability. If consumption of a service is non-rival, but businessmen and entrepreneurs can exclude those who do not pay for it, then they still have strong incentives to provide the service. The most serious “market failure” that is alleged to result is under-utilization of the service. Some people will be prevented from benefiting from the quantity of the service that has been produced, even though permitting them to do so costs nothing. Furthermore, even this imperfection will dissipate if the market permits discriminatory pricing.5

On the other hand, non-excludability creates opportunities for free riders, who will pay for the service only if doing so is absolutely necessary to receive it. From the perspective of economic self-interest, every potential customer has an incentive to try to be a free rider. If enough of them act on this incentive, the service will not be produced at all, or at least not in an optimal quantity.

Another way to think about non-excludability is as a positive externality in its purest form. Many goods and services generate additional benefits for people other than those who directly consume and pay for them. There is often no way for the producers of these goods to charge those who receive these external benefits. A non-excludable good or service is one where the positive externalities are not just an incidental by-product but rather constitute the major benefit of the good or service.6

Clearly, the justification for State provision of national defense does not stem from any major concern that protection services would be produced but under-utilized on the free market. Rather, it stems from the assumption that, unless taxation or some other coercive levy forces people to contribute, national defense would be inadequately funded and therefore under-produced. It is this widely held but rarely examined assumption that I wish to question.

I

Before I directly address the public-goods justification for State provision of national defense, we must clarify the meaning of the term “national defense.” The public-goods justification rests upon a fundamental equivocation over exactly what service “national defense” entails.

When economists discuss national defense, the core service they usually have in mind, explicitly or implicitly, is protection of people’s lives, property, and liberty from foreign aggressors. This also appears to be what people have in mind when they fear foreign conquest, particularly in the case of the American fear of Soviet conquest. People throughout the world apparently believe that their own government, no matter how disagreeable, defends them from foreign governments, which they think would be even more oppressive.

This defense of the people is not synonymous with another service that goes under the same “national defense” label: protection of the State itself and its territorial integrity. Logically, there is no necessary relationship between the two. The defense of the people and the defense of the State are conceptually distinct. Imagine a society without a State. Whereas it would no longer have a State to protect, the people might still need some protection from foreign States.7

Historically, the State often embarks on military adventures unrelated to the defense of its subjects. If this were not the case, people would require no protection from foreign States in the first place. Many Americans still seriously doubt that the United States’ bombing of North Vietnam and Cambodia had very much to do with protecting their liberty. One defense-budget analyst, Earl Ravenal, believes that nearly two-thirds of the United States government’s military spending goes toward the defense of wealthy allied nations in Europe and Asia and has little value for the defense of Americans.8

The distinction between the two meanings of national defense does not only apply when the State engages in foreign conquest, aggression, or intervention. Even during unambiguously defensive wars, the State sacrifices the defense of its subjects to the defense of itself. Such universal war measures as conscription, heavy taxation, rigid economic regulation, and suppression of dissent aggress against the very citizens whom the State is presumably protecting. People believe the State defends their liberty; in fact, they end up surrendering their liberty to defend the State. This is the frequently overlooked cost of the State’s protection captured so aptly in Randolph Bourne’s famous observation: “War is the health of the State.”9

Of course, people may be better off accepting the costs and risks of the State’s protection in order to reduce the risks and costs of foreign conquest. I do not deny the possibility of an incidental relationship between the defense of the State and the defense of the people. But the next section will present theoretical reasons why this relationship is not as common nor as strong as generally supposed. Before doing that, I must fully expose the conceptual gulf between the two meanings of national defense.

Unfortunately, the pervasive doctrine of nationalism obscures this fundamental distinction. Nationalism treats nations as collective entities, applying principles drawn from the analysis of individual interaction to the international level. In a war between two nations, the nationalist model focuses on essentially two parties: nation A and nation B. As in fights between individuals, one of these two nations is the aggressor, whereas the other is the defender. As a result, the model axiomatically equates protecting the State with protecting its subjects.

The basic flaw in the nationalist model is its collectivist premise. Although the model informs many of the formal economic analyses of international relations, it represents a glaring example of the fallacy of composition. Nations consist of two related but distinct elements: the State and its subjects. Democracies are sometimes referred to as “governments of the people,” but this is, at best, rhetorical sloppiness. The State and the people interact, whether under democracies or other forms of government, in important ways that we shall soon explore, but this obvious fact should not confuse us about the inherent difference between a police officer and an ordinary citizen.

Consequently, any conflict between two nations involves not just two parties, but at least four: the State governing nation A, the State governing nation B, the people with the (mis)fortune to live under State A, and the people with the (mis)fortune to live under State B. Whatever the merits of a dispute between State A and B, the dispute need not involve a significant portion of people A or people B.10

Abandoning this collectivist identification of the State with its subjects exposes the critical insight about the national-defense service. If one is truly concerned about defense of peoples’ lives, property, and liberty, then the transfer of their capital city from one location to another is not intrinsically significant. The territory constituting the United States is in a very real sense already conquered—by the United States government. All that is significant is whether transferring the capital city brings the citizens a net loss or gain. The danger is not foreign conquest per se, but the amount of power the conquering State can successfully wield.

In the final analysis, protection from foreign States is not a discrete or unique service. It is a subset of a more general service: protection from any State. Whether we formally label an oppressive State “foreign” or “domestic” becomes a secondary consideration. Although States differ enormously in the amount of domestic power they exercise, they all share certain characteristics. These shared characteristics are more than definitional, and as I hope to show, fatally undermine the public-goods justification for State-provided defense.

Admittedly, the distinction between the two services that go under the name “national defense” has not so far been grounded entirely in an empirical examination of people’s subjective preferences. How can we as economists or historians question the prevailing nationalism, when people do in fact put a high value on the preservation and glorification of their own State? If the service that people desire is protection of the State per se, the State is undoubtedly the best institution for the job.

I do not question the efficacy of the State in providing its own protection. However, my impression is that most people view the State as a production good, a means to other ends, rather than as a pure consumption good, something they value in and of itself. The State does not directly enter their utility functions; instead, people want their government to be powerful relative to other governments basically because they believe that this helps to protect them from foreign States.

If my impression is correct, nationalism becomes something other than a mere subjective preference. It becomes a positive social theory, as legitimately subject to criticism for its policy recommendations as socialism. There is no refuting the socialist who favors central planning for its own sake; but most socialists favor central planning because of positive (and in my opinion, mistaken) theories about its consequences.11

History tentatively reinforces the impression that nationalism rests upon a positive social theory. Prior to the French Revolution, European subjects did not identify strongly with their rulers. Wars were major inconveniences to be avoided if possible while they were going on, but the masses were largely indifferent if the outcome was a change of rulers. Indeed, soldiers and civilians would often enter the service of foreign rulers without being aware that they were doing anything unusual. The spread of modern nationalism coincided with the spread of the novel idea that governments should in some manner benefit their subjects.12

In any case, an examination of people’s subjective preferences would reveal which service or mix of services people desire when they demand national defense.13 A definitive answer is hampered by national defense’s tax funding, which prevents people from revealing their preferences directly and unambiguously. An examination of whether the State is a good institution for protecting people’s lives, property, and liberty, assuming that is what they prefer, is equally legitimate. I am willing to accept the prospect that people may still worship the State, even after discovering that it gives them no real protection.

II

When Paul Samuelson first formalized public-goods theory, it was at a time when many economists unreflectively subscribed to what Harold Demsetz has called the nirvana approach to public theory. Demonstrating some “market failure” with respect to an abstract optimum was considered sufficient to justify State action. Economists assumed that the costless, all-knowing, and benevolent State could simply and easily correct any failure.

Since then, economists have become far more realistic. Public-goods theory has advanced to the point where it is now an exercise in comparative institutions. Demonstrating “market failure” is no longer sufficient. One must compare the market with the State, not as one wishes the State would behave in some ideal realm, but as it must behave in the real world. To justify State action, one must show that the State has the capacity and the incentive to do a better job than the market can do. Can the State provide the public good without costs that exceed the benefits? And is there some incentive structure that would conceivably insure that it do so?14

Economists within the field of public choice have done some of the most important work on the comparative capabilities of the State—by applying public-goods insights to political action itself. They have come to the realization that the free-rider incentive does not only arise for market enterprises. As Mancur Olson has demonstrated, the free-rider incentive can arise for any group, especially political groups wanting to influence State policy. This imparts an inherent public-goods character to all political decisions.15

Assume that one of us wishes to change some State policy that we personally find particularly onerous—for instance, repeal a tax. We are members of a fairly large group that will benefit if the tax is repealed. If enough of us contribute money, time, or other resources to bringing about the tax’s repeal, we will succeed and all be better off. The money we save in taxes will more than reimburse us for our effort. Unfortunately, once the tax is repealed, even those who did not join our campaign will no longer have to pay it. We cannot exclude them from the benefits of the tax’s repeal. They will be free riders on our political efforts.

Just as in the case of a non-excludable good in the market, every potential beneficiary of the tax repeal has an incentive, from the perspective of economic self-interest, to try to be a free rider. If enough of them act according to this incentive, the tax will never be repealed. We can call this result a “political failure,” completely analogous to the “market failure” caused by non-excludability.

Of course, this example grossly oversimplifies the problem. Under a democratic State, people do not directly purchase changes in State policy; they vote for them. Or even more precisely, some of them can vote for representatives who then can vote on and bargain over State policy. If the tax repeal example was completely accurate, nearly every intentional benefit provided by the State would be a pure private good, similar to the current salaries of politicians and bureaucrats. With voting, political entrepreneurs and vote-maximizing firms (which are called political parties) have some incentive to provide us with our tax repeal, even if we do not politically organize, in order to entice us to vote for them.16

This incentive, however, is not very great. First of all, voting itself, unless compulsory, is a public good. An individual must expend time and other resources to vote, but he or she can avoid these expenditures by free riding on the voting of others. Only in the very remote case where the voter anticipates that a single vote will decide the election’s outcome does this incentive to free ride disappear. Consequently, the political entrepreneur must have some reason to expect that we will vote at all. And if we do in fact vote, he must in addition have some reason to expect that the tax repeal, among all the other competing issues, will affect how we vote. Our forming a political organization to repeal the tax gives him reason to believe both these things.17

In short, unorganized groups have some influence upon the policies of a democratic State. But other things being equal, groups which organize and campaign for policies have a significant advantage. That is presumably why they organize and campaign. It strains credulity to suppose that all the people who pour vast sums of money into political lobbying are utterly mistaken in the belief that they thereby gain some leverage on policy. The common observation that special interests have inordinate influence upon a democratic State is without doubt empirically well founded.

Two variables affect the likelihood that a group will overcome the free-rider problem and successfully organize. These variables operate whether the group is trying to attain non-excludable benefits on the market or from the State. The first is the size of the group. The smaller the group, ceteris paribus, the more likely the members are to organize successfully. The larger the group, the more difficult it is to involve enough of them to secure the public good.

The second variable is the difference between the value of the public good to the members of the group and the cost to them. The greater this difference, ceteris paribus, the more likely they are to organize successfully. Indeed, if this difference is great enough, one single member might benefit enough to be willing to pay the entire cost and let all the other members of the group free ride. The smaller this difference, on the other hand, the more essential becomes the contribution of each potential member.18

In short, the democratic State makes it much easier to enact policies that funnel great benefits to small groups than to enact policies that shower small benefits on large groups. Because of this free-rider induced “political failure,” the State has the same problem in providing non-excludable goods and services as the market—with one crucial difference. When a group successfully provides itself a public good through the market, the resources it expends pay directly for the good. In contrast, when a group successfully provides itself a public good through the State, the resources it expends only pay the overhead cost of influencing State policy. The State then finances the public good through taxation or some coercive substitute.

Moreover, the group that campaigned for the State-provided public good will not in all likelihood bear very much of the coerced cost of the good. Otherwise, they would have had no incentive to go through the State, because doing so then costs more in total than simply providing themselves the good voluntarily. Instead, the costs will be widely distributed among the poorly organized large group, who may not benefit at all from the public good.

This makes it possible for organized groups to get the State to provide bogus public goods, goods and services which in fact cost much more than the beneficiaries would be willing to pay even if exclusion were possible and they could not free ride. In this manner, the State generates externalities, and ones that are negative. Rather than overcoming the free-rider problem, the State benefits free loaders, who receive bogus public goods at the expense of the taxpayers. Provision of these goods and services moves the economy away from, not toward, Pareto optimality. When the bogusness of such public goods is obvious enough, economists call them transfers.19

What is the upshot of this “political failure” for national defense? In the case of defending the State itself, we are dealing quite clearly with a service that the State has enormous incentives to provide. If this is a non-excludable good or service at all, then it is a public good that benefits small groups very highly. But in the case of defending the people, we are talking about, in the words of David Friedman, “a public good . . . with a very large public.” The benefits, although potentially great, are dispersed very broadly.20

Thus, to the extent that the free-rider obstacle inhibits market protection of liberty, it raises an even more difficult obstacle to the State over undertaking that vital service. The State has strong incentives to provide national defense that protects itself and its prerogatives, but it has very weak incentives to provide national defense that protects its subjects’ lives, property, and liberty. We can now theoretically understand the common historical divergence between defending the State and defending the people.

Furthermore, there is a perverse inverse relationship between the people’s belief that the State defends them and the reality. To the extent that they accept this nationalistic conclusion, their political resistance against the domestic State’s aggression, however weak because of the existing public-goods problem, decreases further. This is most noticeable during periods of actual warfare. The belief reduces the amount of protection they enjoy, at least against the domestic State.

Nationalism thus results in an ironic and circular paradox. It views the State as a protection agency, but this very view contributes to the State’s literal role as a protection racket. Those who decline to pay for the State’s protection become the State’s victims. This in turn gives the State an incentive to find or create foreign enemies, even when none really exist. For without a foreign threat, the justification for the State’s protection becomes far less persuasive.21

My remarks have thus far been confined to the democratic State. They apply, however, even more strikingly to the undemocratic State, insofar as there is any significant difference between the political dynamics of the two types. For reasons that I will explain in the next section, I actually believe that many economists have over-emphasized the operative significance of formal voting. Both types of States are subject to the influence of groups that marshall resources in order to affect policy. Formal voting merely makes it possible for some changes to manifest themselves faster and less painfully.

But let us for a moment accept the simplistic model of the undemocratic State. Assume that the State’s policies are determined primarily by the whim of a single despot. If he is a benevolent despot, then the defense of his subjects might be high on his agenda. If he is a despot who inhabits the real world, he will be exclusively interested in defending his State and its territorial integrity.

My argument still does not completely rule out the possibility that the State might actually defend its subjects. Whereas the difference between the political dynamics of democratic and undemocratic States is overdrawn, States do differ markedly in the amount of aggression they commit against their own subjects. If we automatically assume that a conquering State can wield as much or more power over foreign populations as it does over its domestic subjects, then a relatively less oppressive State will, in the process of defending itself, provide some protection for its subjects. But this is at best an unintended positive externality.

III

To this point, our conclusions have been somewhat pessimistic, justifying Earl Brubaker’s observation that the free-rider assumption makes economics a dismal science.22 Based on that assumption, neither the market nor the State has much incentive to provide any direct protection of peoples’ lives, property, and liberty. To the extent that historical accident has resulted in marked differences in the power of various States over their own subjects, some such protection might be produced as an unintended externality of the State’s effort to protect its own territorial integrity. But that very effort at self-protection will also have a significant countervailing negative impact on the degree to which the State aggresses against its own subjects.

Attributing a difference to historical accident, however, is simply another way of saying that the difference is unexplained. Not until we explain the marked differences in domestic power of the world’s States will we fully comprehend the relationship between protecting the State and protecting the people.

One naive explanation common among economists is the public-goods theory of the State. This theory rests upon a sharp dichotomy between two types of States, usually democratic and undemocratic. Undemocratic States according to this theory are little better than criminal gangs, run by single despots or small groups of oligarchs for essentially their own personal ends. The subjects of these States suffer under their rulers but can do very little about their plight. Any effort on their part to change the situation, whether through violent revolution or other means, is a public good, caught in the free-rider trap.23

Democratic States, in contrast, are the result of social contracts. According to the public-goods theory of the State, people create democratic States to solve the free-rider problem. At some obscure time in the past, they drew up constitutional rules in which they agreed to be coerced in order to provide public goods for themselves. Over time, because the free-rider problem generates “political failure,” democratic States have a tendency to fall under the influence of special interests. Perhaps better constitutional decision rules could alleviate this decay. Nonetheless, democratic States always retain vestiges of their public-goods origin. That is why they aggress against their own subjects far less than do undemocratic States.24

We do not have to turn to the readily accessible historical evidence to refute this naive theory about the origin of democratic States. The theory’s proponents quite often do not literally believe it. Instead, they view the theory as merely explaining the conceptual nature rather than the concrete origin of the democratic State. Either way, however, the theory has an inner contradiction. Creating a democratic State of this nature is a public good itself. A very large group must in some manner have produced it. Because of the free-rider problem, they have no more incentive to do that than to revolt against an undemocratic State or to provide themselves any other non-excludable benefit.25

A more realistic alternative to the public-goods theory of the State is what we can call the social-consensus theory of the State. All States are legitimized monopolies on coercion. The crucial word is “legitimized.” This legitimization is what differentiates States from mere criminal gangs. Any society in which people refrain from regularly killing each other enjoys some kind of social consensus. No government rules through brute force alone, no matter how undemocratic. Enough of its subjects must accept it as necessary or desirable for its rule to be widely enforced and observed. But the very consensus which legitimizes the State also binds it.26

The social consensus bears little resemblance to the mythical social contract of public-goods theory. Whereas the social contract is generally conceived of as an intentional political agreement, agreed upon explicitly at some specific moment, the social consensus is an unintended societal institution, like language, evolving implicitly over time. Sometimes, the evolution of the social consensus can be very violent. Often, particular individuals or even fairly large groups will strongly disagree with certain features of their society’s consensus. But at all times, members of society are socialized into the consensus in ways that they only dimly grasp, if at all.27

Consider a classroom of average American citizens. Ask for a show of hands on the following question: How many would pay their taxes in full if no penalties resulted from non-payment? Very few would raise their hands; probably only some masochists, ardent statists, and individuals who were not entirely honest. This shows that taxation is involuntary. Then ask the group a second question: How many think taxes are necessary or just? This time, nearly every hand would go up, except those of a few radical libertarians. This shows that taxation is legitimized.28

Of course, one of the reasons Americans generally view taxation as legitimate is because they think it is necessary in order to provide public goods. All this proves, however, is that, although the public-goods theory of the State is utterly worthless as an objective description of the State’s origin or nature, it is very valuable as an ideological rationalization for the State’s legitimization. It performs a function analogous to that performed by the divine right of kings under monarchical States or by Marxist dogma under communist States.

For unlike the public-goods theory of the State, the social-consensus theory applies universally to all States. It predicts that if you conducted the same survey about taxation upon a group of average Russians living within the Soviet Union, or a group of average Iranians living under the Ayatollah (and you could guarantee them complete immunity regardless of how they answered), you would get similar results. These foreign and “evil” undemocratic States are not exogenous and alien institutions imposed on their subjects by sheer terror. They are complex products of the culture, attitudes, preferences, and ideas, whether explicit or implicit, that prevail within their societies.29

The vast ideological and cultural differences among the peoples of the world are what explain the marked differences in the domestic power of their States. The consensual constraints upon States differ in content, but all States face them. The Soviet leaders fully realize this, which is why they devote so many resources to domestic and foreign propaganda. The shifting social consensus also explains the many changes in the form and the power of the State over time. Although professional economists tend to ignore the ideological and cultural components of social dynamics, professional historians give these factors the bulk of their attention.

In the not-so-distant past, the world was entirely in the grip of undemocratic States, which permitted their subjects very little liberty. Democratic States evolved historically from undemocratic States. States that now must tolerate a large degree of liberty emerged from States that did not have to do so. Public-goods theory is in the awkward position of theoretically denying that this could have happened. It raises an across-the-board theoretical obstacle to every conceivable reduction in State power that benefits more than a small group of individuals.30 The social-consensus theory, in contrast, attributes this slow progress, sometimes punctuated with violent revolutions and wars, to ideological changes within the social consensus.

Thus, history is littered with drastic changes in State power and policy that resulted from successful ideological surmounting of the free-rider obstacle. The Minutemen volunteers who fought at Concord Bridge could not even come close to charging all the beneficiaries of their action. They produced tremendous externalities from which Americans are still benefiting today. The abolitionist movement produced such a cascade of positive externalities that chattel slavery—a labor system that was one of the world’s mainstays no less than two hundred years ago, and had been so for millennia—has been rooted out everywhere across the entire globe. I could multiply the examples endlessly.31

Indeed, the existence of any voluntary ethical behavior at all faces a free-rider obstacle. Society is much more prosperous if we all cease to steal and cheat, but the single individual is better off still if everyone else behaves ethically while he or she steals and cheats whenever able to get away with it. Thus, everyone has a powerful personal incentive to free ride on other people’s ethical behavior. If we all succumbed to that incentive, society would be very unpleasant.

We must avoid the mistaken impression that the State’s police forces and courts are what prevents most stealing and cheating. To begin with, the initial creation of such a police and court system (at least under government auspices) is another public good. But far more important, the police and courts are only capable of handling the recalcitrant minority who refuse voluntarily to obey society’s norms. A cursory glance at varying crime rates, over time and across locations, clearly indicates that the total stealing and cheating in society is far from solely a function of the resources devoted to the police and the courts. Certain neighborhoods are less safe, making an equal unit of police protection less effective, because they contain more aspiring ethical free riders. If all members of society or even a substantial fraction became ethical free riders, always stealing and cheating whenever they thought they could get away with it, the police and court system would collapse under the load.32

In short, every humanitarian crusade, every broad-based ideological movement, every widely practiced ethical system, religious and non-religious, is a defiant challenge hurled at the public-goods argument. The steady advance of the human race over the centuries becomes a succession of successful surmounting of the free-rider obstacle. Civilization itself would be totally impossible unless people had somehow solved the public-goods problem, voluntarily.33

IV

Obviously, there is some flaw in public-goods theory. Howard Margolis points out that “no society we know could function” if all its members actually behaved as the free-rider assumption predicts they will. He calls this theoretical failure free-rider “overkill.”34

Despite this flaw, public-goods theory explains a great deal, which is why it remains so popular among economists. It explains why so many eligible voters do not waste their time going to the polls. But it fails to explain why so many of them still do go. (I think an interesting empirical study would be to determine what percentage of economists, who accept public-goods theory, violate their theoretical assumptions about human behavior by voting.) It explains why the progress of civilization has been so painfully slow. But it fails to explain why we observe any progress at all.

Before working out the implications of this theoretical flaw for national defense, let me digress briefly and try to identify it. It must involve some weakness in the theory’s assumption about human behavior. I make no pretensions, however, about being able fully to resolve the weakness. Because this very issue sits at the conjunction of public-goods theory and game theory, it has become one of the most fertile areas of inquiry within economics and political science over the last decade. All I do is modestly offer some tentative thoughts about the sources of the weakness.

Two possibilities suggest themselves. Either people do not consistently pursue the ends that the free-rider assumption predicts they will pursue, or they pursue those ends but using means inconsistent with the assumption. I will take up both of these possibilities in order:

1. Do people consistently pursue their self-interest, as the free-rider assumption defines self-interest? Public-goods theorists have offered, not one, but two motives that should cause a person to behave in accordance with the free-rider assumption. The obvious is narrow economic self-interest. This end does provide a sufficient reason to free ride, but visualizing someone choosing a different end is quite easy. Simple altruism is not the only alternative that will violate this narrow assumption. People may desire social improvements—liberty, justice, peace, etc.—not simply for their material benefits, but as ends in and of themselves, independently present within their utility functions. Patrick Henry may have been engaging in political hyperbole when he exclaimed “Give me liberty or give me death!”, but he was still expressing a willingness to pay more for attaining liberty than its economic returns would cover. Perhaps this willingness should be called ideological altruism; no matter what we call it, it appears to be quite common in human history.35

Mancur Olson is the most prominent public-goods theorist to argue that a second motive beyond narrow economic self-interest justifies the free-rider assumption. And this second motive applies even to the individual with altruistic ends—if the group is large enough. He contends that only rationality in the pursuit of whatever end the individual chooses is strictly necessary. The individual will still choose to free ride, because for a public good requiring a large group his meager contribution will have no perceptible effect on attaining the end.36

I could object that an individual’s contribution to a cause is often not contingent in any way upon the cause’s overall success. Consequently, how much the individual thinks his action will affect the probability of success is often irrelevant. Some people refuse to litter, for instance, fully aware that their refusal will have no perceptible impact on the quantity of litter. Such individuals gain righteous satisfaction from doing what they believe is proper, regardless of its macro-impact. In addition to a sense of righteousness, ideological movements can offer their participants a sense of solidarity, of companionship in a cause, that keeps many loyal no matter how hopeless the cause.37

But this objection concedes far too much to Olson. As philosopher Richard Tuck has cogently pointed out, Olson’s notion of “rationality” if consistently obeyed precludes some everyday activities. It does not just apply to an individual’s contribution to the effort of a large group; it applies just as forcefully to the cumulative actions of a single person on a large individual project. Olson’s “rationality” is simply a modern variant of the ancient philosophical paradox of the Sorites. In one version, the paradox argues that there can never be a heap of stones. One stone does not constitute a heap, nor does the addition of one stone to something that is not already a heap. Therefore, no matter how many stones are added, they will never constitute a heap. (Interestingly enough, in the other direction, this paradox argues that there can never be anything but a heap of stones.)

One more word will not make a perceptible difference in the length of this paper. Because one word makes no difference, I would not have started in the first place if I had adhered to Olson’s “rationality.” One more dollar will not make a perceptible difference in a person’s life savings. One day’s exercise will not make a perceptible difference in a person’s health. If the fact that the individual’s imperceptible contribution goes toward a group rather than an individual effort is what is decisive, then we are simply back again at the motive of narrow self-interest. No doubt, this type of “rationality” does influence some people not to undertake some actions under some circumstances. But just how compelling people find it is demonstrated by the millions who vote in presidential elections, despite the near certainty that the outcome will never be decided by one person’s vote.38

2. Do people pursue their self-interest but in a manner inconsistent with the free-rider assumption? Olson, again, has suggested one way that individuals might effectively organize despite the free-rider obstacle. Groups can link their efforts at achieving non-excludable benefits with excludable by-products. Such by-products include low group-rate insurance and professional journals. The incentive provided by these by-products helps counteract the incentive to be a free rider.39

The most intriguing aspect of the by-product theory is the easy method it offers for providing national defense without a State. The purchase of national defense could be linked to some excludable by-product that everyone wants, such as protection insurance or contract enforcement. Indeed, most of those advocating voluntary funding of national defense have hit upon some such related scheme.40

Unfortunately, this solution is too easy. If the excludable by-product is really what people want, then a competitor who does not link it with the non-excludable good or service can sell it at a lower price. Only if the group has a legal monopoly on marketing its by-product can it really counteract the free-rider incentive. Every really successful example of groups relying upon by-products that Olson discusses involve some sort of legal monopoly. But the groups’ initial attainment of this legal monopoly remains an unexplained surmounting of the public-goods problem.41

Far more promising than the by-product theory for explaining the empirical weakness of the free-rider assumption is some of the recent dynamic analysis being done in game theory. As many scholars have pointed out, the free-rider problem in public-goods theory is identical to the famous Prisoner’s Dilemma in game theory.42

The Prisoner’s Dilemma derives its name from an archetypal situation where two prisoners are being held for some crime. The prosecutor separately proposes the same deal to both prisoners, because he only has sufficient evidence to convict them of a minor crime with a light sentence. Each is told that if he confesses, but the other does not, he will get off free, while the other will suffer the full penalty, unless the other also confesses. If they both confess, they both will be convicted of the more serious crime, although they both will receive some small leniency for confessing. This deal gives each prisoner an incentive independently to confess, because by doing so he individually will be better off regardless of what the other does. Consequently, they both confess, despite the fact that they both collectively would have had much lighter sentences if they both refused to confess.

The public-goods problem is essentially a Prisoner’s Dilemma with many prisoners. I cannot delve into the details here of the recent work, both theoretical and empirical, of such game theorists as Michael Taylor, Russell Hardin, and Robert Axelrod, but essentially they have explored the Prisoner’s Dilemma within a dynamic rather than static setting. Their conclusion: whereas in a static single Prisoner’s Dilemma, cooperation is never rational; in dynamic iterated Prisoner’s Dilemmas, with two or more people, cooperation frequently becomes rational for even the most narrowly self-interested individual. What this exciting work implies is that in many real-world dynamic contexts, ideological altruism or some similar motive beyond narrow self-interest may not be necessary at all to counterbalance the free-rider incentive.43

V

I now arrive finally at my conclusions respecting national defense. We have seen that putting domestic limitations upon the power of the State is a public-goods problem, but nonetheless one that in many historical instances for whatever reason has been solved. We have also seen that national defense, in the sense of protecting the people from a foreign State, is a subset of the general problem of protecting them from any State, domestic or foreign. Consequently, the factors that already provide protection from the domestic State are the very factors which on the market would provide protection from foreign States. To put it concretely, the same social consensus that has voluntarily overcome the free-rider obstacle to protect the United States, one of the most free, if not the most free, nation in the world would voluntarily overcome the free-rider obstacle to protect American freedom from foreign States.

The policy implication of this analysis is, to say the least, very far-reaching. Rather than justifying State provided protection, the fact that national defense is a genuine public good offers a powerful argument for unilaterally disarming the State.44 In current American political discourse, unilateral disarmament has become an emotion-laden term. Radical opponents of current United States military policy are often tainted with the term, although almost none of them actually dare to take that position. So let me be specific about what I mean by unilateral disarmament.45

By “disarmament,” I mean disarmament of the State. Prior to this point, there has been no mention of private protection agencies as alternatives to the State for national defense. The notion of a private agency replacing the United States government’s military establishment seems exotic at first glance. But once we appreciate the equivalence between protection from foreign States and protection from the domestic State, we reach the startling realization that many private protection agencies exist right now. They are the same institutions currently protecting Americans from the United States government’s attempted violations of life, property, and liberty—institutions from the American Civil Liberties Union, at one end of the political spectrum, to the National Rifle Association, at the other. Obviously, these existing private protection agencies might have to change their tactics when confronting a foreign State. Or new agencies might have to arise. But the private sector might very well have to respond similarly if the United States government itself were to undergo some radical transformation, say, from democratic to dictatorial. And in both these instances, non-military methods of protecting liberty might still remain more effective.

If members of the American Civil Liberties Union, the National Rifle Association, and numerous other similar organizations within our society behaved as the public-goods argument predicts, they would all pack up and go home.46 The fact that they do not do so implies that, despite the free-rider problem, more efficient private military alternatives could take the State’s place, if it were disarmed. Thus, a more apt term than “disarmament” for my recommended policy would be “denationalization of defense.”

The word “unilateral” when applied to Cold War disarmament conveys the unfortunate impression that the user prefers a world in which the United States government is disarmed while other States, such as the Soviet Union, remain armed to the teeth. All that I mean by unilateral is that the disarming of one State need not be made conditional upon the disarming of another. I believe this for roughly the same reason that I believe that the elimination of one State’s trade and immigration barriers need not be made conditional upon the elimination of another’s barriers. Thus, a more precise word than “unilateral” is “unconditional.”47

Ideally, I hope for a world in which all States have been disarmed. Although many of the formal economic models of international relations are not very sanguine about this eventuality, this analysis points to two possible shortcomings in such models. First, they are generally built upon a static formulation of the Prisoner’s Dilemma, whereas dynamic formulations are more realistic and more likely to predict cooperation. Second, they generally commit the nationalistic fallacy of composition, ignoring the interactions of the State with its own and foreign populations. Like the public-goods theory they emulate, these models are very good at explaining the cases where disarmament fails. They do not do so well at explaining the cases where disarmament succeeds—as for instance, along the United States-Canada border since 1871.48

It is beyond the scope of this paper to work exhaustively through all the international consequences of the positive relationship between the domestic power of the State and its subjects’ perception of a foreign threat. In general, ideological dynamics create a symbiotic interdependence between hostile States. The dampening of plausible foreign threats should eventually lead to the kind of genuine mutual disarmament that the intuitive, less formal models of the arms race have always suggested. Although an unconditional denationalization of defense would involve the replacement of the State’s military with private alternatives, those alternatives by being divorced from the State would be divorced from the primary means of foreign conquest. Thus, the unconditional disarmament of one State should actually help hasten the day when all the world’s States are disarmed.49

Of course, the denationalization of defense will not make a society invincible. Luxembourg without an armed State could hardly protect itself against the combined forces of a militarized Germany and a militarized France. But then neither could Luxembourg with a fully armed State. The more important comparative question is which institutions in our “imperfect” world would do the best possible job of protecting the lives, property, and liberty of the Luxemborgian people. I believe that the denationalization of defense would not only reduce the likelihood of foreign conquest but also would limit the oppressiveness of conquest when it cannot be prevented altogether.

Most readers will have noticed that I still have failed to address one major problem. Granting that the unconditional denationalization of defense would be beneficial, how is this policy ever to be implemented? The production of disarmament itself is a public good, confronting the same free-rider obstacle that confronts every non-excludable good and service. Should a majority come to endorse this policy, the narrow special interests who benefit from an armed State would still be willing to commit a lot of resources to keeping the State armed.

The solution to this final “political failure” has of course been implicit throughout the analysis. Like all significant gains in the history of civilization, the disarming of the State can only be accomplished by a massive ideological surge that surmounts the free-rider obstacle. But this seeming difficulty only enhances the policy’s attractiveness. By the very act of disarming the domestic State, the people will have forged a tool for protecting themselves from foreign States.50

In conclusion, the public-goods argument fails to justify the State’s protection. Indeed, it utterly fails to explain either the functions or origins of the democratic State at all. Because of the inherent public-goods nature of political action, the State in practice produces very few genuine public goods. The most important public goods in the progress of civilization have been ultimately produced outside the State, either directly, or indirectly through influencing State policy.

The democratic State cannot even take credit for the incidental protection its subjects receive as an externality from its protection of its own prerogatives. The ultimate source of that externality is greater liberty, which is not a gift generously bestowed by the democratic State. Liberty too is a public good, perhaps the most valuable of all. Like any other public good, it must be wrenched from the State through political action. This adds new depth to the cherished maxim: “The price of liberty is eternal vigilance.” The State is not some convenient short-cut for either the production or protection of liberty. Liberty is only secure among a people willing voluntarily to shun the free-rider incentive and to protect it themselves.

Jeffrey Rogers Hummel is publications director at the Independent Institute in San Francisco.

I wish to acknowledge the invaluable assistance of Williamson M. Evers, Joe Fuhrig, and Don Lavoie in working out the themes of this paper and leading me to crucial supporting references. Tyler Cowen, David Friedman, Marshall Fritz, M. L. Rantala, David Ramsay Steele, Richard H. Timberlake, Jr., David J. Theroux, and Lawrence H. White all gave helpful comments on drafts. They do not necessarily share my conclusions, however, and I alone am responsible for any remaining errors. A version of this paper was first delivered at the annual meeting of the Western Economic Association in San Francisco in July, 1986.

The Review of Austrian Economics, Vol. 4, 1990, pp. 88–122

ISSN: 0889–3047

Examples of economists treating national defense as the quintessential public good are so abundant as to be almost not worth citing. Nevertheless, I shall mention a few. Paul A. Samuelson, in his once standard text, Economics, 10th ed., with Peter Temin (New York: McGraw-Hill, 1976), p. 159, refers to “national defense as an example par excellence of public goods.” James M. Buchanan and Marilyn R. Flowers, The Public Finances: An Introductory Textbook, 4th ed. (Homewood, Ill.: Richard D. Irwin, 1975), p. 27, state “[d]efense against external enemies seems to fall squarely within the collective goods category.” John G. Head and Carl S. Shoup, “Public Goods, Private Goods, and Ambiguous Goods,” Economic Journal 79 (September 1969): 567, speak of the “extreme [public-good] cases, such as that of national defense . . .”

Among the few attempts of economists to look in any detail at national defense as a public good are Earl A. Thompson, “Taxation and National Defense,” Journal of Political Economy 82 (July/August 1974): 755–82, and R. Harrison Wagner, “National Defense as a Collective Good” in Craig Liske, et al., William Loehr, and John McCamant, eds., Comparative Public Policy: Issues, Theories, and Methods (New York: John Wiley and Sons, 1975), pp. 199–221. Thompson’s article is a formal attempt to find the most efficient tax structure for national defense, based on the assumption that the need is a function of wealth, and has little in common with my approach. The Wagner article is a utility function analysis of the demand for national defense, and I will have occasion to mention it below.

After national defense, the lighthouse was probably economists’ favorite public good, that is, until Ronald H. Coase, “The Lighthouse in Economics,” Journal of Law and Economics 17 (October 1974): 357–76, demonstrated that historically lighthouses had been privately provided. Despite his demonstration, economists have not completely abandoned this example.

Several economists, however, had anticipated Samuelson. Indeed, Adam Smith, in An Inquiry into the Nature and Causes of the Wealth of Nations (1776; reprint, New York: Random House, 1937), bk. 5, passim., particularly pp. 653–56, 681, presents a brief and crude statement of public-goods theory, giving national defense as an example. The most notable contributions of a largely neglected public-goods tradition among Continental economists were finally collected, translated, and reprinted in Richard A. Musgrave and Alan T. Peacock, eds., Classics in the Theory of Public Finance (London: Macmillan, 1958). See particularly Knut Wicksell, “A New Principle of Just Taxation” (1896), pp. 72–118 and Erik Lindahl, “Just Taxation—A Positive Solution” (1919), pp. 168–76. An English presentation that pre-dated Samuelson’s was by Howard R. Bowen, in “The Interpretation of Voting in the Allocation of Resources,” Quarterly Journal of Economics 58 (November 1943): 27–48, and Toward Social Economy (New York: Rinehart, 1948).

Important further developments in public-goods theory include Paul A. Samuelson, “Aspects of Public Expenditure Theories,” Review of Economics and Statistics 40 (November 1958): 332–38; Richard A. Musgrave, The Theory of Public Finance: A Study in Public Economy (New York: McGraw-Hill, 1959); and William J. Baumol, Welfare Economics and the Theory of the State, 2nd ed. (Cambridge, Mass.: Harvard University Press, 1965).

Samuelson’s initial presentation focused only upon non-rival consumption. The distinction between the two public-goods characteristics was not fully clarified until John G. Head, “Public Goods and Public Policy,” Public Finance 17 (1962): 197–219, reprinted with other of the author’s essays on the same subject in Head, Public Goods and Public Welfare (Durham, N.C.: Duke University Press, 1974), pp. 164–83. The first full text devoted to public goods was James M. Buchanan, The Demand and Supply of Public Goods (Chicago: Rand McNally, 1968), which contains extensive bibliographic references to the previous literature. For a more recent summary of the still sometimes confusing concepts surrounding public goods, see Duncan Snidal, “Public Goods, Property Rights, and Political Organizations,” International Studies Quarterly 23 (December 1979): 532–66.

The public-goods literature is terminologically over-endowed. “Public goods” are also called “collective goods” (Samuelson) and “social goods” (Musgrave). “Non-rival consumption” is also called “joint consumption” (Musgrave), “joint demand” (Samuelson), “joint supply” (Head), “indivisibility” (Buchanan), and “non-exhaustiveness” (Brubaker). Except for the fairly rare “non-marketability,” the variations for “non-excludability”—“non-exclusiveness” and “non-exclusivity”—at least maintain the same root, and although as I note below, “external economies” or “positive externalities” are related, they are still distinct enough to justify a separate term.

Harold Demsetz, “The Private Production of Public Goods,” Journal of Law and Economics 13 (October 1970): 293–306, makes a distinction between the terms “public good” (a good or service exhibiting non-rival consumption) and “collective good” (a good or service exhibiting both non-rival consumption and non-excludability). Perhaps the high-point in obscure public-goods terminology is reached in Carl S. Shoup, Public Finance (Chicago: Aldine, 1969), pp. 66–74, which labels goods with non-rival consumption as “collective-consumption goods” and those with non-excludability as “group-consumption goods.” You can imagine how the poor reader must fare with only the huge difference between “collective” and “group” to navigate him through Shoup’s turgid explanation. Despite all that, Shoup’s treatment is exemplary because he remains the only economist, to my knowledge, not to classify national defense as a public good. Anticipating some of my argument, he puts it in a separate category altogether: “preservation of the nation-state.”

Tyler Cowen, “Public Goods Definitions and Their Institutional Context: A Critique of Public Goods Theory,” Review of Social Economy 43 (April 1985): 53–63, and Snidal, “Public Goods, Property Rights, and Political Organizations,” argue that non-excludability logically implies non-rival consumption. Snidal, however, arrives at this conclusion partially through a definitional sleight of hand. He invents a new term, “noncontrol over exclusion,” which he distinguishes from “nonexclusiveness.” The new term retains, under a slightly different name, an exclusion characteristic that can vary independently of non-rival consumption, whereas the older term becomes synonymous by definition with a public good exhibiting both characteristics.

Many of the early criticisms of Samuelson’s original public-goods articles zeroed in on the polarity of his concept. For instance, see Stephen Enke, “More on the Misuse of Mathematics in Economics: A Rejoinder,” Review of Economics and Statistics 37 (May 1955): 131–33; Julius Margolis, “A Comment on the Pure Theory of Public Expenditure,” ibid. 37 (November 1955): 347–49; and Gerhard Colm, “Comments on Samuelson’s Theory of Public Finance,” ibid. 38 (November 1956): 408–12. Samuelson, himself, admitted this feature in his second article, “Diagrammatic Exposition of a Theory of Public Expenditure.”

The development of a more sophisticated approach can be traced through James M. Buchanan and M. Z. Kafoglis, “A Note on Public Good Supply,” American Economic Review 53 (January 1963): 403–14; Harold Demsetz, “The Exchange and Enforcement of Property Rights,” Journal of Law and Economics 7 (October 1964): 11–26; Jora R. Minasian, “Television Pricing and the Theory of Public Goods,” ibid. 7 (October 1964): 71–80; R. N. McKean and Jora R. Minasian, “On Achieving Pareto Optimality—Regardless of Cost,” Western Economic Journal 5 (December 1966): 14–23; Otto Davis and Andrew Winston, “On the Distinction Between Public and Private Goods,” American Economic Review 57 (Mary 1967): 360–73; E. J. Mishan, “The Relationship Between Joint Products, Collective Goods, and External Effects,” Journal of Political Economy 77 (May/June 1969): 329–48; and Head and Shoup, “Public Goods, Private Goods, and Ambiguous Goods.”

To some extent, this position was anticipated by Earl Brubaker, “Free Ride, Free Revelation, or Golden Rule,” Journal of Law and Economics 18 (April 1975): 147–61. Brubaker argues that what he calls “pre-contract excludability” allows the market in many cases to overcome the free-rider problem. “Pre-contract excludability” involves contractually obligating recipients of the public good to pay on the condition that a specified number of other recipients pay. The entrepreneur does not produce the public good until the requisite number of recipients agree to the contract.

These supposed problems have led some economists to identify non-rival consumption with excludability as a special case of decreasing cost or of economies of scale. See Samuelson, “Aspects of Public Expenditure Theory”; Head, “Public Goods and Public Policy”; and Davis and Winston, “On the Distinction Between Public and Private Goods.” This occasionally leads to the policy suggestion of providing such public goods through legal monopolies rather than through State financing. However, Snidal, “Public Goods, Property Rights, and Political Organizations,” strongly contests this identification by making a sharp distinction between the marginal cost of producing the good or service in the first place and the marginal cost of extending consumption to additional consumers. This distinction is also found in Buchanan’s Demand and Supply of Public Goods, pp. 186–87.

The definitive demonstration of the ability of the market, with discriminatory pricing, to provide non-rival, excludable goods and services is Demsetz, “The Private Production of Public Goods.” This possibility first became dimly appreciated when Carl S. Shoup, “Public Goods and Joint Production,” Rivista internazionale di scienze economiche e commerciali 12 (1965): 254–64, and James M. Buchanan, “Joint Supply, Externality, and Optimality,” Economica (November 1966): 404–15, noticed the analogy between non-rival consumption and the Marshallian concept of joint production, e.g., mutton and wool from a common unit of sheep. Paul A. Samuelson, “Contrast Between Welfare Conditions for Joint Supply and for Public Goods,” Review of Economics and Statistics 51 (February 1969): 26–30, unpersuasively disputed the import of this analogy. Earl A. Thompson, “The Perfectly Competitive Production of Collective Goods,” ibid. 50 (February 1968): 1–12, admitted that discriminatory pricing was possible on the market, but with a faulty model tried to show that the result was over-production of the public good.

John G. Head concludes that the major justification for government intervention, not just in the case of national defense, but in the case of all public goods, “will be found to derive fundamentally from the non-excludability elements rather than from generalized joint supply problems.” See “Public Goods: The Polar Case,” in Richard M. Bird and John G. Head, eds., Modern Fiscal Issues: Essays in Honour of Carl S. Shoup (Toronto: University of Toronto Press, 1972), p. 16.

Thus, Samuelson defined every single case of positive externalities in consumption as a public good. Snidal, “Public Goods, Property Rights, and Political Organizations,” in contrast, articulates the position that I take, and most of the economists cited on public goods in the notes above are closer to me than to Samuelson. Head’s collection, Public Goods and the Public Welfare, pp. 184–213, reprints a useful survey article on externalities, “Externality and Public Policy”; Buchanan’s Demand and Supply of Public Goods, p. 75, offers a brief bibliographic essay on the subject; while Shoup Public Finance, pp. 96–98, and Mishan, “The Relationship Between Joint Products, Collective Goods, and External Effects,” explicitly discuss the relationship between externalities and public goods.

A general substantiation (or refutation) of Bourne’s observation has so far not attracted the professional energies of any historian, perhaps because they feel no need to belabor the obvious. There are lots of studies showing the growth of the State’s power in particular countries during particular wars, but very few that even treat a single country during more than one war, or more than a single country during one war. A few exceptions that have come to my attention include: Clinton Rossiter, Constitutional Dictatorship: Crisis Government in Modern Democracies (Princeton: Princeton University Press, 1948), a comparison of the U.S., Britain, France, and Germany during the twentieth century that concludes that the U.S. has the least bad record; Arthur A. Ekirch, Jr., The Civilian and the Military: A History of the American Antimilitarist Tradition (New York: Oxford University Press, 1956), which is primarily interested in American antimilitarist movements, but in the process gives a sketchy account of war’s impact upon the U.S. government’s power; Robert Higgs, Crisis and Leviathan: Critical Episodes in the Emergence of the Mixed Economy (New York: Oxford University Press, 1987), which also covers the U.S.—during the twentieth century—arguing that the mixed economy is primarily a product of war; and Charles Tilly, ed., The Formation of National States in Western Europe (Princeton: Princeton University Press, 1975), as well as Tilly, “War Making and State Making as Organized Crime,” in Peter B. Evans, Dietrich Rueschemeyer, and Theda Skocpol, eds., Bringing the State Back In (Cambridge: Cambridge University Press, 1985), pp. 169–91, both of which cover the war-related origins of the European nation-States.

The approach in this article to the relationship between positive and normative economics is identical to the wertfrei approach of Ludwig von Mises, as expounded in Theory and History: An Interpretation of Social and Economic Evolution (New Haven, Conn.: Yale University Press, 1957), pp. 26–34, and Human Action: A Treatise on Economics, 3rd. rev. ed. (Chicago: Henry Regnery, 1966), pp. 881–85. See also Murray N. Rothbard, Power and Market: Government and the Economy (Menlo Park, Calif.: Institute for Humane Studies, 1970), pp. 189–96. A quite different formulation of basically the same approach is David Friedman, “Many, Few, One: Social Harmony and the Shrunken Choice Set,” American Economic Review 70 (March 1980): 225–32.

To be completely fair, Samuelson from his first article, “The Pure Theory of Public Expenditure,” on did technically take a positive approach and never insisted that the public-goods “market failure” necessarily justified government intervention. But as Head, in “Public Goods: The Polar Case,” reports: “It is clearly recognized by both Samuelson and Musgrave that political provision for public goods must pose difficult problems. There is, however, a clear implication that the market failure problem is such that the political mechanism could hardly prove inferior” (p. 7). Only in an intemperate reply to Minasian’s “Television Pricing and the Theory of Public Goods,” did Samuelson finally give some prominence to his admission that a public good did not always require State provision. See his “Public Goods and Subscription T.V.: Correction of the Record,” Journal of Law and Economics 7 (October 1964): 81–83.

Of course, in order to determine whether the benefits of State provision of a public good outweigh the costs, one must be able to measure them. But all costs and benefits are ultimately subjective, and only fully revealed through the voluntary actions of individuals. Starting from this radical subjectivist stance, Karl T. Fielding, “Nonexcludability and Government Financing of Public Goods,” Journal of Libertarian Studies 3 (Fall 1979): 293–38, and Barry P. Brownstein, “Pareto Optimality, External Benefits and Public Goods: A Subjectivist Approach,” ibid. 4 (Winter 1980): 93–106, conclude that the State can never do better than the market in providing public goods, even if it wanted to. My argument manages to skirt this thorny theoretical issue by comparing the market and the State with respect to incentives, rather than with respect to costs and benefits. If the State has fewer real-world incentives to provide a public good than the market, the comparative costs and benefits become irrelevant.

Admittedly, there is some ambiguity about which ceteris remain paribus when varying group size. Some scholars have consequently challenged the claim that larger groups have greater difficulty overcoming the free rider incentive. See for instance John Chamberlin, “Provision of Public Goods as a Function of Group Size,” American Political Science Review 68 (June 1974): 707–16. Again, the best resolution of these questions is Hardin, Collective Action, pp. 42–49 and 125–37.

Gordon Tullock has suggested the potential scope of this “political failure,” apparently without fully intending or realizing it, in an intriguing examination of the perfectly corrupt State—a State where all changes in policy are directly purchased. His “Corruption and Anarchy,” in Tullock, ed., Further Explorations in the Theory of Anarchy (Blacksburg, Va.: Center for the Study of Public Choice, 1974), pp. 65–70, concludes that a perfectly corrupt State would generate policies identical to those that would be generated without the State at all. In other words, public goods are no more likely to be produced with the perfectly corrupt State than without it.

Of course, the analysis does not always lead scholars to this extreme position. Tullock himself, in an early article that precociously pre-dated most of the public choice literature, “Some Problems of Majority Voting,” Journal of Political Economy 67 (December 1959): 571–79, reached the more moderate conclusion, which he still apparently holds, that the democratic process merely generates a government budget that is too large. Indeed, Anthony Downs, “Why the Government Budget is Too Small in a Democracy,” World Politics 12 (July 1960): 541–63, turns the analysis around. By focusing on all the genuine public goods that the democratic process has no incentive to produce, he reaches the bizarre conclusion that the democratic State will inevitably be too small.

Incidentally, the inherent public-goods nature of political action fatally undercuts the latest abstraction in public-goods theory: the demand-revealing process. As advanced by Edward H. Clarke, Demand Revelation and the Provision of Public Goods (Cambridge, Mass.: Ballinger, 1980), and Jerry Greene and J. J. Laffont, Incentives in Public Decision-Making (North Holland, The Netherlands: 1979), as well as in numerous journal articles, the demand-revealing process is a proposed voting scheme that links tax payments to votes in such a way as to give people an incentive (1) to vote in the first place and (2) to reveal their true demand-preferences for (or against) various public goods with their votes. Ignoring whether this scheme would work if implemented, we can clearly see that implementing it at all runs afoul of the public-goods obstacle. Without the demand-revealing process in effect already, voters have absolutely no incentive to vote for putting the process into effect.

Although I put the term “legitimization” into my definition of the State, I am not making a purely tautological claim. Not all coercive institutions are called States, and I think the term “legitimization” captures the difference. But if someone should empirically demonstrate that the Soviet State, for instance, is not considered legitimate by a major number of its subjects, then I would modify my definition, rather than deny that the organization ruling over the Russians was a State.

Many other writers have since accepted the social-consensus theory of the State. For instance, see David Hume, “Of the First Principles of Government,” in Essays, Moral, Political, and Literary (1741–42; reprint, London: Oxford University Press, 1963), pp. 29–34. Ludwig von Mises discusses the role of ideas in social consensus in Human Action, pp. 177–90. The description of the social consensus as an unintended institution that evolves implicitly rather than an intended construct that is agreed upon explicitly derives from Friedrich A. Hayek. The implications of social consensus for various kinds of political action are exhaustively explored in Gene Sharp, The Politics of Nonviolent Action (Boston: Porter Sargent, 1973), esp. pt. 1, “Power and Struggle,” although Sharp has a tendency to confound legitimization with mere compliance to the State’s rule.

For a contrasting and ingenious attempt to interpret history as the working out of public-goods theory, rather than as the contradiction of it, see Mancur Olson, The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities (New Haven, Conn.: Yale University Press, 1982). Although this effort is pioneering as far as it goes, it still depends at critical junctures upon historical accidents—wars, revolutions, and conquests—to sweep away the existing distributional coalitions. An even less satisfactory, although still very valuable efforts by economists to account for historical change without reference to people’s ideological preferences but purely on the basis of material factors is Douglass C. North and Robert Paul Thomas, The Rise of the Western World: A New Economic History (New York: Cambridge University Press, 1973).

At least one of those two authors has begun to back away from this a-ideological stance, i.e., North, Structure and Change in Economic History. He states: “Casual everyday observation confirms the ubiquitous existence of the free rider behavior. But casual observation also confirms the immense number of cases where large group action does occur and is a fundamental force for change—action which, however, is simply inexplicable in neoclassical terms. The economic historian who has constructed his model in neoclassical terms has built into it a fundamental contradiction since there is no way for the neoclassical model to account for a good deal of the change we observe in history” (pp. 10–11).

But the most impressive work along these lines is Margolis’s Selfishness, Altruism, and Rationality, which is summarized in his journal article, “A New Model of Rational Choice,” Ethics 91 (January 1981): 265–79. Margolis steps beyond merely noting the ideological and altruistic components in people’s goals; he sets up a very intriguing formal model of human behavior that incorporates group-oriented goals and attempts to test it. His is the first serious attempt to determine when people will choose to free ride and when they will not. My only reservation is with his desire to use his model to resurrect the discredited notion of a bifurcated man: i.e., one whose selfish behavior predominates within the private realm, while his altruistic behavior predominates within the political realm. We observe a close to equal mixture of both motives within both realms.

Daniel Klein, “Private Turnpike Companies of Early America” (unpubl. ms., New York University) examines a historical instance in which what he calls “moral suasion” played a significant role in the provision of a good—roads—that is among the most frequently mentioned examples of a public good. Most of the investors in private turnpike companies in early America lost money, yet they continued to make this investment. Klein persuasively argues that it was not poor forecasting on their part that caused this behavior. They knowingly violated their narrow self-interest in order to provide the community with a public good.

I should note that I attach the adjective “narrow” to the term “self-interest” to indicate the usage that involves seeking particular, usually selfish, goals. This is to distinguish it from the broader usage of the term, which can encompass any goal, including altruism. Whether individuals do in fact pursue their narrow self-interest is a question subject to empirical verification or falsification, but individuals by definition always pursue their broad self-interest.

We can salvage Olsonian “rationality” under two strict conditions. When (1) a threshold level of resources is necessary before any of the public good becomes available whatsoever, and (2) people end up paying whatever resources they contribute, irrespective of whether they reach the threshold or not, it becomes rational not to contribute if a person predicts that the threshold will not be reached. In that special case, he or she would simply be throwing away resources for nothing. Notice that these two conditions apply more frequently to obtaining public goods through politics—which is often a win or lose, all or nothing, situation—than to obtaining public goods on the market. In particular, it applies to voting. Hardin, Collective Action, pp. 55–61, analyzes the first of these conditions, for which he employs the term “step goods.”

About a decade ago, a popular book, Harry Browne’s How I Found Freedom in an Unfree World (New York: Macmillan, 1973), attempted to convince people that among other things they should not try to change society through political action. Browne gave basically two arguments: (1) there are much better ways for people to attain directly the benefits they want (narrow self-interest), and (2) their participation in political action does not change society anyway (Olsonian “rationality”). His book was a best seller, but the fact that he had to write it at all indicates how infrequently these two motives fully govern people’s actions.

I believe this perspective has much to offer. It is more sensitive to the role of legitimization in the power of the State than any of the more conventional perspectives. Nevertheless, my policy proposal departs from this perspective in two very significant features: (1) it envisages military defense organized without a State, whereas non-violent resistance rules out military defense altogether; and (2) it rules out any kind of defense provided by the State, whereas most of the transarmament advocates favor nationalized non-violent resistance. They have no objection to the domestic State employing taxation and in some cases even conscription in order to implement non-violent resistance.

Economic studies of international relations that share these weaknesses include Lee, “The Soviet Economy and the Arms Control Delusion” and Tullock, The Social Dilemma. Most of the economic work in these areas has focused upon alliances. See for instance Mancur Olson, Jr., and Richard Zeckhauser, “Collective Goods, Comparative Advantage, and Alliance Efficiency,” in Roland N. McKean, ed., Issues in Defense Economics (New York: National Bureau of Economic Research, 1967), pp. 25–63.

Tullock is a most egregious example, because on top of other problems his model simplistically assumes that military protection always enjoys increasing returns to scale. He could profit greatly by incorporating some of the insights of Kenneth E. Boulding, Conflict and Defense: A General Theory (New York: Harper and Row, 1962), about the State’s multi-dimensional force gradient, which degrades over distance, or of David Friedman, “A Theory of the Size and Shape of Nations,” Journal of Political Economy 85 (February 1977): 59–77, about the limitations upon a nation’s size arising from the State’s desire to maximize tax revenues.

I might also note that unilateral but total disarmament of the State has the advantage of being, like the total abolition of slavery in the past, a Schelling point, to use the obscure jargon of game theorists, and a particularly prominent Schelling point at that. On the importance of Schelling points to social change see Friedman, “Many, Few, One.” This feature alone gives my policy a far higher probability of ever being practically implemented than something like the demand-revealing process for voting of public-goods theorists. Even trained economists have some difficulty clearly articulating the workings and benefits of the latter.

• 1Historical Statistics of the United States, part 1 (Washington, D.C.: 1975), series D-86 for unemployment rates and series F-32 for gross national product. Throughout this article, the standard data series for unemployment rates are used, with recognition that there has been a challenge to the validity of those data during the Great Depression years. See Michael R. Darby, “Three-and-a-Half Million U.S. Employees Have been Mislaid: Or An Explanation of Unemployment, 1934–1941,” Journal of Political Economy 84, 1976.
• 2A.C. Pigou, Industrial Fluctuations, 1st ed. (London: Macmillan, 1927), p. 176.
• 3A.C. Pigou, Theory of Unemployment (London: Macmillan, 1933), p. 252. Pigou makes his arguments in a variety of other places. For example, see his “Real and Money Wage Rates in Relation to Unemployment,” Economic Journal 47, 1937, and “Money Wages in Relation to Unemployment,” Economic Journal 48, 1938.
• 4It is perhaps something of an exaggeration to ascribe this position entirely to Pigou. A number of other economists espoused similar views. Recognizing that the list is incomplete, we cite a few, beginning with Jacob Viner, Balanced Deflation, Inflation, or more Depression (Minneapolis, Minn.: University of Minnesota Press, 1933), especially pp. 12–13. See also W.H. Beveridge, Causes and Cures of Unemployment (London: Longmans, Green and Co., 1931), p. 25, and Unemployment, A Problem of Industry (London: Longmans, Green and Co., 1930), chapter 16; Wilford I. King, The Causes of Economic Fluctuations (New York: Ronald Press Co., 1938), chapter 8; and Lionel Robbins, The Great Depression (New York: Macmillan, 1934).
• 5John A. Hobson, The Economics of Unemployment (New York: Macmillan, 1923), p. 84.
• 6W.T. Foster and W. Catchings, Profits (Boston: Houghton Mifflin, 1925) and Business Without a Buyer (Boston: Houghton Mifflin, 1927); and C.H. Douglas, Credit-Power and Democracy (London: C. Palmer, 1920) and Warning Democracy (London: C.M. Grieve, 1931). A more recent interpretation of the Great Depression with underconsumptionist overtones in John Kenneth Galbraith, The Great Crash, 1929 (Boston: Houghton Mifflin, 1976).
• 7Murray N. Rothbard, America’s Great Depression (Princeton, N.J.: Van Nostrand, 1963), p. 45.
• 8Henry Ford, The New York Times, November 22, 1929, p. 2.
• 9The New York Times, November 22, 1929, p. 1. It is interesting to note that Hoover’s inclinations toward underconsumptionism were recognized and, of course, approved, by trade unionists. Witness a statement by the AFL’s John P. Frey in 1929 relating to a public works scheme of Hoover’s. In effect, Frey argued that the president was in agreement with the AFL’s position that depressions were the result of underconsumption and low wages. See Joseph Dorfman, The Economic Mind in American Civilization (New York: Viking Press, 1959), vol. 4, pp. 349–50. See also Ronald Radosh, “The Development of the Corporate Ideology of American Labor Leaders, 1914–1933” (doctoral dissertation in history, University of Wisconsin, 1967).
• 10Rothbard, America’s Great Depression, chapter 8. Not to be ignored is the fact that ideas such as those that enamored Hoover were not as unorthodox among professional economists as sometimes claimed. See J. Ronnie Davis, The New Economists and the Old Economists (Ames, Iowa: Iowa State University Press, 1971). Davis presents an interesting array of statements by economists and other academics relating to the issue of the impact of wage reductions on the economy (pp. 94–99).
• 11John M. Keynes, The General Theory of Employment, Interest and Money (London: Macmillan, 1936).
• 12Abba P. Lerner, “Mr. Keynes’ ‘General Theory of Employment, Interest and Money,’” International Labor Review 34, 1936. See also W.B. Reddaway, “The General Theory of Employment, Interest and Money,” Economic Record 12, 1936. A systematic description of the thought of this time is contained in Lawrence R. Klein, The Keynesian Revolution (New York: Macmillan, 1947). For a taxonomic description of the various views of the aggregate demand schedule for labor, see Sidney Weintraub, “A Macroeconomic Approach to the Theory of Wages,” American Economic Review 46, 1956.
• 13Paul M. Sweezy, personal letter to John B. Shelley, dated February 11, 1977, cited in Dana C. Hewins and John B. Shelley, “Sweezy’s Kink: Macro Foundations of a Micro Theory,” Economic Inquiry 17, 1979.
• 14For a description of the various dimensions of the Keynesian critique of classical economics, see Alvin H. Hansen, A Guide to Keynes (New York: McGraw-Hill, 1953). More recent appraisals and restatements of the total thrust of Keynesianism are Abba P. Lerner, “From ‘The Treatise on Money’ to ‘The General Theory,’” Journal of Economic Literature 12, 1974; and Hyman P. Minsky, John Maynard Keynes (New York: Columbia University Press, 1975).
• 15Peter Temin, Did Monetary Forces Cause the Great Depression? (New York: Norton, 1976), p. 140. Temin also attempts to demonstrate that the Great Depression was brought on by an autonomous shift in the consumption function. That view has been challenged (successfully, we think) by Thomas Mayer, “Consumption in the Great Depression,” Journal of Political Economy 86, 1978.
• 16Keynes, The General Theory. In chapter 2, Keynes is very explicit. In reference to the principle that real wages and employment are systematically related, he says, “I am not disputing this vital fact which the classical economists have (rightly) asserted as indefeasible.”
• 17Ludwig von Mises, The Theory of Money and Credit (New Haven, Conn.: Yale University Press, 1953). Permission granted by Mrs. Margit von Mises. Quotes from 1981 Liberty Classics, Indianapolis, edition.
• 18Milton Friedman, “The Role of Monetary Policy,” American Economic Review 58, 1968.
• 19In particular, see Jerome Stein, Monetarist, Keynesian, and New Classical Economics (Cambridge, United Kingdom: B. Blackwell, 1982).
• 20The key assumptions are constant returns to scale and neutral disembodied technical progress.
• 21The underlying statistical models are moderately complex. They are described briefly in the statistical appendix. The logic and structure of the models are more fully developed in Lowell Gallaway and Richard Vedder, The “Natural” Rate of Unemployment, staff study, Subcommittee on Monetary and Fiscal Policy, Joint Economic Committee, Congress of the United States (Washington, D.C.: 1982).
• 22Federal Reserve Bulletin, various issues.
• 23Historical Statistics, series D-86.
• 24The productivity-adjusted real wage rate on a quarterly basis is calculated by dividing the manufacturing wage bill by the product of Federal Reserve Board (not the wage bill) and the index of average labor productivity (not total output) should be used. However, converting the wage bill and the index of industrial production to wage rate and productivity measures involves dividing both of them by the same quantity of labor (L). Since L appears in both the numerator and denominator of the expression for the adjusted real wage rate, it cancels out and can be ignored.
• 25As calculated from Historical Statistics, series D-688.
• 26Ibid,, series D-683 and D-688.
• 27Ibid., series D-724 and Paul A. David and Peter Solar, “A Bicentenary Contribution to the History of the Cost of Living in America” in Paul Uselding, ed., Research in Economic History, vol. 2 (Greenwich, Conn.: JAI Press, 1977), pp. 59–60.
• 28Broadus Mitchell, Depression Decade, vol. 9, The Economic History of the United States (New York: Rinehart, 1947), p. 84; and Arthur Schlesinger, Jr., The Age of Roosevelt: The Crisis of the Old Order, 1919–1933 (Boston: Houghton Mifflin, 1957), p. 249. Interestingly, though, some observers of the period disagree with this assessment. For example, Leo Wolman, Wages in Relation to Economic Recovery (Chicago: 1931) notes, “[I]t is indeed impossible to recall any past depression of similar intensity and duration in which the wages of prosperity were maintained as long as they have been during the depression of 1930–1931.” Similarly, Don Lescohier, “Working Conditions,” vol. 3, History of Labor in the United States, 1896–1932, John R. Commons and Associates, eds. (New York: Macmillan, 1935) states:
• 29Historic Statistics, series D-802, D-813, D-818, and D-824, respectively.
• 30Robbins, The Great Depression, p. 224.
• 31Geoffrey H. Moore, ed., Business Cycle Indicators, vol. 2, Basic Data on Cyclical Indicators (Princeton: Princeton University Press, 1961), p. 129.
• 32Benjamin M. Anderson, Economics and the Public Welfare (New York: Van Nostrand, 1949), p. 72.
• 33Historical Statistics, series D-839.
• 34Anderson, Economics, p. 220.
• 35Without the productivity adjustment, real wages in manufacturing (in 1923 prices) rose from 58.9 cents an hour in December 1929 to 62.5 cents an hour in December 1930. After that, they continued to rise to 66.3 cents an hour in January 1932. Wilford I. King, Causes of Fluctuations, pp. 182–83. See also Sol Shaviro, “Wages and Payroll in the Depression, 1929–1933” (unpublished M.A. essay, Columbia University, 1947).
• 36Milton Friedman and Anna J. Schwartz, A Monetary History of the United States, 1867–1960 (Princeton, N.J.: Princeton University Press, 1963).
• 37U.S. Bureau of the Census, National Income and Product Accounts of the United States, 1929–1976 (Washington, D.C., Department of Commerce, Bureau of Economic Analysis, 1981), p. 308.
• 38Moore, Business Cycle Indicators, p. 106.
• 39Harold Barger, Outlay and Income in the United States, 1921–1938 (New York: National Bureau of Economic Research, 1942), appendix B, table 28. A smaller profit decline is reported in a less comprehensive survey conducted by the Federal Reserve Bank of New York. See Irving Fisher, Booms and Depressions: Some First Principles (New York: Adelphi, 1932), p. 98.
• 40Robbins, The Great Depression, p. 205. The data were originally published in Commercial and Financial Chronicle.
• 41This is based on the Standard and Poor’s index, which fell 32.9 percent from September to November 1929. The second decline actually began in April 1930. A similar pattern is observed using the Dow-Jones index, which fell 39.7 percent from April to December 1930, compared to 37.0 percent from September to November 1929. The recovery in stock prices after November 1929 was robust; the April 1930 Dow-Jones index was the eleventh highest recorded in history, exceeded only in the first ten months of 1929. See Moore, Cyclical Indicators, pp. 108–9.
• 42Ben Bernanke, “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression,” American Economic Review, June 1983, p. 261.
• 43Ibid., p. 262.
• 44Federal debt declined about $700 million in both 1929 and 1930, but rose more than $600 million in 1931. See Historical Statistics, series Y-493.
• 45If one uses the consumer price index to measure price changes, real interest rates on bank loans in 1929 averaged about 6 percent, rising to about 7.7 percent in 1930, and to about 13 percent in 1931. This is based solely on current year price changes. A real interest rate model using weighted averages of past price changes would show a smaller rise. Interest rate data are based on Federal Reserve System reports. See Moore, Cyclical Indicators, p. 154.
• 46Historical Statistics, series F-54.
• 47Friedman and Schwartz, A Monetary History, table A-1, pp. 712–13.
• 48Ibid., table B-3, p. 803.
• 49Ibid. The deposit/currency ratio fell from 11.57 in October 1929, to 4.44 in March 1933, a decline of 7.13 points, with 3.87 points (54 percent) of that decline occurring between October 1930 and October 1931.
• 50Ibid., pp. 308–13.