Rothbard's Underappreciated Contributions to Public Goods Analysis
Listen to the Audio Mises Wire version of this article.
One of the primary justifications given for state provision of a good or service is that it is a “public good,” meaning that it is sufficiently costly to exclude nonpayers from enjoying the good and that one person’s enjoyment of the good doesn’t interfere with anyone else’s. Provision of such goods through voluntary means is considered to be either impossible or, at the very least, inefficient compared to state provision. Rational individuals will choose to free ride by enjoying the good without paying for it. As a result, market provision of the good will result in underproduction, because any business providing such a good will produce a quantity in which marginal revenue equals marginal cost, but marginal cost will be unequal to marginal benefit. Furthermore, if the provider were to contract with all beneficiaries to get them to agree to pay before the good is produced, the transaction costs would still be prohibitive. As such, the state would be a more efficient mechanism of provision, as it can force all beneficiaries to pay for the public good, thus overcoming the free rider problem.
Rothbard rejected this analysis, denying that the state is capable of providing goods more optimally through coercion than are freely acting individuals through voluntary means (Rothbard 1956, 1961, 1962). Individuals voluntarily organize and contribute to all kinds of activities on the market, including common projects that benefit more people than the contributors themselves, i.e., which generate “positive externalities.”
Critics of Rothbard have consistently misread and misunderstood him, be they defenders of public choice economics (Frech 1973) or mainstream neoclassical economics (Caplan 1999). The majority of economists, to their detriment, sadly live in complete ignorance of Rothbard’s contributions in the field of public goods theory.
Robert Lawson and J.R. Clark (2017, 136), in a paper in the Review of Austrian Economics, have taken on the Rothbardian position and accused him of being a “public goods denier” and “intellectually sloppy” for “ridiculing” the ideas of public goods and externalities. Although they acknowledge that “we should take seriously the … Misesian and Hayekian concerns about the limits of knowledge in the absence of market price signals,” (137) anyone who fully appreciated these concerns would not dismiss Rothbard so quickly.
Lawson and Clark present two scenarios of public goods and externalities where individuals who want some good are collectively willing to pay more than would be needed for its provision. In their first example, the inhabitants of a city are collectively willing to pay more than would be needed for the construction of a public park. In the second scenario, a group of hobby astronomers are ready to pay more than is needed to get the rest of the city’s residents to turn their lights down to enable stargazing.
Based on the problems of free riders and transaction costs, the market fails to produce these desired goods. Fortunately, the state is able to tax free riders and make these trades happen. The fact that some people may not value these goods at all is no problem, because “so long as the total willingness to pay by the community exceeds the cost of construction, it is possible to design a system of taxes in which every single person is better off” (Lawson and Clark 2017, 134).
But this is purely an exercise in assuming the problem away. How, precisely, do economists know that individuals have a higher willingness to pay than they demonstrate in action? Rothbard (1962, 1036) states that they don’t—they simply substitute their own ethical views for those of the soon-to-be-mugged taxpayers and then clothe their views
in the “scientific” opinion that, in these cases, free-market action is no longer optimal, but should be brought back into optimality by corrective State action. Such a view completely misconceives the way in which economic science asserts that free-market action is ever optimal. It is optimal, not from the standpoint of the personal ethical views of an economist, but from the standpoint of the free, voluntary actions of all participants and in satisfying the freely expressed needs of the consumers.
The assertion that “tax-financed public goods can make us all, literally each and every one of us, better off” (Lawson and Clark 2017, 134) is just that: an assertion. Lawson and Clark are assuming what cannot be known except through the voluntary actions of individuals in the free market. There is no scientific way to demonstrate that people are made better off through taxation and state provision of goods.
Lawson and Clark say their argument is that private firms will underproduce public goods. But how can they know if a good is underproduced? How can they tell the difference between a situation in which individuals are unwilling to pay for more of a good versus one in which they would be willing to pay but don’t because of transaction costs? Even if people are unwilling to undertake a project because of the transaction costs involved, this simply demonstrates that the value to them of the project is lower than their opportunity costs. Economic science cannot demonstrate that a good is “underproduced,” which is why Rothbard states that economists claiming that state production or subsidization of goods would improve welfare are not doing so based in science. They are simply smuggling their own preferences into their supposedly value-free analysis under the cover of “public goods.” Rothbard reminds us that we cannot assume a can opener; in this case, we cannot assume to know individuals’ actual willingness to pay.
Unfortunately, Rothbard’s contributions in this matter are either ignored or misunderstood by many who would consider themselves free market economists yet accept the standard neoclassical treatment of public goods and the possibility of state intervention leading to Pareto improvements. They ignore the simple truth that the mere possibility of a tax-financed provision of public goods that makes “us all, literally each and every one of us, better off” is as much an argument for state intervention as the mere possibility of winning the jackpot is an argument for throwing coins into a gambling machine. You might personally prefer to do it for the kick of it, but do not expect to win. In fact, Lawson and Clark have it completely backwards. If the mutually beneficial provision of public goods is possible, there is no need for the state. In fact, unlike the gambler, who can at least tell if his winnings exceed his losses (and whether the pleasure of the game exceeds the loss of money), there is no way for the public goods–providing interventionists to know if the goods are valued more or less than the cost imposed on the public. Public goods analysis, if it is to be scientific, has to set out from Rothbard’s strictures.