Global Development And Environment Institute
Tufts University
Medford, MA 02155
http://ase.tufts.edu/gdae
A GDAE Teaching Module on Social and Environmental Issues in Economics
By June Sekera
Public Goods
in Everyday Life
Copyright © June Sekera
Reproduced by permission. Copyright release is hereby granted for instructors to copy this
module for instructional purposes.
Students may also download the reading directly from https://ase.tufts.edu/gdae
Comments and feedback from course use are welcomed:
Global Development And Environment Institute
Tufts University
Somerville, MA 02144
http://ase.tufts.edu/gdae
E-mail: gdae@tufts.edu
PUBLIC GOODS IN EVERYDAY LIFE
2
“The history of civilization is a history of public goods... The more complex the
civilization the greater the number of public goods that needed to be provided.
Ours is far and away the most complex civilization humanity has ever developed.
So its need for public goods – and goods with public goods aspects, such as
education and health – is extraordinarily large. The institutions that have
historically provided public goods are states. But it is unclear whether today’s
states can – or will be allowed to – provide the goods we now demand.”
1
-Martin Wolf, Financial Times
1
Martin Wolf, “The World’s Hunger for Public Goods”, Financial Times, January 24, 2012.
PUBLIC GOODS IN EVERYDAY LIFE
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TABLE OF CONTENTS
1. INTRODUCTION .........................................................................................................4
1.1 TEACHING OBJECTIVES: ...................................................................................................................... 4
2. SESSION 1: WHAT ARE PUBLIC GOODS? ...........................................................4
2.1 DEFINING PUBLIC GOODS .................................................................................................................... 4
2.2 TYPES OF PUBLIC GOODS .................................................................................................................... 5
2.3 THE INVISIBILITY OF PUBLIC GOODS .................................................................................................. 6
3. SESSION 2: SOME CHARACTERISTICS OF PUBLIC GOODS .........................7
3.1 PUBLIC GOODS VS NATURAL GOODS .................................................................................................. 7
3.2 PUBLIC GOODS VARY OVER TIME AND BY PLACE............................................................................ 10
3.3 EDUCATION: “THE SOCIALIZATION OF AN INDUSTRY” ..................................................................... 10
3.4 PUBLIC GOODS VS “THE COMMONS”................................................................................................. 11
4. SESSION 3: HOW ARE PUBLIC GOODS CREATED AND PAID FOR? .........11
4.1 INTRODUCTION .................................................................................................................................. 11
4.2 COLLECTIVE CHOICE ......................................................................................................................... 13
4.4 OPTIONAL SECTION: PUBLIC SECTOR EFFICIENCY ........................................................................... 16
Efficiencies of the public system ......................................................................................................... 16
5. SESSION 4: PUBLIC GOODS AND DEMOCRACY .............................................17
5.1 RULE OF LAW .................................................................................................................................... 17
5.2 THE POLITY AND SOVEREIGNTY ....................................................................................................... 19
Polity ................................................................................................................................................... 20
Sovereignty .......................................................................................................................................... 20
6. SESSION 5: CAPSTONE EXERCISE ......................................................................24
6.1 PUBLIC GOODS AND GRAND CHALLENGES ....................................................................................... 24
7. REFERENCES ............................................................................................................26
8. APPENDIX 1 ................................................................................................................28
OPTIONAL STUDENT EXERCISE: A DAY IN YOUR LIFE ........................................................................... 28
9. APPENDIX 2 ................................................................................................................29
9.1 THE MID-20
TH
CENTURY DEFINITION OF PUBLIC GOODS ................................................................. 29
9.2 CRITIQUES OF THE STANDARD DEFINITION ...................................................................................... 31
9.3 PLURALIST COMMENTARY ................................................................................................................ 32
9.4 CONCLUSION ...................................................................................................................................... 34
10. APPENDIX 3 ..............................................................................................................35
10.1 LOOKING BACK- A BRIEF HISTORY OF PUBLIC GOODS .................................................................. 35
10.2 WHERE DID THE ECONOMICS TEXTBOOK DEFINITION OF PUBLIC GOODS COME FROM? ................. 36
PUBLIC GOODS IN EVERYDAY LIFE
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1. INTRODUCTION
This teaching module offers a framework for understanding “public goods” as a concept in
economics and as real-world goods and services. The framework draws on and builds forward
from “historical school” public economics theory, which has been lost to mainstream economics
teaching. In the approach presented here, concepts are empirically-based and contemporary.
Pivotal ideas are connected to 21
st
century real-world evidence and challenges. The module
provides a pragmatic understanding of public goods, enabling students with or without a
background in economics to consider and appreciate public goods in the context of their daily
lives. The module is suitable for use in courses in economics, sociology, political science, public
law, social history and related fields.
1.1 Teaching Objectives:
• Students will arrive at a clear idea of the nature, source and construction of public goods
from a functional economic systems perspective.
• Students will comprehend the impact of public goods on their daily lives.
• Students will be able to use pivotal public goods concepts to think about ways to address
real-world collective needs and public policy.
The module is designed as a teaching tool for classroom use. It contains five classroom sessions
with optional sub-sections. Appendices contain an optional student exercise, and a brief history of
the development of the concept of public goods in economics. The module and its sub-sections
can be adopted in whole or in part.
The format is designed to be interactive and accessible, with diagrams, text boxes, discussion
questions and illustrations to help students grasp concepts and applications. It is interlaced with
exercises that take students from identifying public goods in their daily lives to a capstone
challenge asking students to apply what they have learned to real-world issues.
2. SESSION 1: WHAT ARE PUBLIC GOODS?
2.1 Defining Public Goods
The topic of this module is “public goods” - both in concept and concretely in daily life. Public
goods are “...things [that] do not lend themselves to [private] production, purchase and sale. They
must be provided for everyone if they are to be provided for anyone, and they must be paid for
collectively or they cannot be had at all.”
2
This definition, by John K. Galbraith, is similar but not
identical to other definitions that are put forward in economic theory.
Definitions matter, as you will see; if health care, libraries, schools, roadways, and drinking water
are considered to be public goods they will be produced by governments. If they are considered to
2
John Kenneth Galbraith, The Affluent Society, 1958, p 111.
PUBLIC GOODS IN EVERYDAY LIFE
5
be private goods, they will be produced by private, for-profit actors and made available through
markets. This means that those who can pay the price will have access to these things, and those
who cannot pay will not get them. We will look at some other ways of defining public goods, and
consider the consequences of using different definitions.
Public goods are produced by public sector agents – government agencies, public authorities,
public universities, etc. – not by businesses, civil society, NGOs, households or individuals. Goods
produced by such entities that may be enjoyed by the public can be called “social goods” but they
are not public goods. The distinguishing characteristics of public goods are that they are created
through collective choice (voting) and are paid for collectively (public financing).
Public goods:
1. Are created to meet identified societal needs. (Why).
2. Are produced by collective choice and shared costs. (How).
Public goods area produced to meet societal needs
From a functional perspective, public goods are created to serve a public purpose. That
fundamental purpose is to meet the unmet needs of a society:
• To create society-wide benefits deemed essential by a polity (i.e. a form of civil
government) for its functioning, improvement or survival –
o making basic necessities accessible to all regardless of ability to pay;
o creating assets or opportunities to aid, improve or benefit the society in general.
• To solve socially or technologically complex common-need problems.
• To enable private production to operate effectively for the society.
Public goods meet a multitude of needs and pervade our lives. They include clean air, clean water,
police and fire protection, street lights, emergency call service, disaster relief, a legal system, food
and drug safety, research and development to mitigate climate change, children’s playgrounds and
bank deposit insurance. These are but a few of the scores of goods and services that we use or
benefit from every day.
2.2 Types of Public Goods
Government produces an enormous variety of public goods, which can be grouped into categories.
Categorizing public goods is an art, not a science. We will use the following categories of public
goods:
• products
• services
• benefits
• standards
• rights
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The chart below organizes examples of public goods into these over-arching categories. (Note:
there are many more public goods; the ones in the right-hand column are merely illustrative.)
Public Goods
Category
Explanation
A few examples
Products
tangible products
street lighting; sidewalks; roads; clean water; parks; playgrounds;
currency; GPS satellites & communications infrastructure; nautical
navigation markers; bridges; dams; canals; airports; shipping ports;
etc.
Services
intangible
products
GPS, weather forecasting; emergency call service; disaster
response/relief; education; food safety inspections; patent system;
enterprise and socioeconomic data collection and dissemination;
copyright protection and copyright enforcement; innovation through
basic R&D investments; legal / judicial system; infrastructure
maintenance and repair; etc.
Benefits
economic
insurance and
other protections
unemployment insurance; old age, survivors and disability
insurance; pension insurance; bank deposit insurance, etc.
Standards
operating rules
& regulations
that afford
protections &
other benefits
air quality standards; water quality standards; drug safety standards;
product safety standards; emissions regulations; food nutritional
labeling; workplace safety protections; banking regulation; food
safety; etc.
Rights
legally
enforceable
entitlements
free speech, property ownership and protection, legal representation,
non-discrimination
Additional Resources
• Optional Student Discussion: Think of more examples of public goods that meet each
of the societal needs listed on page 5 above.
• More Examples of Public Goods: See many more examples of public goods at the
Public Goods Post.
• Video: Students watch “The Bus is Cool”.
2.3 The Invisibility of Public Goods
Invisibility is a key characteristic of many public goods. Here are some of the things that public
goods accomplish, but that are invisible or unrecognized:
PUBLIC GOODS IN EVERYDAY LIFE
7
• food poisonings avoided;
• epidemics that don’t arise or spread;
• plane crashes that don’t occur (each day, in the US alone, there are 60,000 safe plane
landings with 2.6 million passengers);
• car crash injuries and deaths that don’t occur;
• savings that are not lost because bank accounts have been publicly insured.
What could be done about the invisibility problem?
3. SESSION 2: SOME CHARACTERISTICS OF PUBLIC GOODS
3.1 Public Goods vs Natural Goods
Public goods are created by human effort, as contrasted with “natural goods.” Air, water and land
are natural goods. Air is a natural good; clean air is a public good. Land is a natural good; national
parks are public goods. Some public goods (like standards, regulations and land preservation) are
created to protect and preserve natural goods or to make essential resources, like water and air,
available or suitable for human consumption.
PUBLIC GOODS IN EVERYDAY LIFE
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Student Exercise: Distinguishing Natural Goods and Public Goods
Definitions to use in this exercise:
• Natural goods: resources that are found in the environment and in the
natural world and are not produced by humankind.
• Public goods: services and products created by human action that
preserve and protect natural goods or make essential resources, like
water and air, available or suitable for human consumption or other
uses.
In the table below put a checkmark to indicate which category each item falls into based on
the definition given above.
Student Exercise Instructor Notes
This exercise is intended to help students distinguish between resources that are found in
nature versus those that are produced by human actions. Based on the explanation given,
students will distinguish between natural goods and public goods listed in the table below.
Questions are provided for a class discussion following the exercise. A homework reading
assignment provides an example to illustrate the interplay between public goods and
natural goods.
PUBLIC GOODS IN EVERYDAY LIFE
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Items
a public good
a natural good
Ocean
City streets
Rivers
Canals
Disaster relief
Redwood trees
National parks
Clean air
Currency system
A river that catches fire
A river whose water has been
cleaned up
GPS
Oil and gas reservoirs
underground
Thermal energy
Streetlights
Lighthouse
Minerals in the ground
Interstate highway
Aquifers
Regulations to preserve the water
in aquifers
Below is a reading that illustrates the interplay of public goods and natural goods. The story
narrates how a natural good – water – is preserved, maintained and made available to supply a
basic need in our daily lives. In this example the public goods are both the potable (drinkable)
water that is produced and the infrastructure that is used to produce it and deliver it to the public.
Homework Reading Assignment:
• “How New York Gets Its Water,” New York Times
Class Discussion
Think about a situation or case in your hometown that illustrates the idea of public
goods and natural goods and the role of both in your personal life.
• What are some examples of public goods protecting natural goods?
• What are some examples of failure to protect natural goods? What could be
done by citizens, through government, to protect them?
▪ Explain the reasoning behind your thinking.
PUBLIC GOODS IN EVERYDAY LIFE
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Questions to Think About:
• New York City’s water comes from a “municipal” water agency, meaning that it is owned
and operated by the public (government). However, in other cities and towns, water is often
supplied by private companies that are regulated by the government. How is does a
community or a city decide whether to have its potable water produced by a private for-
profit business or by a government agency?
• Municipal water agencies charge fees to the households that receive their water.
Households pay monthly water bills. So, financing is not simply paid by taxes. However,
it is possible that municipal water agencies in some towns and cities do not charge their
customers “full freight” – the true, total cost of providing potable water. Plus, there are
many costs for providing potable water that are paid for collectively, like promulgation and
enforcement of water quality standards by the federal Environmental Protection Agency
and state environmental protection agencies. Can you think of any other costs of providing
potable water that are paid for collectively?
3.2. Public Goods Vary Over Time and by Place
Public goods vary over time and by place. They typically evolve from market to non-market
production, so they vary over time. For example, residential fire service was once a business run
for profit; schools were available only to those who could pay, and street lighting was purchased
by wealthy pedestrians from lamp carriers.
Public goods also vary by place: things that are public goods in one country may not be so in
another. Health care for all has long been a public good in many European countries, Canada and
elsewhere, but not in the U.S. Education is “free” for all in many countries, but in some countries
parents must pay individually for their children to be educated.
3.3. Education: “The Socialization of an Industry”
Professor David A. Moss at the Harvard Business School has pointed
out that the creation of public education in the United States in the
19
th
century “represented a radical development at the time, the virtual
socialization of an industry.”
In an interview published in Harvard Magazine
3
, Professor Moss
explained that in the mid-19
th
century there was a “strong push…for
free public education at the state level (financed by taxes rather than
private tuition charges.) This represented a radical development at the
time, the virtual socialization of an industry. It was enormously
controversial. Ultimately, though, the rise of public education
3
David Moss, quoted in Harvard Magazine, “Can America Compete?”, Sept.-Oct. 2012, p 42.
PUBLIC GOODS IN EVERYDAY LIFE
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constituted a powerful competitive advantage because it moved the United States far ahead of most
other countries in terms of education and human capital development.”
3.4 Public Goods vs “the Commons”
Public goods are not the same as “the commons”. Resources and amenities that are open to all,
such as the oceans and the atmosphere, are sometimes referred to as “the commons”. While these
resources are natural goods, there is an important relationship to public goods: the legal structure
that protects the commons is a public good. This includes, for example, laws that prohibit dumping
of pollutants into the oceans or atmosphere.
4. SESSION 3: HOW ARE PUBLIC GOODS CREATED AND PAID FOR?
4.1 Introduction
You can go to a store or order online and buy a toaster or an electric drill or some shoes but you
can’t go to a store or go online and buy some clean air or food safety.
How do you get clean air? Safe foods? Public parks? Bridges? Freeways? Weather forecasting?
Disaster relief? Emergency call service? public beaches?
Things can be provided by either the market system or the public economy system (or by you or
your family personally, like when you make a toy robot, knit a sweater or cook dinner, or when
Class Discussion
Think about public goods in your country and in other countries, now and in the
past.
1. What are some other things that are now public goods in your country but once
were not?
2. Can you think of some things that are public goods in your country but not in
others?
Student Exercise Instructor Notes
This exercise is meant to be an interactive class discussion. Students should be
encouraged to think globally when answering the questions above. The exercise is
meant to help students comprehend how public goods are creations of social forces in
different countries at different times. Students will think not only about their country
but also other countries and cultures around the world.
PUBLIC GOODS IN EVERYDAY LIFE
12
your sister drives you to school; but that’s another story – about the “core economy”
4
).
The market system – for-profit businesses – produces lots of things we use every day like clothing
and tooth brushes and meals at restaurants. But other things can’t be produced the by market
system because in that system each producing company must make a profit in order to survive.
Clean air, disaster relief and weather forecasting infrastructure are examples of products and
services that businesses can’t make a profit from if those products are to be provided to everyone.
Some products and services can only be produced collectively. But, someone must produce them
and someone must pay for their production. So who produces them, and how are they paid for?
We can answer these questions by following the leads given to us by 19
th
and early 20
th
century
thinkers about public goods and the public economy, and by looking at the works of Marc Wuyts,
John K. Galbraith and others. (See Appendix 2).
And we can also look to more recent guidance:
“Is Health Care a Right?”
That was the title of a 2017 essay by Atul Gawande
5
. It’s
a thought-provoking article, with a number of crucial
nuggets. Gawande points out that some feel that people
have a right to health care. But he then poses the question
“Do people have a right to trash pickup?” This gets to
his central message: “the key point [is] that these
necessities can be provided only through collective
effort and shared cost.”
Public administration scholars Stewart Ranson and John Stewart have argued that public goods
and services “are provided following a collective choice and financed by collective funds.”
6
Indeed, empirically, those are the two chief forces, in addition to public purpose, that drive the
production of public goods.
4
Economist Neva Goodwin originated the term “core economy” to refer to the productive activities of households
and communities.
5
Gawande, 2017, pp 48-55.
6
Ranson and Stewart, 1994, p. 55.
“these necessities
can be provided only
through collective
effort and shared
cost.”
Public goods are created by human effort
through collective action.
The costs are shared by everybody in the polity.
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In Summary
Public goods are:
• created through collective choice (voting by members of a polity);
• paid for collectively (via taxes or other public finance methods);
• supplied without charge (or below cost
7
) to recipients.
In the next two sections we will look more closely at the concepts of collective choice and
collective finance.
4.2 Collective Choice
In democratic nation-states
8
, collective choice through the election process is the generator of
public products. Public products are not created in response to market “demand.” Instead, a variety
of products – goods, services, benefits, protections, standards – originate from the complex
decision-making dynamics of collective choice and collective financing, in contrast to the “supply
and demand” dynamic of the market environment.
Collective choice is not merely an “aggregation” of individual choices. In 2002 public
management scholar John Alford added an important clarification that “collective choice is a
mediated process because it is articulated through the channels of representative government.” His
elaboration on the mediated nature of this process gives a sense of the profound complexity of the
public sector:
This collective choice is not simply an aggregation of the preferences of individual
citizens. Such an aggregation would be very difficult to achieve because each
citizen has different wants and aspirations. Collective choices, therefore, are
necessarily the outcome of political interaction and deliberation, in which citizens
or their representatives engage with each other in advocacy, debate, and
negotiation. Sometimes these processes manage to reconcile conflicts or identify
7
See definition of “prices that are not economically significant” in NIPA handbook: Bureau of Economic Analysis,
Concepts and Methods of the U.S. National Income and Product Accounts, November 2017.
8
We use the term “nation-state” rather than “nation” in order to denote the connection to the concepts of “polity” and
“sovereign,” discussed in Section 5.
Key Concept
COLLECTIVE CHOICE: VOTING
Key Concepts
COLLECTIVE CHOICE
COLLECTIVE FINANCE
PUBLIC GOODS IN EVERYDAY LIFE
14
convergent interests, but often they do not. When they don’t the political process
follows some procedure, usually enshrined in a constitution, for arriving at
authoritative determination…
9
Collective choice is achieved through a process with the following attributes
10
:
• it is carried out via a procedure established by a polity;
• it represents aggregated individual preferences (values, needs and wants);
• it is expressed following a process of argumentation, disputation and contention;
• it is intermediated by elected representatives (except for referenda,
which are aggregated but un-intermediated).
4.3. Collective Financing
Standard economics courses teach how individual
buyers “maximize their utility” and individually pay
for things they want. And individual payment is
fundamental to the market not only in theory; it’s
also true in reality. Importantly, in the real-world
market economy, access to products and services is
contingent on ability to pay.
In contrast, in the public economy system the cost of
production is shared: financing must be collective in order for the system to work. Public goods
are paid from the aggregate wealth of the polity (the civil government). This how we “share costs”.
Paying “collectively” means that there has to be some sort of financing system. Public goods
financing systems include taxes, public bonds and money creation.
11
Public goods are not paid for
at the point of receipt or usage. Sometimes there are fees, for example for national park entry, but
the fees do not cover the full cost of providing that product or service.
9
Alford, 2002, p. 339.
10
Ranson and Stewart, 1989, 1994; Sen 2017; Gutmann 1987; Musgrave in Desmarais-Tremblay, 2013, 2017; Alford
2002.
11
Even though taxes are conventionally considered the source of revenue for government financing, Modern Monetary
Theory (MMT) holds that taxes technically do not “pay for” government services and products, but rather that money
creation by government precedes payment of taxes. However, it is not necessary to delve into the intricacies of MMT
for purposes here.
In the market economy
access to products and
services is contingent
on ability to pay.
Key Concept
COLLECTIVE FINANCE
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15
Public goods are created to meet a need, not to produce
revenue or profit. Fees, if any, do not – and are not supposed
to – cover the full cost of production. In the technical
terminology of the Bureau of Economic Analysis, public
goods are “supplied for free or at prices that are not
economically significant.”
12
The UK’s National Health
Service, an example of a public good, is said to be “free at the
point of delivery” or “free at the point of use”.
Non-market production is systemically not intended to yield income or profit. Imposing a goal of
revenue-raising to cover the costs of production not only displaces public purpose, it also
destabilizes and disables the system and ultimately renders it incapable of meeting collective
needs. Simply put, you can’t impose revenue-raising as a goal and still expect the system to work
for everyone.
13
12
See definition of “prices that are not economically significant” in NIPA handbook: Bureau of Economic Analysis,
Concepts and Methods of the U.S. National Income and Product Accounts, November 2017.
13
Any fees that may be paid by users are not, or should not be, intended to cover the costs of production. The only
justification to make revenue-raising a goal is to raise money to cross-subsidize the supply of other public goods.
Public goods are
paid from the
aggregate wealth
of the polity.
Class Discussion
Paying for Streets: Should cities and towns charge for each use of a street?
An article in The Economist (June 23, 2018) talked about how public transit is “ailing” in
many cities. The article discusses various options for people to get around in cities such as
public transportation, personal cars, cycling and app-based ride-hailing services.
Whatever type of transportation exists, it must be paid for. And in all cases, transportation
in cities and towns relies on the existence of streets (or rails in the case of subway systems).
After considering ways to reduce congestion and pollution, the Economist article states: “It
would be much better to charge for each use of a road, with higher prices for busy ones.”
Homework Reading Assignment:
• Read “Off the rails: How to stop the decline of public transport in rich countries,” The
Economist, June 23, 2018.
Questions to Think About:
1. How are streets paid for in your city or town?
2. Do you agree or disagree with The Economist that it would be better for people to
pay for streets each time they use one? Why?
3. What are the advantages and disadvantages of collective financing vs individual
payment for essential things everyone needs and that we use every day?
PUBLIC GOODS IN EVERYDAY LIFE
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4.4 Optional Section: Public Sector Efficiency
Efficiencies of the public system
Research has shown that public sector delivery of public goods is often more efficient and less
costly than delivery by private-for-profit contractors or privatized services.
Some of the reasons for these public sector advantages include:
• less costly financing;
• information efficiency;
• single provider efficiency.
For information about the relative costs and efficiencies of public and private delivery, see:
• David Hall and Tue Anh Nguyen, “Economic Benefits of Public Services” in Real World
Economics Review Issue No. 84, 19 June 2018.
• Paul Chassy and Scott Amey, Bad Business: Billions of Taxpayer Dollars Wasted on
Hiring Contractors; Project on Government Oversight, September 2011.
Privatization and contracting out
Although public goods are paid for through collective financing, public
services and products are sometimes delivered by market actors (firms).
This has particularly been the case over the last 30 years through
privatization or contracting-out. But it is crucial to recognize that even
when public goods delivery is contracted out, it is still paid for by taxes or
other collective financing methods. Contractors are not getting paid by
users; they are operating at public expense. And even when public
systems (like trains) are “privatized” there are usually still public subsidies
that enable the for-profit firms to retain their profitability at public expense.
False Economies
Studies show that privatization or contracting out to private
corporations often costs more than direct government provision.
See Hall and Nguyen, “Economic Benefits of Public Services” and
Chassy and Amey, Bad Business: Billions of Taxpayer Dollars
Wasted on Hiring Contractors
PUBLIC GOODS IN EVERYDAY LIFE
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5. SESSION 4: PUBLIC GOODS AND DEMOCRACY
5.1 Rule of Law
If you make up a game, you make up rules. Everybody has to agree to abide by the rules or they
cannot play. Likewise, driving a car has rules. Driving is a privilege, not a right. You have to know
the rules and abide by them in order to get, or keep, a driver’s license. Most countries today are
organized to operate by rules and standards; these are called laws. Laws are how public goods are
created.
In the United States, for example, creating public goods requires action by both Congress, which
writes and passes “bills,” and by the president, who has to sign each bill in order for it to become
a law. Laws create not only rights, rules and standards; they also are the means by which products
and services are created. Public parks, food safety, Air Traffic Control, GPS – everything
government creates and produces comes from passing a law. Laws are used to both authorize the
production of public services and products, and to fund their production. In this system, all citizens
are able – at some remove – to have input into what laws – and hence what public goods – are
created.
Here is how it works: public goods are created by citizens voting for representatives who, in turn,
make decisions about how government monies, raised collectively, will be used. These “elected
funders” make day-to-day decisions about what and whether to fund and produce. But in the end,
the citizenry has the power, through democratic processes, to appoint and dismiss those elected
funders. The maxim that elected representatives “work for us” is more than just rhetoric.
This process is an economic production system.
Here’s a diagram of how this collective action production system works:
Key Concepts
RULE OF LAW
POLITY
SOVEREIGNTY
Key Concept
RULE OF LAW
PUBLIC GOODS IN EVERYDAY LIFE
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Figure 1. Public Goods Production – System Dynamics
In the public production system diagram above, notice how collective choice and collective
payment both come from the people and lead to “legislation,” which is created by the elected
representatives (symbolized by the state house and treasury in the bottom center of the diagram).
“Legislation” is another word for “laws.” And, notice that legislation is required in order for a
government agency (represented by the building on the left side of the diagram) to produce public
goods. Once those public goods are produced, they go to “the people” – who both authorized their
creation and receive them. But – notice that the people don’t pay the agency directly. They have
already paid through their taxes.
© June Sekera
PUBLIC GOODS IN EVERYDAY LIFE
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Figure 2. Circular Flow Diagram for the Basic Neoclassical Model
The public production system (shown in Figure 1) is very different from the standard circular flow
diagram of “the economy”
14
in standard economics (Figure 2). In this model, all decisions are
made by individuals and the only two agents are individuals (in households) and firms.
The public economy diagram (Figure 1) raises a question about how that system operates: How
do “the people” get the power to authorize and pay for collective production?
To answer that, we need to look at the concepts of “the polity” and “sovereignty,” which are
discussed mostly in political science today, but which are closely related to the economics
discussions that took place 100-plus years ago to understand the nature of the public economy.
5.2 The Polity and Sovereignty
While 20
th
century economics teaches that government action is legitimate only in cases of “market
failure,” the reality is that government precedes the market both historically and conceptually.
Governments existed before capitalism and before any theory of markets. Moreover, laws and
public services must exist in order for markets to function at all.
As still taught in most universities today, economics is an elaboration of concepts about markets
birthed hundreds of years ago, in an age of mercantilism and monarchies. Forms of societal
14
“The Circular Flow Diagram for the Basic Neoclassical Model,” Principles of Economics in Context; N. Goodwin
et.al. 2014, p 62.
PUBLIC GOODS IN EVERYDAY LIFE
20
organization have since evolved – most notably with the modern development of democratic
nation-states. In effect, society enables markets, not the other way around. One economist who
made this point was Karl Polanyi.
15
But 20
th
century conventional economics did not keep up with
this insight.
A question remains: how does a society get the ability and power to act, to produce?
In theory – and in reality – groups of people can, and do, organize themselves to jointly produce
things they need and want. The “group of people” is the “polity.” And the ability to jointly produce
things stems from the “sovereign” authority of the polity.
Polity
A polity is an organized body of people that is
constituted to mobilize resources and take action. In
today’s world, a polity is generally a nation-state or one
of its subordinate authorities, such as a province,
county, city or town.
16
Sociologist John W. Meyer
defined polity as a “system of creating value through
the collective conferral of authority”.
17
There is not much discussion of the polity in
economics; only a few economists have addressed the
concept. One is David M. Winch, who in his essay:
“Political Economy and the Economic Polity,”
18
says:
“The society is a polity and its dominant theme and purpose today is organization
of our economic affairs. I call it the economic polity.”
The concept of a polity and sovereignty are closely connected.
Sovereignty
Historically, the sovereign was a monarch or some other type of autocratic ruler whose power
stemmed from hereditary right. Now the idea of sovereignty is broader: it applies to the many
forms of government found in the world today.
What’s important here is the basic concept of sovereignty as the root source of societal power; it
applies to all forms of governmental organization: democracies, autocracies, oligarchies,
republics, monarchies, or any other.
15
Polanyi, 1944.
16
There are also efforts today to formally recognize the nationhood of Indigenous peoples and associated institutions
of self-governance.
17
Meyer, 1980.
18
Winch, 1977.
A polity is an
organized body of
people that is
constituted to
mobilize resources
and take action.
PUBLIC GOODS IN EVERYDAY LIFE
21
The majority of countries today are organized as democracies. Although some democracies are
“backsliding”,
19
according to a report on The Global State of Democracy, 2017
20
about 68% of the
world’s countries, home to 62% of the world’s population, are electoral democracies with
“genuinely contested elections”
21
.
In modern nation-states, sovereignty is the power to create,
change and enforce legal obligation (Jacobson 2011,
Moore 2014). In effect, in democratic nation-states,
sovereignty is collective, and the government is the agent
of the polity.
So, in sum – in a democracy – sovereignty is collective and
“we are the government”.
“We Are the Government”
In 1945 Mary Elting wrote a book designed for elementary
school students with the title We Are the Government. In
it she wrote
22
:
“For many centuries government all over the world worked pretty much like a one-
way radio. A few individuals told everybody else what to do, and there wasn’t any
apparatus that allowed people to talk back. But when the Constitution was written,
it gave the people of this country a voice in their government”.
She then recounts the many ways in which democracy has fallen short of the ideal. But she
concludes:
“A democratic government has many complications, but that is not the important
thing about it. People and plants and animals are complicated too. The most
important thing is that they are alive – that is, they can grow and change. Only
dead things stay the same. A really democratic government is one that is alive –
one that can change and grow.”
19
V-Dem Institute, “Democracy for All? V-Dem Annual Democracy Report 2018”; https://www.v-
dem.net/media/filer_public/3f/19/3f19efc9-e25f-4356-b159-b5c0ec894115/v-dem_democracy_report_2018.pdf
20
International Institute for Democracy and Electoral Assistance https://www.idea.int/gsod/
21
Mélida Jiménez, Washington Post, November 15 2017, “Is Democracy in a Worldwide Decline? Nope.”
https://www.washingtonpost.com/news/monkey-cage/wp/2017/11/15/is-democracy-in-a-worldwide-decline-we-
measured-it-heres-what-we-found/?utm_term=.643158c624e4.
22
Mary Elting, We Are the Government; Doubleday & Co., 1945. The quotes are from an updated version of the book
in 1967, p 91.
The majority of countries
today are organized as
democracies. About 68% of
the world’s countries, home
to 62% of the world’s
population, are electoral
democracies with
“genuinely contested
elections.”
PUBLIC GOODS IN EVERYDAY LIFE
22
Class Discussion
Look at the diagram of “Public Goods Production” (Figure 1). It’s a picture of the system by
which public goods are created in a democracy. Public products, services, benefits, etc. are
authorized and paid for by the people (via voting and taxes), and produced by a public agency.
Then notice how Mary Elting (above) contrasts a “dead” democratic government versus an
“alive” one.
Discussion Questions
• How do citizens express voice in a democracy that is “alive”?
• How would a democratic government become “dead”?
Optional Class Discussion: Outsourcing Sovereignty
In writing about the widespread privatization and outsourcing of government, Paul Verkuil
said that this movement amounts to the “outsourcing of sovereignty.”
23
What do you think he meant by that, and whose sovereignty was being outsourced?
“Public Bads?”
Not every law is viewed as “good” (in the moral sense) by everyone. Some legislative actions
produce what some people would see as “bad.” Deneulin and Townsend (2006) raised and
addressed this issue:
“[H]ow is the common good generated or nurtured and how can we ensure that
the common life of a community is good and not bad?...We emphasize here that
there is no guarantee that participation in common action will generate something
genuinely good. It might lead to bringing into power a government which might
use nuclear weapons or which introduces unjust structures such as those of
Apartheid. Human actions are always fallible because they are human. However
the ‘possibility of moral evil inherent in man’s constitution’ does not nullify the
claim that the good for each of us is found and sustained in relationships, whether
at the level of the community of the family, village, country or world, and the public
policy ought to recognize and nurture them if it is not to undermine the human well-
being.”
24
23
Verkuil, 2007.
24
Deneulin and Townsend, 2006.
PUBLIC GOODS IN EVERYDAY LIFE
23
Here are some other distinguishing characteristics of public goods:
Public goods are measurable. They are goods, services and benefits that can be identified and that
produce results that can be assessed or measured. They are not merely ideas, “interests” or
“values”.
25
5.3 Optional Section: Public Goods, Energy and Climate Change
Change is coming in our collective energy future. But what will that change look like? What
products, services and innovations will be developed to supply solutions? Who will decide?
A recent article
26
in a scholarly scientific journal about energy describes the dilemma that countries
are beginning to face: the competition for public resources between energy transformation and
climate impact mitigation. A competition is beginning for resources for both courses of
action. This is a competition for resources (money, talent, energy) between the need for mitigation
of climate change and its impacts and, on the other hand, transformation to a new energy
future. These are two paths. They are not really alternatives; both challenges will have to be taken
up to one extent or another. The real question is about the relative amounts of money, talent, effort
and energy to put into each.
The problems can’t be solved merely by individuals buying things (the market system). Societies
will have to take collective action. Nation-states will have to take action. Climate impact
mitigation and energy transformation both have to be addressed.
25
The characteristic of measurability is connected to assessing or measuring the achievement of public purpose, a
crucial topic, but one that is beyond the scope of this module.
26
Day, John W., et al, 2018
Public Goods and “Social Goods”
Public goods are produced by the public sector agents of the polity –
government agencies, public authorities, public universities, etc. – not
by businesses, civil society, NGO’s, households or individuals. Goods
produced by such entities that may be enjoyed by the public can be
called “social goods” but they are not public goods. The
distinguishing characteristics of public goods are that they are
created through collective choice by the polity (voting) and are paid
for collectively (public financing).
Class Discussion
What are examples of public goods that could address these climate-related needs?
PUBLIC GOODS IN EVERYDAY LIFE
24
Readings:
• “The Energy Pillars of Society”
27
https://econpapers.repec.org/article/sprbioerq/v_3a3_3ay_3a2018_3ai_3a1_3ad_3a10.1007_5
fs41247-018-0035-6.htm
• “The Need for a New Public Administration”
28
http://www.paecon.net/PAEReview/issue84/Galbraith84.pdf
• “Our Energy Future” Our Energy Future, Part 1 and Our Energy Future, Part 2. Public
Goods Post, April & May, 2018 https://www.publicgoodspost.org/.
“Global Public Goods”?
Issues like pollution and climate change mitigation are international in scope.
Some say that “global public goods” are the answer. But a question this raises is:
How can there be “global public goods” to address such concerns when no
one has global sovereignty?
29
6. SESSION 5: CAPSTONE EXERCISE
6.1 Public Goods and Grand Challenges
The following is a list of some of the challenges that are confronting us:
o Mitigating impacts of climate change, like increased flooding and wildfires, and
displaced populations due to climate disasters.
o Need for energy transformation: creating energy-efficient renewable sources that are
affordable by and accessible to all.
o Food waste and simultaneous food insecurity.
o Loss of potable water in an increasing number of communities.
o Need for transport that is energy-efficient, affordable and accessible to all.
o Higher education – universal access.
o Health care – universal access.
o Precarious (gig) employment and “worklessness.”
o Ensuring the “right to repair”.
o Other grand challenges identified by students or instructor
27
Day, John W., et al, 2018.
28
Galbraith, 2018.
29
To be sure, international organizations exist, many affiliated with the United Nations. However, they have no claims
to sovereignty and, according to a report in The Economist, international regulating organizations, such as the
International Maritime Organization which has responsibility for limiting emissions from shipping, are populated by
private firms with self-interest, are “clubs that represent producer interests,” and conduct their meetings in secrecy.
“Agency Problems,” The Economist, Nov. 24, 2018, p 15.
PUBLIC GOODS IN EVERYDAY LIFE
25
Student Exercise
1. Identify a challenge (either from the list above or another grand challenge).
2. Describe the problem and state the societal need.
3. Propose an outcome goal (what would be different – what would things be like –
if the problem were fixed and the need were met?)
4. Propose your idea for legislation to correct the problem or meet the grand challenge
you picked. (Limit your description to a paragraph or no more than one page.)
5. Which category(ies) of public goods does your solution fall into: is it a service, a
product, a benefit, a standard, a right?
• What benefits, if any, does your solution confer, and upon whom?
• What obligations, if any, does your solution impose, and on whom?
6. Bonus points:
• Describe how results would be measured – i.e., metrics or assessment
criteria.
• What words or phrase would you use to “message” to the public about your
proposed solution?
PUBLIC GOODS IN EVERYDAY LIFE
26
7. REFERENCES
Alford, John. (2002) (May-June) “Defining the Client in the Public Sector: A Social-Exchange
Perspective,” Public Administration Review, Vol. 62, No. 3.
Backhouse, Roger E., (2005) “The Rise of Free Market Economics: Economists and the Role of
the State since 1970,” History of Political Economy., 01/2005, Vol. 37, Suppl. 1: 355-
392.
Bernstein, Michael (2001) A Perilous Progress: Economists and Public Purpose in Twentieth-
Century America, Princeton University Press.
Bureau of Economic Analysis (2017) Concepts and Methods of the U.S. National Income and
Product Accounts, November 2017. Commonly referred to as the “NIPA handbook.” See
the definition of “prices that are not economically significant.”
Colm, Gerhard (1936) “Theory of Public Expenditures,” The Annals of the American Academy of
Political and Social Science, Vol. 183, Government Finance in the Modern Economy,
Jan., 1936, pp. 1-11.
Colm, Gerhard (1956) “Comments on Samuelson’s Theory of Public Finance,” The Review of
Economics and Statistics, Vol 38, No. 4, Nov. 1956, pp 408-412.
Day, John W., Christopher F. D’Elia, Adrian R. H. Wiegman, Jeffrey S. Rutherford, Charles A.
S. Hall, Robert R. Lane, David E. Dismukes. (2018) “The Energy Pillars of Society:
Perverse Interactions of Human Resource Use, the Economy, and Environmental
Degradation,” BioPhysical Economics and Resource Quality; 3:2.
Deneulin, Severine, and Nicholas Townsend, “Public Goods, Global Public Goods and the
Common Good”, WeD Working Paper 18; Sept. 2006.
Desai, Meghnad (2003) “Public Goods: A Historical Perspective” in Rethinking Public, Global
and Good, 2003.
Desmarais-Tremblay, Maxime (2013) “On the Definition of Public Goods; Assessing Richard A.
Musgrave’s Contribution”. Paper presented at 17
th
Annual Conf Europe Soc Hist Econ
Thought, Kingston University, London.
Desmarais-Tremblay, Maxime (2017) “Musgrave, Samuelson, and the Crystallization of the
Standard Rational for Public Goods;” History of Political Economy 49:1. Duke
University Press.
Elting, Mary We Are the Government; Doubleday & Co., 1945. The quotes are from an updated
version of the book in 1967, p 91.
Galbraith, James K. (2008) The Predator State: How Conservatives Abandoned the Free Market
and Why Liberals Should Too. Free Press, Simon & Schuster, Inc., New York.
Galbraith, James K. (2018) “The Need for a New Public Administration,” Real World Economics
Review, Issue 84, June, pp 175-176.
Galbraith, John Kenneth (1958) The Affluent Society, Houghton Mifflin.
Gawande, Atul (2017) “Is Health Care a Right?”, The New Yorker, October 2, 2017, pp 48-55.
Gutmann, Amy (1987) Democratic Education. Princeton University, Princeton
Hall, David and Tue Anh Nguyen (2018) “Economic Benefits of Public Services” in Real World
Economics Review Issue No. 84, 19; June 2018.
Jacobson, Arthur J. 2011 (June 26). “Outsourcing Incompetence: An Essay in Honor of Paul
Verkuil,” Cardozo Law Review, Vol. 32 No. 6.
Jiménez, Mélida (2017) Washington Post, November 15, 2017, “Is Democracy in a Worldwide
Decline? Nope.”
PUBLIC GOODS IN EVERYDAY LIFE
27
https://www.washingtonpost.com/news/monkey-cage/wp/2017/11/15/is-democracy-in-a-
worldwide-decline-wemeasured-it-heres-what-we found/?utm_term=.643158c624e4.
Meyer, John W. (1980) "The World Polity and the Authority of the Nation-State." Pp. 109-137
in A. Bergesen (ed.), Studies of the Modern World-System. New York: Academic Press;
cited in
whsatell.yolasite.com/resources/Unit_1/.../GLOBALIZATION%20THEORIES.doc
Mirowski, Philip (1989) More Heat Than Light; Economics as Social Physics, Physics as
Nature’s Economics, Cambridge University Press.
Moore, Mark H. (2014) (July-Aug). “Public Value Accounting: Establishing the Philosophical
Basis,” Public Administration Review, 74(4): 465-477.
Polanyi, Karl (1944) The great transformation: the political and economic origins of our time.
Beacon, Boston.
Ranson, Stewart, and John Stewart (1989) “Citizenship and Government: The Challenge for
Management in The Public Domain;” Political Studies. 37(1): 5-24. doi: 10.1111/j.1467-
9248.1989.tb00262.x
Ranson, Stewart, and John Stewart (1994) Management for the Public Domain; Enabling the
Learning Society. St. Martin’s, New York.
Sen, Amartya (2017) Collective Choice and Social Welfare, An Expanded Edition. Harvard
University Press.
Stretton, Hugh, and Lionel Orchard. 1994. Public Goods, Public Enterprise, Public Choice – The
Theoretical Foundations for The Contemporary Attack on Government. St. Martin’s,
New York.
Studenski, Paul. (1939) (Nov.). “Government as a Producer,” Annals of the American Academy
of Political and Social Science, Vol. 206, Government Expansion in the Economic
Sphere, pp. 23-34.
Studenski, Paul (1958) The Income of Nations. New York University Press, New York
Sturn, Richard (2010) “‘Public goods’ before Samuelson: interwar Finanzwissenschaft and
Musgrave’s synthesis,” The European Journal of the History of Economic Thought, Vol.
17, Issue 2.
Toynbee, Polly and David Walker (2017) Dismembered – How the Attack on the State Harms Us
All. Winch, David. M, (1977) “Political Economy and the Economic Polity,” The
Canadian Journal of Economics; Vol. 10, No. 4 (Nov.), pp. 547-564.
V-Dem Institute, “Democracy for All? V-Dem Annual Democracy Report 2018”;
https://www.vdem.net/media/filer_public/3f/19/3f19efc9-e25f-4356-b159-
b5c0ec894115/v-dem_democracy_report_2018.pdf
Verkuil, Paul R. (2007) Outsourcing Sovereignty: why privatization of government functions
threatens democracy and what we can do about it. Cambridge University, Cambridge
Wedel, Janine R. (2104) Unaccountable: How Elite Power Brokers Corrupt our Finances,
Freedom and Security.
Winch, D. M. (1977) “Political Economy and the Economic Polity,” The Canadian Journal of
Economics; Vol. 10, No. 4 (Nov., 1977), pp. 547-564.
Wolf, Martin (2012) “The World’s Hunger for Public Goods,” Financial Times, January 4, 2012.
Wuyts, Marc (1992) “Deprivation and Public Need,” In: Macintosh, Maureen and Marc Wuyts
(Eds.), Development Policy and Public Action. Oxford University, Oxford, p 13-38.
PUBLIC GOODS IN EVERYDAY LIFE
28
8. APPENDIX 1
Optional Student Exercise: A Day in Your Life
We use public goods every day, but often don’t realize it.
Exercise 1 (Part 1):
Each day we wake up and go through our morning routine, checking our phones, having our
beverage of choice. Between our morning routine and the time we go to bed we perform a myriad
tasks at home, at work and at play. Most of us go about our day using products and services that
help us navigate our day smoothly, without giving any thought to how they come to exist or how
we get them. In this exercise you will explore a typical day for you and the various goods and
services that you use during the course of a day. Use the prompts below to identify some goods
and services that you use “for free” and ones that you pay to use.
1. Think about a typical day in your life from the time you wake up until you go to bed:
What services or products do you use every day that you don’t pay for when
you receive or use them? Think about this in contrast with things you pay
for directly. An example of the latter is your smartphone. That’s a private
product. Examples of the former are GPS, which your phone relies on, and
the streets you use to get to school. What are some other services and
products that you use pretty much every day but don’t pay for when you use
or get them? Jot down a list (4 – 5) of these types of goods and services.
2. If you did not pay each time you got or used those products or services as you went
through your day, this raises some questions:
How were they paid for? And who produced them for you?
Instructor Notes
This exercise is set up in two parts - an opening discussion and a homework reading
assignment.
Part 1 is designed as an interactive discussion. Students will think about a typical day for
them and the various goods and services they might use during the course of the day. Using
the prompts provided, students will identify the goods and services that they use “for free”
and the ones that they pay for with each use. Class discussion will follow.
Part 2 is a homework reading assignment to follow the classroom discussion and has follow-
up questions for discussion at the beginning of class on the following day.
PUBLIC GOODS IN EVERYDAY LIFE
29
Exercise 1 (Part 2) - Homework Assignment:
The following reading and video assignments, and related questions, form the basis for the opening
class discussion on the following day. The questions build on your answers to Part 1 of the
exercise. The readings are selected to help advance your thinking on public goods in your daily
lives.
Reading & Video
• A Day in Your Life – http://governmentisgood.com/articles.php?aid=1&p=1
• Government’s role in Fostering Technological Innovation
http://www.publicgoodspost.org/wp-content/uploads/2016/02/Government-and-
Innovation.pdf
• Government – Investor, Risk-Taker, Innovator
https://www.ted.com/talks/mariana_mazzucato_government_investor_risk_taker_innovat
or
9. APPENDIX 2
9.1 The Mid-20
th
Century Definition of Public Goods
The contemporary textbook definition of public goods was formulated by economist Paul
Samuelson in the 1950’s and is abstract. It pertains to ascribed inherent characteristics of
particular “goods” (meaning products and services). It does not address pragmatic questions such
as how those goods are produced.
This theory holds that public goods are:
• Non-rivalrous – consumption of the good by one individual does not reduce availability
of the good for consumption by others; and
• Non-excludable – goods that are difficult or impossible to keep nonpayers from
consuming.
In standard economics, which utilizes this definition, public goods are seen as a “problem” because
their ascribed qualities of “non-rivalry” and “non-excludability” imply that they are generally not
amenable to market production. They therefore represent “market failure”. Typical examples of
public goods given in textbooks are national defense, a lighthouse, a fireworks show.
Class Discussion (Part 2 Questions):
1. Are there any changes or additions you would make to the description of your own
typical day after reading “A Day in Your Life”?
2. If a product or service you use the most every day is produced by government – did
that realization take you by surprise?
PUBLIC GOODS IN EVERYDAY LIFE
30
Samuelson’s formulation borrowed from the work of previous economists, particularly that of
Richard Musgrave. But it was an aberration from the line of thinking about public goods, and the
relationship between the State and markets, that had been developing in mid- and late-19
th
century
European economics, now often called the “historical school”. (More on this shortly). A key
feature of Samuelson’s formulation was that it could be mathematically modeled, in line with the
sweeping trend of mathematicising economics in the mid-20
th
century.
30
However, the formulation
that emerged from Samuelson’s construct was so restrictive that it was difficult to find any product
or service it applied to in the real world; it had little practical utility.
31
For example, consider the following questions that the standard definition doesn’t answer:
• Should Amazon replace public libraries?
• Should NASA sell naming rights for its rockets?
• Should motorists pay for each use of a street?
“Yes” or “No” and why?
Some think the answer to each of these questions is “yes”.
Should Amazon replace public libraries?
• In summer 2018 Forbes posted an article by an economist who argued that libraries no
longer served a purpose and did not deserve public support. According to a reporter, the
economist “suggested that Amazon replace libraries with its own retail outlets, and claimed
that most Americans would prefer a free-market option.”
32
Should NASA sell naming rights for its rockets?
• The Washington Post published an article (Sept. 10, 2018) on “Why NASA’s next rockets
might say Budweiser on the side.” The NASA administrator who took over in 2018
proposed selling naming rights to our rockets because of reduced public funding.
Should motorists pay for each use of a street?
• An article in The Economist (June 23, 2018) talked about how public transit is “ailing” in
many cities. The article discusses various options for people to get around in cities such as
public transportation, personal cars, cycling and app-based ride-hailing services. After
considering ways to reduce congestion and pollution, the Economist article states: “It
would be much better to charge for each use of a road, with higher prices for busy ones.”
30
Philip Mirowski, More Heat Than Light; Economics as Social Physics, Physics as Nature’s Economics, Cambridge
University Press; 1989; Clive Beed and Owen Kane, “What Is the Critique of the Mathematization of Economics?”,
Kyklos, Vol. 44, 1991, pp 581-612.
31
Meghnad Desai, “Public Goods: A Historical Perspective”, in Concepts: Rethinking Public, Global and Good, 2003.
32
Eric Klinenberg, “Why Libraries Still Matter,” New York Times, Sept. 9, 2018. Klinenberg notes that Forbes deleted
the article from its website after receiving overwhelmingly negative comments.
PUBLIC GOODS IN EVERYDAY LIFE
31
Products and services like free-access public libraries and public roadways are public goods in
most countries. Yet, the private market system could provide libraries, toll roads or rockets that
charge customers for each ride.
• On what basis is it determined which system should produce which things?
• Who makes that determination?
• How are public products paid for?
In economics today, there is no empirically-based conceptual model for answering these questions.
The textbook economics definition of public goods does not provide it.
As we’ve noted, in the current, standard definition, public goods are defined in terms of ascribed
inherent characteristics of the goods and services themselves. Below, we briefly summarize an
alternative perspective in which public goods are seen as arising out of actions to address a
perceived public need. But first, let’s consider some commentary on the standard definition.
9.2 Critiques of the Standard Definition
The concept of public goods has been of limited interest in economics for several decades. Those
who have paid attention to it have been mainly those on the economic/political right who challenge
the Samuelson definition as too supportive of a role for government. For example, numerous
libertarian essays and websites question whether public goods – according to the standard
definition – actually exist. These sources argue that if public goods do exist, they can and should
be provided by the market, not government.
Some examples of these critiques:
• “[M]any of the goods government actually
does produce do not correspond to the
economist’s definition of public goods, so the
theory does a poor job of explaining the
government’s actual role in the
economy…The theory is promulgated by the
state-supported education system, giving
educators, as employees of this state-supported
industry, an incentive to promote the theory of
public goods.”
33
• “There is a presumption in some circles that the identification of an externality or a public
good presents a prima facie case for government intervention. Tyler Cowen has assembled
a group of articles that challenge this view by arguing that the market, broadly construed,
33
Randall G. Holcombe, “A Theory of the Theory of Public Goods”, Review of Austrian Economics 10, No. 1, 1997.
“Samuelson’s austere
simplification produced
a rarefied concept, a
mythical beast, without
any counterpart in, and
therefore without any
applicability to, the real
world.”
PUBLIC GOODS IN EVERYDAY LIFE
32
can handle many problems of public goods and
externalities that are normally considered the
province of the state.”
34
• “In everyday life, there are probably no goods
that resemble the pure public goods of
economic theory.”
35
• “Samuelson’s classic formulation provoked a
number of critics…whose chief concern was
that Samuelson’s austere simplification
produced a rarefied concept, a mythical beast,
without any counterpart in, and therefore
without any applicability to, the real world.”
36
[Emphasis added.]
Because the Samuelson definition is so narrow and
constricting, one can indeed demonstrate that the
standard textbook examples of Samuelsonian public
goods have been or may be produced by the private
market: ships have paid for lighthouse services;
Disneyworld produces fireworks. Even clean air has
been purchased individually–by the wealthy in Beijing.
37
9.3 Pluralist Commentary
Samuelson’s definition has had the effect of downplaying public goods among pluralist
economists. In contrast to extensive commentary from the libertarian world, little attention has
been devoted to this topic by heterodox or pluralist economists currently.
In the past, a few have challenged the Samuelson definition and some have called for a new one.
• Gerhard Colm, a prominent economist from the German Public Economics school and an
official in the New Deal Roosevelt administration, challenged Samuelson’s definition
almost as soon it was published in the 1950’s. Finding it “not a…fruitful approach” and
34
Hal R. Varian, “Markets for public goods?”, Critical Review: A Journal of Politics and Society; Vol. 7, Issue 4,
1993.
35
Gunning, James Patrick, “Public Choice, Public Goods, and Constitutions”; constitution.org, May 3, 1997.
36
Richard Cornes & Todd Sandler, “Are Public Goods Myths?”, Journal of Theoretical Politics, 6(3), 1994, p 369.
37
In China in response to extreme air pollution, some schools have built domes over sports fields and wealthy parents
choose schools based on air-filtration systems. “In China, Breathing Becomes a Childhood Risk”; New York Times;
April 22, 2013.
The terms “public
goods,” “public good”
and “public interest”
are often used
interchangeably,
without definition and
without clarity. “Public
good” and “public
interest” are ethical or
moral concepts; they
are value judgements
that vary according to
the judge. The term
“public goods” refers,
instead, to products,
services and other
outputs of production.
PUBLIC GOODS IN EVERYDAY LIFE
33
more of a “mental experiment,” Colm
38
emphasized that Samuelson’s formulation did not
answer the question of why some goods are produced by government and others are not.
He concluded that “the usefulness of a theory should not be judged by the extent to which
it lends itself to mathematical treatment but by its usefulness in solving the problems which
confront us.”
• In “Rethinking Public, Global and Good”, Meghnad Desai argued that “Most public goods
are excludable and have externalities but are genuinely beneficial to many people. They
are also rivalrous in the sense that one has to choose among them as well as determine the
quantity and quality of the provision of those chosen.” And he concluded that: the
Samuelson formulation is “useless for policy purposes,” and summed up by saying that
“The Samuelson fiction of pure nonexcludable goods is just that.”
39
• Kaul and Mendoza in “Advancing the Concept of Public Goods” noted that the existing
definition does not offer clear categories of public and private, and point out that “goods
often become private or public as a result of deliberate policy choices.”
• John K. Galbraith in 1958 told us that public goods are “...things [that] do not lend
themselves to [private] production, purchase and sale. They must be provided for everyone
if they are to be provided for anyone, and they must be paid for collectively or they cannot
be had at all.”
40
• Of particular importance is the perspective of economist Marc Wuyts
41
. His central point
is that public goods should not be defined in terms of supposed “inherent characteristics”
of the products and services themselves, but rather that public goods are “socially defined
and constructed” and “result from public action prompted by…perceived public needs.”
38
Gerhard Colm, “Comments on Samuelson’s Theory of Public Finance,” The Review of Economics and Statistics,
Vol 38, No. 4, Nov. 1956, pp 408-412.
39
Meghnad Desai, “Public Goods: A Historical Perspective”, in Concepts: Rethinking Public, Global and Good, 2003.
40
John Kenneth Galbraith, The Affluent Society, 1958, p 111.
41
Marc Wuyts, “Deprivation and Public Need” in Development Policy and Public Action, Wuyts, Mackintosh &
Hewitt Eds. 1992, p 31. Wuyts is Emeritus Professor in Applied Quantitative Economics, International Institute of
Social Studies of Erasmus University, Rotterdam, and Principal Research Associate, Economic and Social Research
Foundation, Tanzania.
Public goods should not be defined in terms of supposed “inherent
characteristics” of the products and services themselves, but rather,
public goods “result from public action prompted by…perceived
public needs.”
- Marc Wuyts, Development Economist
PUBLIC GOODS IN EVERYDAY LIFE
34
Economists Hugh Stretton and Lionel Orchard (1994
42
) showed how the deficiencies in
Samuelson’s definition have enabled critics of government to use it to attack public provision of
goods and services. Like Wuyts, they stress the socio/political origins of public goods: “The
amount and kind of public goods have to be determined by political choice...Those choices are not
likely to be improved by the use or the common misuses of public goods theory...”
9.4 Conclusion
In the environment of mainstream economics, public goods are pronounced “a problem” because
they are not amenable to market production. Businesses can’t or won’t produce them because, for
one thing, since they are theoretically “non-excludable,” there is no way for a market-based
business to capture the cost of producing them. The implication is that, since – by the textbook
definition – the market can’t or won’t produce them, they are an economic negative, a
representation of “market failure.”
As we noted above, many products and services – libraries, schools, roadways, drinking water –
are public goods in most countries. Yet, the private market system could provide them too. We
return to the questions we raised earlier:
• On what basis is it determined which system should produce them?
• How is that determination made?
• How are public goods to be paid for?
In standard economics, there is no empirically-based conceptual model for answering these
questions. The present economics definition of public goods does not provide a valid empirically-
testable basis.
The definition of public goods is not a trivial matter. Public non-market production makes up a
major share of all economic activity among advanced democratic nations, ranging from a quarter
to more than half of GDP.
43
42
Hugh Stretton and Lionel Orchard, Public Goods; Public Enterprise, Public Choice: Theoretical Foundations of
the Contemporary Attack on Government; 1994.
43
These figures are based on the two principal conventional ways in which government’s contributions are portrayed
in GDP calculations: expenditures and output. However, GDP undervalues government output, as has been widely
documented.
Among European Union countries, government expenditures average 47% of GDP. And in nine European countries,
government expenditures equal half or more of GDP. Belguim 53.9%; Denmark 54.8%; Greece 55.4%; France 57%;
Italy 50.3%; Hungary 50%; Austria 51.6%; Finland 57%; Sweden 50.2%. http://ec.europa.eu/eurostat/statistics-
explained/images/7/70/Total_general_government_expenditure_by_function%2C_2015_%28%25_of_GDP%29_03
032017.png. Government’s share of GDP output, a different calculation that omits “transfer payments,” shows
government’s share ranging from 12% to 26%. In seven European countries, government’s share of GDP output is
about one-quarter, even according to the faulty methodology of GDP accounting, which undervalues government’s
contribution. Government’s share of total output for 2016 was at or nearly 25% in 7 countries: Sweden 26.1%;
Denmark 25.4%; Finland 24%; Netherlands 24.7%; Norway 24.3%;France 23.6%, Belgium 23.6%
https://data.worldbank.org/indicator/NE.CON.GOVT.ZS From either standpoint – expenditures or output –
government’s share of economic activity is significant.
PUBLIC GOODS IN EVERYDAY LIFE
35
For an important summary of the range and impacts of government spending on public goods see
the study by David Hall and Tue Anh Nguyen (2018) “Economic Benefits of Public Services”.
44
The authors report that public sector activity, directly and indirectly, supports half the formal jobs
in the world, and has a comparative advantage over private contractors in delivering public goods
such as universal access to healthcare, affordable housing, and protecting the planet from climate
change.
The topic of public goods is today relegated to the sidelines of economics; it is little discussed in
classrooms. In textbooks, public goods are presented as a negative – a representation of “market
failure.” Yet public goods are vital to well-being, to the functioning of the economy and ultimately
for the survival of species, including humans, on the planet.
10. APPENDIX 3
10.1 Looking Back- A Brief History of Public Goods
As Martin Wolf wrote in the Financial Times,
45
societies have been producing public goods for
millennia:
But the term “public goods” didn’t come into fashion until the last hundred years or so. And the
textbook definition only appeared in the 1950’s.
It’s interesting to see how the use of the term “took off” after Samuelson put it in his widely-used
1950’s textbook, Economics. Here’s a Google Ngram that show usage over time:
Figure 3. Usage of the term “public goods” over time
44
David Hall and Tue Anh Nguyen, “Economic Benefits of Public Services” in Real World Economics Review Issue
No. 84, 19 June 2018.
45
Martin Wolf, “The World’s Hunger for Public Goods,” Financial Times, January 4, 2012.
“The history of civilization is a history of public goods.”
-Martin Wolf, Financial Times
PUBLIC GOODS IN EVERYDAY LIFE
36
Regardless of its recent provenance, economics textbooks today present the definition of public
goods as though it was long ago etched in stone, or is as irrefutable as the laws of physics. The
texts don’t describe how the definition was developed, or the considerations that went into it or
the motivations behind it.
10.2 Where did the economics textbook definition of public goods come from?
Pre-20
th
century public goods: The “Historical School” and “German Public Economics”
Economics lost the concept of public goods as it was being developed in Europe in the late 19
th
and early 20
th
centuries.
“A framework of collective agency for common purposes”
“Public goods” as a concept in economics grew out of late 19
th
and early 20
th
century thinking
about the economic foundations of the state, and efforts to understand the relationships between
states and markets. Margit Cassel, Gustav Cassel, Emil Sax and Gerhard Colm were some of the
leading thinkers. They theorized about collective choice as an economic mechanism and saw the
state as “a framework of collective agency for common purposes” – a “mechanism” for producing
the goods and services necessary to meet “collective needs” (Sturn 2010).
46
The concepts of “non-rivalry” and “non-excludability” were also being discussed at that time, and
were embraced by economist Richard Musgrave, who brought these ideas with him when he
emigrated from Germany to the United States in the early 20
th
century. But, unlike today’s
treatment of these terms, Musgrave theorized public goods within the context of a vital and
essential role of government.
Samuelson, however, rejected this earlier systemic thinking in his “pure” definition, which,
according to the requirements of mainstream economics, had to be amenable to mathematical
modeling. In 1983, Musgrave criticized Samuelson’s approach as “somewhat of a scholastic
exercise, of little help to improving the fiscal performance of the real world setting.” (Desmarais-
Tremblay 2013, p 10).
What happened? The triumph of rational-choice, market-centric economics.
Starting in mid-20
th
century, as economic historian Roger Backhouse has shown,
47
there were
“profound changes in economic theory” with the triumph of rational choice economics, which
fostered a “remarkable and dramatic change in attitudes toward the role of the state in economic
activity…a radical shift of worldview.” The rise of “free market” economics, along with the
46
Richard Sturn “’Public Goods’ before Samuelson: interwar Finanzwissenschaft and Musgrave’s synthesis”; 2010,
p 304.
47
“The shift toward market solutions did not occur spontaneously; it was actively promoted by groups of economists
committed to opposing socialism, making the case for free enterprise, and reviving the fortunes of liberalism. In the
first stage, the most influential institution was, as the previous section has made clear, the RAND Corporation, which
brought together the Cowles Commission, Princeton University, and many of the economists associated with the
development of rational choice theory. RAND was a think tank set up by the U.S. Air Force at Santa Monica,
California, to prevent the scientific and technical expertise that it had brought together during the Second World War
from being dispersed. It was established in 1946 as a division of the Douglas Aircraft Company to undertake research
on air warfare.” Roger E. Backhouse, “The Rise of Free Market Economics: Economists and the Role of the State
since 1970,” Hist. Polit. Econ. 37, Suppl 1; 2005.
PUBLIC GOODS IN EVERYDAY LIFE
37
“ideology of rational choice” led to a belief that government action often creates perverse
outcomes, which in turn produced a “climate of opinion” within economics “in which state action
was seen as raising more problems than it solved.”
48
These profound changes in economic theory had major impacts on public policy-making.
Economist Michael Bernstein (2001)
49
has traced the evolution of economics from an academic
field marginal to public policy into a powerhouse influencing and orienting government decision-
making. Economists in the late 19
th
and early 20
th
centuries ardently sought to cultivate influence
with elected and appointed officials to shape public policy and to contribute to “purposeful
management” and “statecraft.”
By the mid-20
th
century, the concept of a “public economy” had been extinguished in favor of the
idea that societies operate via markets, while, at the same time, the concept of “public goods”
became constrained within the “market failure” paradigm and took on an essentially negative
connotation.
So today, virtually no economics textbooks or literature mention the earlier corpus of economic
literature and scholarship from which the concept of public goods evolved
50
. Several generations
of economics students have learned nothing about public goods beyond Samuelson’s narrow,
abstract definition, hinged on market theory.
Impacts on the real world
The consequences have been dire. This is not the place to go into the impacts, which arguably
include: students under onerous debt, the public justice system in jeopardy, families put in serious
economic insecurity, workers at risk of ill-health and shorter lives, and the planet under increased
threat of waves of famine, fires, floods, and social disruption.
Among those who have written about the real-world implications are: Toynbee and Walker,
Dismembered – How the Attack on the State Harms Us All (2017); James K. Galbraith, The
Predator State -- How Conservatives Abandoned the Free Market and Why Liberals Should Too
(2008); Janine Wedel, Unaccountable: How Elite Power Brokers Corrupt our Finances, Freedom
and Security (2014).
Back to the Future
A few economists have seen the need for re-thinking what public goods are and how they are
supplied. These critiques were summarized above.
Especially important is the critique by development economist Marc Wuyts (1992). He explicitly
rejected “orthodox economic theory” in which “public goods are defined solely with respect to the
inherent characteristics of the goods and services concerned. He argued that, instead: public goods
48
Roger E. Backhouse, op. cit.
49
Michael Bernstein, A Perilous Progress: Economists and Public Purpose in Twentieth-Century America, 2001.
50
This literature generally uses a term other than “public goods”. Musgrave talked about “social goods” and “merit
wants”, for example.
PUBLIC GOODS IN EVERYDAY LIFE
38
are “socially defined and constructed” and “result from public action prompted by…perceived
public needs.”
Wuyts’ insight is crucial: it is problematic that the standard definition rests on ascribed inherent
characteristics of the goods and services themselves. The textbook formulation does not provide
a framework for understanding the economic production of public goods. If education, libraries,
roads, etc. can be produced by either the market system or government, why are they produced by
the market in some countries and by the government in others?
To find a framework for answering this question, and others related to public goods, we must go
back to the line of enquiry and thinking that was interrupted by mid-20
th
century rational choice,
market-centric economics.
Let us explore how to recapture the ideas developed in the 19
th
and early 20
th
century, and also
update them for 21
st
century needs.
Recovering lost concepts: Learning from the past to think about the future
The “Historical School of Economics”, sometimes called German Public Economics, strove to
understand the economic foundations that would explain the state.
In particular, Gerhard Colm’s reasoning can be a source of pivotal insights concerning public
goods. To begin with, we can look to his two guiding principles:
…the public sector should be dealt with as an essentially economic phenomenon,
not as an extra-economic appendix to the market economy; and the state as the core
of a modern public sector is an economic system with its own economic logic – it
is an essentially non-market type of economic system whose proper analysis must
neither explicitly nor implicitly be based on market price-theoretic reasoning.”
(Emphases in original; Sturn 2010).
As Colm stressed in 1936,
51
“The fundamental difference between these [market and public]
economies must be explained before their interrelationship in modern economy can be
understood.” He spells out those differences:
The modern economic system consists of two realms which are interwoven with
each other: the private and the public realm. Production and services in the private
sector of the economic system are rendered by enterprises, in the public sector by
administrative departments and public institutions (for instance public schools.)
The public realm is distinguished by the fact that it rests on authority…In the public
sector services are ordered by the responsible organs of the state or the
municipalities, by the parliament, the chief executive or whoever else may have the
constitutional right or factual power to decide upon public activities.” [Emphases
in original.]
51
Gerhard Colm, “Theory of Public Expenditures,” The Annals of the American Academy of Political and Social
Science, Vol. 183, Government Finance in the Modern Economy (Jan., 1936), pp. 1-11.
PUBLIC GOODS IN EVERYDAY LIFE
39
Government as a Producer
Public goods are things that are produced -- both tangible and intangible things. They are produced
by the collective system we call government. Governments are producers, and what they produce
are public goods. Yet, mainstream economics does not see or explain government as a producer.
Rather it generally sees “the state” as an intervenor in the market or a redistributor of wealth.
This was not always the case. Three-quarters of a century ago, economist Paul Studenski
challenged this mainstream thinking. He found government to be a vital economic actor whose
role was not merely to intervene or redistribute. Government was clearly and strongly a producer.
A professor of economics at New York University (1927-55), an authority on public finance and
a widely-respected historian of national income accounting,
52
Studenski explained government as
an economic agent of the polity. He argued that “government is a productive, wealth-creating
organization. It supplies direct utilities as well as aids to private production” (1939). He elaborated:
Under all forms of organized society, economic activity has required some
collective effort in addition to the individual one, and this is still true of the modern
society. …In every type of political organization known in human history, from the
most primitive to the most elaborate, government has had to furnish services
satisfying important needs of the members of the society, help them to make a
living, influence their productive processes and consumption habits, manage
economic resources to these several ends, and generally function as the collective
economic agent of the people.
Production consists in the creation of utilities. Government furnishes services and
goods which satisfy the two tests of economic value -- namely, utility and scarcity.
They satisfy human needs and must be economically used. Government is,
therefore, engaged in production just as much as is private enterprise. Government
employees are just as much producers as are private employees and entrepreneurs.
In democratic nation-states, production occurs through a system of authorization and financing
that is distinctly different from that of the market.
53
But today, rather than seeing public goods as the products of the public economy system, as was
the case in a previous era, public goods have been recast as representations of “market failure”.
And today, we have no term in economics (or in public discourse), that encompasses all that
government produces.
52
In The Income of Nations (1958), Studenski traced the history of national income accounting and competing
historical conceptions of production. Descriptions of Studenski’s work can be found in Warren 2005 and Ogle 2000.
53
See Gerhard Colm, “Theory of Public Expenditures,” The Annals of the American Academy of Political and Social
Science, Vol. 183, Government Finance in the Modern Economy, Jan., 1936, pp. 1-11.