The political economy of public goods: why economists should care.

In Viner's view, Smith had little trust in either the competence or good faith of government but saw that "it was necessary, in the absence of a better instrument, to rely upon government for the performance of many tasks which individuals as such would not do, or could not do, or would do badly" (p. 232). Smith saw merit in government's participation in education that would yield multiple social benefits. Proper education would make the populace better citizens, prepare them for industry, prepare them for the military, and improve their health and happiness. Public education also would mitigate class distinctions in the division of labor and in the inequality of income. Smith endorsed government's important role in public health. He approved of restrictions on trade, if conditions warranted, and also of government involvement to alleviate indebtedness and limit interest rates. Smith did not endorse taxation as an instrument of social reform, but he did give support to progressive taxation in several instances. Smith's approach was not a doctrinaire division between what government should and should not do relative to the private sector. He continuously made extremely pragmatic calculations of what should be undertaken by government based on criteria of individual and public benefit in the context of his time and situation.

The notion that societies change the extent of public involvement over time is borne out in the history of the United States where one can follow cycles of change in the public-private economic mix starting from the 18th century to today (Davis and North 1970). At the time of Adam Smith, government in the former colonies participated in a wide variety of economic activities perceived as appropriate from the English mercantilist heritage. Using government to help capture profits by reducing transactions costs, among other things, when scale and markets were small, seemed most appropriate. It was government (state in most cases) that underwrote much of the canal investments in the 1830s. The widespread defaults of state government bonds following the 1839-1843 depression began to change the perception of the efficacy of government involvement in economic affairs. With the growth of the American market in the mid-19th century, increased scale and innovative technology lowered transactions costs and resulted in new market institutions and an expansion of the private sphere of activity. This expansion of the private scope in the public/private mix shifted again with the First World War and succeeding wars in the 20th century. Efforts to effect more equal income distribution that were not possible under the Marshall Court at the beginning of the 18th century became possible in the early 20th century. The Great Depression of 1929 resulted in a public perception that government intervention was preferable to private sector management. This acceptance of government involvement and management was further strengthened by the Second World War. This changed again in the 1980s, as exemplified by the Reagan Revolution, and we see a shift away from the perception that government is an efficient and wise promoter and manager of the public good. Part of the impetus for this has been the general desire to decrease taxes and by the desire of Libertarian groups to reduce the functions of government to the barest minimum through fiscal starvation if necessary.

Reflecting Smith's view of appropriate government involvement, education in the United States has effectively displayed public good status. This has occurred within a social context determined by public perception. As an example, with the rapid expansion westward in the 19th century, land was often set aside to support a local school in a township. The passing of the Morrill Act in 1862 was a striking federal embodiment of a pragmatic public good approach to higher education. The argument for the 1944 GI Bill was also pragmatic in that it would provide a more highly trained workforce and spur economic development after the Second World War. There was also a short-term fear that the large number of returning GIs would flood the workforce and cause unemployment. While Conant of Harvard and Hutchins of Chicago were fearful that the influx might damage academic standards (Humes 2006, p. 32), Conant strongly supported the notion that opportunities for higher education needed to be grounded on merit, independent of prevailing social and economic mores that tended to direct some to higher education over others. Being too true to its time, the GI Bill stumbled badly in terms of lost opportunity to advance racial and sexual equality. Even so, it was probably the most significant piece of social legislation of its time and set a pattern for supporting access to higher education that was effective for several decades. The impact has dwindled as the number of veterans and level of support have decreased.

The basic premise of the public goods nature of education is changing today. Within think tanks, state legislatures, public forums and commissions of higher education, publicly financed higher education is being increasingly redefined as more of a private good that deserves less public support based on a narrower view of the benefits and where the benefits accrue. The current mantra is that the benefits accrue primarily to the students; therefore they should pay for them. The public perception of the public goods content of education is being determined on the one hand by the argument about the locus of benefit for higher education and on the other by arguments for more cost-effective, more parent-controlled provision of quality services for primary and secondary education with charter schools and vouchers. While the perception of public support remains for traditional primary and secondary education, there is the increasing advocacy of public support for formerly private education at this level and public support for charter schools that have many private school characteristics. The general assumption that existed thirty years ago, that all education was more of a public good in terms of a valid claim on public resources, is now much more complex.

As we look at today's public decisions about what goods and services to support, we must address the relevance of the definitional criteria to the decisions at hand. Do such properties as being non-depletable and non-excludable serve as critical benchmarks for decision makers? What role should economists play in setting these benchmarks? At one end of the spectrum of views, Malkin and Wildavsky (1991) see public goods in terms of context--a product of societal desires at the time. Alternatively, any number of economists has pondered at length over the definition of public goods and how one could permanently categorize them sufficiently precisely to reduce or eliminate ambiguity and make these definitions useful in guiding policy. Economists such as Samuelson, Head, Buchanan, and others have written extensively on such public goods issues.

Musgrave (p. 13) avoided much of the battle for definitional and operative precision by introducing the concept of merit goods. These are goods or wants "considered so meritorious that that their satisfaction is provided for through the public budget and paid for by private consumers." While merit goods might well be public or quasi-public goods, they could also be private goods. One of the distinctions raised here is the extent to which a merit good might interfere with consumer sovereignty--when these goods are satisfied or serviced through the market. Medical services and housing are two services/goods that present such a dilemma. Ver Ecke (1999) argues that in a sense, public, private, and merit are tags that give general shades of meaning to classes of goods. He then goes on to construct his own multi-faceted definition of public goods, in which he simplifies the complexities of other definitions by squeezing a number of seemingly different concepts together. The question is whether it is necessary to delve exhaustively into the realm of what constitutes a public, quasi-public, merit, or other good along the continuum between public and private goods in order to contribute to public decisions about the degree and character of the involvement of government in the lives and activities of citizens.

At this point we are faced with something of a morass when we ask how economists relate to, are interested in, or should even care about public goods and the decisions made by society about them. Lionel Robbins (1981) in his lecture "Economics and Political Economy" gives us operational guidelines for approaching the analysis of public and related goods. This lecture is quite different from his pre-World War II The Nature and Significance of Economic Science, through which economists that know Robbins at all tend to see him today. Since writing that piece, Robbins was involved in the economic planning of the war effort, became Chairman of the Financial Times after the war and also chaired the commission that produced the seminal report on higher education in Britain. By the time of his lecture in 1981, Robbins was practicing as an applied economist as well as brilliantly teaching the history of economic thought.