The Fallacy of Public Goods: Libertarians and National Defense

For some reason free market libertarians, Ayn Rand included, tend to fall for the public goods unlogic and therefore dismiss anarchism as a viable social order. Nothing could be further from the truth. Public goods are not a problem in a free market — they are only a problem in a regulated such. In fact, the logic emanating from identifying the existence of public goods is based on false assumptions.

Public goods are defined as goods or services that are both non-rivalrous and non-excludable, i.e. the u201Cexact oppositeu201D of private goods, which are both rivalrous and excludable, in the common two-by-two setup. Whatever is rivalrous is limited in terms of consumption, which means your use of the good reduces availability of it for others; whatever is excludable can be u201Cprotectedu201D from others through exclusion, i.e. if I have it and want to use it I can easily make sure you can’t have it. In other words, the rivalrous and excludable private goods are cakes that you cannot both eat and have. It follows that public goods, as the very opposite of private goods, are cakes we all can eat and have at the same time.

The setup has obvious political connotations in that private goods are like private property in the free market whereas public goods are of a rather communist character and require government regulation. Consequently, public goods are used as an argument against the free market and for a government.

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However, the distinction between public and private goods and, especially, the conclusion drawn from it (that only the latter work well as private property) is fallacious. There are two reasons for this. In the first case, the structure of present government provision of the public good is taken as a given and the market, it is concluded, cannot provide this type of structure. In the second case, the current market structure is shown not to provide a good or service that is presumed to be wanted by consumers. Here the market is u201Cobviouslyu201D suboptimal since there exists demand but the market, through its very structure of bottom-up solutions based on private property, provides disincentives to satisfy the demand and therefore u201Cfails.u201D

Both arguments are wrong and for the same reason. I would like to say that they are obviously wrong, but since so many, even free-marketeers, seem to fall for them I guess they are not that obvious after all.

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Taking Government Structure for Granted

The problem is that status quo is implicitly assumed. Where government is currently providing a service, such as national defense, it is concluded that the market could not provide that service holding the production structure, provision, and level of service constant. This is a common trick that many seem to fall for, but the conclusion does not make much sense: the free market cannot provide government defense. And even if the market could, why in the world would we assume market organization would be identical to government organization? Market organization is bottom-up subject to consumer wants through the profit-loss system; government organization is top-down political command with no incentive whatsoever to satisfy consumer wants (except, perhaps, to the degree that it keeps voters voting).

In the case of national defense, an issue that often seems to confuse advocates of the free market, the public goods argument bluntly states that the free market cannot supply national defense. Well, to be honest: I see no reason for private enterprise to provide national defense. u201CThe nationu201D is not a consumer and has no wants and also cannot pay for the service — it is but a collectivist illusion. The market would provide defense services for individuals and families and their property — to the degree they are willing and able to pay for the service. In what sense is protection of my life and property non-rivalrous and non-excludable?

A counter-argument claims that even if private life and property is protected, it is still the case that foreign nations constitute a threat and that we need to defend our nation. But this counter-argument is even worse than the original argument: not only is u201Cour nationu201D assumed as the starting point — but now we also seem to assume other u201Cnationsu201D have the ability to act and even have feelings (they’re u201Chostileu201D and therefore u201Ca threatu201D). Also, the argument seems to assume that u201Cweu201D — our u201Cnationu201D — must have pissed u201Cthemu201D off somehow to such a degree that u201Ctheyu201D not only want to but will attack u201Cus.u201D I doubt it is possible to get more collectivism than that into a single sentence.

So how would the free market provide u201Cnational defenseu201D? The question has been answered over and over to different levels of detail, but a good starting point is government. If one would want to u201Cdefeatu201D (occupy, take over, destroy, whatever…) the United States all that is necessary is to get the people on capitol hill on their knees and then they’ll wave the white flag of surrender and all Americans will instantaneously be subjected to another master. If someone would want to take over the area formerly known as the United States that someone would have to occupy and defeat every single individual and every single piece of private property. Furthermore, a free market society would not supply the aggressor with a fixed and ready structure of government, so the aggressor would need to both subject 300 million people to his will and build the controlling hierarchy of government to keep them all in check.

As an aggressor, which structure would you choose? Which suffers from a u201Cpublic goods problemu201D?

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The Market’s Failure to Provide

The alternative version of the public goods anti-market rhetoric states that the market is unable to provide certain goods or services that are desired by [most or all] consumers. The obvious question to ask anyone claiming this is u201Chow do you know?u201D — how do you establish that there is sufficient market demand but not supply to satisfy those consumer wants? To me, this seems like a contradiction in terms: if there is sufficient demand there will be supply, and if there isn’t there won’t be.

Oftentimes market demand is assumed to be great because the good or service is u201Cimportantu201D or necessary in very general terms, such as a clean or protected environment and the supply of radio or television (and, lately, Internet). In the case of the environment, government u201Cneedsu201D to step in since the market doesn’t regulate e.g. emissions and therefore the market suffers from extensive externalities.

The description of the u201Cproblemu201D obviously assumes a distribution of property rights and a system for property protection — and regulation of the extent of property rights — that is identical to that provided by government, i.e. a political system based on force. The fallacy is here the assumption of a society with a free market based on private property existing side by side with (or, more likely, under) government. The truth is that any force-based system necessarily compromises private property rights: a system of power cannot guarantee property but can only guarantee property for as long as that power finds it beneficial. In other words, property exists subject to the whim of government leaders, which increases uncertainty and therefore creates disincentives to invest in risky projects.

Also, such a system provides the illusion of a universal u201Csafe pathu201D for business. As long as entrepreneurs follow the government-provided guidelines they are u201Csafeu201D (i.e., approved) and therefore they need not bother as much with market demand, since a market subjected to government is necessarily restricted in supply and has limited competition and artificial barriers to entry. This means that if consumers prefer reduced emissions they cannot rely fully on market instruments such as boycotts, since new market actors are hindered from entering, but find it more effective to organize in order to influence politicians who can then regulate business.

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The problem of public goods is further increased by the fact that government does not enforce property rights to the degree necessary (i.e., to the degree they would be in the free market) and also that it prohibits property of certain assets (air, water, frequencies for radio, TV, cell phones). Where there are no allocated and enforced property rights there will be chaos. Chaos, in fact, is a perfectly understandable outcome of a lack of private property, but only where private property rights aren’t applicable or are prohibited. In fact, where there are no property rights but property rights can be established there will be no chaos — there will be property rights. Such rights spontaneously arise through market interaction everywhere possible. In other words, there is no need for government ownership of air waves for television and radio since frequencies can indeed be owned and traded in a market.

But what about exclusion of the use of air waves since they are freely available for anyone capable of picking them up? This seems to have been an issue in the public goods debate, but should not be. It is true that the broadcast of television can be received by anyone within reach — but it is equally true that the broadcaster can encrypt or encode the broadcast so that only those who buy the service get access, thereby creating excludability of non-excludable goods. The extent of the market is dependent on the overall level of division of labor which is in turn partly dependent on developments in communication and technology.


The conclusions should be fairly obvious: there is no public goods problem. In fact, we can say that there is either private property or chaos, and there is chaos to the degree that there is no private property. Our regulated market contains the level of chaos corresponding to the level of government meddling with the incentives and orders of the free market. That government would be the solution to the so-called public goods problem is nothing but preposterous.

The public goods problem exists in the mind of theoreticians for two reasons. One is due to their inability to imagine a way to satisfy consumer wants different from the one-size-fits-all service provided by government. The fact that the market works in very different ways than governments has not crossed their minds. The other is that they underestimate the destruction caused by government regulation in the existing market and that they fail to understand that markets successfully manage to provide all services that are worth providing. Making government provide a solution that the market u201Ccannotu201D simply means making a good or service available prematurely while forcing the costs on everybody through taxation. In either case, it is obvious that government is the problem and cause of the u201Cfailureu201D of markets.

The solution is more market, but that’s not the way public good theorists want to go. They want to go the other way; they want their own and nobody else’s values to shape the world. For that to happen more government is obviously the key; without it they cannot force any solution upon the rest of us.