This is the final paper I submitted for my Public Finance class. I'll post the other two, shorter articles later. Please keep in mind two things:
I presented this after the other three students gave their oral overviews. Theirs were all on "hard finance" topics such as Social Security privatization, the workings of the budget the President proposed this year, and the idea of a national sales tax replacing the federal income tax. As you'll see, my paper took a deeper approach. After I was done speaking, the class was eerily silent and it took a minute or two for the questions to formulate in their minds. Interestingly, none of them rejected my conclusion outright, though, as I expected, one of them did raise the issue of "local mafias" running around and "what about the law? who'd create and enforce it?"
My professor expressed sincere interest in my work and despite the rather deep extent of his statism, looked forward to reading it.
In that sense: Mission Accomplished.
Full text below.
Charles Hueter
Professor Parsells
Public Finance
March 7, 2005
A CONCEPTUAL ANALYSIS OF PUBLIC GOODS: THE CASE OF NATIONALIZED DEFENSE
The concept of the public good is one of the most widely-accepted economic concepts in contemporary economics. Nearly fifty years after Paul Samuelson's "The Pure Theory of Public Expenditure" (Samuelson 1954), it has provided a way to categorize the goods and services humanity wants, produces, and consumes in two fundamental areas: the private and the public. An enduring example of the latter is national defense. However, I have never been quite convinced by that particular application of the concept and in this paper I will attempt to explain why I think it deserves modification.
The Concept of Public Goods
What is a public good and what differentiates it from a private good? There are two primary factors to consider in making this distinction; the first is called nonexclusion. This means that, for a public good, it is either impossible or infeasible to exclude people from consuming that good if they do not wish to pay for it because consumption of that good can be accomplished without paying. A classic example is national defense: "[a]ll citizens are under the umbrella of deterrence; if national defense is provided for one, it is provided for all" (Champney 988). How can the federal government exclude citizens from its protection who have avoided paying their taxes when it protects all within its borders? "The critical feature of a nonexclusive public good is the inability of a private provider to capture all of the benefits from its provision" (Speir 399). It would be prohibitively costly to do so, especially in a time of war where the bullets are flying and people are rushing to escape the carnage and every city becomes a potential battleground. Individuals can free-ride off the services provided to others because it becomes difficult to price individual units of that good.
The second consideration is whether a good's consumption is rivalrous or not. This factors in costs as well, but for consumers rather than producers: "each individual's consumption of such a good leads to no subtraction from any other individual's consumption of that good" (Samuelson 387). If I can consume a good without negatively affecting the consumption of someone else consuming the same good, then the good is said to be nonrivalous. National defense is again given as an example of this because as the population of the United States increases, "the additional population can be defended without any reduction in benefits to the existing population" (Hyman 66). Consumption of public goods that exhibits nonrival behavior therefore has benefits that must be shared rather than individually purchased.
Thus, we come to the final assertions common to nearly all economic discussions of public goods and defense services. "National defense is ... the quintessential federal service, a vital function that cannot reasonably be provided by the market" (Lewis 60). "[I]t is inconceivable to imagine defense services being packaged into neat bundles that can be sold over the counter to eager buyers" (Hyman 134). "[F]or developed nations ... the usual hypothesis that defense is a pure public good cannot be rejected" (Gonzalez and Mehay 284). As is thought in the economic mainstream, national defense quite aptly embodies both nonrivalry and nonexcludability. Therefore, it ought to be produced and provided by the state.
Private goods, on the other hand, are just the opposite. A private business can easily exclude people from consuming its goods by way of requiring a price to be paid before the good is delivered. A private business can produce a good that is rivalous in consumption because most consumer goods like cars, food, and houses exist in given quantities and the sale of one must result in the decline of that quantity at that time. Of course, some goods do not squarely fall in one camp and it could be postulated that a continuum exists between "pure" public goods and "pure" private goods (Hyman 136-138). I also note there is considerable theoretical evidence that the concept of a public/private good is coherent at all (Hoppe 28-34), but I will leave that stone unturned for this purposes of this discussion.
The Concept of Defense
Before I continue, it would be helpful to explain the nature of defense services first and differentiate among their manifestations.
Humans have physical bodies and possessions and given that they value these objects, they will want them protected from violence and unwelcome transportation. The extent of a farmer's livelihood greatly depends on the tools he uses. The ability of a trumpet player to play jazz depends on his bodily capability to play the instrument. For the aggregate economy of a city to grow, human labor and the factors of production it employs must not be under constant threat of robbery or destruction. It is only natural people want protection from those willing to steal, alter, maim, or destroy.
Threats to property come in several forms. A drug addict may wish to grab the purse from a woman shopping in an outdoor market to pay for that next high. A fired employee might become enraged and might return to work a few days later, intending to kill everyone in the human resources department. A government that fears a catastrophic economic collapse if its supply of energy resources dwindles to nothing, might choose to invade a neighboring country to seize its oil fields. These are very real threats from which people want protection and they vary in simplicity as well as likelihood. Threats are part of the uncertainty of life. Thus, just as there is a demand for chocolate, there is a demand for defense services.
There are countless ways a defense service might be manifested. I could buy a handgun and keep it under my bed in case I am roused from sleep by the sounds of my living room windows breaking and careful footsteps. The inhabitants of a neighborhood might agree to keep an eye out for suspicious behavior that would concern the owner of the property at which the behavior is aimed. Or, a group of associates, noting their prowess in physical detention and criminal pattern recognition, could decide to offer property protection for a fee.
It should be clear that in these cases defense services can be exclusive. I do not set out to defend a community with my single handgun for free. If a family in the watchful neighborhood doesn't want to participate, the watchers don't have to pay attention to that family's property. Obviously, by charging a price, the private defense agency (PDA) excludes people. Furthermore, "there is no guarantee that the free-rider incentive is the only incentive with which individuals are faced in regard to public goods" (Fielding 298).
Defense services can be rivalous. I cannot personally defend everything I own all the time; my opportunity costs become too great and my other desires will eventually intercede. Similarly, the neighbors cannot stand eternal guard. The scarce resource in these scenarios is one's time and our desire for protection competes with our other desires. In addition, by "consuming" our defense in such a manner, we remove ourselves from the lives of others by, at most, an equal amount. Thus, in a sense, we become the rivalous good under demand because we are the ones providing the defense service.
The PDA can overcome the opportunity cost problem with solutions such as hired 24 hour video surveillance. However, a bank will desire defense services of a structure and form that a fisherman might not want to employ to temporarily protect his boat while away at lunch. Therefore, private defense services will diversify and complete to capture the varied demands of the market, resulting in rivalous consumption because the good offered only exists in a certain quantity at a certain time.
Nationalized Defense as a Public Good
I think it can be easily shown that, at the very least, some defense services constitute goods more private than public. Of course, the specific subject here is not just defense but national defense intended to deter and throw back invaders. The scope of such a defense service is not limited to one person, a neighborhood, or the people who buy private defense services, but expanded to the whole of a country. This is the defense of militaries against government armies and militaristic groups like guerilla forces.
Could such a system emerge from the above examples, and thus retain the characteristics of economic rivalry and exclusion and remain private goods? Given the severe market limitations of the first two (pure altruism scaling to that magnitude is extraordinarily unlikely), the third deserves consideration. Could a PDA grow to the point where it covers the defense services voluntarily requested of every citizen of the US? This implies monopoly, and thus suffers from the single greatest threat to such a market position: freedom, both of entry into that market and to choose with whom one associates. While it is possible one PDA could provide diverse and superior defense service for many years, the demands of consumers will always outpace its ability to innovate and provide. Humans make mistakes and it is impossible for a company to always satisfy everyone with which it contracts. In addition, why would a PDA continue to sell coverage to a consumer who took little or no precautions with his belongings and left his property to great risk after repeated crimes against it? I doubt one PDA could become the de facto provider of national defense. It might be a market leader, but not one that exercises monopoly power.
I submit that the only feasible scenario where all American citizens live under the protection of a single defense service provider would be a system where coercion takes place. Either the provider is compelled to extend service to those it normally would not cover (such as those who won't pay for coverage) or the consumer is compelled to accept coverage she would normally not purchase. This is the current state of affairs in regards to the United States military. Americans are compelled to pay taxes and a significant portion of those taxes goes towards the Department of Defense. Under threat of imprisonment for disobeying orders, the members of the military must defend all Americans should the political process demand it.
Ignoring the harm and difficulties created by state-monopolized national defense (Hoppe 35-38), does the nationalized defense we currently enjoy constitute a public good? It satisfies the requirement of nonexclusion. Even if I renounce all taxation and live alone, the United States military will protect me. If I have visiting relatives from another country and the US is attacked, they will be provided with defense services. In reality, anyone living in the country that is not explicitly identified with the enemy will tend to have the benefit of the doubt. Even a declared, open enemy of the country will still receive protection from accidental death if his forces accidentally attack the city block he resides in and the defensive American forces repel them. In practice, just about every human being in the United States has benefited and still benefits from the deterrent effect of the American nuclear arsenal.
It is slightly more complicated in the matter of nonrivalous consumption. In many instances, the defense of an additional person does not adversely affect the defense of others. Should the province of Saskatchewan secede from the rest of Canada and attempt to occupy Montana, Americans in Hawaii, Florida, and Nevada shouldn't fear for their provision of defense services. Some conflicts don't require large mobilizations of troops and equipment. However, some do. An example currently in the headlines is the US occupation of Iraq. There are well-founded concerns that the hefty deployment of military resources leaves other Department of Defense and National Guard responsibilities without adequate manpower (Squitieri). Only so many uses of the American armed forces can be engaged before problems emerge, so there are limits to the consumption of the US military. These limits, if surpassed, threaten the provision of defense of other Americans. Therefore, it could be rightfully claimed that nationalized defense is a congestible public good, very much like the congestion of a public road at peak driving times. This knocks even the most public version of defense down from the position of a "pure" public good.
Conclusion
"Nonrivalness and nonexcludability define public goods" (Zax and Ichinowski 294). However, defense services are not necessarily public goods because they can exhibit both exclusionary and rivalry behavior when consumed and produced without compulsion. Since the government has compelled both the provision and acceptance of one form of defense service, it in effect makes that defense service demonstrate nonrival and nonexclusive behavior when consumed and produced. The state therefore creates the externalities it set out to correct.
Works Cited
Champey, Leonard. "Public Goods and Policy Types." Public Administration Review (1988): 988-994.
Fielding, Karl T. "Nonexcludability and Government Financing of Public Goods." Journal of Libertarian Studies 3.3 (1979): 293-298.
Gonzalez, Rodolfo A. and Stephen L. Mehay. "Publicness, Scale, and Spillover Effects in Defense Spending." Public Finance Quarterly. 18.3 (1990): 273-291.
Hoppe, Hans-Hermann. "Fallacies of the Public Goods Theory and the Production of Security." Journal of Libertarian Studies 9.1 (1989): 27-46.
Hyman, David N. Public Finance: A Contemporary Application of Theory to Policy. Orlando: Harcourt, 2002.
Lewis, Gregory B. "Guns, Butter, and Federal Careers: Growth, Decline, and Personnel in Defense and Domestic Agencies." Journal of Public Administration Research and Theory. 7.1 (1997): 59-85.
Samuelson, Paul. "A Pure Theory of Public Expenditure." Review of Economics and Statistics. 36 (1954): 387-389.
Speir, John P. "The implications of different liability rules for the provision of a risky public good." Public Finance Quarterly. 23.3 (1995): 399-417.
Squitieri, Tom. "General Says New War Could Strain Military." USA Today 16 Feb. 2005. 7 Mar. 2005. .
Zax, Jeffery S. and Casey Ichinowski. "Excludability and the Effects of Free Riders: Right-to-Work Laws and Local Public Sector Unionization." Public Finance Quarterly 19.3 (1991): 316.