===== PAGE 1 =====

National Goods Versus Public
Goods: Defense, Disarmament,
| and Free Riders

’

J offrey Rogers Hummel*

f all the functions of the State, the one generally considerec
essential above all others is national defense. According t
the popular ideal, national defense is a service provided b;
_ the State to its citizens. This service entails protection from aggres
sors outside the State's jurisdiction, usually foreign States. The mos
sophisticated theoretical justification for State provision of this ser
vice is' the public-goods' argument. Economists have called man:
things public goods and then endlessly debated whether the labe
really applies, but national defense has. remained the quintessentia
public good. ‘Although rarely discussed in’ detail, it is universal
invoked as the classic representative of the public-goods category.’

- As the publie-goods argument has been refined by economists, tw:
characteristics distinguish a pure public good from a private good

*Jeffrey Rogers Hamel is publications ¢ director at the Independent Institute | I
San Francisco.
' Iwishto acknowledge the invaluable assistance of Williamson M. Evers, Joe Fuhrig
. dnd Don Lavoie in working out the themes of this paper and leading me to cruciz
supporting references. Tyler Cowen, David Friedman; Marshall Fritz, M. L. Rantale
David Ramsay: Steele, Richard H. Timberlake, Jr., David'J. Theroux, and Lawrence E
White all gave helpful comments on drafts. They donot necessarily share my conclusion:
however, and I alone am responsible for any remaining errors. A version of this pape
was first delivered at the annual meeting of the Western Economic Association in Sa
Francisco in July, 1986. :

By “the State” I mean government. I use the two terms interchangeably, unlik
many political scientists, who use the term the “State” either for what I am calling th
“nation,” the government plus its subjects, or for some vague intermediate entity whic
is less than. the entire nation but more than just the government. I capitalize the wor
“State” to distinguish it: from constituent states within a federal system of governmen
like that of the United States.

‘Examples of economists treating national defense as the quintessential public goo
are so abundant as to be almost not worth citing. Nevertheless, I shall mention a fev
Paul A. Samuelson, in his once standard text, Economics, 10th ed., with Peter Temi
(New York: McGraw- Hill, 1976), p. 159, refers to “national defense as an example pai

The Review of Austrian Economics, Vol. 4, 1990, PP. 88-122 |
ISSN 0889- 3047

88


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National Goods Versus Public Goods 89

The first is non-rival consumption. One customer’s consumption of
a marginal unit of the good or service does not preclude another’s
consumption of the same unit. For example, in an uncrowded
theater, two patrons’ enjoyment of the same movie is non-rival. The
second characteristic is non-excludability. The good. or service
cannot be provided to an individual customer without simulta-
neously providing it to others. The owner of a dam, for example,
cannot provide flood control separately to the individual farmers
residing downstream.’

Although these two characteristics frequently come in con-
junction with each other, they do not necessarily have to. The non-

excellence of public goods.” James M. Buchanan and Marilyn R. Flowers, The Public
Finances: An Introductory Textbook, 4th ed. (Homewood, Ill.: Richard D. Irwin, 1975), p.
27, state “[d]efense against external enemies seems to fall squarely within the collective
goods category.” John G. Head and Carl S. Shoup, “Public Goods, Private Goods, and
Ambiguous Goods,” Economic Journal 79 (September, 1969): 567, speak of the “extreme
[public- good] cases, such as that of national defense ..

Among the few attempts of economists to Jook | in any detail at national defense
as a public good are Earl A. Thompson, “Taxation and National Defense,” Journal of
Political Economy 82 (July/August 1974): 755-82, and R. Harrison Wagner, “National
Defense as a Collective Good” in Craig Liske, et al., William Loehr, and John
McCamant, eds., Comparative Public Policy: Issues, Theories, and Methods (New York:
John Wiley and Sons, 1975), pp. 199-221. Thompson’s article is a formal attempt to
find the most efficient tax structure for national defense, based on the assumption
that the need is a function of wealth, and has little in common with my approach. The
Wagner article is a utility function analysis of the demand for national defense, and
I will have occasion to mention it below.

After national defense, the lighthouse was probably economists’ favorite public
good, that is, until Ronald H. Coase, “The Lighthouse in Economics,” Journal of Law
and Economics 17 (October 1974): 357-76, demonstrated that historically lighthouses
had been privately provided. Despite his demonstration, economists have not com-
pletely abandoned this example.

2paul A. Samuelson’s two classic articles, “The Pure Theory of Public Expenditure,”
Review of Economics and Statistics 36 (November 1954): 387-89, and “Diagrammatic Expo-
sition of a Theory of Public Expenditure,” ibid. 37 (November 1955): 350-56, are generally
credited as being the first formal statements of modern public-goods theory. They, like all of
Samuelson’s articles that I shall cite, are reprinted in The Collected Scientific Papers
of Paul A. Samuelson, vol. 2, Joseph E. Stiglitz, ed. (Cambridge, Mass.: M. I. T. Press,
1966) or vol. 3, Robert C. Merton, ed. (Cambridge, Mass.: M. I. T. Press, 1972).

Several economists, however, had anticipated Samuelson. Indeed, Adam Smith, in An
Inquiry into the Nature and Causes of the Wealth of Nations (1776; reprint, New York:
Random House, 1937), bk. 5, passim., particularly pp. 653-56, 681, presents a brief and
crude statement of public-goods theory, giving national defense as an example. The most
notable contributions of a largely neglected public-goods tradition among Continental
economists were finally collected, translated, and reprinted in Richard A. Musgrave and
Alan T. Peacock, eds., Classics in the Theory of Public Finance (London: Macmillan, 1958).
See particularly Knut Wicksell, “A New Principle of Just Taxation” (1896), pp. 72-118 and
Erik Lindahl, “Just Taxation—A Positive Solution” (1919), pp. 168-76. An English presen-
tation that pre-dated Samuelson’s was by Howard R. Bowen, in “The Interpretation of
Voting in the Allocation of Resources,” Quarterly Journal of Economics 58 (November
1943): 27-48, and Toward Social Economy (New York: Rinehart, 1948).


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90 The Review of Austrian Economics, Volume «

excludability from the dam’s flood-control services is accompaniec
by non-rival consumption of the services among the various farmers
but the owner of a nearly empty theater can still exclude additiona
patrons. Yet, according to the public-goods argument, either charac
teristic alone causes “market failure”—that is, an allocation of re
sources that is less than Pareto optimal. Thus, either can be sufficien
to justify State intervention.

Much of the literature on public goods has conceded that, strictl
speaking, very few actual goods or services exhibit either of thes:
characteristics in their polar form. Instead, in the real world, wi
encounter a range of goods and services, for which the potentia
capacity and quality of non-rival consumption is increasing or fo:

Important further developments in public-goods theory include Paul A. Samuelson
“Aspects of Public Expenditure Theories,” Review of Economics and Statistics 4!
(November 1958): 332-38; Richard A. Musgrave, The Theory of Public Finance: A Stud:
in Public Economy (New York: McGraw-Hill, 1959); and William J. Baumol, Welfar
Economics and the Theory of the State, 2nd ed. (Cambridge, Mass.: Harvard Universit

- Press, 1965).

Samuelson’s initial presentation focused only upon non-rival consumption. Th
distinction between the two public-goods characteristics was not fully clarified unti
John G. Head, “Public Goods and Public Policy,” Public Finance 17 (1962): 197-21¢
reprinted with other of the author’s essays on the same subject in Head, Public Good
and Public Welfare (Durham, N.C.: Duke University Press, 1974), pp. 164-83. The firs
full text devoted to public goods was James M. Buchanan, The Demand and Suppl:
of Public Goods (Chicago: Rand McNally, 1968), which contains extensive biblic
graphic references to the previous literature. For a more recent summary of the stil
sometimes confusing concepts surrounding public goods, see Duncan Snidal, “Publi
Goods, Property Rights, and Political Organizations,” International Studies Quarterl
23 (December 1979): 532-66.

The public-goods literature is terminologically over-endowed. “Public goods” ar
also called “collective goods” (Samuelson) and “social goods” (Musgrave). “Non-rivs
consumption” is also called “joint consumption” (Musgrave), “joint demand” (Samuel
son), “joint supply” (Head), “indivisibility” (Buchanan), and “non-exhaustiveness
(Brubaker). Except for the fairly rare “non-marketability,” the variations for “non-ex
cludability”—“non-exclusiveness” and “non-exclusivity”—at least maintain the sam
root, and although as I note below, “external economies” or “positive externalities” ar
related, they are still distinct enough to justify a separate term.

Harold Demsetz, “The Private Production of Public Goods,” Journal of Law an
Economics 13 (October 1970): 293-306, makes a distinction between the terms “publi
good” (a good or service exhibiting non-rival consumption) and “collective good” (a goo
or service exhibiting both non-rival consumption and non-excludability). Perhaps th
high-point in obscure public-goods terminology is reached in Carl S. Shoup, Publi
Finance (Chicago: Aldine, 1969), pp. 66-74, which labels goods with non-rival consumg
tion as “collective-consumption goods” and those with non-excludability as “group-corn
sumption goods.” You can imagine how the poor reader must fare with only the hug
difference between “collective” and “group” to navigate him through Shoup’s turgi
explanation. Despite all that, Shoup’s treatment is exemplary because he remains th
only economist, to my knowledge, not to classify national defense as a public gooc
Anticipating some of my argument, he puts it in a separate category altogethe:
“preservation of the nation-state.”


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Vational Goods Versus Public Goods 91

vhich the costs of exclusion are increasing.’ Indeed, some economists
1ave gone so far as to suggest that these characteristics are almost
1ever physically inherent in any good or service, but are rather nearly
1lways a consequence of choosing one out of many feasible methods
or producing the good or service.*

While I believe that this argument has much merit, I am not going
o challenge the validity, realism, or relevance of the public-goods
.oncept. On the contrary, I think that the core service within national
lefense captures the essence of a public good more fully than economists

30f the four possibilities that the two public-goods characteristics generate, econ-
mists have had the most difficult time identifying real-world examples of goods or
ervices that are non-excludable but nevertheless rival in consumption. Some attempts
nclude: use of a neighbors blossoms by the bees of competing bee-keepers; travel on
rowded freeways; extraction of oil from underground oil fields; and theft of automo-
iles. All of these examples, however, with the possible exception of the blossoms,
epresent goods or services that could be easily made excludable with a better definition
ir protection of property rights.

Tyler Cowen, “Public Goods Definitions and Their Institutional Context: A Critique
f Public Goods Theory,” Review of Social Economy 43 (April 1985): 53-63, and Snidal,
Public Goods, Property Rights, and Political Organizations,” argue that non-exclud-
tbility logically implies non-rival consumption. Snidal, however, arrives at this conclu-
ion partially through a definitional sleight of hand. He invents a new term, “noncontrol
wer exclusion,” which he distinguishes from “nonexclusiveness.” The new term retains,
inder a slightly different name, an exclusion characteristic that can vary indepen-
lently of non-rival consumption, whereas the older term becomes synonymous by
lefinition with a public good exhibiting both characteristics.

Many of the early criticisms of Samuelson’s original public-goods articles zeroed in
in the polarity of his concept. For instance, see Stephen Enke, “More on the Misuse of
Mathematics in Economics: A Rejoinder,” Review of Economics and Statistics 37 (May
.955): 131-33; Julius Margolis, “A Comment on the Pure Theory of Public Expenditure,”
bid. 37 (November 1955): 347-49; and Gerhard Colm, “Comments on Samuelson’s
“heory of Public Finance,” ibid. 38 (November 1956): 408-12. Samuelson, himself,
idmitted this feature in his second article, “Diagrammatic Exposition of a Theory of
ublic Expenditure.”

The development of a more sophisticated approach can be traced through James
A. Buchanan and M. Z. Kafoglis, “A Note on Public Good Supply,” American Economic
teview 53 (January 1963): 403-14; Harold Demsetz, “The Exchange and Enforcement
if Property Rights,” Journal of Law and Economics 7 (October 1964): 11-26; Jora R.
dinasian, “Television Pricing and the Theory of Public Goods,” ibid. 7 (October 1964):
'1-80; R. N. McKean and Jora R. Minasian, “On Achieving Pareto Optimality—Regard-
ess of Cost,” Western Economic Journal 5 (December 1966): 14-23; Otto Davis and
Andrew Winston, “On the Distinction Between Public and Private Goods,” American
fconomic Review 57 (Mary 1967): 360-73; E. J. Mishan, “The Relationship Between
loint Products, Collective Goods, and External Effects,” Journal of Political Economy
'7 (May/June 1969): 329-48; and Head and Shoup, “Public Goods, Private Goods, and
Ambiguous Goods.”

‘See Cowen, “Public Goods Definitions and Their Institutional Context”; Tom G.
>almer, “Infrastructure: Public or Private?” Policy Report 5 (May 1983): 1-5, 11; Murray
V. Rothbard, “The Myth of Neutral Taxation,” Cato Journal 1 (Fall 1981): 532-46; and
{enneth D. Goldin, “Equal Access vs. Selective Access: A Critique of Public Goods
heory,” Public Choice 29 (Spring 1977): 63-71.

To some extent, this position was anticipated by Earl Brubaker, “Free Ride, Free


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92 : RK The Review of Austrian Economics, Volume

have ever appreciated. But this essential feature, rather than provid
ing a solid justification for State provision of the service, offers on
of the most powerful objections to such provision.

National defense as it is provided by.the State certainly exhibit
both public-good characteristics to a substantial extent. True, Amer;
cans in Alaska and Hawaii could very easily be excluded from th
United States government’s defense perimeter, and doing so migh
enhance the military value of at least United States convention
forces to Americans in the other 48 states. But in general, an addi
tional ICBM in the United States arsenal; insofar ds it truly protect
one American, can simultaneously protect everyone else within th
country without diminishing its protection. In that respect, consumg
tion of national defense is non-rival. Moreover, a technique that defend
just a single American from the Soviet State without necessarily defenc
ing his or her entire community and perhaps the entire nation is difficul
to visualize. That makes national defense non-excludable as well.

I am going to focus, however, only upon non-excludability. ]
consumption of a service is non-rival, but businessmen and entrepre
neurs can exclude those who do not pay for it, then they still hav
strong incentives to provide the service. The most serious “marke
failure” that is alleged to result is under-utilization of the service
Some people will be prevented from benefiting’ from the quantity c
the service that has been produced, even though permitting them t
do so costs nothing. Furthermore, even this imperfection will diss
pate if the market permits discriminatory pricing,’ :

On. the other hand, non-excludability cieates opportunities fo
free riders, who will pay for.the service only if doing so is absolutel
necessary to receive it. From. the perspective of economic self-inte:
est, every potential customer has an incentive to try to be a free ride:
If enough of them act on this incentive, the service will not b
produced at all, or at least. not in an optimal quantity.

Revelation, or Golden Rule,” Journal of Laiv and Economics 18 (April 1975): 147-6
Brubaker argues that what he calls “pre-contract excludability” allows the market i
many cases to overcome the. free-rider problem. “Pre-contract excludability” involve
contractually obligating recipients of the public good to pay on the condition that
specified number of other recipients pay. The entrepreneur does. not produce the publ
good until the requisite number of recipients agree to the contract.

~ °I have slightly simplified the alleged “market failure” from non-rival consumptic
with excludability. The quantity of the public.good could also be non-optimal, althoug
economists have not yet determined in exactly which direction. To the ‘extent th:
different’ competitors produce redundant quantities of the public good for thos
customers willing to pay the market price, there will be over-production in addition {
under-utilization. To the extent that producers cannot capture the returns from thos
potential customers who would be willing to pay something less than the market pric
there will be under- production. oo :


===== PAGE 6 =====

National Goods Versus Public Goods 93

Another way to think about non-excludability is as a positive
externality in its purest form. Many goods and services generate
additional benefits for people other than those who directly consume
and pay for them. There is often no way for the producers of these
goods to charge those who receive these external benefits. A non-ex-
cludable good or service is one where the positive externalities are
not just an incidental by- product but rather constitute the major
benefit of the good or service.’

Clearly, the justification for State provision of national defense
does not stem from any major concern that protection services would
be produced but under-utilized on the free market. Rather, it stems
from the assumption that, unless taxation or some other coercive levy
forces people to contribute, national defense would be inadequately
funded and therefore under-produced. It is this widely held but rarely
examined assumption that I wish to question.

These supposed problems have led some economists to identify non-rival consump-
tion with excludability as a special case of decreasing cost or of economies of scale. See
Samuelson, “Aspects of Public Expenditure Theory”; Head, “Public Goods and Public
Policy”; and Davis and Winston, “On the Distinction Between Public and Private
Goods.” This occasionally leads to the policy suggestion of providing such public goods
through legal monopolies rather than through State financing. However, Snidal,
“Public Goods, Property Rights, and Political Organizations,” strongly contests this
identification by making a sharp distinction between the marginal cost of producing
the good or service in the first place and the marginal cost of extending consumption
to additional consumers. This distinction is also found in Buchanan's Demand and
Supply of Public Goods, pp. 186-87.

The definitive demonstration of the ability of the market, with discriminatory
pricing, to provide non-rival, excludable goods and services is Demsetz, “The Private
Production of Public Goods.” This possibility first became dimly appreciated when Carl
S. Shoup, “Public Goods and Joint Production,” Rivista internazionale di scienze
economiche e commerciali 12 (1965): 254-64, and James M. Buchanan, “Joint Supply,
Externality, and Optimality,” Economica (November 1966): 404-15, noticed the analogy
between non-rival consumption and the Marshallian concept of joint production, e.g.,
mutton and wool from a common unit of sheep. Paul A. Samuelson, “Contrast Between
Welfare Conditions for Joint Supply and for Public Goods,” Review of Economics and
Statistics 51 (February 1969): 26-30, unpersuasively disputed the import of this
analogy. Ear] A. Thompson, “The Perfectly Competitive Production of Collective Goods,”
ibid. 50 (February 1968): 1-12, admitted that discriminatory pricing was possible on
the market, but with a faulty model tried to show that the result was over-production
of the public good. .

John G. Head concludes that the major justification for government intervention,
not just in the case of national defense, but in the case of all public goods, “will be found
to derive fundamentally from the non-excludability elements rather than from gener-
alized joint supply problems.” See “Public Goods: The Polar Case,” in Richard M. Bird
and John G. Head, eds., Modern Fiscal Issues: Essays in Honour of Carl S. Shoup
(Toronto: University of Toronto Press, 1972), p. 16.

6Samuelson, in a later article, “Pure Theory of Public Expenditure and Taxation,
in J. Margolis and H. Guitton, eds., Public Economics: An Analysis of Public Production
and Consumption and their Relations to the Private Sectors (London: Macmillan, 1969),
pp. 98-123, advanced an astonishing revised definition of public goods: “A public good

»


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94 The Review of Austrian Economics, Volume 4

I

Before I directly address the public-goods justification for State
provision of national defense, we must clarify the meaning of the term
“national defense.” The public-goods justification rests upon a funda-
mental equivocation over exactly what service “national defense”
entails.

When economists discuss national defense, the core service they
usually have in mind, explicitly or implicitly, is protection of people’s
lives, property, and liberty from foreign aggressors. This also appears
to be what people have in mind when they fear foreign conquest,
particularly in the case of the American fear of Soviet conquest.
People throughout the world apparently believe that their own gov-
ernment, no matter how disagreeable, defends them from foreign
governments, which they think would be even more oppressive.

This defense of the people is not synonymous with another service
that goes under the same “national defense” label: protection of the
State itself and its territorial integrity. Logically, there is no neces-
sary relationship between the two. The defense of the people and the
defense of the State are conceptually distinct. Imagine a society
without a State. Whereas it would no longer have a State to protect,
the people might still need some protection from foreign States.’

Historically, the State often embarks on military adventures un-
related to the defense of its subjects. If this were not the case, people
would require no protection from foreign States in the first place.

... is simply one with the property of involving a ‘consumption externality,’ in the sense
of entering into two or more persons’ preference functions simultaneously. ... What are
we left with? Two poles and a continuum in between? No. With a knife-edge pole of the
private-good case, and with all the rest of the world in the public-good domain ...
[Emphasis his].”

Thus, Samuelson defined every single case of positive externalities in consumption
as a public good. Snidal, “Public Goods, Property Rights, and Political Organizations,”
in contrast, articulates the position that I take, and most of the economists cited on
public goods in the notes above are closer to me than to Samuelson. Head's collection,
Public Goods and the Public Welfare, pp. 184-213, reprints a useful survey article on
externalities, “Externality and Public Policy”; Buchanan's Demand and Supply of
Public Goods, p. 75, offers a brief bibliographic essay on the subject; while Shoup Public
Finance, pp. 96-98, and Mishan, “The Relationship Between Joint Products, Collective
Goods, and External Effects,” explicitly discuss the relationship between externalities
and public goods.

"David Friedman, in his defense of anarcho-capitalism, The Machinery of Freedom:
Guide to Radical Capitalism (New York: Harper and Row, 1973), pp. 188-89, makes this
point, yet without quite identifying the distinction between the two forms of national
defense. “One ... argument is the assertion that national defense is unnecessary in an
anarchist society, since there is no nation to defend. Unfortunately, there will still be
nations to defend against, unless we postpone the abolition of our government until
anarchy is universal.”


===== PAGE 8 =====

National Goods Versus Public Goods 95

Many Americans still seriously doubt that the United States’ bombing
of North Vietnam and Cambodia had very much to do with protecting
their liberty. One defense-budget analyst, Earl Ravenal, believes that
nearly two-thirds of the United States government’s military spend-
ing goes toward the defense of wealthy allied nations in Europe and
Asia and has little value for the defense of Americans.

The distinction between the two meanings of national defense
does not only apply when the State engages in foreign conquest,
aggression, or intervention. Even during unambiguously defensive
wars, the State sacrifices the defense of its subjects to the defense of
itself. Such universal war measures as conscription, heavy taxation,
rigid economic regulation, and suppression of dissent aggress against
the very citizens whom the State is presumably protecting. People
believe the State defends their liberty; in fact, they end up surren-
dering their liberty to defend the State. This is the frequently over-
looked cost of the State’s protection captured so aptly in Randolph
Bourne's famous observation: “War is the health of the State.”

Of course, people may be better off accepting the costs and risks
of the State’s protection in order to reduce the risks and costs of
foreign conquest. I do not deny the possibility of an incidental rela-
tionship between the defense of the State and the defense of the
people. But the next section will present theoretical reasons why this

8Earl C. Ravenal, Defining Defense: The 1985 Military Budget (Washington, D.C.:
Cato Institute, 1984). Public-goods theorists do occasionally admit that not all of the
State’s military necessarily goes to defending the people, but they generally attach no
theoretical significance to the admission. For instance, see Buchanan and Flowers, The
Public Finances, pp. 27-28.

Randolph Bourne’s famous observation first appeared posthumously in an essay
under the title “Unfinished Fragment on the State,” in James Oppenheim, ed., Untimely
Papers (New York: B. W. Huebsch, 1919), pp. 140-53. A later version of the essay that
restored Bourne's original sequence, under the title “The State,” was included in Carl
Resek, ed., War and the Intellectuals (New York: Harper and Row, 1964), pp. 64-104.

A general substantiation (or refutation) of Bourne’s observation has so far not
attracted the professional energies of any historian, perhaps because they feel no need
to belabor the obvious. There are lots of studies showing the growth of the State’s power
in particular countries during particular wars, but very few that even treat a single
country during more than one war, or more than a single country during one war. A few
exceptions that have come to my attention include: Clinton Rossiter, Constitutional
Dictatorship: Crisis Government in Modern Democracies (Princeton: Princeton Univer-
sity Press, 1948), a comparison of the U.S., Britain, France, and Germany during the
twentieth century that concludes that the U.S. has the least bad record; Arthur
A.Ekirch, Jr., The Civilian and the Military: A History of the American Antimilitarist
Tradition (New York: Oxford University Press, 1956), which is primarily interested in
American antimilitarist movements, but in the process gives a sketchy account of war’s
impact upon the U.S. government's power; Robert Higgs, Crisis and Leviathan: Critical
Episodes in the Emergence of the Mixed Economy (New York: Oxford University Press,
1987), which also covers the U.S.—during the twentieth century—arguing that the
mixed economy is primarily a product of war; and Charles Tilly, ed., The Formation


===== PAGE 9 =====

96 | The Review of Austrian Economics, Volume 4

relationship is not as common nor as strong as generally supposed.
Before doing that, I must fully expose the conceptual gulf between
the two meanings of national defense."

Unfortunately, the pervasive doctrine of nationalism obscures this
fundamental distinction. Nationalism treats. nations as collective
entities, applying principles drawn from the analysis of individual
interaction to the international level. In a war between two nations,
the nationalist model focuses on essentially two parties: nation A and
nation B. As in fights between individuals, one of these two nations
is the aggressor, whereas the other is the defender. As a result, the
model axiomatically equates protecting the State with protecting its
subjects.

The basic flaw in the nationalist model is its collectivist premise.
Although the model informs many of the formal economic analyses of
international relations, it represents a glaring example of the fallacy
of composition. Nations consist of two related but distinct elements:
the State and its subjects. Democracies are sometimes referred to as
“governments of the people,” but this is, at best, rhetorical sloppiness.
The State and the people interact, whether under democracies or
other forms of government, in important ways that we shall soon
explore, but this obvious fact should not confuse us about the inherent
difference between a police officer and an ordinary citizen. .

Consequently, any conflict between two nations involves not just
two parties, but at least four: the State governing nation A, the State
governing nation B, the people with the (mis)fortune to live unde:
State A, and the people with the’ (mis)fortune to live under State B.
Whatever the merits of a dispute between State A and B, the dispute
need not involve a significant portion of people Aor people BX

' Abandoning this collectivist identification. of the State with its
subjects exposes the critical insight about, the natiorial-defense ser.
vice. If one is truly concerned about defense of peoples’ lives, property
and liberty, then the transfer of their capital city from one location tc
another is not intrinsically significant. The territory constituting the
United States is in a very real sense ‘already conquered-——by the

of National States in Western Europe (Princeton: Princeton University Press, 1975), as
well as Tilly, “War Making and State Making as Organized Crime,” in Peter B. Evans
Dietrich Rueschemeyer, and Theda Skocpol, eds., Bringing the State Back In (Cam
bridge: Cambridge University Press, 1985), pp. 169-91, both of which cover the war-re
lated origins of the European nation-States.

197 cite examples of economic models exhibiting the nationalistic fallacy of compo
sition below. One of the very few written challenges to the nationalistic model is Murray
N. Rothbard, “War, Peace and the State,” in Rothbard, Egalitarianism as a Revol
Against Nature: And Other Essays (Washington, D.C.: Libertarian Review Press, 1974)
pp. 70-80. 1 have profited greatly from this pathbreaking essay.


===== PAGE 10 =====

National Goods Versus Public Goods 97

United States government. All that is significant is whether transfer-
ring the capital city brings the citizens a net loss or gain. The danger
is not foreign conquest per se, but the amount of power the conquering
State can successfully wield.

In the final analysis, protection from foreign States is not a
discrete or unique service. It is a subset of a more general service:
protection from any State. Whether we formally label an oppressive
State “foreign” or “domestic” becomes a secondary consideration.
Although States differ enormously in the amount of domestic power
they exercise, they all share certain characteristics. These shared
characteristics are more than definitional, and as I hope to show,
fatally undermine the public-goods justification for State- provided
defense.

Admittedly, the distinction between the two services that go under
the name “national defense” has not so far been grounded entirely in
an empirical examination of people’s subjective preferences. How can
we as economists or historians question the prevailing nationalism,
when people do in fact put a high value on the preservation and
glorification of their own State? If the service that people desire is
protection of the State per se, the State is undoubtedly the best
institution for the job.

I do not question the efficacy of the State in providing its own
protection. However, my impression is that most people view the
State as a production good, a means to other ends, rather than as a
pure consumption good, something they value in and of itself. The
State does not directly enter their utility functions; instead, people
want their government to be powerful relative to other governments
basically because they believe that this helps to protect them from
foreign States.

If my impression is correct, nationalism becomes something other
than a mere subjective preference. It becomes a positive social theory,
as legitimately subject to criticism for its policy recommendations as
socialism. There is no refuting the socialist who favors central plan-
ning for its own sake; but most socialists favor central planning
because of positive (and in my opinion, mistaken) theories about its
consequences.

History tentatively reinforces the impression that nationalism
rests upon a positive social theory. Prior to the French Revolution,
European subjects did not identify strongly with their rulers. Wars

l1See Don Lavoie, National Economic Planning: What is Left? (Cambridge, Mass.:
Ballinger, 1985), and Rivalry and Central Planning: The Socialist Calculation Debate
Reconsidered (New York: Cambridge University Press, 1985).


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98 The Review of Austrian Economics, Volume 4

were major inconveniences to be avoided if possible while they were
going on, but the masses were largely indifferent if the outcome was
a change of rulers. Indeed, soldiers and civilians would often enter
the service of foreign rulers without being aware that they were doing
anything unusual. The spread of modern nationalism coincided with
the spread of the novel idea that governments should in some manner
benefit their subjects."

In any case, an examination of people’s subjective preferences
would reveal which service or mix of services people desire when they
demand national defense.'® A definitive answer is hampered by na-
tional defense’s tax funding, which prevents people from revealing
their preferences directly and unambiguously. An examination of
whether the State is a good institution for protecting people’s lives,
property, and liberty, assuming that is what they prefer, is equally
legitimate. I am willing to accept the prospect that people may still
worship the State, even after discovering that it gives them no real
protection.

11

When Paul Samuelson first formalized public-goods theory, it was at
a time when many economists unreflectively subscribed to what
Harold Demsetz has called the nirvana approach to public theory.
Demonstrating some “market failure” with respect to an abstract
optimum was considered sufficient to justify State action. Economists
assumed that the costless, all-knowing, and benevolent State could
simply and easily correct any failure.

Since then, economists have become far more realistic. Public-
goods theory has advanced to the point where it is now an exercise in

The approach in this article to the relationship between positive and normative
economics is identical to the wertfrei approach of Ludwig von Mises, as expounded in
Theory and History: An Interpretation of Social and Economic Evolution (New Haven,
Conn.: Yale University Press, 1957), pp. 26-34, and Human Action: A Treatise on
Economics, 3rd. rev. ed. (Chicago: Henry Regnery, 1966), pp. 881-85. See also Murray
N. Rothbard, Power and Market: Government and the Economy (Menlo Park, Calif.:
Institute for Humane Studies, 1970), pp. 189-96. A quite different formulation of
basically the same approach is David Friedman, “Many, Few, One: Social Harmony and
the Shrunken Choice Set,” American Economic Review 70 (March 1980): 225-32.

Historical generalizations of this sort are admittedly subject to many particular
exceptions. Nonetheless, consult Hans Kohn, The Idea of Nationalism: A Study in Its
Origins and Backgrounds (New York: Macmillan, 1944), pp. 16-17. For further details,
see Andre Corvisier, Armies and Societies in Europe, 1494-1789 (Bloomington: Indiana
University Press, 1979); John Childs, Armies and Warfare in Europe, 1648-1789 (New
York: Holmes & Meier, 1982); and Geoffrey Best, War and Society in Revolutionary
Europe, 1770-1870 (New York: St. Martin’s Press, 1982).

BFor a purely formal approach to people's utility functions with regard to national
defense, see Wagner, “National Defense as a Collective Good.”


===== PAGE 12 =====

National Goods Versus Public Goods 99

comparative institutions. Demonstrating “market failure” is no
longer sufficient. One must compare the market with the State, not
as one wishes the State would behave in some ideal realm, but as it
must behave in the real world. To justify State action, one must show
that the State has the capacity and the incentive to do a better job
than the market can do. Can the State provide the public good without
costs that exceed the benefits? And is there some incentive structure
that would conceivably insure that it do so?'*

Economists within the field of public choice have done some of the
most important work on the comparative capabilities of the State—by
applying public-goods insights to political action itself. They have
come to the realization that the free-rider incentive does not only
arise for market enterprises. As Mancur Olson has demonstrated, the
free-rider incentive can arise for any group, especially political
groups wanting to influence State policy. This imparts an inherent

4 Demsetz makes the comparison between the “nirvana” and “comparative institu-
tions” approaches in “Information and Efficiency: Another Viewpoint,” Journal of Law and
Economics 12 (April 1969): 1-3. Of the earliest assertions of the comparative-institu-
tions approach, perhaps the most influential were Ronald Coase, “The Problem of Social
Cost,” ibid. 3 (October 1960): 1-44; James M. Buchanan, “Politics, Policy, and the
Pigovian Margins,” Economica 29 (February 1962): 17-28; and Ralph Turvey, “On the
Divergences between Social Cost and Private Cost,” ibid. 30 (August 1963): 309-13. I have
already cited the first applications to public goods: Demsetz, “The Exchange and Enforce-
ment of Property Rights”; Minasian, “Television Pricing and the Theory of Public Goods”;
McKean and Minasian, “On Achieving Pareto Optimality—Regardless of Cost”; and David
and Winston, “On the Distinction Between Public and Private Goods.”

To be completely fair, Samuelson from his first article, “The Pure Theory of Public
Expenditure,” on did technically take a positive approach and never insisted that the
public-goods “market failure” necessarily justified government intervention. But as
Head, in “Public Goods: The Polar Case,” reports: “It is clearly recognized by both
Samuelson and Musgrave that political provision for public goods must pose difficult
problems. There is, however, a clear implication that the market failure problem is such
that the political mechanism could hardly prove inferior” (p. 7). Only in an intemperate
reply to Minasian’s “Television Pricing and the Theory of Public Goods,” did Samuelson
finally give some prominence to his admission that a public good did not always require
State provision. See his “Public Goods and Subscription T.V.: Correction of the Record,”
Journal of Law and Economics 7 (October 1964): 81-83.

Of course, in order to determine whether the benefits of State provision of a public
good outweigh the costs, one must be able to measure them. But all costs and benefits are
ultimately subjective, and only fully revealed through the voluntary actions of individuals.
Starting from this radical subjectivist stance, Karl T. Fielding, “Nonexcludability and
Government Financing of Public Goods,” Journal of Libertarian Studies 3 (Fall 1979):
293-38, and Barry P. Brownstein, “Pareto Optimality, External Benefits and Public Goods:
A Subjectivist Approach,” ibid. 4 (Winter 1980): 93-106, conclude that the State can never
do better than the market in providing public goods, even if it wanted to. My argument
manages to skirt this thorny theoretical issue by comparing the market and the State with
respect to incentives, rather than with respect to costs and benefits. If the State has fewer
real-world incentives to provide a public good than the market, the comparative costs and
benefits become irrelevant.


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100 . The Review of Austrian Economics, Volume 4

public-goods character to all political decisions."

Assume that one of us wishes to change some State policy that we
personally find particularly onerous—for instance, repeal a tax. We
are members of a fairly. large group that will benefit if the tax is
repealed. If enough of us contribute money; time, or other resources
to bringing about the tax’s repeal, we will succeed and all be better
off. The money we save in taxes will more than reimburse us for our
effort. Unfortunately, once the tax is repealed, even those who did not
join our campaign will no longer have to pay it. We cannot exclude
them from the benefits of the tax’s repeal. They will be free riders on
our political efforts.

Just as in the case of a non- -excludable good in the market, every
potential beneficiary of the tax repeal has an incentive, from the
perspective of economic self-interest, to try to be a free rider. If
enough of them act according to this incentive, the tax will never be
repealed. We can call this result a “political failure,” completely
analogous to the “market failure” caused by non-excludability.

Of course, this example grossly oversimplifies the problem. Under
a democratic State, people do not directly purchase changes in State
policy; they vote for them. ‘Ot ‘even more precisely, some of them can
vote for representatives who then can vote on and bargain over State
policy. If the tax repeal example was completely accurate, nearly
every intentional benefit provided by the State would be a pure
private good, similar to the current salaries of politicians and bureau-
crats. With voting, ‘political entrepreneurs and vote- maximizing
firms (which are called political parties) have some incentive to
provide us with our tax repeal, even if we do not politically organize,
in order to entice us to vote for them.'® FREER

The first public-choice work to begin to apply public-goods theory to political
action was Anthony Downs, An Economic Theory of Democracy (New York: Harper and
Row, 1957), which examined political parties as vote-maximizing firms. James M.
Buchanan and Gordon Tullock, in The Calculus of Consent: Logical Foundations of
Constitutional Democracy (Ann Arbor; University of Michigan Press, 1962), took a
hard-headed look at the drawbacks of majority rule, although they coupled it up with
an ethereal foray into the mystical realm of social contract. One of the most seminal
contributions to this tradition, the first edition of which appeared in 1965, was Mancur
Olson, The Logic of Collective Action: Public Goods and the Theory of Groups, 2nd ed.
(Cambridge, Mass.: Harvard University Press, 1971). It applied public-goods theory
to groups in general. William A. Niskanen, Jr., Bureaucracy and Representative
Government (Chicago: Aldine-Atherton, 1971), introduced the notion of the bureau-
cracy as an independent special interest group. Further refinements upon how the
democratic process benefits special interests include Gordon Tullock, Toward a Math-
ematics of Politics (Ann Arbor: University of Michigan Press, 1967), and Albert Breton,
The Economic Theory of Representative Government (Chicago: Aldine, 1974).

Richard E. Wagner, in a review of the first edition of Olson’s Logic of Collective
Action— “Pressure Groups and Political Entrepreneurs,” Papers on Non-Market Decision


===== PAGE 14 =====

National Goods Versus Public Goods 101

This incentive, however, is not very great. First of all, voting itself,
unless compulsory, is a public good. An individual must expend time
and other resources to vote, but he or she can avoid these expendi-
tures by free riding on the voting of others. Only in the very remote
case where the voter anticipates that a single vote will decide the
election’s outcome does this incentive to free ride disappear. Conse-
quently, the political entrepreneur must have some reason to expect
that we will vote at all. And if we do in fact vote, he must in addition
have some reason to expect that the tax repeal, among all the other
competing issues, will affect how we vote. Our forming a political
organization to repeal the tax gives him reason to believe both these
things."

In short, unorganized groups have some influence upon the poli-
cies of a democratic State. But other things being equal, groups which
organize and campaign for policies have a significant advantage.
That is presumably why they organize and campaign. It strains
credulity to suppose that all the people who pour vast sums of money
into political lobbying are utterly mistaken in the belief that they
thereby gain some leverage on policy. The common observation that
special interests have inordinate influence upon a democratic State
is without doubt empirically well founded.

Two variables affect the likelihood that a group will overcome the
free-rider problem and successfully organize. These variables operate
whether the group is trying to attain non-excludable benefits on the
market or from the State. The first is the size of the group. The
smaller the group, ceteris paribus, the more likely the members are
to organize successfully. The larger the group, the more difficult it is
to involve enough of them to secure the public good.

Making 1 (1966): 161-70—raises the political-entrepreneur thesis as an objection to
Olson’s conclusions. Norman Frohlich, Joe A. Oppenheimer, and Oran R. Young,
Political Leadership and Collective Goods (Princeton: Princeton University Press,
1971), stress the role of the entrepreneur in creating political organizations. Olson
responds briefly in the 2nd ed., pp. 174-75. Brian Barry, Sociologists, Economists and
Democracy (Chicago: University of Chicago Press, 1978), pp. 37-40, and Russell Hardin,
Collective Action (Baltimore, Md.: The Johns Hopkins University Press, 1982), pp.
35-37, go into the weakness of the political-entrepreneur thesis in greater detail.

"The fact that voting becomes less of a public good the closer the anticipated outcome
of the election allows Yoram Barzel and Eugene Silberberg, “Is the Act of Voting Rational?”
Public Choice 16 (Fall 1973): 51-58, to explain some of the variation in voter turnout.
Nevertheless, voting remains the gaping hole in much of the public-choice literature. The
fact that voting is a public good, and is not therefore “rational” according to public-choice
assumptions, has been long realized. Yet, many public-choice theorists go on blithely
spinning out elaborate models based on the untenable paradox that people always vote
but in every other respect always behave “rationally.” Downs, An Economic Theory of
Democracy, recognizes the problem but does not resolve it. For an extended discussion of
this paradox, see Barry, Sociologists, Economists and Democracy, pp. 13-19.


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102 The Review of Austrian Economics, Volume 4

The second variable is the difference between the value of the
public good to the members of the group and the cost to them, The
greater this difference, ceteris paribus, the more likely they are to
organize successfully. Indeed, if this difference is great enough, one
single member might benefit enough to be willing to pay the entire
cost and let all the other members of the group free ride. The smaller
this difference, on the other hand, the more essential becomes the
contribution of each potential member.'®

In short, the democratic State makes it much easier to enact
policies that funnel great benefits to small groups than to enact
policies that shower small benefits on large groups. Because of this
free-rider induced “political failure,” the State has the same problem
in providing non-excludable goods and services as the market—with
one crucial difference. When a group successfully provides itself a
public good through the market, the resources it expends pay directly
for the good. In contrast, when a group successfully provides itself a
public good through the State, the resources it expends only pay the
overhead cost of influencing State policy. The State then finances the
public good through taxation or some coercive substitute.

Moreover, the group that campaigned for the State-provided pub-
lic good will not in all likelihood bear very much of the coerced cost
of the good. Otherwise, they would have had no incentive to go
through the State, because doing so then costs more in total than
simply providing themselves the good voluntarily. Instead, the costs
will be widely distributed among the poorly organized large group,
who may not benefit at all from the public good.

This makes it possible for organized groups to get the State to
provide bogus public goods, goods and services which in fact cost
much more than the beneficiaries would be willing to pay even if
exclusion were possible and they could not free ride. In this manner,
the State generates externalities, and ones that are negative. Rather

301son’s taxonomy of groups—privileged (small), intermediate, and latent
(large)—in The Logic of Collective Action treats these two factors, group size and
relative cost of the public good, simultaneously and thus slightly confuses the issue.
Hardin, Collective Action, pp. 38-42, clarifies Olson's taxonomy, correctly pointing
out that a privileged group (one in which a single member values the public good
enough to pay its entire cost) could theoretically be quite large. One of the clearest
expositions of these factors appears in David Friedman's neglected The Machinery
of Freedom, pp. 185-88.

Admittedly, there is some ambiguity about which ceteris remain paribus when
varying group size. Some scholars have consequently challenged the claim that larger
groups have greater difficulty overcoming the free rider incentive. See for instance John
Chamberlin, “Provision of Public Goods as a Function of Group Size,” American
Political Science Review 68 (June 1974): 707-16. Again, the best resolution of these
questions is Hardin, Collective Action, pp. 42-49 and 125-37.


===== PAGE 16 =====

National Goods Versus Public Goods 103

than overcoming the free-rider problem, the State benefits free load-
ers, who receive bogus public goods at the expense of the taxpayers.
Provision of these goods and services moves the economy away from,
not toward, Pareto optimality. When the bogusness of such public
goods is obvious enough, economists call them transfers.

What is the upshot of this “political failure” for national defense?
In the case of defending the State itself, we are dealing quite clearly
with a service that the State has enormous incentives to provide. If
this is a non-excludable good or service at all, then it is a public good
that benefits small groups very highly. But in the case of defending
the people, we are talking about, in the words of David Friedman, “a

The position that democratic political action, rather than producing genuine
public goods, primarily if not exclusively produces bogus public goods that benefit
special interests, goes back as far as Giovanni Montemartini’s turn-of-the-century
essay, “The Fundamental Principles of a Pure Theory of Public Finance,” translated
and reprinted in Musgrave and Peacock, Classics in the Theory of Public Finance, pp.
137-51. One of the most succinct and lucid modern restatements of the position is, again,
Friedman, The Machinery of Freedom, pp. 213-15, who concludes that “bad law is often
less of a public ‘good’ than good law.” Brubaker, “Free Ride, Free Revelation, or Golden
Rule,” uses the term “forced riding” to describe what the State does in the name of
providing public goods. A detailed presentation of the position is Joseph P. Kalt, “Public
Goods and the Theory of Government,” Cato Journal 1 (Fall 1981): 565-84.

Gordon Tullock has suggested the potential scope of this “political failure,” appar-
ently without fully intending or realizing it, in an intriguing examination of the
perfectly corrupt State—a State where all changes in policy are directly purchased. His
“Corruption and Anarchy,” in Tullock, ed., Further Explorations in the Theory of
Anarchy (Blacksburg, Va.: Center for the Study of Public Choice, 1974), pp. 65-70,
concludes that a perfectly corrupt State would generate policies identical to those that
would be generated without the State at all. In other words, public goods are no more
likely to be produced with the perfectly corrupt State than without it.

Of course, the analysis does not always lead scholars to this extreme position. Tullock
himself, in an early article that precociously pre-dated most of the public choice literature,
“Some Problems of Majority Voting,” Journal of Political Economy 67 (December 1959):
571-79, reached the more moderate conclusion, which he still apparently holds, that the
democratic process merely generates a government budget that is too large. Indeed,
Anthony Downs, “Why the Government Budget is Too Small in a Democracy,” World
Politics 12 (July 1960): 541-63, turns the analysis around. By focusing on all the genuine
public goods that the democratic process has no incentive to produce, he reaches the
bizarre conclusion that the democratic State will inevitably be too small.

Incidentally, the inherent public-goods nature of political action fatally undercuts
the latest abstraction in public-goods theory: the demand-revealing process. As ad-
vanced by Edward H. Clarke, Demand Revelation and the Provision of Public Goods
(Cambridge, Mass.: Ballinger, 1980), and Jerry Greene and J. J. Laffont, Incentives in
Public Decision-Making (North Holland, The Netherlands: 1979), as well as in numer-
ous journal articles, the demand-revealing process is a proposed voting scheme that
links tax payments to votes in such a way as to give people an incentive (1) to vote in
the first place and (2) to reveal their true demand-preferences for (or against) various
public goods with their votes. Ignoring whether this scheme would work if implemented,
we can clearly see that implementing it at all runs afoul of the public-goods obstacle.
Without the demand-revealing process in effect already, voters have absolutely no
incentive to vote for putting the process into effect.


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104 . The Review of Austrian Economics, Volume 4

public good ... with a very large public. ” The benefits, although
potentially great, are dispersed very broadly.”

Thus, to the extent that the. free-rider obstacle inhibits market
protection of liberty, it raises an even more difficult obstacle to the
State over undertaking that vital service. The State has strong
incentives to provide national defense that protects itself and its
prerogatives, but it has very weak incentives to provide national
defense that protects its subjects’ lives, property, and liberty. We can
now theoretically understand the common historical divergence be-
tween defending the State and defending the people.

Furthermore, there is a perverse inverse relationship between the
people’s belief that the State defends them and the reality. To the
- extent that they accept this nationalistic conclusion, their political
resistance against the domestic State’s aggression, however weak
because of the existing public-goods problem, decreases further. This
' is most noticeable during periods of actual warfare. The belief reduces
the amount of protection they enjoy, at least against the domestic
State.

Nationalism thus results in an ironic and circular. paradox. It
views the State as a protection agency, but this very view contributes
to the State’s literal role as a protection racket. Those who decline to
pay for the State’s protection’ become the.State’s victims. This in turn
gives the State an incentive to find or create foreign enemies, even
when none really exist. For without a foreign threat, the justification
for the State’s protection becomes far less persuasive.”

My remarks have thus far been confined to the democratic State.
They apply, however, even more ‘strikingly to the undemocratic State,
insofar as there is any significant, difference between the political
dynamics of the two types. For reasons that I will explain,in the next
section, I actually believe that many economists have over-émphasized

yon

“Friedman, The Machinery of Freedom, p. 189. Dwight .R. Lee, “The Soviet
Economy and the Arms Control Delusion,” Journal of Contemporary Studies 8
(Winter/Spring 1985): 46, makes the same observation about the political production
of national defense, but because he does not recognize the distinction between
defending the State and defending the people, he arrives at a much different
conclusion: viz., democratic States will under-produce military defense relative to
undemocratic States.

2A similar point is made by Kenneth E. Boulding, “The ‘World War Industry as an
Economic Problem,” in the collection he co-edited with Emile Benoit, Disarmament and
the Economy (New. York: Harper and Row, 1963), pp. 3-27. He refers to the world’s
competing military organizations as “milorgs” and insists that, in contrast to any. other
social enterprise (including police protection), military organizations generate their
own demand. “The only justification for the existence of a milorg is the existence of
another milorg i in some other place. ... A police force is not justified by the existence of
a police force in another town, that i is, by another institution of the same kind” (p. 10).


===== PAGE 18 =====

National Goods Versus Public Goods : 105

the operative significance of formal voting. Both types of States are
subject to the influence of groups that marshall resources in order to
affect policy. Formal voting merely makes it possible for some changes
to manifest themselves faster and less painfully.

But let us for a moment accept the simplistic model of the un-
democratic State. Assume that the State’s policies are determined
primarily by the whim of a single despot. If he is a benevolent despot,
then the defense of his subjects might be high on his agenda. If he is
a despot who inhabits the real world, he will be exclusively interested
in defending his State and its territorial integrity.

My argument still does not completely rule out the possibility that
the State might actually defend its subjects. Whereas the difference
between: the political dynamics of democratic and undemocratic
States is overdrawn, States do differ markedly in the amount of
aggression they commit against their own subjects. If we automati-
cally assume that a conquering State can wield as much or more
‘power over foreign populations as it does over its domestic subjects,
then a relatively less oppressive State will, in the process of defending
itself, provide some protection for its subjects. But this is at best an
unintended positive externality.

III

To this point, our conclusions have been somewhat pessimistic, justi-
fying Earl Brubaker’s observation that the free-rider assumption
makes economics a dismal science.” Based on that assumption,
neither the market nor the State has much incentive to provide any
direct protection of peoples’ lives, property, and liberty. To the extent
that historical accident has resulted in marked differences in the
power of various States over their own subjects, some such protection
‘might be produced as an unintended externality of the State’s effort
to protect its own territorial integrity. But that very effort at self-pro-
tection will also have a significant countervailing negative impact on
‘the degree to which the State aggresses against its own subjects.

Attributing a difference to historical accident, however, is simply
another way of saying that the difference is unexplained. Not until
we explain the marked differences in domestic power of the world’s
States will we fully comprehend the relationship between protecting
‘the State and protecting the people.

One naive explanation common among economists i is the public-
goods theory of the State. This theory rests upon a sharp dichotomy
between two types of States, usually democratic and undemocratic.

22Brubaker, “Free Ride, Free Revelation, or Golden Rule,” p. 153.


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106 The Review of Austrian Economics, Volume 4

Undemocratic States according to this theory are little better than
criminal gangs, run by single despots or small groups of oligarchs for
essentially their own personal ends. The subjects of these States
suffer under their rulers but can do very little about their plight. Any
effort on their part to change the situation, whether through violent
revolution or other means, is a public good, caught in the free-rider
trap.”

Democratic States, in contrast, are the result of social contracts.
According to the public-goods theory of the State, people create
democratic States to solve the free-rider problem. At some obscure
time in the past, they drew up constitutional rules in which they
agreed to be coerced in order to provide public goods for themselves.
Over time, because the free-rider problem generates “political fail-
ure,” democratic States have a tendency to fall under the influence of
special interests. Perhaps better constitutional decision rules could
alleviate this decay. Nonetheless, democratic States always retain
vestiges of their public-goods origin. That is why they aggress against
their own subjects far less than do undemocratic States.”

We do not have to turn to the readily accessible historical evidence
to refute this naive theory about the origin of democratic States. The
theory’s proponents quite often do not literally believe it. Instead,

Z3For the argument that revolution is a public good, see Gordon Tullock, “The Paradox
of Revolution,” Public Choice 9 (Fall 1971): 89-99, which became with minor alterations
one of the chapters of his book, The Social Dilemma: The Economics of War and Revolution
(Blacksburg, Va.: University Publications, 1974). Tullock distinguishes between what he
calls “exploitative” and “cooperative” governments, rather than democratic and un-

" democratic, but the two classifications are operationally almost identical.

The public-goods theory of the democratic State is still stated best in Baumol,
Welfare Economics and the Theory of the State : “The essence of democratic government
may then be the voluntary acceptance of a central agency of intimidation designed for
the attainment of the desires of the public” (p. 57). Baumol traces this view of the State
back through John Stuart Mill, Adam Smith, and David Hume. This view also informs
the constitutional speculations about better decision rules of Buchanan and Tullock in
The Calculus of Consent. Buchanan is more pessimistic about the State in “Before
Public Choice,” from Gordon Tullock, ed., Explorations in the Theory of Anarchy
(Blacksburg, Va.: Center for the Study of Public Choice, 1972), pp. 27-37, and in The
Limits of Liberty: Between Anarchy and Leviathan (Chicago: University of Chicago
Press, 1975), but he is still caught up in the milieu of the social contract. Even Olson,
The Logic of Collective Action, pp. 98-110, who uses the free-rider problem to critique
effectively the Marxist theory of the State, still appears uncritically to accept the
public-goods theory of the State. One public-choice theorist who is shying away from
social contract and moving toward a generalized exploitation theory of the State is J.
Patrick Gunning, “Towards a Theory of the Evolution of Government,” in Tullock, ed.,
Explorations in the Theory of Anarchy, pp. 19-26. Douglass C. North, Structure and
Change in Economic History (New York: W. W. Norton, 1981), pp. 20-32, makes a
less-than-convincing effort to reconcile the contract and exploitation theories of the
State by claiming that a purely predatory State will still provide many important
genuine public goods in order to maximize its revenue.


===== PAGE 20 =====

National Goods Versus Public Goods 107

they view the theory as merely explaining the conceptual nature
rather than the concrete origin of the democratic State. Either way,
however, the theory has an inner contradiction. Creating a demo-
cratic State of this nature is a public good itself. A very large group
must in some manner have produced it. Because of the free-rider
problem, they have no more incentive to do that than to revolt against
an undemocratic State or to provide themselves any other non-ex-
cludable benefit.” :

A more realistic alternative to the public-goods theory of the State
is what we can call the social-consensus theory of the State. All States
are legitimized monopolies on coercion. The crucial word is “legiti-
mized.” This legitimization is what differentiates States from mere
criminal gangs. Any society in which people refrain from regularly
killing each other enjoys some kind of social consensus. No govern-
ment rules through brute force alone, no matter how undemocratic.
Enough of its subjects must accept it as necessary or desirable for its
rule to be widely enforced and observed. But the very consensus
which legitimizes the State also binds it.”

25K alt, “Public Goods and the Theory of Government,” pinpoints the contradiction
in the public-goods theory of the State. The still devastating, classic, point-by-point
refutation of the social contract, in its literal rather than metaphorical version, remains
Lysander Spooner, No Treason: The Constitution of No Authority (1870; reprinted,
Larkspur, Colo.: Pine Tree Press, 1966). See also Williamson M. Evers, “Social Con-
tract,” Journal of Libertarian Studies 1 (Summer 1977): 185-94, which traces the literal
notion of a social contract all the way back to Socrates.

26Since the definition of the State (or government) is something political scientists
cannot even agree upon, mine will obviously be controversial. By “legitimized” (a
positive adjective), I of course do not mean “legitimate” (a normative adjective). Most
economists should have no difficulty conceiving of the State as a monopolistic coercive
institution, but non-economists might balk. Members of the general public appear to
have a bifurcated definition of the State, depending on whether it is domestic or foreign.
They view hostile foreign States as simply monopolies on coercion, just like criminal
gangs, which is why they fear foreign conquest. They overlook the legimitization of
these States. On the other hand, that is the only element they seem to recognize about
the domestic State, overlooking or at least deemphasizing the coercive element. This
dichotomy is only a cruder version of the distinction made by public-goods theory
between democratic and undemocratic States. For an extended defense of the implica-
tions of this universal definition, see Murray Rothbard, “The Anatomy of the State,” in
Egalitarianism as a Revolt Against Nature, pp. 34-53. I should note that my definition
neither necessarily implies nor necessarily contradicts the conquest theory of the
State's origin, as expounded most notably in Franz Oppenheimer, The State (1914;
reprinted, New York: Free Life Editions, 1975).

Although I put the term “legitimization” into my definition of the State, I am not
making a purely tautological claim. Not all coercive institutions are called States, and
1 think the term “legitimization” captures the difference. But if someone should
empirically demonstrate that the Soviet State, for instance, is not considered legitimate
by a major number of its subjects, then I would modify my definition, rather than deny
that the organization ruling over the Russians was a State.


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108 Co oo The Review of Austrian Economics, Volume 4

The social consensus bears little resemblance to the mythical
social contract of public- goods’ theory. Whereas the social contract is
generally conceived of as.an intentional political agreement, ‘agreed

- upon explicitly at some. Specific moment, the social consensus is an
unintended societal institution, like language, . evolving implicitly
"over time. Sometimes, the evolution of the social consensus can be
very violent. Often, particular individuals or even fairly large groups
will strongly disagree with certain features of their society’s consen-
sus. But at all times, members of society are socialized into the
consensus in ways that! they only dimly grasp, if at all.”

. Consider a classroom of average American citizens. Ask for a show
of hands on the, following question: How many would pay their taxes
“in full if no penalties resulted from non-payment? Very few would

raise their hands; probably only some masochists, ardent statists,
and;individuals who were not entirely honest. This shows that taxa-
tion is involuntary. Then askthe group a second question: How many
think taxes are necessary or just? This time, nearly every hand would
go up, except those of a few radical libertarians. This shows that
taxation is-legitimized. 2 Sol st

Of course, one of the reasons Americans generally view taxation
as legitimate i is because they think it is necessary in order to provide
public goods. All this, ‘proves, however, is that, although the public-
- goods theory of the State is utterly worthless as an objective descrip-
tion of the State’s origin or nature, itis very valuable as an ideological
rationalization for the State’s legitimization. It performs a function
analogous to that performed by the" divine right’ of kings under
‘'monarchical States or by Marxist dogma’ under communist States.

For unlike the public- goods theory o of the State, the social- consensus

"One of the earliest observations that a social consensus always legitimizes the
State is Etienne de la Boetie, The Politics of Obedience: ‘The Discource of Voluntary
Servitude (1574; reprinted; New York: Free Life Editions, 1975). La Boetie first wrote
this essay in sixteenth-century France, while living under a despotic monarch. In other
words, the concept of legitimized State, rather than being unique to democratic States,
arose at a time when there were no such States to study.

‘Many other writers have since accepted the social-consensus theory of the State.
For instance, see David Hume, “Of the First Principles of Government,” in Essays,
Moral, Political, and Literary (1741-42; reprint, London: Oxford University
Press, 1963), pp. 29-34. Ludwig von Mises discusses the role of ideas in social consensus
in Human Action, pp. 177-90. The description of the social consensus as an unintended
institution that evolves implicitly rather than an intended construct that is agreed upon
explicitly derives from’ Friedrich A. Hayek. The implications | of social consensus for
various kinds of political action are exhaustively explored in Gene Sharp, The Politics
of Nonviolent Action (Boston: Porter Sargent, 1973), esp. pt: 1, “Power and Struggle,”
although Sharp has a tendency to confound legitimization with mere compliance to the
Beaje! s rule. '

81-am confident about the empirical results, having conducted the test many times.


===== PAGE 22 =====

Vational Goods Versus Public Goods 109

:heory applies universally to all States. It predicts that if you con-
lucted the same survey about taxation upon a group of average
Russians living within the Soviet Union, or a group of average
[ranians living under the Ayatollah (and you could guarantee them
:omplete immunity regardless of how they answered), you would get
similar results. These foreign and “evil” undemocratic States are not
>xogenous and alien institutions imposed on their subjects by sheer
terror. They are complex products of the culture, attitudes, prefer-
ances, and ideas, whether explicit or implicit, that prevail within
:heir societies.”

The vast ideological and cultural differences among the peoples of
the world are what explain the marked differences in the domestic
power of their States. The consensual constraints upon States differ
in content, but all States face them. The Soviet leaders fully realize
this, which is why they devote so many resources to domestic and
foreign propaganda. The shifting social consensus also explains the
many changes in the form and the power of the State over time.
Although professional economists tend to ignore the ideological and
;ultural components of social dynamics, professional historians give
these factors the bulk of their attention.

In the not-so-distant past, the world was entirely in the grip of
undemocratic States, which permitted their subjects very little lib-
arty. Democratic States evolved historically from undemocratic
States. States that now must tolerate a large degree of liberty
emerged from States that did not have to do so. Public-goods theory
is in the awkward position of theoretically denying that this could
have happened. It raises an across-the-board theoretical obstacle to

Although Americans like to think that the Russian people share the aspirations
of the widely publicized Russian dissidents, most observers report that the Russians
view their dissidents much the same way as Americans view their traitors. Moreover,
rather than desire more liberty, there is a considerable segment of the Soviet population
:hat thinks the Soviet State is too soft. Despite official disapproval, this growing Stalin
:ult longs for the good old days of effective Stalinist discipline. Victor Zaslavsky, The
Neo-Stalinist State (New York: Oxford University Press, 1983), has actually conducted
fairly reliable surveys among Soviet subjects, which indicate quite unambiguously that
he Soviet State is legimitized. For a look at some of the conflicting ideological trends
within the Soviet Union, see Alexander Yanov, The Russian New Right: Right-Wing
Ideologies in the Contemporary USSR (Berkeley, Calif.: Institute for International
Studies, 1978). Good single-volume histories that impart an appreciation for the
jomestic sources of the Soviet State are Robert V. Daniels, Russia: The Roots of
Confrontation (Cambridge, Mass.: Harvard University Press, 1985), and Geoffrey
Hosking, The First Socialist Society: A History of the Soviet Union from Within
‘Cambridge, Mass.: Harvard University Press, 1985). An introduction to the various
interpretations of Soviet history by American scholars, written from a revisionist slant,
is Stephen F. Cohen, Rethinking the Soviet Experience: Politics and History since 1917
‘New York: Oxford University Press, 1985).


===== PAGE 23 =====

110 The Review of Austrian Economics, Volume 4

every conceivable reduction in State power that benefits more than a
small group of individuals.” The social-consensus theory, in contrast,
attributes this slow progress, sometimes punctuated with violent revo-
lutions and wars, to ideological changes within the social consensus.
Thus, history is littered with drastic changes in State power and
policy that resulted from successful ideological surmounting of the
free-rider obstacle. The Minutemen volunteers who fought at Concord
Bridge could not even come close to charging all the beneficiaries of their
action. They produced tremendous externalities from which Americans
are still benefiting today. The abolitionist movement produced such a
cascade of positive externalities that chattel slavery—a labor system
that was one of the world’s mainstays no less than two hundred years
ago, and had been so for millennia—has been rooted out everywhere
across the entire globe. I could multiply the examples endlessly.”
Indeed, the existence of any voluntary ethical behavior at all faces
a free-rider obstacle. Society is much more prosperous if we all cease
to steal and cheat, but the single individual is better off still if
everyone else behaves ethically while he or she steals and cheats
whenever able to get away with it. Thus, everyone has a powerful
personal incentive to free ride on other people’s ethical behavior. If
we all succumbed to that incentive, society would be very unpleasant.

30This awkward position is clearest in Tullock’s Social Dilemma. He concedes “that
the earliest governments of which we have any positive knowledge were despotisms of
one sort or another, and that despotisms have remained the dominant form of govern-
ment of the human race ever since” (p. 25). But rather than notice that this creates
considerable tension for his claim later in the book that revolutions bringing about
social benefits are impossible, because of the free-rider obstacle, he instead makes the
breathtaking assertion: “Revolution is the subject of an elaborate and voluminous
literature and, if I am right, almost all of this literature is wrong” (p. 46). Actually,
this statement represents a mellowing from the claim in his previous article, “The
Paradox of Revolution.” There he left out the qualifying word “almost” in front of “all
of this literature.”

31 Revolutionary historians of the imperial school might deny that the stand at Concord
Bridge generated any positive externalities, and they would point to the amount of freedom
that the British people themselves came to enjoy. But these historians would just
underestimate the externalities. The American Revolution not only brought net benefits
for Americans, but by altering the nature of the British Empire, eventually brought
benefits to the British as well. The premier work on the role of ideas in the American
Revolution is Bernard Bailyn, Ideological Origins of the American Revolution (Cambridge,
Mass.: Harvard University Press, 1967), while a work that explores the international
repercussions of the revolution is Robert R. Palmer, The Age of Democratic Revolution: A
Political History of Europe and America, 1760-1899, vol. 2 (Princeton: Princeton Univer-
sity Press, 1959-64). As for my other example, a magisterial survey of the international
history of chattel slavery is David Brion Davis, Slavery and Human Progress (New York:
Oxford University Press, 1984), while a narrower historical survey of the international
abolitionist movement itself is his The Problem of Slavery in Western Culture (Ithaca, N.Y.:
Cornell University Press, 1966).


===== PAGE 24 =====

National Goods Versus Public Goods 111

We must avoid the mistaken impression that the State's police
forces and courts are what prevents most stealing and cheating. To
begin with, the initial creation of such a police and court system (at
least under government auspices) is another public good. But far
more important, the police and courts are only capable of handling
the recalcitrant minority who refuse voluntarily to obey society’s
norms. A cursory glance at varying crime rates, over time and across
locations, clearly indicates that the total stealing and cheating in
society is far from solely a function of the resources devoted to the
police and the courts. Certain neighborhoods are less safe, making
an equal unit of police protection less effective, because they contain
more aspiring ethical free riders. If all members of society or even a
substantial fraction became ethical free riders, always stealing and
cheating whenever they thought they could get away with it, the
police and court system would collapse under the load.*

In short, every humanitarian crusade, every broad-based ideolog-
ical movement, every widely practiced ethical system, religious and
non-religious, is a defiant challenge hurled at the public-goods argu-
ment. The steady advance of the human race over the centuries
becomes a succession of successful surmounting of the free-rider
obstacle. Civilization itself would be totally impossible unless people
had somehow solved the public-goods problem, voluntarily.*

32 Among the economists that recognize the public-goods nature of ethical behavior
are James M. Buchanan, in “Ethical Rules, Expected Values, and Large Numbers,”
Ethics 76 (October 1965): 1-13; Richard B. McKenzie, in “The Economic Dimensions of
Ethical Behavior,” Ethics 87 (April 1977): 208-21, and North, in Structure and Change
in Economic History, pp. 11-12, 18-19, 45-46. Buchanan again touches upon this aspect
of ethical behavior in “Before Public Choice,” pp. 29-30, where he emphasizes that
ethical behavior involves a total externality—because an individual gains no benefits
from his own ethical behavior—and in The Limits of Liberty, pp. 123-29, where he looks
upon an increase in ethical free riding as an erosion of a society’s rule-abiding capital.

33 Rothbard, “The Myth of Neutral Taxation,” makes a similar observation: “Thus
the free-rider argument proves far too much. After all, civilization itself is a process of
all of us ‘free-riding’ on the achievements of others. We all free-ride, every day, on the
achievements of Edison, Beethoven, or Vermeer” (p. 545).

For a contrasting and ingenious attempt to interpret history as the working out of
public-goods theory, rather than as the contradiction of it, see Mancur Olson, The Rise
and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities (New
Haven, Conn.: Yale University Press, 1982). Although this effort is pioneering as far as
it goes, it still depends at critical junctures upon historical accidents—wars, revolu-
tions, and conquests—to sweep away the existing distributional coalitions. An even less
satisfactory, although still very valuable efforts by economists to account for historical
change without reference to people’s ideological preferences but purely on the basis of
material factors is Douglass C. North and Robert Paul Thomas, The Rise of the Western
World: A New Economic History (New York: Cambridge University Press, 1973).

At least one of those two authors has begun to back away from this a-ideological
stance, i.e., North, Structure and Change in Economic History. He states: “Casual


===== PAGE 25 =====

112 oo "The Review of Austrian Economics, Volume 4

IV

Obviously, there is some flaw in public-goods theory. ‘Howard
Margolis points out that “no society we know could function” if all its
members actually behaved as the free-rider assumption predicts they
will. He calls this theoretical failure free-rider “overkill.”

Despite this flaw, public:goods theory explains a great deal, which
is why it remains so popular among economists. It explains why sc
many eligible voters do not waste their time going to the polls. But it
fails to explain why so many of them still do go: (I think an interesting
empirical study would be to determine what percentage of econo
- mists, who accept public-goods theory, violate their theoretical as
sumptions about human behavior by. voting.) It explains why the
progress of civilization has been so painfully slow. But it fails tc
explain why we observe any progress at all.

‘Before working out the implications of this theoretical flaw for
national defense, let me digress briefly and try to identify it. It must
involve some weakness in-the theory’s assumption about humar
behavior..I make no pretensions, however, about being able fully tc
resolve the weakness: Because this very issue sits at the conjunctior
of public-goods theory and game theory, it has become one of the most
_ fertile areas of inquiry within economics and political science ove:
“the last decade. All I do is modestly offer some tentative thought:
about the sources of the weakness.

Two possibilities suggest themselves. Either people do not consis.
tently pursue the ends that the free-rider assumption predicts they
will pursue, or they pursue those ends but using means inconsistent
with the assumption. I will take up both of these possibilities in order

1. Do people consistently pursue their self-interest, .as the free-rider
assumption defines self- interest? Public-goods theorists have offered
not one, but two motives that should cause a person to behave ir
accordance with the free-rider assumption. The obvious is narrow
economic self-interest. This-end does provide a sufficient reason tc
free ride, but visualizing someone choosing a different end is quite
easy. Simple altruism is not the only alternative that will violate this

everyday observation confirms the ubiquitous existence of the free rider behavior. Bu
casual observation also confirms the immense number of cases where large group actior
does occur and is a fundamental force for change—action which, however, is simp;
inexplicable in neoclassical terms. The economic historian who has constructed hi:
model in neoclassical terms has built into it a fundamental contradiction since there i:
no way for.the neoclassical model to account for a good deal of the change we observ
in history” (pp. 10-11).

3Howard Margolis, Selfishness, Altruism, and Rationality: A Theory of Socia
"Choice (Cambridge, Mass.: Cambridge University Press, 1982), p. 6.


===== PAGE 26 =====

National Goods Versus Public Goods 113

narrow assumption. People may desire social improvements—liberty,
justice, peace, etc.—not simply for their material benefits, but as ends
in and of themselves, independently present within their utility
functions. Patrick Henry may have been engaging in political hyper-
bole when he exclaimed “Give me liberty or give me death!”, but he
was still expressing a willingness to pay more for attaining liberty
than its economic returns would cover. Perhaps this willingness
should be called ideological altruism; no matter what we call it, it
appears to be quite common in human history.*

Mancur Olson is the most prominent public-goods theorist to
argue that a second motive beyond narrow economic self-interest
justifies the free-rider assumption. And this second motive applies
even to the individual with altruistic ends—if the group is large

%Several scholars, noting the empirical problem with the free-rider assumption,
are moving in this direction. For instance, Robyn M. Dawes, “Social Dilemmas,” Annual
Review of Psychology 31 (1980): 169-93, suggests.that altruism, conscience, and social
norms are important individual ends. Barry, Sociologists, Economists, and Democracy,
goes so far as to propose that a full understanding of human society requires two distinct
approaches: the economic and sociological. He is building upon Mancur Olson, “Eco-
nomics, Sociology, and the Best of All Possible Worlds,” Public Interest 12 (Summer
1968): 96-118, who contrasts economics, the study of rational action, with sociology, the
study of socialization. Higgs, Crisis and Leviathan, chap. 3, discusses ideology at great
length as the factor which overcomes what he calls “Olson’s Iron Law of Collective
Inaction.” Similarly, North gives chap. 5 of Structure and Change in Economic History
the title “Ideology and the Free Rider Problem.”

But the most impressive work along these lines is Margolis’s Selfishness, Altruism,
and Rationality, which is summarized in his journal article, “A New Model of Rational
Choice,” Ethics 91 (January 1981): 265-79. Margolis steps beyond merely noting the
ideological and altruistic components in people’s goals; he sets up a very intriguing
formal model of human behavior that incorporates group-oriented goals and attempts
to test it. His is the first serious attempt to determine when people will choose to free
ride and when they will not. My only reservation is with his desire to use his model to
resurrect the discredited notion of a bifurcated man: i.e., one whose selfish behavior
predominates within the private realm, while his altruistic behavior predominates
within the political realm. We observe a close to equal mixture of both motives within
both realms.

Daniel Klein, “Private Turnpike Companies of Early America” (unpubl. ms., New
York University) examines a historical instance in which what he calls “moral suasion”
played a significant role in the provision of a good—roads—that is among the most
frequently mentioned examples of a public good. Most of the investors in private
turnpike companies in early America lost money, yet they continued to make this
investment. Klein persuasively argues that it was not poor forecasting on their part
that caused this behavior. They knowingly violated their narrow self-interest in order
to provide the community with a public good.

I should note that I attach the adjective “narrow” to the term “self-interest” to
indicate the usage that involves seeking particular, usually selfish, goals. This is to
distinguish it from the broader usage of the term, which can encompass any goal,
including altruism. Whether individuals do in fact pursue their narrow self-interest is
a question subject to empirical verification or falsification, but individuals by definition
always pursue their broad self-interest.


===== PAGE 27 =====

114 The Review of Austrian Economics, Volume 4

enough. He contends that only rationality in the pursuit of whateve:
end the individual chooses is strictly necessary. The individual will stil
choose to free ride, because for a public good requiring a large group his
meager contribution will have no perceptible effect on attaining the
end.’

I could object that an individual's contribution to a cause is ofter
not contingent in any way upon the cause’s overall success. Conse
quently, how much the individual thinks his action will affect the
probability of success is often irrelevant. Some people refuse to litter
for instance, fully aware that their refusal will have no perceptible
impact on the quantity of litter. Such individuals gain righteous
satisfaction from doing what they believe is proper, regardless of its
macro-impact. In addition to a sense of righteousness, ideologica
movements can offer their participants a sense of solidarity, of com
panionship in a cause, that keeps many loyal no matter how hopeles:
the cause.”

But this objection concedes far too much to Olson. As philosophes
Richard Tuck has cogently pointed out, Olson’s notion of “rationality’
if consistently obeyed precludes some everyday activities. It does no:
just apply to an individual’s contribution to the effort of a large group
it applies just as forcefully to the cumulative actions of a single persor
on a large individual project. Olson’s “rationality” is simply a moder:
variant of the ancient philosophical paradox of the Sorites. In one
version, the paradox argues that there can never be a heap of stones
One stone does not constitute a heap, nor does the addition of one ston:
to something that is not already a heap. Therefore, no matter how man;
stones are added, they will never constitute a heap. (Interesting
enough, in the other direction, this paradox argues that there can neve:
be anything but a heap of stones.)

One more word will not make a perceptible difference in the lengtl
of this paper. Because one word makes no difference, I would not hav:
started in the first place if I had adhered to Olson’s “rationality.” Ont
more dollar will not make a perceptible difference in a person’s lif
savings. One day’s exercise will not make a perceptible difference i1
a person’s health. If the fact that the individual’s imperceptible
contribution goes toward a group rather than an individual effort u
what is decisive, then we are simply back again at the motive o
narrow self-interest. No doubt, this type of “rationality” does influenc
some people not to undertake some actions under some circumstances

30lson, The Logic of Collective Action, pp. 64-65.

3"Higgs, Crisis and Leviathan, chap. 3, heavily emphasizes the role of ideologica
solidarity.


===== PAGE 28 =====

Vational Goods Versus Public Goods 115

3ut just how compelling people find it is demonstrated by the
nillions who vote in presidential elections, despite the near cer-
.ainty that the outcome will never be decided by one person’s vote.*

2. Do people pursue their self-interest but in a manner inconsistent
vith the free-rider assumption? Olson, again, has suggested one way
hat individuals might effectively organize despite the free-rider obsta-
le. Groups can link their efforts at achieving non-excludable benefits
vith excludable by-products. Such by-products include low group-rate
nsurance and professional journals. The incentive provided by these
yy-products helps counteract the incentive to be a free rider.”

The most intriguing aspect of the by-product theory is the easy
nethod it offers for providing national defense without a State. The
yurchase of national defense could be linked to some excludable
)y-product that everyone wants, such as protection insurance or
rontract enforcement. Indeed, most of those advocating voluntary
unding of national defense have hit upon some such related
scheme. *°

Unfortunately, this solution is too easy. If the excludable by-prod-

Richard Tuck, “Is There a Free-Rider Problem, and if so, What is It?” in Ross Harrison,
d., Rational Action (Cambridge, Mass.: Cambridge University Press, 1979), pp. 147-56.

We can salvage Olsonian “rationality” under two strict conditions. When (1) a
hreshold level of resources is necessary before any of the public good becomes available
vhatsoever, and (2) people end up paying whatever resources they contribute, irrespec-
ive of whether they reach the threshold or not, it becomes rational not to contribute if
| person predicts that the threshold will not be reached. In that special case, he or she
vould simply be throwing away resources for nothing. Notice that these two conditions
ipply more frequently to obtaining public goods through politics—which is often a win
r lose, all or nothing, situation—than to obtaining public goods on the market. In
rarticular, it applies to voting. Hardin, Collective Action, pp. 55-61, analyzes the first
if these conditions, for which he employs the term “step goods.”

About a decade ago, a popular book, Harry Browne’s How I Found Freedom in an
Jnfree World (New York: Macmillan, 1973), attempted to convince people that among
ther things they should not try to change society through political action. Browne gave
rasically two arguments: (1) there are much better ways for people to attain directly
he benefits they want (narrow self-interest), and (2) their participation in political
ction does not change society anyway (Olsonian “rationality”). His book was a best
eller, but the fact that he had to write it at all indicates how infrequently these two
notives fully govern people’s actions.

390lson, The Logic of Collective Action, pp. 132-68. Olson also refers to excludable
by-products” as “selective incentives.” Gary Becker, “A Theory of Competition among
>ressure Groups for Political Influence,” Quarterly Journal of Economics 98 (August
983): 372-80, basically depends on the by-product theory to overcome the free-rider
ncentive against political activity. Looked at another way, the by-product theory
onverts a full public good into a positive externality of a private good.

40Those advocating voluntary funding of national defense through the sale of exclud-
ible by-products include Ayn Rand, “Government Financing in a Free Society,” in The
%irtue of Selfishness: A New Concept of Egoism (New York: New American Library, 1964),
ip. 157-63; Jarret B. Wollstein, Society Without Coercion: A New Concept of Social
)rganization (Silver Springs, Md.: Society for Individual Liberty, 1969), pp. 35-38; Morris


===== PAGE 29 =====

116 The Review of Austrian Economics, Volume

uct is really what people want, then a competitor who does not lin]
it with the non-excludable good or service can sell it at a lower price
Only if the group has a legal monopoly on marketing its by-produc
can it really counteract the free-rider incentive. Every really success
ful example of groups relying upon by-products that Olson discusse
involve some sort of legal monopoly. But the groups’ initial attain
ment of this legal monopoly remains an unexplained surmounting o
the public-goods problem."

Far more promising than the by- product theory for explaining th
empirical weakness of the free-rider assumption is some of the recen
dynamic analysis being done in game theory. As many scholars hav
pointed out, the free-rider problem in public-goods theory is identica
to the famous Prisoner’s Dilemma in game theory.*’

The Prisoner’s Dilemma derives its name from an archetypa
situation where two prisoners are being held for some crime. Th
prosecutor separately proposes the same deal to both prisoners
because he only has sufficient evidence to convict them of a mino
crime with a light sentence. Each is told that if he confesses, but th
other does not, he will get off free, while the other will suffer the ful
penalty, unless the other also confesses. If they both confess, the:
both will be convicted of the more serious crime, although they bot!
will receive some small leniency for confessing. This deal gives eac
prisoner an incentive independently to.confess, because by doing s
he individually will be better off regardless of what the other does

and Linda Tannehill, The Market for Liberty (Lansing, Mich.: Tannehill, 1970), p;
126-35; and Tibor R. Machan, “Dissolving the Problem of Public Goods,” in Machan, ed
The Libertarian Reader (Totowa, N.J.: Rowman and Littlefield, 1982), pp. 201-08. Ran
and Machan would still have national defense provided by the State, but one that collecte
no taxes. Wollstein and the Tannehills—whose separate works were reprinted togethe
under the combined title Society without Government (New York: Arno Press, 1972)—prt
fer private alternatives. For a telling critique of the by-product theory as applied t
national defense, see Friedman, The Machinery of Freedom, pp. 192-93.

“Hardin, Collective Action, pp. 31-34, criticizes the by-product theory.

““The book which launched mathematical game theory was John von Neumann an
Oskar Morgenstern, The Theory of Games and Economic Behavior, 3rd ed. (Princeton
Princeton University Press, 1953); the first edition appeared in 1944. According t
Hardin, Collective Action, p. 24, the Prisoner’s Dilemma itself was first discovered i
1950 by Merril Flood and Melvin Dresher. A. W. Tucker, a game theorist at Princeto
University, later gave the Prisoner’s Dilemma its name. For the personal reminiscence
of one of the early researchers who worked on the Prisoner’s Dilemma, coupled with
survey ofthe studies of the dilemma up to the mid-seventies, see Anatol Rapopor
“Prisoner’s Dilemma—Recollections and Observations,” in Rapoport, ed., Game Theory a
a Theory of Conflict Resolution (Dordrecht, The Netherlands: D. Reidel, 1974), pp. 17-3:
Interestingly enough, despite the commonality between the Prisoner’s Dilemma and th
public-goods problem, Samuelson in “Pure Theory of Public Expenditure and Taxation
dismissed all game theory because “except in trivial cases, {it] propounds paradoxe
rather than solves problems.” :


===== PAGE 30 =====

National Goods Versus Public Goods 117

Consequently, they both confess, despite the fact that they both
collectively would have had much lighter sentences if they both
refused to confess.

The public-goods problem is essentially a Prisoner’s Dilemma
with many prisoners. I cannot delve into the details here of the recent
work, both theoretical and empirical, of such game theorists as
Michael Taylor, Russell Hardin, and Robert Axelrod, but essentially
they have explored the Prisoner’s Dilemma within a dynamic rather
than static setting. Their conclusion: whereas in a static single
Prisoner’s Dilemma, cooperation is never rational; in dynamic iter-
ated Prisoner’s Dilemmas, with two or more people, cooperation
frequently becomes rational for even the most narrowly self-inter-
ested individual. What this exciting work implies is that in many
real-world dynamic contexts, ideological altruism or some similar
motive beyond narrow self-interest may not be necessary at all to
counterbalance the free-rider incentive.*’

v

[ now arrive finally at my conclusions respecting national defense.
We have seen that putting domestic limitations upon the power of the
State is a public-goods problem, but nonetheless one that in many
historical instances for whatever reason has been solved. We have
also seen that national defense, in the sense of protecting the people
from a foreign State, is a subset of the general problem of protecting
them from any State, domestic or foreign. Consequently, the factors
that already provide protection from the domestic State are the very
factors which on the market would provide protection from foreign
States. To put it concretely, the same social consensus that has
voluntarily overcome the free-rider obstacle to protect the United
States, one of the most free, if not the most free, nation in the world
would voluntarily overcome the free-rider obstacle to protect Ameri-
can freedom from foreign States.

The policy implication of this analysis is, to say the least, very
far-reaching. Rather than justifying State provided protection, the
fact that national defense is a genuine public good offers a powerful

3R. Hardin, “Collective Action as an Agreeable n-Prisoners’ Dilemma,” Behavioral
Science 16 (September 1971): 472-81; Michael Taylor, Anarchy and Cooperation
‘London: John Wiley & Sons, 1976); Hardin, Collective Action; and Robert Axelrod, The
Evolution of Cooperation (New York: Basic Books, 1984). Axelrod confines himself to
:wo person dynamic Prisoner’s Dilemmas, while both Taylor and Hardin consider
1-person iterated games. For a good review of the growing literature on n-person games,
see Dawes, “Social Dilemmas.” The conclusion of much of this work was anticipated by
Brubaker, “Free Ride, Free Revelation, or Golden Rule,” who tested for cooperation on
sublic goods with pre-contract excludability.


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118 The Review of Austrian Economics, Volume «

argument for unilaterally disarming the State.* In current Americar
political discourse, unilateral disarmament has become an emotion
laden term. Radical opponents of current United States military
policy are often tainted with the term, although almost none of then
actually dare to take that position. So let me be specific about wha
I mean by unilateral disarmament.’

By “disarmament,” I mean disarmament of the State. Prior to thi:
point, there has been no mention of private protection agencies a:
alternatives to the State for national defense. The notion of a privat
agency replacing the United States government’s military establishmen
seems exotic at first glance. But once we appreciate the equivalenc
between protection from foreign States and protection from the do

Strictly speaking, my argument has applied to the provision of national defens
with taxation or some other coercive measure. Thus, it challenges the use of sucl
measures by private alternatives. Some might also speciously conclude that it allow
for the provision of defense by a State that does not collect taxes. To fully explain wh;
I believe the idea of a voluntary State is a contradiction in terms would involve us i
the lengthy philosophical debate between anarchist and minarchist libertarians. Sul
fice to say, without the public-goods argument, those who still advocate State-provide:
protection must present a different argument for entrusting this service to the State
Until then, I will merely point out that entrusting national defense to a State that doe
not collect taxes, at least to support that service, would achieve the worst of both worlds
It would abandon the only apparent advantage of having the State provide this publi
good, the ability to coerce free riders, but would maintain all the other obviou
disadvantages of State-provided protection.

“In Britain, unlike the U.S., significant segments of the peace movement d
advocate unilateral disarmament, but even there, many of them view this as a realisti
possibility only because of the existence of the U.S. military establishment. Within th
U.S, the only individuals actually to endorse unilateral disarmament have been thos
who believe non-violent resistance is a practical alternative. They have recently beguw
to refer to themselves as the transarmament movement, because they wish to “tran
scend” reliance upon arms for defense. Their most prominent proponent is Gene Sharg
See his Making Europe Unconquerable: The Potential of Civilian-based Deterrence an:
Defence (Cambridge, Mass.: Ballinger, 1986), has been recently published. Others wh
have explored this option both here and abroad are Anders Bosserup and Mack Andrew
War Without Weapons: Non-Violence in National Defense (New York: Schocken Book:
1974); Dietrich Fischer, Preventing War: A Policy for Britain (Totowa, N.J.: Rowma:
and Allanheld, 1984); Stephen King-Hall, Power Politics in the Nuclear Age (Londor
Victor Gollancz, 1962); Adam Roberts, ed., Civilian Resistance as a National Defense
Non-Violent Action Against Aggression (Baltimore: Penguin Books, 1969); and Mulfor
Q. Sibley, ed., The Quiet Battle: Writings on the Theory and Practice of Nonviolen
Resistance (Chicago: Quadrangle Books, 1963).

I believe this perspective has much to offer. It is more sensitive to the role ¢
legitimization in the power of the State than any of the more conventional perspectives
Nevertheless, my policy proposal departs from this perspective in two very significan
features: (1) it envisages military defense organized without a State, whereas non-vi
olent resistance rules out military defense altogether; and (2) it rules out any kind ¢
defense provided by the State, whereas most of the transarmament advocates favo
nationalized non-violent resistance. They have no objection to the domestic Stat
employing taxation and in some cases even conscription in order to implement non-v:
olent resistance.


===== PAGE 32 =====

Vational Goods Versus Public Goods 119

nestic State, we reach the startling realization that many private
yrotection agencies exist right now. They are the same institutions
‘urrently protecting Americans from the United States government’s
ittempted violations of life, property, and liberty—institutions from
he American Civil Liberties Union, at one end of the political spec-
rum, to the National Rifle Association, at the other. Obviously, these
:xisting private protection agencies might have to change their tac-
ics when confronting a foreign State. Or new agencies might have to
irise. But the private sector might very well have to respond similarly
f the United States government itself were to undergo some radical
ransformation, say, from democratic to dictatorial. And in both these
nstances, non-military methods of protecting liberty might still
‘emain more effective.

If members of the American Civil Liberties Union, the National
Rifle Association, and numerous other similar organizations within
yur society behaved as the public-goods argument predicts, they
vould all pack up and go home.*® The fact that they do not do so
mplies that, despite the free-rider problem, more efficient private
nilitary alternatives could take the State's place, if it were disarmed.
(hus, a more apt term than “disarmament” for my recommended
yolicy would be “denationalization of defense.”

The word “unilateral” when applied to Cold War disarmament
onveys the unfortunate impression that the user prefers a world in
vhich the United States government is disarmed while other States,
such as the Soviet Union, remain armed to the teeth. All that I mean
)y unilateral is that the disarming of one State need not be made
:onditional upon the disarming of another. I believe this for roughly
he same reason that I believe that the elimination of one State’s

The continuing success of the National Rifle Association is frequently commented
1pon, but many observers jump to the misleading inference that the NRA is a lobby.
‘or a recent instance, see Bob Secter and Karen Tumulty, “Victory Spotlights Power,
strategy of NRA Lobbyists,” Los Angeles Times, 11 April 1986, pp. 1, 28. If they mean
he term “lobby” broadly to include any group that attempts to influence public policy,
hen this inference is correct. But the narrower meaning of the term “lobby” restricts
t to groups that attempt to influence public policy for private pecuniary benefit, such
1s when automobile manufacturers band together for import quotas. If the NRA
-epresented mainly gun manufacturers, then it would be a lobby in this sense. But it
learly represents gun owners. Furthermore, these gun owners work assiduously to
yrotect the right to gun ownership of the entire public. Like defense of the public
renerally, defense of the right to gun ownership is a public good with a very large public.
hus, according to public-goods theory, the NRA could never exist. It does no good to
irgue that many in the public do not care about their right to own guns. That only
-einforces the free rider incentives against the NRA. Because now we are talking about
10t only a public good with a large public, but also a public good that most of the
yeneficiaries do not value highly. Yet, the efforts of the small number who do value this
yublic good highly are enormously successful in its production.


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120 SE ++ The Review of Austrian Economics, Volume
trade and immigration barriers need not be made conditional upo:

"the elimination of another’ s barriers. Thus, a more precise word thai
“unilateral” is “unconditional.”

Ideally, I hope for a world in which all States have been disarmed
Although many of the formal economic models of international rela
tions are not very sangiline about this eventuality, this analysi
points to two possible shortcomings in such models. First, they ar
generally built upon a static formulation of the Prisoner’s Dilemma
whereas dynamic formulations are more realistic and more likely t
predict cooperation. Second, ‘they generally commit the nationalisti
fallacy of composition, ignoring the'interactions of the State with it
own and foreign populations. Like the public- -goods theory they emu
late, these models are very. goad at. explaining the cases wher
disarmament fails. They do not do so well at explaining the case
~ where: disarmament succeeds—as for instance, along the Unite
States~Canada border since 1871. 8

It is beyond the scope of this paper to work exhaustively throug]
all the international consequences of the positive relationship be
tween the domestic power of the State and its subjects’ perception ¢
a foreign threat. In general, ideological dynamics create a symbioti
“interdependence between hostile States. The dampening of plausibl
foreign threats should eventually lead to the kind of genuine mutus
disarmament that the intuitive, less formal models. of the arms rac
have always suggested. Although an unconditional denationalizatio:
of defense would involve the replacement of the State’ s military wit.

t
Fon

“ir, am indebted to George Sinith, “Thoughts on ‘Unilateral Disirmament (unpub
ms. L982), for clarifying some of these términological questions.

*8Britain and the U.S. demilitarized,the Great Lakes in the Rush- Bagot: Treaty (
1817. The process of disarming the entire border was not complete until 1871, howeve
Both Philip Noel-Baker, The Arms Race: A Programme for World Disarmament (Lor
don: Atlantic Books, 1958), and Boulding, “The. World War Industry as“an Econom
Problem,” appreciate the significance of this example.

Economic studies of international. relations that share these weaknesses incluc
Lee, “The Soviet Economy and: the Arms Control Delusion” and Tullock, The Socic
Dilemma. Most of the economic work in these areas has focused upon alliances. See ft
instance Mancur Olson, Jr., and Richard Zeckhauser, “Collective Goods, Comparatit
Advantage, and Alliance Efficiency,” in Roland N. McKean, ed., Issues in Defen:
Economics (New York: National Bureau. of Economic Research, 1967), pp. 25-63.

Tullock is a most egregious example, because on top of other problems his mod
simplistically, assumes that military protection .always enjoys-increasing returns |
scale. He could profit greatly, by incorporating some of the insights of Kenneth !
Boulding, Conflict and Defense: A General Theory (New York: Harper and Row, 1962
about the State's multi-dimensional force gradient, which degrades over distance, or
David Friedman, “A Theory of the Size and Shape of Nations,” Journal of Politic
Economy 85 (February 1977): 59-77, about the limitations upon a nation’s size arisir
from the State’ s desire to maximize tax revenues.

!


===== PAGE 34 =====

National Goods Versus Public Goods 121

private alternatives, those alternatives by being divorced from the
State would be divorced from the primary means of foreign conquest.
Thus, the unconditional disarmament of one State should actually
help hasten the day when all the world’s States are disarmed.“

Of course, the denationalization of defense will not make a society
invincible. Luxembourg without an armed State could hardly protect
itself against the combined forces of a militarized Germany and a
militarized France. But then neither could Luxembourg with a fully
armed State. The more important comparative question is which
institutions in our “imperfect” world would do the best possible job of
protecting the lives, property, and liberty of the Luxemborgian peo-
ple. I believe that the denationalization of defense would not only
reduce the likelihood of foreign conquest but also would limit the
oppressiveness of conquest when it cannot be prevented altogether.

- Most readers will have noticed that I still have failed to address
one major problem. Granting that the unconditional denationaliza-
tion, of defense would be beneficial, how is this policy ever to be
implemented? The production of disarmament itself is a public good,
confronting the same free-rider obstacle that confronts every non-ex-
cludable good and service. Should a majority come to endorse. this
policy, the narrow special interests who benefit from an armed State
would still be willing to commit a lot of resources to keeping the State
armed.

The solution to this final “political failure” has of course been
implicit throughout the analysis. Like all significant gains in the
history of civilization, the disarming of the State can only be accom-
plished by a massive ideological surge that surmounts the free-rider
obstacle. But this seeming difficulty only enhances the policy’s attrac-
tiveness. By the very act of disarming the domestic State, the people
will have forged a tool for protecting themselves from foreign States.

In conclusion, the public-goods argument fails to justify the
State’s protection. Indeed, it utterly fails to explain either the func-

495ee Jeffrey Rogers Hummel, “Deterrence vs. Disarmament,” Caliber 9 (Octo-
ber/November 1981): 8-10; “On Defense,” Free World Chronicle 2 (January/February
1984): 18-23; and “A Practical Case for Denationalizing Defense,” The Pragmatist 3
(April 1986): 1, 8-10, and (June 1986).

As Boulding, “The World War Industry as an Economic Problem,” notes: “It is a
striking testimony to the power of the underlying drive toward the ultimate payoffs of
disarmament that in spite of two world wars, the hypocrisy of governments, and the
weighing of the bargaining organization so strongly against it, the movement toward
disarmament refuses to die” (p. 25).

I might also note that unilateral but total disarmament of the State has the
advantage of being, like the total abolition of slavery in the past, a Schelling point, to
use the obscure jargon of game theorists, and a particularly prominent Schelling point


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122 The Review of Austrian Economics, Volume

tions or origins of the democratic State at all. Because of the inheren
public-goods nature of political action, the State in practice produce:
very few genuine public goods. The most important public goods it
the progress of civilization have been ultimately produced outside th:
State, either directly, or indirectly through influencing State policy.
The democratic State cannot even take credit for the incidenta
protection its subjects receive as an externality from its protection o
its own prerogatives. The ultimate source of that externality i
greater liberty, which is not a gift generously bestowed by the demo
cratic State. Liberty too is a public good, perhaps the most valuabl;
of all. Like any other public good, it must be wrenched from the Stat:
through political action. This adds new depth to the cherished maxim
“The price of liberty is eternal vigilance.” The State is not som
convenient short-cut for either the production or protection of liberty
Liberty is only secure among a people willing voluntarily to shun th

~ free-rider incentive and to protect it themselves.

at that. On the importance of Schelling points to social change see Friedman, “Man;
Few, One.” This feature alone gives my policy a far higher probability of ever bein
practically implemented than something like the demand-revealing process for votin
of public-goods theorists. Even trained economists have some difficulty clearly articu
lating the workings and benefits of the latter.