WEBVTT NOTE Appendix B: “Collective Goods” and “External Benefits”: Two Arguments for Government Activity 1 00:00:00.000 --> 00:00:10.000 Appendix B, Collective Goods and External Benefits, Two Arguments for Government Activity 2 00:00:10.000 --> 00:00:18.000 One of the most important philosophical problems of recent centuries is whether ethics is a rational discipline, 3 00:00:18.000 --> 00:00:24.000 or instead a purely arbitrary, unscientific set of personal values. 4 00:00:24.000 --> 00:00:41.000 Whichever side one may take in this debate, it would certainly be generally agreed that economics, or praxeology, cannot by itself suffice to establish an ethical or politico-ethical doctrine. 5 00:00:41.000 --> 00:00:49.000 Economics per se is therefore a vert-frei science, which does not engage in ethical judgments. 6 00:00:49.000 --> 00:00:55.400 Yet while economists will generally agree to this flat statement, it is certainly curious 7 00:00:55.400 --> 00:01:02.880 how much energy they have spent trying to justify, in some tortuous, presumably scientific 8 00:01:02.880 --> 00:01:08.640 and vert-frei manner, various activities and expenditures of government. 9 00:01:08.640 --> 00:01:16.000 The consequence is the widespread smuggling of un-analyzed, undefended ethical judgments 10 00:01:16.000 --> 00:01:21.000 into a supposedly vert-frei system of economics. 11 00:01:21.000 --> 00:01:28.320 One venerable example used constantly in texts on public finance, an area particularly prone 12 00:01:28.320 --> 00:01:35.240 to camouflaged ethical judgments, is The Cannons of Justice for Taxation, propounded 13 00:01:35.240 --> 00:01:37.320 by Adam Smith. 14 00:01:37.320 --> 00:01:44.920 The analysis of the economic nature and consequences of government ownership in this book is wertfrei 15 00:01:44.920 --> 00:01:48.100 and does not involve ethical judgments. 16 00:01:48.100 --> 00:01:54.660 It is a mistake, for example, to believe that anyone, knowing the economic laws demonstrating 17 00:01:54.660 --> 00:02:01.300 the great inefficiencies of government ownership, would necessarily have to choose private over 18 00:02:01.300 --> 00:02:06.180 government ownership, although of course he may well do so. 19 00:02:06.180 --> 00:02:14.300 Those who place a high moral value, for example, on social conflict, or on poverty, or on inefficiency, 20 00:02:14.300 --> 00:02:21.720 or those who greatly desire to wield bureaucratic power over others, or to see people subjected 21 00:02:21.720 --> 00:02:28.420 to bureaucratic power, may well opt even more enthusiastically for government ownership. 22 00:02:28.420 --> 00:02:33.980 Ultimate ethical principles and choices are outside the scope of this book. 23 00:02:33.980 --> 00:02:39.340 This of course does not mean that the present author deprecates their importance. 24 00:02:39.340 --> 00:02:45.360 On the contrary, he believes that ethics is a rational discipline. 25 00:02:45.360 --> 00:02:52.460 Two favorite seemingly scientific justifications for government activity and enterprise are 26 00:02:52.460 --> 00:03:00.420 a. what we might call the argument of external benefits and b. the argument of collective 27 00:03:00.420 --> 00:03:03.780 of Goods or Collective Wants. 28 00:03:03.780 --> 00:03:10.740 Stripped of seemingly scientific or quasi-mathematical trappings, the first argument reduces to the 29 00:03:10.740 --> 00:03:19.100 contention that A, B and C do not seem to be able to do certain things without benefiting 30 00:03:19.100 --> 00:03:25.780 D, who may try to evade his just share of the payment. 31 00:03:25.780 --> 00:03:31.140 This and other external benefit arguments will be discussed shortly. 32 00:03:31.140 --> 00:03:36.680 The collective goods argument is, on its face, even more scientific. 33 00:03:36.680 --> 00:03:43.680 The economist simply asserts that some goods or services, by their very nature, must be 34 00:03:43.680 --> 00:03:51.640 supplied collectively, and therefore, government must supply them out of tax revenue. 35 00:03:51.640 --> 00:03:59.440 This seemingly simple existential statement, however, cloaks a good many unanalyzed politico-ethical 36 00:03:59.440 --> 00:04:01.040 assumptions. 37 00:04:01.040 --> 00:04:09.140 In the first place, even if there were collective goods, it by no means follows either, one, 38 00:04:09.140 --> 00:04:16.280 that one agency must supply them, or two, that everyone in the collectivity must be 39 00:04:16.280 --> 00:04:18.560 forced to pay for them. 40 00:04:18.560 --> 00:04:26.000 In short, if X is a collective good needed by most people in a certain community and 41 00:04:26.000 --> 00:04:33.600 which can be supplied only to all, it by no means follows that every beneficiary must 42 00:04:33.600 --> 00:04:39.660 be forced to pay for the good, which incidentally he may not even want. 43 00:04:39.660 --> 00:04:46.080 In short, we are back squarely in the moral problem of external benefits, which we shall 44 00:04:46.080 --> 00:04:47.340 discuss. 45 00:04:47.340 --> 00:04:54.300 The collective goods argument turns out, upon analysis, to reduce to the external benefit 46 00:04:54.300 --> 00:04:55.300 argument. 47 00:04:55.300 --> 00:05:02.840 Furthermore, even if only one agency must supply the good, it has not been proved that 48 00:05:02.840 --> 00:05:10.040 the government, rather than some voluntary agency or even some private corporation, cannot 49 00:05:10.040 --> 00:05:12.140 supply that good. 50 00:05:12.140 --> 00:05:18.740 Secondly, the very concept of collective goods is a highly dubious one. 51 00:05:18.740 --> 00:05:24.660 How first of all can a collective want, think or act? 52 00:05:24.660 --> 00:05:28.800 Only an individual exists and can do these things. 53 00:05:28.800 --> 00:05:37.300 There is no existential referent of the collective that supposedly wants and then receives goods. 54 00:05:37.300 --> 00:05:43.980 Many attempts have been made, nevertheless, to salvage the concept of the collective good, 55 00:05:43.980 --> 00:05:50.900 to provide a seemingly iron-clad scientific justification for government operations. 56 00:05:50.900 --> 00:05:57.940 Molinari, for example, trying to establish defense as a collective good, asserted a police 57 00:05:57.940 --> 00:06:04.260 force serves every inhabitant of the district in which it acts, but the mere establishment 58 00:06:04.260 --> 00:06:07.780 of a Bakery does not appease their hunger. 59 00:06:07.780 --> 00:06:14.820 But on the contrary, there is no absolute necessity for a police force to defend every 60 00:06:14.820 --> 00:06:22.660 inhabitant of an area, or still more, to give each one the same degree of protection. 61 00:06:22.660 --> 00:06:30.040 Furthermore, an absolute pacifist, a believer in total nonviolence living in the area, would 62 00:06:30.040 --> 00:06:38.160 would not consider himself protected by or receiving defense service from the police. 63 00:06:38.160 --> 00:06:44.440 On the contrary, he would consider any police in his area a detriment to him. 64 00:06:44.440 --> 00:06:52.640 Hence, defense cannot be considered a collective good or collective want, similarly for such 65 00:06:52.640 --> 00:06:59.640 and such projects as dams, which cannot be simply assumed to benefit everyone in the area. 66 00:06:59.640 --> 00:07:07.640 Antonio Daviti de Marco defined collective wants as consisting of two categories, 67 00:07:07.640 --> 00:07:15.640 wants arising when an individual is not in isolation and wants connected with a conflict of interest. 68 00:07:15.640 --> 00:07:21.640 The first category, however, is so broad as to encompass most market products, 69 00:07:21.640 --> 00:07:32.640 There would be no point, for example, in putting on plays unless a certain number went to see them, or in publishing newspapers without a certain wide market. 70 00:07:32.640 --> 00:07:38.640 Must all these industries therefore be nationalized and monopolized by the government? 71 00:07:38.640 --> 00:07:43.640 The second category is presumably meant to apply to defense. 72 00:07:43.640 --> 00:07:44.640 Defense. 73 00:07:44.640 --> 00:07:47.240 This, however, is incorrect. 74 00:07:47.240 --> 00:07:54.240 Defense itself does not reflect a conflict of interest, but a threat of invasion, against 75 00:07:54.240 --> 00:07:56.760 which defense is needed. 76 00:07:56.760 --> 00:08:03.380 Furthermore, it is hardly sensible to call collective that want which is precisely the 77 00:08:03.380 --> 00:08:09.540 least likely to be unanimous, since robbers will hardly desire it. 78 00:08:09.540 --> 00:08:17.380 Other economists write as if defense is necessarily collective because it is an immaterial service, 79 00:08:17.380 --> 00:08:25.240 whereas bread, autos, etc. are materially divisible and saleable to individuals. 80 00:08:25.240 --> 00:08:30.180 But immaterial services to individuals abound in the market. 81 00:08:30.180 --> 00:08:37.540 Must concert giving be monopolized by the state because its services are immaterial? 82 00:08:37.540 --> 00:08:43.820 In recent years, Professor Paul Samuelson has offered his own definition of collective 83 00:08:43.820 --> 00:08:50.580 consumption goods in a so-called pure theory of government expenditures. 84 00:08:50.580 --> 00:08:56.660 Collective consumption goods, according to Samuelson, are those which all enjoy in common 85 00:08:56.660 --> 00:09:03.500 in the sense that each individual's consumption of such a good leads to no subtraction from 86 00:09:03.500 --> 00:09:18.500 For some reason, these are supposed to be the proper goods, or at least these, for government, rather than the free market to provide. 87 00:09:18.500 --> 00:09:23.500 Samuelson's category has been attacked with due severity. 88 00:09:23.500 --> 00:09:29.300 Professor Steven Encke, for example, pointed out that most governmental services simply 89 00:09:29.300 --> 00:09:37.820 do not fit Samuelson's classification, including highways, libraries, judicial services, police, 90 00:09:37.820 --> 00:09:41.540 fire, hospitals and military protection. 91 00:09:41.540 --> 00:09:48.140 In fact, we may go further and state that no goods would ever fit into Samuelson's 92 00:09:48.140 --> 00:09:51.860 category of collective consumption goods. 93 00:09:51.860 --> 00:09:58.740 Julius Margolis, for example, while critical of Samuelson, concedes the inclusion of national 94 00:09:58.740 --> 00:10:02.640 defense and lighthouses in this category. 95 00:10:02.640 --> 00:10:09.900 But national defense is surely not an absolute good with only one unit of supply. 96 00:10:09.900 --> 00:10:16.660 It consists of specific resources committed in certain definite and concrete ways, and 97 00:10:16.660 --> 00:10:20.140 these resources are necessarily scarce. 98 00:10:20.140 --> 00:10:27.060 A ring of defense bases around New York, for example, cuts down the amount possibly available 99 00:10:27.060 --> 00:10:34.620 around San Francisco. Furthermore, a lighthouse shines over a certain fixed area only. Not 100 00:10:34.620 --> 00:10:41.380 only does a ship within the area prevent others from entering the area at the same time, but 101 00:10:41.380 --> 00:10:47.940 also the construction of a lighthouse in one place limits its construction elsewhere. In 102 00:10:47.940 --> 00:10:55.260 In fact, if a good is really technologically collective in Samuelson's sense, it is not 103 00:10:55.260 --> 00:11:02.780 a good at all, but a natural condition of human welfare, like air, superabundant to 104 00:11:02.780 --> 00:11:06.780 all and therefore unowned by anyone. 105 00:11:06.780 --> 00:11:14.300 Indeed, it is not the lighthouse, but the ocean itself, when the lanes are not crowded, 106 00:11:14.300 --> 00:11:20.660 which is the collective consumption good and which therefore remains unowned. 107 00:11:20.660 --> 00:11:27.640 Obviously neither government nor anyone else is normally needed to produce or allocate 108 00:11:27.640 --> 00:11:29.380 the ocean. 109 00:11:29.380 --> 00:11:36.300 In his reply to critics, Samuelson, after hastening to deny any possible implication 110 00:11:36.300 --> 00:11:43.100 that he wished to confine the sphere of government to collective goods alone, asserts that his 111 00:11:43.100 --> 00:11:47.340 This category is really a polar concept. 112 00:11:47.340 --> 00:11:54.060 Goods in the real world are supposed to be only blends of the polar extremes of public 113 00:11:54.060 --> 00:11:56.260 and private goods. 114 00:11:56.260 --> 00:12:04.620 But these concepts, even in Samuelson's own terms, are decidedly not polar, but exhaustive. 115 00:12:04.620 --> 00:12:11.620 Either A's consumption of a good diminishes B's possible consumption, or it does not. 116 00:12:11.620 --> 00:12:17.060 These two alternatives are mutually exclusive and exhaust the possibilities. 117 00:12:17.060 --> 00:12:24.100 In effect, Samuelson has abandoned his category either as a theoretical or as a practical 118 00:12:24.100 --> 00:12:25.580 device. 119 00:12:25.580 --> 00:12:31.960 Charles Thibault, conceding that there is no pure way to establish an optimum level 120 00:12:31.960 --> 00:12:40.100 for government expenditures, tries to salvage such a theory specifically for local government, 121 00:12:40.100 --> 00:12:46.040 Realizing that the taxing and even voting process precludes voluntary demonstration 122 00:12:46.040 --> 00:12:52.660 of consumer choice in the governmental field, he argues that decentralization and freedom 123 00:12:52.660 --> 00:13:00.340 of internal migration renders local government expenditures more or less optimal, as we can 124 00:13:00.340 --> 00:13:07.700 say that free market expenditures by firms are optimal since the residents can move in 125 00:13:07.700 --> 00:13:10.140 in and out as they please. 126 00:13:10.140 --> 00:13:16.020 Certainly it is true that the consumer will be better off if he can move readily out of 127 00:13:16.020 --> 00:13:23.560 a high-tax and into a low-tax community, but this helps the consumer only to a degree. 128 00:13:23.560 --> 00:13:29.420 It does not solve the problem of government expenditures, which remains otherwise the 129 00:13:29.420 --> 00:13:30.500 same. 130 00:13:30.500 --> 00:13:37.060 There are indeed other factors than government entering into a man's choice of residence, 131 00:13:37.060 --> 00:13:43.540 And enough people may be attached to a certain geographical area, for one reason or another, 132 00:13:43.540 --> 00:13:48.260 to permit a great deal of government depredation before they move. 133 00:13:48.260 --> 00:13:55.300 Furthermore, a major problem is that the world's total land area is fixed, and that governments 134 00:13:55.300 --> 00:14:02.700 have universally pre-empted all the land, and thus, universally burden consumers. 135 00:14:02.700 --> 00:14:08.940 At one point, Thibault seems to admit that his theory would be valid only if each person 136 00:14:08.940 --> 00:14:13.500 could somehow be his own municipal government. 137 00:14:13.500 --> 00:14:19.500 In the course of an acute critique of the idea of competition in government, the Colorado 138 00:14:19.500 --> 00:14:22.860 Springs Gazette Telegraph wrote as follows, 139 00:14:22.860 --> 00:14:30.180 Were the taxpayer free to act as a customer, buying only those services he deemed useful 140 00:15:00.180 --> 00:15:07.180 The rules are never free to refuse the services of the products of the ruler. 141 00:15:07.180 --> 00:15:12.180 Instead of trying to see which government could best serve the governed, 142 00:15:12.180 --> 00:15:19.180 each government began to vie with every other government on the basis of its tax collections. 143 00:15:19.180 --> 00:15:23.180 The victim of this competition is always the taxpayer. 144 00:15:23.180 --> 00:15:31.180 The taxpayer is now set upon by the federal, state, school board, county and city governments. 145 00:15:31.180 --> 00:15:37.180 Each of these is competing for the last dollar he has. 146 00:15:37.180 --> 00:15:47.180 We come now to the problem of external benefits, the major justification for government activities expounded by economists. 147 00:15:47.180 --> 00:15:56.180 The problem of external costs, usually treated as symmetrical with external benefits, is not really related. 148 00:15:56.180 --> 00:16:01.180 It is a consequence of failure to enforce fully the rights of property. 149 00:16:01.180 --> 00:16:09.180 If A's actions injure B's property and the government refuses to stop the act and enforce damages, 150 00:16:09.180 --> 00:16:15.180 property rights, and hence the free market, are not being fully defended and maintained. 151 00:16:15.180 --> 00:16:42.180 where individuals simply benefit themselves by their actions, many writers concede that the free market may be safely left unhampered, but men's actions may often, even inadvertently, benefit others. 152 00:16:42.180 --> 00:16:50.180 While one might think this a cause for rejoicing, critics charge that from this fact flow evils in abundance. 153 00:16:50.180 --> 00:16:58.180 A free exchange where A and B mutually benefit may be all very well, say these economists, 154 00:16:58.180 --> 00:17:09.180 but what if A does something voluntarily which benefits B as well as himself, but for which B pays nothing in exchange? 155 00:17:09.180 --> 00:17:16.880 There are two general lines of attack on the free market using external benefits as the point of criticism. 156 00:17:16.880 --> 00:17:25.780 Taken together, these arguments against the market and for governmental intervention or enterprise cancel each other out, 157 00:17:25.780 --> 00:17:29.980 but each must, in all fairness, be examined separately. 158 00:17:29.980 --> 00:17:36.380 The first type of criticism is to attack A for not doing enough for B. 159 00:17:36.380 --> 00:17:51.380 The benefactor is, in effect, denounced for taking his own selfish interests exclusively into account, and thereby neglecting the potential indirect recipient waiting silently in the wings. 160 00:17:51.380 --> 00:18:02.380 For some unexplained reason, the benefits worried over are only the indirect ones, where B benefits inadvertently from A's action. 161 00:18:02.380 --> 00:18:12.380 Direct gifts or charity, where A simply donates money to B, are not attacked under the category of external benefit. 162 00:18:12.380 --> 00:18:21.380 The second line of attack is to denounce B for accepting a benefit without paying A in return. 163 00:18:21.380 --> 00:18:28.380 The recipient is denounced as an ingrate and a virtual thief for accepting the free gift. 164 00:18:28.380 --> 00:18:35.080 The market, then, is accused of injustice and distortion by both groups of attackers. 165 00:18:35.080 --> 00:18:40.980 The first believes that the selfishness of man is such that A will not act enough in 166 00:18:40.980 --> 00:18:48.480 ways to benefit B. The second, that B will receive too much unearned increment without 167 00:18:48.480 --> 00:18:49.980 paying for it. 168 00:18:49.980 --> 00:18:56.740 Either way, the call is for remedial state action, on the one hand, to use violence in 169 00:18:56.740 --> 00:19:03.940 In order to force or induce A to act more in ways which will aid B, on the other to 170 00:19:03.940 --> 00:19:07.940 force B to pay A for his gift. 171 00:19:07.940 --> 00:19:15.320 Generally, these ethical views are clothed in the scientific opinion that in these cases 172 00:19:15.320 --> 00:19:21.500 free market action is no longer optimal, but should be brought back into optimality by 173 00:19:21.500 --> 00:19:24.100 corrective state action. 174 00:19:24.100 --> 00:19:30.260 Such a view completely misconceives the way in which economic science asserts that free 175 00:19:30.260 --> 00:19:34.060 market action is ever optimal. 176 00:19:34.060 --> 00:19:40.380 It is optimal not from the standpoint of the personal ethical views of an economist, but 177 00:19:40.380 --> 00:19:47.580 from the standpoint of the free voluntary actions of all participants, and in satisfying 178 00:19:47.580 --> 00:19:52.040 the freely expressed needs of the consumers. 179 00:19:52.040 --> 00:20:00.280 Interference, therefore, will necessarily and always move away from such an optimum. 180 00:20:00.280 --> 00:20:07.200 It is amusing that while each line of attack is quite widespread, each can be rather successfully 181 00:20:07.200 --> 00:20:11.520 rebutted by using the essence of the other attack. 182 00:20:11.520 --> 00:20:15.800 Take for example the first, the attack on the benefactor. 183 00:20:15.800 --> 00:20:22.240 To denounce the benefactor and implicitly call for state punishment for insufficient good 184 00:20:22.240 --> 00:20:28.680 deeds is to advance a moral claim by the recipient upon the benefactor. 185 00:20:28.680 --> 00:20:35.400 We do not intend to argue ultimate values in this book, but it should be clearly understood 186 00:20:35.400 --> 00:20:43.960 that to adopt this position is to say that B is entitled peremptorily to call on A to 187 00:20:43.960 --> 00:20:50.840 to do something to benefit him, and for which B does not pay anything in return. 188 00:20:50.840 --> 00:20:56.560 We do not have to go all the way with the second line of attack on the free rider, but 189 00:20:56.560 --> 00:21:02.800 we can say, perhaps, that it is presumptuous of the free rider to assert his right to a 190 00:21:02.800 --> 00:21:09.440 post of majesty and command, for what the first line of attack asserts is the moral 191 00:21:09.440 --> 00:21:23.680 Compulsory thrift, or attacks on potential savers for not saving and investing enough, 192 00:21:23.680 --> 00:21:26.880 are examples of this line of attack. 193 00:21:26.880 --> 00:21:32.520 Another is an attack on the user of a natural resource that is being depleted. 194 00:21:32.520 --> 00:21:40.000 Anyone who uses such a resource at all, whatever the extent, deprives some future descendant 195 00:21:40.000 --> 00:21:41.560 of the use. 196 00:21:41.560 --> 00:21:47.760 Conservationists, therefore, call for lower present use of such resources in favor of 197 00:21:47.760 --> 00:21:50.280 greater future use. 198 00:21:50.280 --> 00:21:56.320 Not only is this compulsory benefaction an example of the first line of attack, but if 199 00:21:56.320 --> 00:22:11.320 If this argument is adopted, logically no resource subject to depletion could ever be used at all, for when the future generation comes of age, it too faces a future generation. 200 00:22:11.320 --> 00:22:17.320 This entire line of argument is therefore a peculiarly absurd one. 201 00:22:17.320 --> 00:22:24.320 The second line of attack is of the opposite form, a denunciation of the recipient of the gift. 202 00:22:24.320 --> 00:22:34.820 The recipient is denounced as a free rider, as a man who wickedly enjoys the unearned increment of the productive actions of others. 203 00:22:34.820 --> 00:22:37.820 This too is a curious line of attack. 204 00:22:37.820 --> 00:22:49.820 It is an argument which has cogency only when directed against the first line of attack, that is, against the free rider who wants compulsory free rides. 205 00:22:49.820 --> 00:23:01.820 But here we have a situation where A's actions, taken purely because they benefit himself, also have the happy effect of benefiting someone else. 206 00:23:01.820 --> 00:23:07.820 Are we to be indignant because happiness is being diffused throughout society? 207 00:23:07.820 --> 00:23:13.820 Are we to be critical because more than one person benefits from someone's actions? 208 00:23:13.820 --> 00:23:17.820 After all, the free rider did not ask for his ride. 209 00:23:17.820 --> 00:23:24.820 He received it unasked, as a boon, because a benefits from his own action. 210 00:23:24.820 --> 00:23:34.820 To adopt the second line of attack is to call in the gendarmes to apply punishment because too many people in the society are happy. 211 00:23:34.820 --> 00:23:41.820 In short, am I to be taxed for enjoying the view of my neighbor's well-kept garden? 212 00:23:41.820 --> 00:23:44.820 As one commentator on this issue has put it, 213 00:23:44.820 --> 00:24:13.140 One striking instance of this second line of attack is the nub of the Henry Georgist position, 214 00:24:13.140 --> 00:24:20.060 An attack on the unearned increment derived from a rise in the capital values of ground 215 00:24:20.060 --> 00:24:21.300 land. 216 00:24:21.300 --> 00:24:29.460 We have seen that as the economy progresses, real land rents will rise with real wage rates, 217 00:24:29.460 --> 00:24:35.340 and the result will be increases in the real capital values of land. 218 00:24:35.340 --> 00:24:42.340 Growing capital structure, division of labor, and population tend to make site land relatively 219 00:24:42.340 --> 00:24:46.380 be more scarce, and hence cause the increase. 220 00:24:46.380 --> 00:24:52.340 The argument of the Georgists is that the landowner is not morally responsible for this 221 00:24:52.340 --> 00:25:00.300 rise, which comes about from events external to his landholding, yet he reaps the benefit. 222 00:25:00.300 --> 00:25:06.960 The landowner is therefore a free rider, and his unearned increment rightfully belongs 223 00:25:06.960 --> 00:25:09.060 to society. 224 00:25:09.060 --> 00:25:16.300 Setting aside the problem of the reality of society and whether it can own anything, 225 00:25:16.300 --> 00:25:21.740 we have here a moral attack on a free-rider situation. 226 00:25:21.740 --> 00:25:26.500 The difficulty with this argument is that it proves far too much. 227 00:25:26.500 --> 00:25:33.240 For which one of us would earn anything like our present real income were it not for external 228 00:25:33.240 --> 00:25:37.060 benefits that we derive from the actions of others? 229 00:25:37.060 --> 00:25:43.500 Specifically, the great modern accumulation of capital goods is an inheritance from all 230 00:25:43.500 --> 00:25:46.620 the net savings of our ancestors. 231 00:25:46.620 --> 00:25:52.740 Without them, we would, regardless of the quality of our own moral character, be living 232 00:25:52.740 --> 00:25:54.700 in a primitive jungle. 233 00:25:54.700 --> 00:26:01.140 The inheritance of money capital from our ancestors is, of course, simply inheritance 234 00:26:01.140 --> 00:26:04.440 of shares in this capital structure. 235 00:26:04.440 --> 00:26:09.080 We are all, therefore, free riders on the past. 236 00:26:09.080 --> 00:26:15.220 We are also free riders on the present, because we benefit from the continuing investment 237 00:26:15.220 --> 00:26:20.880 of our fellow men and from their specialized skills on the market. 238 00:26:20.880 --> 00:26:26.960 Certainly the vast bulk of our wages, if they could be so imputed, would be due to this 239 00:26:26.960 --> 00:26:30.360 heritage on which we are free riders. 240 00:26:30.360 --> 00:26:35.460 The landowner has no more of an unearned increment than any one of us. 241 00:26:35.460 --> 00:26:41.600 Are all of us to suffer confiscation, therefore, and to be taxed for our happiness? 242 00:26:41.600 --> 00:26:44.740 And who, then, is to receive the loot? 243 00:26:44.740 --> 00:26:50.320 Our dead ancestors, who were our benefactors in investing the capital? 244 00:26:50.320 --> 00:26:55.280 There is justice as well as bluntness in Benjamin Tucker's criticism. 245 00:26:55.280 --> 00:27:02.720 What gives value to land? asks Rev. Hugh O. Pentecost, a Georgist, and he answers, the 246 00:27:02.720 --> 00:27:06.240 presence of population, the community. 247 00:27:06.240 --> 00:27:12.240 Then rent, or the value of land, morally belongs to the community. 248 00:27:12.240 --> 00:27:15.520 What gives value to Mr. Pentecost's preaching? 249 00:27:15.520 --> 00:27:18.960 The presence of population, the community. 250 00:27:18.960 --> 00:27:26.440 And Mr. Pentecost's salary, or the value of his preaching, morally belongs to the community. 251 00:27:26.440 --> 00:27:32.900 An important case of external benefits is external economies, which could be reaped 252 00:27:32.900 --> 00:27:40.660 by investment in certain industries, but which would not accrue as profit to the entrepreneurs. 253 00:27:40.660 --> 00:27:46.960 There is no need to dwell on the lengthy discussion in the literature on the actual range of such 254 00:27:46.960 --> 00:27:51.680 external economies, although they are apparently negligible. 255 00:27:51.680 --> 00:27:58.320 The suggestion has been persistently advanced that the government subsidize these investments 256 00:27:58.320 --> 00:28:03.960 so that society can reap the external economies. 257 00:28:03.960 --> 00:28:10.160 Such is the Pigou argument for subsidizing external economies, as well as the old and 258 00:28:10.160 --> 00:28:16.160 still dominant infant industries argument for a protective tariff. 259 00:28:16.160 --> 00:28:23.280 The call for state subsidization of external economy investments amounts to a third line 260 00:28:23.280 --> 00:28:30.960 of attack on the free market, that is, that b, the potential beneficiaries, be forced 261 00:28:30.960 --> 00:28:38.280 to subsidize the benefactors a, so that the latter will produce the former's benefits. 262 00:28:38.280 --> 00:28:44.420 This third line is the favorite argument of economists for such proposals as government-aided 263 00:28:44.420 --> 00:28:52.680 dams or reclamations, recipients taxed to pay for their benefits, or compulsory schooling, 264 00:28:52.680 --> 00:28:58.320 the taxpayers will eventually benefit from others' education, etc. 265 00:28:58.320 --> 00:29:04.800 The recipients are again bearing the onus of the policy, but here they are not criticized 266 00:29:04.800 --> 00:29:06.460 for free riding. 267 00:29:06.460 --> 00:29:12.320 They are now being saved from a situation in which they would not have obtained certain 268 00:29:12.320 --> 00:29:18.360 and Benefits, since they would not have paid for them, it is difficult to understand exactly 269 00:29:18.360 --> 00:29:21.260 what they are being saved from. 270 00:29:21.260 --> 00:29:27.840 The third line of attack therefore agrees with the first that the free market does not, 271 00:29:27.840 --> 00:29:34.520 because of human selfishness, produce enough external economy actions, but it joins the 272 00:29:34.520 --> 00:29:41.080 second line of attack in placing the cost of remedying the situation on the strangely 273 00:29:41.080 --> 00:29:43.320 Unwilling Recipients. 274 00:29:43.320 --> 00:29:49.920 If this subsidy takes place, it is obvious that the recipients are no longer free riders. 275 00:29:49.920 --> 00:29:56.600 Indeed, they are simply being coerced into buying benefits for which, acting by free 276 00:29:56.600 --> 00:30:00.000 choice, they would not have paid. 277 00:30:00.000 --> 00:30:06.260 The absurdity of the third approach may be revealed by pondering the question, who benefits 278 00:30:06.260 --> 00:30:08.880 from the suggested policy? 279 00:30:08.880 --> 00:30:13.060 The benefactor, A, receives a subsidy, it is true. 280 00:30:13.060 --> 00:30:18.880 But it is often doubtful if he benefits, since he would otherwise have acted and invested 281 00:30:18.880 --> 00:30:21.820 profitably in some other direction. 282 00:30:21.820 --> 00:30:28.900 The state has simply compensated him for losses which he would have received, and has adjusted 283 00:30:28.900 --> 00:30:34.360 the proceeds so that he receives the equivalent of an opportunity foregone. 284 00:30:34.360 --> 00:30:41.840 Therefore, A, if a business firm does not benefit, as for the recipients, they are being 285 00:30:41.840 --> 00:30:47.880 forced by the state to pay for benefits that they otherwise would not have purchased. 286 00:30:47.880 --> 00:30:51.760 How can we say that they benefit? 287 00:30:51.760 --> 00:30:58.140 A standard reply is that the recipients could not have obtained the benefit even if they 288 00:30:58.140 --> 00:31:01.240 had wanted to buy it voluntarily. 289 00:31:01.240 --> 00:31:07.760 The first problem here is by what mysterious process the critics know that the recipients 290 00:31:07.760 --> 00:31:10.960 would have liked to purchase the benefit. 291 00:31:10.960 --> 00:31:17.920 Our only way of knowing the content of preference scales is to see them revealed in concrete 292 00:31:17.920 --> 00:31:19.340 choices. 293 00:31:19.340 --> 00:31:25.840 Since the choice concretely was not to buy the benefit, there is no justification for 294 00:31:25.840 --> 00:31:34.840 for Outsiders to assert that B's preference scale was really different from what was revealed in his actions. 295 00:31:34.840 --> 00:31:42.840 Secondly, there is no reason why the prospective recipients could not have bought the benefit. 296 00:31:42.840 --> 00:31:50.840 In all cases, a benefit produced can be sold on the market and earn its value product to consumers. 297 00:31:50.840 --> 00:32:06.840 The fact that producing the benefit would not be profitable to the investor signifies that the consumers do not value it as much as they value the uses of non-specific factors in alternative lines of production. 298 00:32:06.840 --> 00:32:17.840 For costs to be higher than prospective selling price means that the non-specific factors earn more in other channels of production. 299 00:32:17.840 --> 00:32:24.520 Furthermore, in possible cases where some consumers are not satisfied with the extent 300 00:32:24.520 --> 00:32:30.240 of the market production of some benefit, they are at perfect liberty to subsidize the 301 00:32:30.240 --> 00:32:32.720 investors themselves. 302 00:32:32.720 --> 00:32:39.780 Such a voluntary subsidy would be equivalent to paying a higher market price for the benefit, 303 00:32:39.780 --> 00:32:43.280 and would reveal their willingness to pay that price. 304 00:32:43.280 --> 00:32:50.560 The fact that in any case such a subsidy has not emerged eliminates any justification for 305 00:32:50.560 --> 00:32:53.920 a coerced subsidy by the government. 306 00:32:53.920 --> 00:33:00.460 Rather than providing a benefit to the taxed beneficiaries, in fact, the coerced subsidy 307 00:33:00.460 --> 00:33:06.440 inflicts a loss upon them, for they could have spent their funds themselves on goods 308 00:33:06.440 --> 00:33:09.960 and services of greater utility. 309 00:33:09.960 --> 00:33:16.720 As Mises states, the means which a government needs in order to run a plant at a loss, or 310 00:33:16.720 --> 00:33:23.900 to subsidize an unprofitable project, must be withdrawn either from the taxpayers' spending 311 00:33:23.900 --> 00:33:28.160 and investing power, or from the loan market. 312 00:33:28.160 --> 00:33:33.080 What the government spends more, the public spends less. 313 00:33:33.080 --> 00:33:37.960 Public works are paid for by funds taken away from the citizens. 314 00:33:37.960 --> 00:33:43.720 If the government had not interfered, the citizens would have employed them for the realization 315 00:33:43.720 --> 00:33:51.080 of profit-promising projects, the realization of which is neglected merely on account of 316 00:33:51.080 --> 00:33:53.080 the government's intervention. 317 00:33:53.080 --> 00:33:57.840 Yet this non-realized project would have been profitable. 318 00:33:57.840 --> 00:34:03.360 That is, it would have employed the scarce means of production in accordance with the 319 00:34:03.360 --> 00:34:06.480 most urgent needs of the consumers. 320 00:34:06.480 --> 00:34:11.640 From the point of view of the consumers, the employment of these means of production for 321 00:34:11.640 --> 00:34:16.360 the realization of an unprofitable project is wasteful. 322 00:34:16.360 --> 00:34:22.660 It deprives them of satisfactions which they prefer to those which the government-sponsored 323 00:34:22.660 --> 00:34:25.540 project can furnish them. 324 00:34:25.540 --> 00:34:31.940 Howard S. Ellis and William Fellner, in their discussion of external economies, ignore the 325 00:34:31.940 --> 00:34:42.940 and the primordial fact that the subsidization of these economies must be at the expense of funds usable for greater satisfactions elsewhere. 326 00:34:42.940 --> 00:34:52.940 Ellis and Felner do not realize that their refutation of the Pigou thesis, that increasing cost industries are over-expanded, 327 00:34:52.940 --> 00:34:59.940 destroys any possible basis for a subsidy to the decreasing cost industries.