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Using Free Markets To Provide Public Goods

Page history last edited by Alex Backer, Ph.D. 11 years, 8 months ago

Using Free Markets To Provide Public Goods

     Self-organizing Government



Amidst furious innovation in most areas of society, our system of government has remained relatively unchanged for the last two hundred years. While this could theoretically mean that perfection has been achieved, the evidence summarized below suggests that this is far from the case.


Large government slows economic growth

In The Size and Functions of Government And Economic Growth, Profs. Gwartney, Lawson and Holcombe cite extensive evidence that larger governments (as a fraction of the economy) correlate with slower economic growth:


"There is overwhelming evidence that both the size of government and its expansion have exerted a negative impact on economic growth during the last several decades. As government outlays in the United States have grown from 28.4 percent of GDP in 1960 to 34.6 percent in 1996, investment as a share of GDP, labor productivity, and real GDP growth have fallen. Data for 23 OECD countries also revealed that higher government expenditures were correlated with both less investment and lower rates of growth during the 1960-96 period. An analysis of data for a larger set of 60 nations illustrates the same thing. Moreover, the size of government in the world's fastest-growing economies is generally less than 20 percent, and their non-investment government expenditures are approximately 13 percent of GDP, far less than the comparable figures in the United States and other OECD countries. In the few isolated cases where government expenditures shrank by an appreciable amount, this reduction in the size of government was correlated with an increase in real GDP growth. All this evidence points in the same direction: Larger government means slower economic growth."


How do we achieve smaller government without sacrificing provision of the public goods government provides? Is it in fact possible to achieve a higher level of provisioning of public goods with a smaller government?


Voter Apathy

Voter turnout is extremely low in the United States. Is there a way to get citizenship more involved?


Lack of Accountability of Public Officials, Corruption

With the notable exception of voting records and history of bills introduced, the collective nature of government makes it difficult to hold individual public officials accountable for their track record, reward those that do well and get rid of those that do not. Lack of accountability can lead in individual cases to corruption.


Term Limits Prevent Good Lawmakers from Staying in Office

Term limits have their good side, but they also prevent a really good elected official from continuing to serve. So just by the time some politicians learn how to do their jobs well, they have to look for a new job.



The Power of Free Markets is not Harnessed Today for the Production of Public Goods

One of the primary functions of government is to take care of activities such as public goods that private enterprise cannot provide because individuals would not be compelled to pay for them --goods such as clean air in open spaces, since individuals are better off not paying if their neighbors foot the bill and they get to breathe too. Put in Gwartney, Lawson and Holcombe's words, public goods are goods that markets may find troublesome to provide because their nature makes it difficult (or costly) to establish a close link between payment for and receipt of such goods. This is the reason profits are not the driving force for government spending. But nothing dictates that government cannot benefit from that most powerful and effective of forces driving the private economy: free markets.


That is, the most powerful force behind modern society's complex ecosystem, which seemingly magically caters for every need and desire that money can quell, is its self-organizing nature: the fact that each of many agents (enterprises) are free to choose the problem it will solve and the solution it will offer, and that each is rewarded according to the success of his/her endeavour. In this, free markets resemble biological evolution.


Government, in contrast, depends on a single central authority (or at most a few, when competencies overlap), and the sole feedback loop to reward success and punish failure comes in an all-or-none vote (i.e. no selective approval of some policies but not others, in the manner in which customers can reward one product in favor of another even from the same company) only once every four years or so (for a discussion of why Adjustment to change is much slower in the public sector, see The Size and Functions of Government And Economic Growth, footnote 7). To top this, political systems like the U.S. one which disallow repeated re-election do not even allow transmission of good governments the way good genes are inherited in a biological system. This robs government of all three ingredients of a successful evolutionary system: diversity, selection and inheritance.


Public Good Enterprises

Yet this need not be so. We could have multiple government units (which I will call "pubic good enterprises", or PGEs) whose budget is allocated from the total tax monies by citizens according to their past success, and which can remain funded (the PGE equivalent of in 'office') for as long as they continue to satisfy citizens' mandate in such a way as to receive money. Individual PGEs would succeed and persist, or die rapidly by virtue of their effect on society. A self-organizing government like this would promote the creation of public good enterprises specializing in as many issues as citizens care about.


The allocation of tax monies would borrow from the concept of the Senate, which ensures that all states, no matter how unpopulated, get equal representation in a critical stage of law-passing. Likewise, allocation of taxmonies would give each taxpayer equal representation regardless of how much tax each contributes. Taxpayers could vote for the allocation of their portion of taxmonies by writing in the code for their preferred PGEs in their annual tax return, or through a more sophisticated online system to provide information on all PGEs in the geographical location or topical areas of interest for each taxpayer.


PGEs could be organized for profit or as non-profits. Importantly, each PGE would receive tax monies in accordance to its ability to help taxpayers, so whether investors benefit as well or not is irrelevant.


Importantly, creation of a PGE, and eligibility for funding, should not be subject to approval by any government bureaucrat; the very purpose of the system is to allow the system to self-organize and provide diversity of approaches, a goal that would be defeated by subjecting them to the vision of any single individual or institution.


PGEs would still be subject to the law, ensuring that no minority could impinge upon the rights of the majority.

How would infrastructure projects that are less visible to the public get funded? The same way that they get funded in a market economy: just as consumers pay B2C companies for goods and services and B2C companies pay B2B companies for supplies, infrastructure and services, so would taxpayers fund PGEs which generate visible benefits for society, and these PGEs would in turn pay other firms to provide the necessary infrastructure.


Take, for example, an idea to reduce traffic congestion: visual barriers around traffic accidents (or permanently between freeway directions) that reduce rubbernecking, restricting the congestion to the direction of traffic affected by the accident, or perhaps even to some lanes. An idea such as this does not see the light of day except in isolated cases of visionary governments, because the benefit is for society at large, and no individual has an incentive to pay for it unless all do. With self-organizing government and public good enterprises, a group of citizens with a good idea on how to reduce traffic congestion could appeal to the public to vote a fraction of tax monies for it and implement it without the need to convince a single bureaucrat. Word about good initiatives could spread virally through word of mouth and electronic communications. A good initiative would thus grow in budget and spread around the country. Bad initiatives would die.


I have little doubt that a system along the lines of what I describe would aid our own rather dated form of government. In the absence of revolutions, though, the hardest thing about instituting a new political system is designing a viable transition. In this case, a smooth transition comes naturally: the fraction of the overall government budget devoted to Public Good Entreprises could be gradually increased over several years, after an experimental period during which any wrinkles in the system could get ironed out and the success of the system verified, until eventually, perhaps most of or even the entire budget could be allocated in such a way.


The ball, my friends, is now in the hands of Congress. Or a local or state government with an eye for innovation. Terminator comes to mind...


Alex Bäcker, Ph.D.

Altadena, California, first version published October 8th, 2006


Q&A and Technical Notes

1.Q: How is this different from allowing tax deductible contributions to charity?

A: Only a fraction of charitable contributions is deducted from taxes. Thus, the incentive to fund public goods with charitable contributions is rather limited.

2. Q: How do we avoid the limit case where each taxpayer funds a tiny PGE whose sole purpose is to serve that taxpayer and which perpetuates by always pleasing that voter, and prevent a lack of funding of PGEs providing public goods?

A: At first blush, it might seem like the solution to this would be for PGEs to need to reach a minimum number of votes in order to receive tax funding. This minimum number should be large enough to reduce the creation of tiny special interest groups. The largest challenge that would face a PGE system is the risk that taxpayers overwhelmingly choose to fund special-interest "semi-public" goods, leaving necessary public goods underfunded. This will be true while the marginal benefit to a taxpayer of investment in the public good is less than that of investment in "semi-public" goods. To some extent, this system will self-correct, since as publicly acclaimed public goods get underfunded, the marginal benefit of investment in them will increase. But if this really worked, public goods would be provided by the private sector in a market economy.

One solution to this problem is to make the contribution to each PGE proportional to the square of the number of taxpayers voting for it (normalized by the sum of the squares across all PGEs). This compensates for the fact that the marginal return on investment would be lower for goods shared with others, by rewarding votes for PGEs which benefit a larger constituency of beneficiaries with a larger fraction of the overall tax budget. The price to pay for this is favoring the wish of majorities at the expense of minorities, and making it harder for innovations, which by definition are started by a minority, to be popularized.

The original, shorter, version of this document, entitled Self-organizing Government, can be found here.

Up to Science.



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