Academic journal article American Economist

The Comparative Study of Public Economies

Academic journal article American Economist

The Comparative Study of Public Economies

Article excerpt

One of Adam Smith's major contributions was the development of a theory of order that demonstrated the possibility of beneficial outcomes emerging from the independent contributions of many individuals pursuing their own interests within a set of agreed upon rules. Smith's work provided the foundation for modern micro-economics that has formalized the theory of competitive markets. Individuals organize themselves into enterprises that seek out opportunities for gain through production and exchange. Competition among buyers and sellers exchanging purely private goods in an open market within a legal framework that defines and enforces property rights and contractual agreements, generates incentives that lead toward optimal results. While each participant tries to maximize his or her own welfare, competition among producers and consumers of pure private goods leads to an increase in the benefits for all while driving individual advantage over others to a minimum. Public policies consistent with this view of order encourage the development of markets as a stimulus to increase "the wealth of nations."

Smith's theory of order stands in marked contrast to that of Thomas Hobbes, who argued that self-organization and competition leads to warfare and necessitates a single center of power dominating all social relationships and imposing peace and order on others. For Hobbes, order came from having a single decision maker rather than relying on the decisions made by many self-organized and independent decision makers. While modern scholars frequently deny their reliance on Hobbesian intellectual roots, the modern theory of "The State" is a direct descendant of Leviathan. The State is defined as an organization with a monopoly over the authority to make law and the legitimate use of coercion.

A major question puzzling analysts for some time has been how far the logic of market organization can be applied to the organization of productive activities beyond strictly private goods. In 1954, Paul Samuelson, for example, demonstrated that it was not possible to rely on decentralized, spontaneous (self-organized) processes to achieve the same level of optimality as that of an open competitive market when the goods involved were public goods and thus not excludable and subtractable. In the same year, H. Scott Gordon examined the effect of open competitive processes for common-pool resources, such as fisheries, where exclusion is also difficult but the goods appropriated by one user are not available to others. Both Samuelson and Gordon - and many scholars who have built on their work - revealed suboptimalities when dealing with collective goods (the term I will use to include both public goods and common-pool resources). Problems range from minor underprovision to the "tragedy of the commons." Markets fail to achieve optimal results when externalities are generated, and it is difficult to exclude beneficiaries who gain an advantage without their contributing to the cost of provision. A policy prescription stemming from the work of these political economists and from some theoretical traditions in public administration has been that a centralized authority is necessary to achieve greater welfare potentials for collective goods.

Contemporary policy prescriptions tend to recommend Smith's concept of market order for all private goods and Hobbes's conception of the sovereign State for all collective goods. Since many of the goods and services desired in a modern economy are not pure private goods, this leads to the prescription that the State - in the singular - should provide and produce all the goods and services where markets fail. Showing that one institutional arrangement leads to sub-optimal performance is not equivalent, however, to showing that another institutional arrangement will perform better. Government monopolies also fail in providing and producing local public goods and common-pool resources efficiently and equitably. …

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