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Success Means Competing and Cooperating. Adam Smith as You’ve Never Seen Him Before

Free rider problems and twenty-first century public goods

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By Nicholas Gruen

Part one of this essay showed how two dimensions of free riding define what we call “public goods” – things that often fall to governments to supply because markets frequently can’t: Things like defense forces, suburban roads and public fireworks displays.

The ‘non-excludability’ of such goods creates a free rider problem for market provisionIt’s hard to charge prices because, once provided, people can free ride on such goods, whether or not they pay. So we invented government to fund public goods through taxation.

But as well as being ‘non-excludable’, public goods are also ‘non-rival’. This article is a public good. Your reading it doesn’t prevent others from doing so. So once they’re provided, public goods provide a free rider opportunity.

Despite our culture’s hostility to free riding, the opportunity has always outweighed the problem. Most prosperity we’ve achieved since our days on the African Savannah arose from people copying others’ good ideas, most of which weren’t and shouldn’t have been patented because they didn’t need to be patented to come into existence. Or they were patented and the relevant patents have expired, such as the patent on James Watt’s eighteenth century refinements to piston engines.

Free rider opportunities now so dominate free rider problems that some of our most successful companies provide their wares as public rather than private goods. Google and Facebook could have marketed their products behind a pay-wall to monetize more of the value they generated. But seizing the free rider opportunity and, instead, providing their services as free, public goods, led to such vast value creation that monetizing a small fraction of that value via advertising has lifted their combined market capitalization to over three quarters of a trillion dollars.

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But there are areas where the free rider problem must be solved in order to seize the free rider opportunity. Take 23andMe. It provides you with a partial analysis of your genome and identifies the health issues it detects and tips on your ancestry. But the genomic analysis on which it is built is sufficiently costly that it can’t easily be covered by advertising. So it operates as a private good behind a paywall. I’ve sketched a way of generating vastly more value by providing the site as a free public good. But it probably needs some government subsidy – at least initially – and some ‘nudges’ from the health system to really thrive.

If you’re thinking that this isn’t the normal story in which innovation and productivity is a matter of more and better private goods flooding the market, you’re right. As I explain in the next section, that way of thinking was always simplistic. But the internet is consigning it to the dustbin of history.

History is a co-evolution of public and private goods

Modern economic development is far more compellingly represented as the co-evolution of new private and public goods: And new ecologies between them.

Thus, for instance, as the eighteenth century dawned, the seas weren’t properly navigable. Sailors kept dying of scurvy. And ships couldn’t work out where they were and so kept bumping into continents. We didn’t need more competition amongst shipbuilders. We needed the generation and/or application of knowledge. In fact, citrus fruits’ efficacy in solving the scourge of scurvy had been known for centuries but made it into public circulation with the first ever clinical trial (another public good) in 1747. And Harrison’s clocks famously solved the longitude problem to win the British Admiralty’s £20,000 prize (though the British themselves were free riding on the idea of a longitude prize from earlier prizes offered by the Spanish and then the Dutch).

The arteries of modern commerce couldn’t have developed without the public goods of central banking and the joint stock company, both of which developed through the eighteenth century. But they really came of age in the mid nineteenth century which saw the maturation of a vast slew of modern public goods – public education, public health and sanitation, a public service chosen on merit, central bank notes, ‘integrity’ institutions like the Auditor General. Standards for weights and measures are public goods and identified as a core function of the sovereign way back in Magna Carta, but the nineteenth century saw standardisation with a vengeance as local customs were displaced by national regimes for weights, measures and time zones in the Anglosphere and by Napoleonic metrication throughout Europe.

Emergent public goods

Even this trawl through history underplays the ubiquity and foundational significance of public goods not just to economic, but to all forms of human social life. Because of their preoccupation with the marketplace and thus with public goods as a problem, you’ll not see them mentioned in an economic textbook, but there are three archetypal, foundational emergent public goods.

The first is human culture. In tribal societies, culture enables groups of up to around 150 people to cooperate closely with each other, specializing and sharing the proceeds of that specialization, protecting each other from the hazards of nature – and from other tribes. As David Sloan Wilson has argued citing Hayek, group level selection rewarded cooperative cultures. Tribes with more ‘Hobbsian’ and internally competitive cultures were less likely to prosper and grow in size beyond the family groups that typify other primate species.

And as Robin Dunbar has argued, integral to that development was the second archetypal public good – language. Today, miraculously, the language instinct has taken wing again – transfigured on the internet as open source software: Executive, eternal, endlessly extended and enriched.

As we shall see, the third foundational emergent public good that made us, certainly in the modern world, is the market itself!

A nested ecology of public and private goods

The idea of some organic relation between public and private goods then plays out for all institutions. Within a family, it is understood that each person has his or her private interests – and rights. And each is part of a larger entity – the family – with everything that brings about. Ditto for clubs, charities, associations and firms.

And this pattern is replicated throughout human life. Indeed as those at the cutting edge of human evolution now argue,[1] this capacity for shared intentionality focused around some abstract artifact of our choosing – a sporting team, a working bee, a political campaign, a firm, a nation – is one of those crucial things that distinguish us from the other great apes.

Outwardly, sporting teams and firms are obsessed with competition – with other teams and firms. But as a means to that end, they’re obsessed with solidarity and cooperation within. Likewise, our political governance is arranged in concentric circles of proximity – from local shires and councils to state or provincial governments to national governments and finally to configurations of international cooperation from simple international agreements to institutions like the World Bank, IMF and, of course, the United Nations. Each level provides free public goods of benefit to all its members or constituents, though each of those – each citizen, county, state or nation – may compete within that framework.

Adam Smith: theorist of the co-evolution of public and private goods

Remarkably enough, the patron intellectual saint of all this is Adam Smith. However much the apparatus of modern economics – the discipline he set in train – has contrived to forget it all, Smith was the original theorist of emergent public goods and the organic co-evolution of public and private goods.

His Theory of Moral Sentiments explains how human culture emerges from the vicissitudes of life itself. Homo economicus appears nowhere in Smith’s work, except perhaps a baby who begins its life as a blob of purely self-interested infantile ego – infans economicus if you like.

Smith sought to build his two great books according to what he called “the Newtonian Method” of rhetoric.[2] He aspired to explain human society as Newton had the heavens in such a way that “an immense chain of the most important and sublime truths, all closely connected together” were explained “by one capital fact, of the reality of which we have daily experience”.

And as Smith explained, the fulcrum of his system was the innate human capacity for ‘sympathy’. In Smith’s hands, just as gravity is the fulcrum of Newton’s celestial mechanics, so our innate capacity for ‘sympathy’ becomes Smith’s the singular foundation of society – a fundamental engine of social knowledge and connection. He wrote with great feeling of how, in our defenselessness as infants, we crave the physical and emotional necessities of life. We quickly discover those actions that attract approval and disapproval, and adapt our expression of our growing personality accordingly.

As we develop, we must understand others and can only do so indirectly – by imagining ourselves in their shoes. Twigging that it’s the same for everyone else, draws us into a lifelong dialectical social drama in which we understand ourselves as both spectators of others and the subject of their gaze.

We keep an eye on our own conduct contemplating what others might think of us. And so the fabric of sympathetic understanding is laboriously woven, initially amongst intimates and then radiating out. The first and most primal bond is woven between infant and mother, but weaker bonds grow, initially with family and then with people progressively more distant from us. Thus the social world is built of ‘circles of sympathetic understanding’, the strength of which depends on social, geographic and cultural proximity.

As we mature, as we are socialized, we begin to crave not just others’ approval, but their deserved approval. For Smith, these are the psychological roots of virtue and of how we come to live the values embodied in human culture, rather than just pretend. Thus, even in large communities, culture enables each person to behave in broad accord with others’ social expectations.

Order without design

Today, Smith is most famous for his explanation of the market as the third foundational emergent public good – an inadvertent by-product of life itself – the paradigm case of order without design from which Darwin built his own theory of evolution. As people meet their private needs in trade, that congregation grows in usefulness to others. This emergent public good of physical proximity is mirrored in the growth of another emergent public good. Market liquidity enables people to trade at will to satisfy their changing needs – with each trade further deepening liquidity.[3]

The next emergent public good thrown off by the market – perhaps the most remarkable of all – is the price system. As Hayek explained, it’s a kind of telecommunications system broadcasting the relative opportunity cost – that is the relative scarcity – of all goods to all people. Not only can we all free ride on this spontaneously generated information, but, when markets work well, the great human dilemma of reconciling private and public wellbeing is solved! In optimising his own interests, the merchant optimizes that of his community.

Finally, Smith also published a Dissertation on the formation of languages. And the mechanism by which language was built was the same as for all the other emergent public goods from human culture to commercial markets. Human beings went about their private business seeking to advantage themselves and, over time, repeated patterns in their attempts to communicate with one another and the habits of speech and interpretation that emerged, built as a residue the coded symbolic social intelligence that became language.[4]

Conclusion

So next time textbooks or political zealots privilege the private over the public, competition over collaboration, you’ll know you’re encountering the ideological echoes of a culture unmoored and drifting ever further from the world as best we can apprehend it. As Smith showed over two centuries ago, it never made sense. But as public goods burgeon before us, privately provided in the digital world, it becomes less apposite with every passing day.

You’ll know the answer to all this is not simply to assert the converse – collaboration over competition, public over private – unless your ultimate purpose is to restore some balance between extreme perspectives. You’ll know you’re competing against your opponent in the argument. But then the debate makes no sense if it isn’t also a fundamentally cooperative struggle – to higher ground in which agreement is forged, if only to more precisely narrow the source of irresolvable disagreement. In other words, if you can’t forge a healthy ecology of public and private in that very argument, you’ll be wasting your time – going through the motions.

It was ever thus.

For human life is built on a nested ecology of public and private goods.

To be continued .…

[1] Michael Tomasello, 2014. A Natural History of Human Thinking, Harvard University Press, Cambridge, Massachusetts.

[2] Smith’s first academic role was as a lecturer in “Rhetoric and Belles Lettres”.

[3] As we discovered in the financial crisis, the public good of liquidity can dry up with frightening speed. Today, the public good of Facebook is built in a similar way. Each person on Facebook, each post, comment, message, poke and ‘like’ deepens the experience for others. Each builds the public good as they address their private desires. Adam Smith would have understood.

[4] James R. Otteson, 2002. “Adam Smith’s First Market: The Development of Language,” History of Philosophy Quarterly, 19, 1, January

2016 May 23


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  • cscoxk

    There is another explanation for why we invented the notion of public goods.

    Public goods arise because the economies of scale fail when we have a large number of autonomous agents. To get a large number of autonomous agents to cooperate we can combine them together to create a smaller number of cooperating agents. We see this with the creation of companies and other organisations. We then combine these agents into governments. We do this because it reduces the complexity of the interactions.

    Google and Facebook etc have to get a large number of autonomous agents to cooperate for their businesses to succeed. One way to do it is to make a service free and get income in other ways. Once you have people cooperating then there is a benefit to all and we do not want to lose that benefit. This has been the way of all the businesses dependent on advertising.

    Economics is about the creation, consumption and transfer of value.

    I have changed the normal definition by substituting value for wealth.

    If we think of the transfer of wealth then we think that money has value. If we think money has value we create systems that do not scale. This is because if we change the value of money in one part of the system it influences the value of money and of the goods and services throughout the system. To stabilise the system we create organisations, governments, and other smaller autonomous agents. We do this so the system can stabilise.

    There is another way to make the system stable and that is to make money zero value. When we do that economic systems evolve in different ways. That is what Google has done. It has removed the cost of doing a search. That means we are happy for Google to use our searches in other ways. We cooperate.

    The same thing will happen to other systems if we remove the cost of a transfer of value. In other words if we stop treating money as a store of value. We do this by removing interest on interest.

    Here is a short description of what is likely to happen.

    https://kevinrosscox.me/2016/05/21/democratisation-of-money/

    • fgbouman

      In your referenced blog you suggest that money tokens should have no value. I do not understand how you connect zero value money tokens with a pricing mechanism and the allocation of limited resources. How does that work in your scenario?

  • BruceEWoych

    The association of “Free Rider” with the commons is a gross error. It is just as presumptuous to

    state that the only true “Free Riders” are found under the consumptive power of wealth. Wealth permits an extraction from both ecological and demographic resources out of proportion to pure merit. One typically hears how wealth creation is equivalent to its drawing power and of course some individuals achieve a one to one contribution with an over-abundantly paid debt to society. But the whole point of getting rich is the “free ride” and all the business and economic sophistry in the world can’t hide that fact. The extractions that individuals manage to leverage out of the system of ‘drawing rights’ (so to speak), is on other people’s back, but people who enjoy positions of power leveraging confuse their independence with the belief that they do it all themselves. Of course under the delusional independence of money exploiting everyone else, it is a neat trick to make it appear that these privateers are “giving” free goods out to others when in fact they are hoarding and lending out what was socially constructed in the first place.

    • Nicholas Gruen

      You’re easily wound up Bruce.

      On the substantive points you make – ie that the goods given out are “socially constructed” of course I agree.

      Most of your others are quibbles about how to use language and, in particular the loaded term (unusually loaded amongst Americans I’ve discovered) “free rider”. But being the emergent public good that it is, language is constructed as we use it. That’s what I’m doing in the article. If you don’t address that, then I guess all we have to work out is whether you want the five minute argument or the full half hour.

  • rorysutherland

    Classy way of providing public goods here: it’s a 16th Century body which still operates the UK’s lighthouses. Yesterday a friend of mine had a query about a buoy visible from his house. He emailed them and got an answer within 30 minutes.

    https://en.wikipedia.org/wiki/Trinity_House

  • BruceEWoych

    Nicholas:
    ” It was ever thus.
    For human life is built on a nested ecology of public and private goods.
    To be continued .…”
    This is an interesting set of propositions. More of a starting point than a conclusion, but granted that the two sequential posts brought us to this entry. I am certainly looking forward to the continuation. The question really must be raised, however, if the relatively modern concepts of “public” and “private” (as dichotomized and independent) are valid categories as having always been as you suggest. All private share in the public by definition. In fact it is typically the divisison and the capture of open resources made exclusive and rationed by ownership, property and enforcement (soft and hard) that constitutes private (and subsequent “rationalized” economy of scope and scale).. It is clear, therefore, that you may be more inclined to accept publicly instituted as opposed to privately constituted as your property and productive forces.In ‘critical terms’ the public becomes ‘colonized’ by private instruments of political and commercial conventionality (enforced by the state apparatus).
    In this regard, I would “argue” that the reverse is true from what you are stating. The private forges what it can from the public from which they themselves derive wealth. Emergence is always from the public to the private not the other way around. OF course the private sector manages exclusivity, but extract the public from the formula and the private world is instantly gone. The fiction of separation is divisive. Competitive cooperation and cooperative competition (collaborative when it is mutual and at its best) go hand in hand.

    In the social constructs that we categorize as public and private sectors, the private sector is kept in check by public concerns against excessive concentration and the public sector is kept collectively effective when individuals comprising the private sector contest dilution. Between them there is a constant tension for divergence and convergent interests that goes through a market selection and elective process of acceptance or rejection. When this counterbalance is disturbed you get oppressive political economy and class interests of self preservation that distort true emergence and capture social economies for privatized gains.

    I would hope some of this is argued or addressed in the continuation of your ecological foundation of a healthy economy.

    Regards to you:
    Bruce E. Woych; Cultural Ecologist in Anthropology

    • Nicholas Gruen

      Thanks Bruce for your very insightful response. I think I agree with all of it or am certainly inclined to. However I fear I will disappoint you. The next piece is not a further development of the concepts of public and private but looks at the question of social capital as a public good. Now I have to say that my involvement with Evonomics as brief as it’s been – since Evonomics is still pretty new – has clarified some things about my own practice. As opposed to pretty much everyone I’ve seen in Evonomics, in my high level ruminations about theoretical notions like ‘public’ and ‘private’, my principal motive is NOT to assert some truth against theoretical error. I do think there’s lots of error in the neoclassical way of looking at the world – and certainly teaching about it. But economics and in my view all social sciences need to mark their contributions to market in the sense that they need to always have an eye to their usefulness. Of course that doesn’t mean they should be atheoretical. Theory is always necessary and indeed theory is always present – it’s question of whether it’s acknowledged or not and so whether it’s theory by design rather than default. Nevertheless theoretical debate isn’t useful unless it’s leading us to better designing institutions and interventions – whether as private actors or in debate about public decisions.

      So while it’s important for disciplines to listen to each other and to talk to each other, you’ll notice that my essay has specific policy observations – and suggestions for new policies – like public private digital partnerships. That’s ultimately the point, not the parlour game of coming to a better theoretical view. I say ‘parlour game’ because I think the level of depth that you’re seeking in categories of ‘public’ and ‘private’ as intellectually commendable as it is in the way of serving our desire to go deeper, ultimately in the social sciences, we use provisional concepts and make progress by a crab walk between practice and theory. Theoretical clarity will always allude us, as valuable as it is to strive towards it where that seems likely to yield worthwhile insights.

      My use of the terms ‘public’ and ‘private’ is similarly provisional. It will do to convey meaning to readers in the context of the discussion in my essay and in this comments thread – I hope it has satisfied you at least to that extent (that it doesn’t seem like incoherent nonsense). But, for my purposes I’m not seeking to go any deeper into the nature of those concepts than is necessary for me to make some progress in how I think about things in order to make worthwhile practical suggestions or somehow reflect on what they might look like.

  • David Brin

    Another excellent missive. And I disagree only slightly on matters of emphasis. Competition is a word that has been dropped by the American right, except as a platitude, because Adam Smith himself pointed h=out that markets are ruined by oligarchy, more often than by civil servant. But my mai point has to do with “emergent properties.” From the competitive jostling of molecules within our cells, on up, we see layerings of regulated rivalry subsequently spawning an appearance of effective collaboration, in which entities of the next-higher level then commence competing yet again… forming clusters that seem to be cooperative… and onward, building order.

    Along the way, there are potential traps and pitfalls that can cause such agglomerations to fail. When a type of predator or parasite gets to strong, it may gorge on prey, driving species extinct, destroying the ecosystem and food supply it relied upon.

    The same thing happened when human-predators gained access to metal weapons. Across 6000 years, ever since we began recording agricultural societies, competitively vigorous men would win local games of power, then seize way too much, cheating for the sake of short-term reproductive success (lordship and harems), stifling competition, thus starving the health of their tribes or nations.

    Indeed, both great Pericles and Adam Smith preached that we must stymie this trap by cooperative design, through rules and customs that thwart cheating, and we must do this not only for justice. The bigger, pragmatic reason is that only such limits to power can possibly allow flat-fair-open-creative competition to resume its generative miracle, making us all better off.

    Returning to the example of Sports: In this arena, individual athletes compete with each other to become members of a team. The team itself, then, is a profoundly cooperative enterprise, finely crafted for solidarity. It competes at the next level, against other teams. But the league and its fiercely enforced rules are emergent cooperative processes ensuring that lower level competition will foster fun and profits. Finally, this inwardly cooperative league then competes with other kinds of sport for fans and viewership… and thus the emergent dance of competition and cooperation climbs ever-upward. As it does in markets, democracy, science, courts and in Nature.

    That is, when those arenas are healthy.

    • Nicholas Gruen

      Thanks David,

      Agreed, though as you probably noted, the conclusion was a shout out to you 😉

  • Nicholas Gruen

    Not that there are many relatively benevolent autocrats, but it seems Lee Kwan Yew was onto this stuff.

    To be successful, society must maintain a balance between nurturing excellence and encouraging the average to improve. There must be both cooperation and competition between people in the same society.

    https://www.farnamstreetblog.com/2016/06/lee-kuan-yew-competitiveness-equality/