Public Goods Viewed through Entrepreneurship
Public goods, in mainstream economic theory, are goods that are nonrivalrous, where one person using a good does not preclude anyone else’s capacity to do the same, and nonexcludable, where owners of the public goods are generally unable to restrict anyone’s access to the good. Commonly touted examples include public lighting, like streetlights, radio, firework shows, military defenses, and flood defenses.
To the mainstream, public goods present an economic and social problem. According to their understanding, the lack of rivalry and excludability allows free riders to exist, which eliminates the profit motive for providing the good and thus the incentive to provide it in the first place. This means that the market on its own would not produce enough public lighting, radio, and defense. Therefore, because the market has failed, the state must provide these goods in as close to their optimal quantity as possible.
Most Austrian economics critiques focus on the erroneous claim that the state’s coercion is more “efficient” than the voluntary actions of individuals. Others may opt to debunk the mainstream view of a good, which is wrongly fixated upon physical material rather than the subjective wants of the individual that have made it a means to an end. While both critiques are important, there is a forgotten angle. Few have focused on the mainstream’s claim that there is no profit potential (or no adequate potential) for goods that anyone can consume and access at any time, meaning that, in mainstream theory, the market for that good will always be in disequilibrium. This claim is the entire basis for the problem existing and is why the mainstream formally uses public goods to justify state intervention. Assuming good intentions, this is primarily a mistake arising out of the mainstream’s failure to incorporate the entrepreneur into their economic theories.
The business structure in traditional industries centers primarily around excludability. Because of a good’s excludability, entrepreneurs can charge prior to exchange, like someone purchasing from a grocer, or entry, like admission to a movie theater. Other industries that have excludability but that feature the entrepreneur charging after consumption have a similar business structure, like in most restaurants, where the bill is presented after eating rather than prior. This is relevant to the entrepreneur’s business structure, in particular, as the consumers pay the entrepreneur because they value having the good more than the money.
With excludability removed, the entrepreneur no longer explicitly has the revenue generated from providing goods to the consumer. This is still an issue of business structure. The entrepreneur must still generate a profit by serving consumers but now also has to account for free riders, so the logic is different. Since the consumer’s acquisition of the good is not conditional upon payment, the entrepreneur must not only convince the consumer to choose his good over the other available options, but he must also convince the consumer that the provision of the good in the future is worth paying for. The business structure, then, must account for marketing, in whatever form it may take, not just toward the consumer for immediately choosing the entrepreneur’s good, but also toward the future. The entrepreneur must market toward and emphasize the consumer’s patronage as a means of the continual provision of the good.
A small industry that developed within my lifetime has arisen around a public good that demonstrates these principles. Video essays, gaming videos, vlogs, educational videos, and any other kind of video regularly uploaded to YouTube or similar platforms are public goods. The producer of the videos has no way to exclude anyone from watching the video until they pay the producer, and no one person’s viewing of the video meaningfully prohibits anyone else from viewing the video.
According to mainstream theory, because this form of entertainment is a public good, it cannot be sufficiently provided by private actors. Its audience would have some portion of free riders that would prevent the industry from reaching equilibrium levels of supply. While it would be silly to suggest that the state must assist in providing videos as a result, this is the logic used to justify the state’s provision of other public goods. As anyone can see from the profits generated by any number of YouTube video producers and the abundance of videos regularly uploaded to the website in the pursuit of profit, the mainstream theory falls flat. While some people may have complaints about a specific kind of video being produced or going unproduced, the complaints result not because videos are a public good, but because an entrepreneur, in this case a video producer, has not yet provided them or has already provided them and was unable to turn a profit.
These successful video producers can enjoy a continuous stream of revenue from their productions primarily because of their marketing. In the fashion mentioned earlier, successful producers communicate to their consumers that the future production of more videos is more valuable than some amount of money held by the consumer. Because people think they will enjoy the future videos more than the money, they pay the video producer.
The logic that we see with video production and payments can apply to any other public good. It is very easy to imagine that, with proper communication to the consumer, entrepreneurs could supply public lighting to towns without any state intervention, convincing consumers to pay for the future provision of public lighting. The same reasoning applies to defense, where the provider of the service could clearly communicate that if the venture is not profitable, the consumers will in the future go without the defense provided. In short, it is possible to profit from providing public goods.
In advocating for interventionist policies, the mainstream has neglected the entrepreneur, a major error in reasoning, and is wrongly using that error to justify state intervention. Reintroducing the entrepreneur and his business structure to the economic reasoning has solved the problem of profit motive and the incentive to provide public goods. This invalidates the mainstream’s entire conception of public goods being an issue in a free market, meaning the market has not failed. It is therefore nonsensical for the state to provide them in place of private actors.