2 July 2009

Commons Sense and Market Mayhem

As must have become clear by now I am not a loyal aficionado of the school of holy writ when it comes to economic theory. However, I am interested to see the UK economy proving one of the central principles of market theory that the theorists themselves appear to have forgotten: the limitations of the market when it comes to public goods.

The theory says that 'public goods' cannot be provided efficiently by the market. The rather grainy image below shows why this is the case by setting up a simplistic four-dimensional division of goods between different categories according to whether you can exclude other people from them and whether you compete with other people to obtain them.

So-called 'club goods' are provided to those who sign up, so they are not individual but you can be excluded from them. Rival and excludable goods are the things you buy in shops. Commons resources are the sort of aspects of life that are of especial interest to a green economist, such as nature and the blackboard outside my local pub which has an amusing quotation to lift your spirits every morning. (If they run out of inspiration it defaults to 'Up the Workers!'). The strict public-private division leaves no space for co-operative or mutual solutions, but we'll leave that discussion for another day.

Today the focus is on the final category: public goods. Theory says it makes sense to provide these as a community, paid for from taxation, because you cannot exclude people from them and they benefit everybody in the community. This is a recognition that education or a decent postal service are not personal services but important components of the sort of society we all want to live in. Some of us will pay more for them than others, and we will use them more or less at different points in our lives. They are services we share and therefore should be in the public sector.

I need hardly point out that, following hard on the heels of our lesson about the very public nature of banking, the theory has been proved this week in the case of both railways and post offices - they simply will not work in the private sector. When bits of them are privatised profits are made by corporations and their shareholders, the service declines, and when profits are no longer available we still have to fund them from taxation because they are too fundamental to do without. This is not a radical old-Labour conclusion; it is the obvious conclusion from any (even a market-orientated) examination of how the economy works.

So why have we struggled for years with disastrous and declining rail and post systems? The megalomania of the market makers has outstripped even their own dubious theory. Their mantra that the market is always best was used to extract all possible value from some of our most precious public goods, leaving us with near-worthless husks that we will now have to resuscitate.

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