are there public goods?

what are they?

Public goods are things like roads, bridges, tunnels, schools, police, power generation/transmission…which either would not be provided at all for the average person by private companies or which would only be provided at much greater cost.

The theoretical underpinning of the Reagan/Thatcher revolutions of the 1980s onward in the US/UK is the neoliberal idea that there are no such things as public goods. A further claim is that state involvement in in their provision creates great inefficiencies and that the simple act of shrinking the state will cause lower-cost, more efficient private substitutes to spring up to take their place.

This hasn’t worked out well at all. The UK is the sick man of Europe, potentially nosing out Italy as that continent’s laggard …and, shockingly, in worse shape that Greece! The US is barely growing. Visitors make fun of our antiquated public infrastructure. And, of course, the rural poor left jobless by the modernization of the pre-WWII industrial base during the 1980s are so badly off that they could be persuaded by con men preying on them to try to overthrow the government.

the idea of creative destruction

…is arguably the culprit. I like the idea itself. The metaphor of the phoenix rising from the ashes is very dramatic. Flames are always good. And if (counterfactually) one ignores the Marshall Plan, it serves as a reasonable description of the rebuilding of Europe and Japan after WWII. Hard to argue that WWII was a big plus because it allowed rebuilding to happen, however. The larger issue is that destroying stuff to make the world better isn’t how economics normally works.

I think of creative destruction as follows:

Department stores emerged as a thing in the 19th century. For the first time, you could do all your shopping in one place, with the assurance of a wide selection and the warrant of a minimum level of product quality. To some degree, department stores replaced the local retailer, but I think in many respects they also filled a vacuum. By the middle of the 20th century these retail palaces were everywhere.

During the 1970s in the US, enterprising retailers had worked out that not all departments were equally profitable. Things like toys, electronics, jewelry and some branded clothing lines made much higher returns than, say, furniture or home appliances. Connecting the dots, entrepreneurs began to mimic these stronger departments in smaller, more focused specialty retail stores that concentrated on only one type of goods. Selection was broader. Rents were lower. The new firms didn’t have the drag on profits of weaker departments. They were more flexible in shaping their offerings. Therefore their prices were lower. They could locate a block away from their department store competitor. And, again in the US, they were easily able to follow population shifts into the suburbs, so they remained closer physically to their middle-income audience.

There has been a further turn of the wheel since, with the emergence of Walmart, Target and Costco as newer, better-managed forms of multi-line retailing.

Luxury goods, once a staple of department stores, is a similar, though slightly different, story. In this case, many luxury goods manufacturers seeking stronger profit growth, and dissatisfied/alarmed by the deterioration of the department store category. have decided to capture the wholesale to retail margin by opening their own stores.

my point

Metaphors are colorful, concise and attention-capturing, but often inexact. In the real world, burning down the local department store is highly unlikely to get the neighborhood a Hermes store, a Starbucks and a Costco to replace it. Probably the opposite. And even in the phoenix legend, the old phoenix imploded by itself and then respawned.

Similarly, defunding Medicare or the VA won’t make people healthier or up enlistments in the military.

PS. Cutting taxes for the wealthiest–who have the lowest marginal propensity to consume–as a vehicle to force change is loony as well. Yes, maybe it generates campaign contributions or lavish vacations or kickbacks to your spouse, but it doesn’t generate econonic progress.

Leave a Reply