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Hitching a free ride can be good for all

By Nicholas Gruen - posted Tuesday, 13 November 2012

There's a revolution going on in the provision of public goods. We need to do some rethinking.

Economists define public goods around two characteristics - which are often illustrated with the classic public good - the lighthouse. There's no way to stop passing ships benefiting from a lighthouse's light whether or not they pay. This non-excludability creates the classic dilemma in which everyone waits to free-ride off others' efforts so no one funds the lighthouse. Enter government, which taxes people to fund such public goods.

As well as being non-excludable, public goods are also non-rival. Consumers are rivals when they buy physical things, such as food, cars, or labour services such as taxi-driving or dentistry. One consumer can only get more of what's on offer if others get less. By contrast, the ships consuming the lighthouse's light aren't rivals - light enough for one creates light enough for all. Knowledge is a classic non-rival good.


And if non-excludability creates a free-riding problem, non-rivalrousness discloses a great free-riding opportunity. Our modern world dates from around the time these insights emerged. Thomas Jefferson effused about the free rider opportunities abounding as the knowledge economy came wheeling into view: "He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me. That ideas should freely spread from one to another over the globe, for the moral and mutual instruction of man, and improvement of his condition, seems to have been peculiarly and benevolently designed by nature."


Still, many aspects of our knowhow - for instance our discovery and testing of useful drugs - require heavy investment. In this situation, a free-riding opportunity only exists once the initial free-rider problem of funding the research is overcome. However, some public goods actually build themselves - and where they do they create free-riding opportunities without free-rider problems.

While ideologues bicker about which is more important, in healthy systems private and public goods each reinforce the other. Free market economic philosopher Friedrich Hayek made this point - though without using the language of public and private goods.

For Hayek, the marvel of the market was that it produced as a byproduct a set of market prices known to all. As Hayek said, it was "more than a metaphor" to describe the price system as akin to a "system of telecommunications" by which the increasing scarcity of a commodity becomes known to all from its rising price. "Without an order being issued, without more than perhaps a handful of people knowing the cause, tens of thousands of people whose identity could not be ascertained by months of investigation, are made to use the material or its products more sparingly."

The price system is thus an immensely valuable piece of public information - a public good on which we all free ride. Yet it is what I call an "emergent public good", not built by government, or any conscious collective, but arising spontaneously from life.


The ultimate emergent public good is language - upon which we've been free-riding as a species since well before Adam was a lad. Adam Smith, that is - the 18th century founder of modern economics who, remarkably enough, left us a paper describing the evolution of language in terms remarkably similar to his exposition of the way markets and market prices emerge spontaneously from economic life - an exposition that Hayek built on.

We'll always have free-rider problems to overcome, but our language instinct is now loose on the internet and it's spawning a whole new world of free-riding opportunities. Google, Facebook, Twitter, Wikipedia and open-source software are all emergent public goods. None of us are rivals in our access to them. Indeed, because they establish co-operative networks, their value to each user actually grows as more people use them. And no one is excluded from accessing them.

In fact they are excludable. They could charge for their services by requiring users to log in and then excluding those who don't pay. But it turns out that free access generates so much more value for all that it also works better for those who own the platform - whether their motives are philanthropic as is Wikipedia's, or for profit as is Google's and Twitter's.

So they're not true public goods by the textbook. But that's only because economists have built their definition of public goods around the dismal way they've approached them - as presenting "serious problems in human organisation" to quote Nobel laureate, the late Elinor Ostrom. Ostrom's insight and the definition around it remain valid for those many public goods which still require governments to overcome the free-rider problem.

But it is blind to the free-rider opportunities on the internet which now burgeon before us.

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This article was first published in The Age.

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About the Author

Dr Nicholas Gruen is CEO of Lateral Economics and Chairman of Peach Refund Mortgage Broker. He is working on a book entitled Reimagining Economic Reform.

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