Is Economics a Public Good? How Would We Know?

by Mario Rizzo

What is the economic justification for using tax money to subsidize the production of economic research? The standard answer is that academic economists produce a public good. In other words they produce knowledge for which they do not charge and for which it is not feasible to exclude non-payers.

Let’s accept this basic paradigm and see where it takes us.

First off, the claim about the infeasibility of excluding non-payers is not quite accurate. Books are produced (especially textbooks) for which people pay the authors. It may, however, be argued that those who produce books are generally not the same individuals who produce, discover or invent the ideas themselves, that is, the originators of the basic research.
This is no doubt true in most cases.

Of course, the argument avoids the question, “Why shouldn’t these originators spend at least some of their time packaging their discoveries for sale?” Perhaps that would force greater relevance on to their research. But let that pass. We shall assume that they cannot spare the time or have a comparative advantage simply in producing the scholarly articles and research.

But our question is more basic: How do we know that what they produce is an economic good, public or otherwise? ( And how do we know the margin at which it is a good?) The answer may seem obvious – because people value it. Who values it? Do they value it in the sense that the ideas are worth their cost of production?

In economics the standard of value is willingness to pay. This standard does not disappear simply because we call something a “public good.” Public-goods theory presupposes that people do value ideas in terms of willingness to pay if we could somehow discern their underlying preferences. But we cannot simply assert this value. This must be some kind of evidence.

We do know that under current circumstances other economists seem to value the research. How much in the aggregate would economists be willing to pay for an article in the Journal of Economic Theory or Econometrica or The American Economic Review? Frankly, I do not know, but I surmise that the answer is not much.

Does the general public value it? After all, there have been many popular or quasi-popular books recently summarizing, simplifying and interpreting economic ideas. We have an obvious value imputation problem here. Those who transform the ideas often add something of great commercial value. Consider the aggregate willingness to pay for the “raw” scholarship as compared to the “processed” scholarship. I think it safe to say that the latter is vastly greater than the former.

People will argue that without the raw or basic research they would be nothing to process. In a certain sense this is obviously true. But this does not mean there is no possible substitution between research and processing – say, less research and more processing, or research of a different kind. It is rare that an ultimate output can be produced in only one way.

In the ordinary firm we do not usually worry, for example, about any factor being used where its marginal product is zero or even negative. We can also assume that the firm will substitute more of one factor and reduce another factor if such minimizes the total cost of production. All of this is the result of profit-maximization and competitive conditions.  These are absent in the case of producing a putative public good.

Thus we can ask in the research case: Are we producing the ultimate public good – if it be that – with too much raw research or raw research in an inappropriate form? Must it be the form that it now takes – so unintuitive and so formalistic? If it were less so the costs of processing would be lower. Would the then processed-research be any less valuable to the educated lay public? I doubt it.

But even assuming that the form it takes is appropriate, is there too much of it relative to processing? Would more processing and less raw research be more efficient?

I have been assuming that we are dealing largely with applied economics. Let us look at what goes for economic theory these days. Theorists are generally completely uninterested in whether their applied mathematics has applications in economics or not. They are a world unto themselves. Who has the willingness to pay for this public “good”? Aside from their fellow practitioners, I cannot think of anyone.

The basic point that I am making is that many economists have too readily assumed that economic research as it is practiced today (especially what is called “theory”) is an ultimate or intermediate good with sufficient aggregate willingness to pay to justify public subsidy. To call something knowledge is not to answer the questions raised here.

Simply because, to a certain extent, it is infeasible (very costly) to exclude non payers from the fruits of this work is beside the point. The real issue is whether, and at which margin, it is a good? And a good of sufficient value?

If it is not, then what is going on? Intellectuals whether for reasons of personal satisfaction or enjoyment have convinced the government to subsidize their activities. From one perspective this is rent-seeking. From another perspective the state is buying support from the intellectual class. From still another perspective the state is creating a dependent group, affecting the nature and orientation of research, and encouraging rationalizations for government policies and plans.

I do not pretend to have written anything more than a series of explorations. But I will say this with greater certainty: The case for government subsidy of economic research, especially economic theory, as practiced today, has not been convincingly made.

Postscript: To those who object that I am “commodifying” knowledge, I only answer that I am simply trying to apply economic analysis to the production of economic research. In addition, I challenge them to come up with an alternative criterion that will tell us when there is too little or enough in this world of scarce resources.

22 thoughts on “Is Economics a Public Good? How Would We Know?

  1. It is pure rent seeking.

    Intellectuals are reliable supporters of the state, even of authoritarian regimes. As Thomas Sowell details in Intellectuals and Society, Hitler, Stalin and Mussolini all had support among the inteleectual class.

    Mario touches on a very undesireable consequence of gov’t support of research: misdirection of research. It is malinvestment.

  2. A public good, under standard definition, is excepted from marginal valuation; consequently, it would appear that there is no straight forward way of assesing economically how much of a public good should be produce.

  3. Economics today is an organ of the government’s propaganda apparatus, much like the media and the rest of academia.

    A few exceptions seem to persist, for now. They will be “fed” less until they get in line.

  4. Bogdan,

    There may be some confusion in your comment between the non-rivalrous nature of the consumption of a public good and its optimum quantity. It is true that if you consume a knowledge product this does not thereby reduce the quantity available to me of that knowledge product. So the quantity available in invariant with respect to the number of consumers. Nevertheless, there is an optimal quantity of the public good. This is attained at that quantity where the sum of the valuations across all consumers is equal to the marginal cost of its production. To put matters another way, the optimal quantity is where the difference between the aggregate valuation and the cost of production is maximized. This is the point (quantity) of maximum net benefit. So it is quite conceivable that too much of the public good can be produced.

  5. They’re great questions.

    Another way of looking at it is through the relationship between teaching and research. The public at large may be more willing to subsidize the teaching, hence the profession benefits from yoking the two together. But it is a strained connection at best.

  6. Yes, of course, but the cost-benefit analysis is a poor substitute, an approximation at best, for the individual marginal valuations of a good expressed through prices.

  7. But does the governemnt say its a public good or a merit good? May be its something we just should have even if we don’t realise it at the time.

    “How much in the aggregate would economists be willing to pay for an article in the Journal of Economic Theory or Econometrica or The American Economic Review? Frankly, I do not know, but I surmise that the answer is not much.”

    I think you are right, at the time people would not pay much for any research, but what about over time? For example, How much at the time would your average European been willing to pay for calculus? Today we may see great value in it, but if its development has depended on the willingness to pay of Europeans at the time we may well not have calculus. Someone had to pay for research not knowing which bits will be useful and would private provision therefore result in under-supply of basic research?

  8. Paul,

    I will think about your merit-good point. Thanks. Most of my colleagues say “we produce a public good” so I went with that.

  9. Great post, Mario.

    The public goods argument you challenge depends on the implicit assumption that economists are truth seekers. The theory fails to model the motives of the key players, the subsidized expert. Thus, our benchmark theory of science-as-public-good assumes a motivational asymmetry between the subsidized expert and everyone else. Analytical egalitarianism repudiates such motivational asymmetries. In other words, we need to put ourselves in our models.

  10. Roger,

    This is very interesting. My puzzlement probably stems from the issue you raise. I want to know how to distinguish between true provision of a public good and rent seeking!

  11. I think the non-rivalrous aspect of information hangs, in at least many cases, on it’s use — is it a means or and end? For instance, if we’re talking about some valuation model that one hopes to use to generate returns from the market I think the more who know and use the model the gain will be available. Isn’t that a form of exclusion?

  12. A most intriguing and highly relevant topic Mario!

    While generally sharing your viewpoint I think your argument has a weak point when it comes to dealing with “pure theory”. You should at least have dealt with the claim that is often made that basic economic theory has much of the “trickle-down” effects that research in theoretical physics, or real math, arguably has in the sense of providing basic tools to eventually move the frontier also in more applied research. In that spirit formal economic theory could be considered a “public good” within the economics community (only indirectly outside).

    An argument for this view could be the fact that universities, even private ones like NYU, maintain pure theory chairs at all: a majority of economists are not pure theorists and no one forces departments to have hardcore theory chairs, yet they do. So why would they unless they thought they could somehow benefit from it collectively?

  13. Let me clarify that post — the more using the improved pricing model the lower the gains from using the model as market price will deviate less from it’s “true” price (as defined by the better model).

  14. Mario,

    I wonder if that distinction can be made. If the public good is something we can readily observe, then there is no agency problem for the public. It observes the output and pays the provider(s) accordingly. The question of rent seeking does not arise. If it is hard to observe the output, however, we rely on the provider to tell us that he is generating “truth,” “knowledge,” “intelligence,” “security,” “jobs,” or whatever. In that case, I’m not sure what we might observe that would decide how much public good the public’s agent(s) has actually provided. You can distinguish in principle between true provision and rent seeking, but not in practice.

  15. To add to what Roger Koppl has said, the subject of economics ultimately reduces to one question – what are the consequences of government intervention? Without the state, economists are unnecessary and the optimal quantity of economics as a public good is zero. Now what’s more likely – economists as apologists for the state or constraints upon it?

  16. Mark,

    It is true that many universities hire pure theorists and it is a good question to ask why. However, since my problem ultimately boils down to distinguishing between rent seeking and pubic goods provision, might we not more directly determine the effect that pure theory has on applied economics? We could examine the actual use of recent theory in applied economics.

    It may be that pure theorists are just smart people and that it is useful to have such smart people around to interact with. This is quite separate from whether their research proper has much value.

    Finally, I am not sure that we want to measure the value of today’s pure theory by its effect on more applied forms of economics. The value of the pure theory would be an imputation from the value of the applied work. But the value of the applied work is questionable or, at least, I have questioned that as my post discusses.

  17. If the research is a public good, why does the AEA put it behind a pay wall and charge monopoly rents for it? The taxpayer pays for the research — and then is excluded by monopoly prices from consuming it.

  18. It’s not obvious to me that current “pure theory” research really affects what second hand dealers in ideas write. Seems to me like that first category is almost hermetically sealed off from the rest of economics. I would say that second hand dealers in ideas get most of their stuff from the political economy kind of economics, good or bad. At least I don’t see what are those laymen oriented books that would be the byproduct of discussions going on in very technical journals.

  19. (I posted this over at Coordination Problems and have reproduced it below.)

    It is not clear to me why the motives of scientists matter. The institutions which govern science can accomodate all sorts of intentions; more importantly, what makes science an emergent knowledge-generating system – even if science is funded by government – are the interactions of scientists filtered through the evolved (and evolving) institutions that confer some sort of legitimacy on putative scientific claims. If we take science as a largely non-catallactic “spontaneous order,” the intentions of scientists should not matter, much in the same sense that the voluntary transactions of the catallaxy produce certain outcomes whether its participants are public-spirited or nasty.

    I think a full analysis of the market failure argument of science is yet to be penned. Thomas McQuade and I hurled a few shots across the bow in a 2006 paper that appeared in The Independent Review. Of course, lots of excellent treatments can be found of the ways in which taxpayer funding of science via government imposes costs and pitfalls for the functioning of science; the work of Savage, Barnett, Kealey is relevant here.

  20. When people typically talk about something being a public good, they mean that the government should fund it. But what is the government interested in funding, when it comes to economics? Surely it is anything that would benefit the government. Does having an economically literate populace benefit the government? I would argue that it clearly does not. It is likely not a coincidence that economics is not taught at all up through high school, and in both high school (if it’s offered at all) and college, it’s not a required class. Considering that our schools are government run and government funded, it is telling as to this absence.

    And what kinds of economics would bebest for our government to fund? Certainly not free market economics. No, it would be at best Keynesian economics (which justifies all sorts of economic interventions during a crisis — which get to be defined by the government, of course). Perhaps fund some marginal stuff that doesn’t make the least real difference in truly understanding the nature of the economy — a heavy investment in econometrics would really make the government look like it’s funding economics, while producing next to nothing for its investment.

    This would be in the best interest of any government funding economics research. Sound familiar?

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