Practical Solutions of Today’s Problems

Culture - May 11, 2024

European Diary: Blagoevgrad, April 2024


Blagoevgrad is a small city in Bulgaria’s southwestern corner, located in the valley of the Struma River at the food of the Rila Mountains, near the border with North Macedonia. The American University of Bulgaria in Blagoevgrad, in cooperation with the Austrian Economics Centre in Vienna, invited me to talk on 26 April 2024 about ‘Practical Solutions of Today’s Problems’. The red thread in my talk was that government was more often the problem than the solution. The need for government to produce services, and not private companies run for a profit, was usually vastly exaggerated. Often individuals could accomplish much more by voluntary cooperation and spontaneous coordination and innovation than by obeying commands from above.

Public goods: The Lighthouse and Law Enforcement

I began with the textbook example of a ‘public good’. This is a good which government has to produce because its use cannot be limited to those who pay for it. The example often invoked is the lighthouse. It is certainly useful, indeed indispensable in the old times. Ships need its services when they sail by, but how are they going to pay for those services? The English economist Ronald Coase (who received the Nobel Prize in 1991) studied the case of the lighthouse and found out that the market had actually found a way to price the product properly. Ships do not only sail by a lighthouse, because normally they also have to dock at the next port. Their sailing routes were traditional and well known. The service of the lighthouse was included in the fee the ship had to pay at port. This was an instance of a ‘tie-in’ contract where the seller of a product insists that another product is also bought with it. Indeed, Coase found that historically many lighthouses had been privately run. So much for the textbook example of a public good.

I briefly mentioned what I have often pointed out that even law enforcement can be privately produced. Of course locks, security cameras, alarm systems, doormen and guards could in modern societies be regarded as privately produced law enforcement. But there is also a case of private law enforcement in the Icelandic Commonwealth between 930 and 1262, as David D. Friedman has pointed out. Iceland had no king but the law in this period. But the weak who could not by themselves enforce judgements passed at popular assemblies, could turn to their chieftain, the godi, usually an influential farmer, who often took on their cases. There were 39 chieftainships in Iceland, and the farmers could choose to which chieftainship to belong. In effect, therefore, a chieftainship was like a protection association. Alternatively, the weak could transfer their cases to others who were more powerful: the cases were transferable. The family also performed an important role in guaranteeing that perpetrators would be punished. The Icelandic Commonwealth was certainly an imperfect society but at the time so were other European societies where kings commanded large armies and fought sanguinary wars with one another.

Public Goods: Defence and Education

The reason of course why Iceland could do without a state and a king for more than three hundred years was that she was not threatened by an army, like other European countries. A remote, windswept island in the North Atlantic Ocean, she was protected by the sea. Indeed, the clearest example of a public good is defence. Moreover, defence is a public good which has to be produced on a large scale if it is to be effective. The bigger, the better. Either we hang together or we hang separately. Small countries have to find allies if they are to survive. The despots can seize one small country after another if those countries are not united in a military alliance, as the experience of Europe between the two world wars showed. The North Atlantic Treaty Organisation, NATO, to which most countries in Europe belong therefore was an excellent solution of this practical problem. Alone, each NATO country except the United States would have been vulnerable. Together, with the support of the United States, they should be able to withstand any assault from the oriental despots still around and itching to extend their power.

In my talk, I recalled that Adam Smith had second thoughts about the division of labour and free trade. He thought that people might become too narrow-minded in big cities where they would disappear into the crowd. They could lose their traditional ties and with them, their inhibitions, their morality. As a remedy he suggested education. Perhaps he was right about that. Education may be a public good. But this does not imply that it cannot be privately produced. The American economist Milton Friedman (who received the Nobel Prize in 1976) has designed an ingenious solution, the voucher system. Parents would receive vouchers from government that they could use to pay for their children’s education in the school of their choice. Thus, schools would be private companies. This would encourage them to compete with one another in providing good education and to eliminate waste (of which there is usually plenty in public institutions). Parents would have choice between schools, and children would receive education irrespective of their parents’ means.

‘The Tragedy of the Commons’

I then turned to ‘the tragedy of the commons’, including the depletion of deep-sea fish stocks and African elephant stocks, pollution of lakes and streams, and congestion of motorways. The practical solution in all these cases, I suggested, was the development of some kind of property rights to the goods in question which would enable their owners to price the access to them. The Icelanders developed a system of transferable fishing rights, the individual transferable quotas, ITQs, which is both sustainable and profitable. The African elephants could be owned by local communities, theme parks or private companies which would limit access in such a way that the stocks would be maintained. If lakes and streams were privately owned, polluters would hardly get away with their activities for long. If access to motorways was priced correctly, congestion would be greatly reduced or it would even disappear. Airlines price tickets according to shifting demand: Over the year, you pay much more during high season. The same principle could be applied to motorways over the day, especially now when machines can easily scan license plates of cars and instantly debit their owners’ credit card accounts.

I finally observed that it should not be the task of government (apart from providing a safety net) to change the income distribution which was the spontaneous outdome of individual choices. Not only was government then disregarding individual choices, but it was also distorting information. The income distribution brought about in free market exchanges transmits to us information about where our skills and abilities, whether natural or acquired, are best employed to our benefit and that of others.