Education, a public and private service

The last public service associated with Ben Franklin that I wanted to discuss is education, which is of course linked with research and libraries (discussed earlier).

With his own formal education ending when he was ten, no one was more aware than Franklin that self-education is both possible and important. He nonetheless argued in favor of The Academy, Charity School, and College of Philadelphia, and served as first president of the Academy (secondary school) and Charity School. In 1758 he argued for the education of Philadelphia's Black enslaved population.

Education is another of those areas with both private and public benefits, from which it is relatively easy to exclude people. Education typically has its delights in itself, as the student encounters new ways of thinking that enliven their life and illuminate mysteries. It directly provides methods to solve problems in production. And it can yield higher offers in ob markets, though this effect is typically overstated. All those benefits are received by the scholar (former scholar). So why should the general public pay for any of it, and why should any education be compulsory?

First of all, I invite you to consider being an employer in a largely-illiterate society. If you want to hire literate employees, you have to engage in search procedures and tolerate delays-- both costs. If you hire illiterate workers, you will have two choices. You can deliver instructions-- perhaps complex instructions that depend on contingencies-- orally, and then deend on the worker's memory. Or you can invest in the employees' abilities by teaching them to read. You might even want to teach them to write, which is a much bigger schlep.

As such an employer you benefit from worker literacy. Why, once they're literate you can even have them use written works to learn entirely new fields, if you wish. So why shouldn't you engage the cost of paying for employee literacy?

For one reason, they can leave and share the skills you paid for, with another employer.

But also, haven't we now asked both why students shouldn't pay for their own education, and why employers shouldn't pay for employee education?*

And this is just one area in which A benefits from B's education. More next time.

* The economics answer to whether employees or employers should (for efficiency's sake) pay for employee education is that it depends on the extent to which the education can only be used with employer.

Facebook entries incorporated:
Education: Cui bono I

More examples of public goods and services: Ben Franklin's contributions

The concept of public goods and services seems to be really hard for people to make sense of, by and large. Partly, I think, because Plain 'n' Simple Addition seems to be what's intuitive and commonsensical for most humans-- and public goods/services are more-than-additive. Partly, I think, on ideological grounds.

That's why I approached the topic through the example of paths/roads.

And that's why I'm going to spend time on other, varied examples of public goods and services.

We saw that every travel path from a location to a network of paths adds value to the entire network, as the existing network gives increased value to each added path.

Communication networks operate very similarly. The telephone system radically lowered the cost of communicating for those with phones. Every addition to the network of phones increased the value of the entire network.

In this case the approach used in the United States was to permit a monopoly-- the Bell Telephone Company-- to undertake the costly task of wiring the nation, to require it to serve rural areas that would not profit it, to permit it to profit enough overall to repay its massive investment, but to regulate its operations.

In this case, obviously, phone owners received benefits from being part of the network-- and paid for the privilege.

But those who didn't own phones also benefited. For one example-- there are many more-- lower-cost communication made goods and services in general less expensive for everyone.

And of course the phone network could propagate destructive or false information.

But the phone system was (and is) a miracle of public service. Like its predecessor and coeval, the post office.

I'd like to note that, while I have been talking about pretty solid and quantifiable benefits from communication networks, I think that a more arcane goal of connecting the people and areas of this huge and disparate nation was and is a legitimate objective of this kind of public network.

Consider what we are saying, have been saying for decades, about people and regions that feel ignored, forgotten, left behind.

As I have seen major and concerted pushes to unplug public networks that connect us, I have felt sure that division and disconnection were goals. Revealed Preference analysis at work.


We've talked about roads and safety from road-robbery. These are two of the things imperial Rome brought to a world that wouldn't have it so good again for a millennium and a half-- so let's talk about another Roman trumph of a public good -- plumbing.

It is a great cost saving to have sanitary water emerge from a tap with a mere twist, and that is best provided on a large, industrial scale. It can be efficiently provided to households by private companies, though there are issues with corporate power involved when there's monopoly or difficulty changing provider.

But the plumbing of waste removal cannot be efficiently provided on a voluntary household basis, because of the health issues involved. Waste running along city streets, waste infecting the water sources for public and private pumps, has been a major disease vector.

One household's sanitary waste disposal is a benefit to that household-- but a much, much larger benefit to that household's community.

And again-- inflows of water can bring infection or poison or heavy metals, and badly maintained waste processing channels and equipment can cause community disaster. But it is not only more efficient to supply water and waste removal on a large-scale basis-- it makes for a much smaller field to monitor for performance quality.

Though we remember Flint, and we should remember Flint, and we should have treated Flint's water as the public health emergency it is.


Yesterday I discussed public sewage systems as a public good, because we all depend on the meticulousness of neighbors where it is individual or even voluntarily market-based.

So onward to the public good of herd immunity. Anyone in a population who are 99% immune to a disease is in a population where they will encounter very few carriers of that disease, whether they are immunized or not. Every person's immunity is a benefit to themself, and a benefit to the wider community. Those who do not immunize themselves are still unlikely to become infected, if the community is sufficiently immunized.

Economists call one who enjoys the benefits of a public good or service without contributing to its maintenance a #FreeRider . A community system can withstand some level of free-riding, and critiques of a public good or service on grounds that free-riders exist is -- not about costs and benefits. In the case of herd immunity, some in our population are immunocompromised so that immoculation is dangerous to them.

As with many sorts of public goods and services, the issues of limited ability to exclude from public benefits, and free-riding, mean that some involuntariness is involved in providing the good/service efficiently.

It is possible to reject public provision of a good/service because one values individual choice more than one values the net benefits of the good/service.

But I think that a more sensible analysis assesses all the benefits and costs of public provision, including the incidence of free-riding and incursions on individual choice.


When Chun Woo was in third grade he read an excellent book, Robert Byrd's _Electric Ben_, and I was astonished to learn that Benjamin Franklin was a genius of public good/service foundation. So I wanted to spend a few days celebrating the public goods and services he founded.

Fire prevention and the extinguishing of fires is a public service, and Franklin got the first public fire department started, though Philadelphia had evidently purchased a fire engine almost twenty years earlier.

Like infectious disease, fire readily spreads from one building to another, and this is particularly an issue in urban areas where buildings are close together. Individual choices in favor of fire-resistance and practices that prevent fire give benefits to oneself and one's neighbors. Individual choices that lead to greater incidence of fires give costs to oneself and one's neighbors.

And of course there have always been fire risks beyond human choices, like lightning.

Mutual fire associations gave assistance to members, and that assistance benefited others indirectly-- but others were excluded from the direct benefits of help in extinguishing or limiting fires.

The establishment of fire departments put staff on-call to fight fires, and while I don't know about the financing of Frankin's fire department, nowadays fire departments are most often financed through local taxes. That financing purchases and maintains supplies and equipment, and compensates firefighters to be on-call.

About twenty years ago I was hearing stories about fire departments financed on a membership basis, where fire departments would show up to burning buildings but let them burn if they didn't display a membership medallion. It occurs to me in writing this that those stories took place in areas where building density was not particularly high.

Those stories were widely greeted with some shock-- evidently for at least some people, values of community unity are among the public goods served by fire departments that serve the entire community.

But even without that-- though membership-financed fire departments can exclude non-members from the direct benefits of having fires on their property extingushed, non-members still benefit from the fire control their neighbors invest in.


Continuing a subseries on public goods and services associated with Ben Franklin, or founded by him.

I mentioned post offices briefly as an addendum to discussing telephone services and the massive investment needed to wire the nation. But despite the speed and ease of responsive conversation offered by telephones, public mail services were far more revolutionary.

For millennia, when someone wanted to send a written message, they needed to find and secure a carrier. In a town that might mean offering a small coin to a child. For longer distances it meant knowing or paying a traveler. Sea captains used to carry around bundles of mail to drop off at any ports they might visit over the next three years or so. Sea captains were probably the most reliable, barring seawreck and piracy-- they would want repeat business.

These factors led to slow, erratic delivery that served mostly the wealthy and their friends. Delivery to or from any remote or isolated location would seldom be available, usually only by special hire.

When Ben Franklin became colonial postmaster of Philadelphia, the post office was run from the postmaster's home or place of business. He succeeded another newspaperman, and said in his autobiography, "My old competitor's newspaper declined proportionately, and I was satisfy'd without retaliating his refusal, while postmaster, to permit my papers being carried by the riders."

Ponder that for a moment. Franklin's predecessor refused to let him use the mails for his newspaper.

Though Franklin's "efficient work for a score of years had transformed the Colonial post from a losing investment into a source of revenue for the Royal government," he was dismissed n 1774. (Stamps were then purchased as a way to pay taxes on things like tea and paperwork, which had something to do with it.) Franklin was soon appointed postmaster general to the new revolutionary government.

Publicly instituted and defended mails would not become fully national until Rowland Hill instituted the penny post in Great Britain in 1840, lowering the rate for sending a half-ounce letter anywhere in that country.

A fully public postal service not only includes the people of remote, rural, and low-profit locations in a network of communication that facilitates national unity. Its low cost makes it accessible, and as a civil service it can offer better guarantees of reliable, honest delivery than lower-cost commercial delivery services can.

As Francesca Forrest said yesterday on Twitter, "I *adore* the USPS. You can send several pages of stuff to the entire US, whether it's your next town or Hawaii or Puerto Rico, for one stamp. THAT is what people can do when they decide they want to-- mail goes everywhere, regardless of politics, ethnicity, wealth, anything."


Libraries are a very interesting case of what can be proided as a public service, or on a voluntary-association basis, or on a commercial basis. The basic technological fact is that books, like many other capital items, are profoundly shareable.

Charles Homer Haskins argued that scholarly book-sharing was the foundation of the medieval universities that developed into the colleges and universities we know today.

Subsequently other groups formed assocations to pool their resources and acquire books for the group-- and eventually books became sufficiently inexpensive that entrepreneurs formed lending libraries for subscription-paying customers.

Those forms of members-only library served literate people of means, and did so well. There was little enough difficulty excluding non-paying would-be readers who had no member as a patron. What need for a public library that makes books available for no fee, then?

It depends on how one thinks about books, reading, and knowledge.

The Library Company Ben Franklin co-founded was set up to serve its members. But when Continental Congresses met in Philadelphia, the Company offered use of its books to all delegates-- presumably because they viewed the benefits of delegate knowledge as a benefit to the Company and to the general public.

In this regard the Library Company was a precursor of public libraries that are supported not only by foundation grants but by tax revenues.

And today's public libraries have become general spaces for public self-education and association, and for that matter for day shelter and often the distribution of material aid without moral enquiries or demands.

They are hopping places, and they are more profoundly trusted than any other intution I can think of offhand.

Voluntary associations and commercial lending libraries provide booksharing efficiently for those who can pay. Public libraries are premised on the idea that public knowledge and access to it are good for communities as a whole.


Most of us USians learn in the primary grades that Ben Franklin experimented with electricity; we may also have learned that he invented a lightning rod, bifocals and the Franklin stove. In fact, he was an intellectually wide-ranging Enlightenment man who interested himself in the American silk industry, astronomy, weather, the dynamics and properties of water, and pretty much anything that struck his attentive senses.

In the realms of research and invention, individual initiative and private rewards may motivate research and inventions that are kept as secrets, or licensed out under conditions of secrecy, and thus provide benefits for their originators.

But apart from the direct fruits of applying such knowledge, when knowledge is shared it is more likely to be developed quickly and surprisingly, making still more beneficial inventions and techniques socially available.

It is also directly difficult/costly to maintain the privacy of information, partiularly if one hopes to exploit its profitability.

In these regards, knowledge clearly has both private and public benefits.

Like many of the leisured and monied Enlightenment researchers of his time, Franklin preferred to make his inventions and learning available as freely as possible, specifically refusing to have the Franklin stove patented.

Franklin said “that as we enjoy great advantages from the inventions of others, we should be glad of an opportunity to serve others by any invention of ours, and this we should do freely and generously.”

He understood knowledge as public services, and his ethics pointed to providing more.

Depending less on ethics and monied leisure, and thus opening research fields to wider participation, the U.S. Patent system protects private returns to patented inventions for a fixed period, to be followed by unprotected public domain. It's a balance.

Facebook posts incorporated:
More examples of public goods and services: Telephones and post office
Herd immunity
Ben Franklin's public service innovations: The fire department
Ben Franklin's public service: The post office
Ben Franklin's public service: Libraries
Ben Franklin on research, invention, and knowledge

Public goods and services: Understanding through example

There are some goods and services that markets do not provide efficiently nor in sufficient quantity, that provide enormous benefit to the general population. Those are called public goods and services.*

Consider for example roads. Imagine a community without any tracks or paths, let alone wide lanes or paved roads. Residents and animals of each farm and home can reach another only by pushing through forest, or meadows, or mire, around or over outcroppings.

Initially there would be no market center specialized in trade. There would be no center.

But people and their animals would wear paths to where they most often went. Most of all, of course, to their own fields. But to other farms and houses where they exchanged or socialized, as well.

Each household's paths would have value to its members, of course-- that value is how they got made. But each household's paths have value to other households, which can now reach that first household more easily, in less time.

And consider how a household can wear a shorter path to reach paths worn by others, to go to, say, a mill.

The value of networked paths greatly exceeds the sum of the private values of the paths-- though the private values is what gets them made, in this example. As these pathways interconnected the value of the network of paths would increase-- at least for some time, would multiply rather than merely being added to.

In fact, a path focus or foci would emerge, where many paths insected. Each focus would be a handy place for people to meet, to trade, maybe even to consider becoming a community.

It probably wouldn't take very long for specialists to emerge who would set up stable markets where goods could be securely left rather than transported daily, where the public nature of interactions would limit dishonest practices, where rules of trade might emerge and be monitored by the community gaze, if not yet by justice specialists.

If you have been following my example of community in which individual households/businesses build paths, maybe even roads between premises, and a central marketplace emerges, you may well have thought, YES! who needs government? Individual self-interest will lead to emergence of All the Good Things.

Even though my example purports to demonstrate that there are goods and services that that are inadequately provided in insufficient quantities, by individual actors, whether through markets or not.

So let us consider further.

Remember how I said that when A beats a path to pathways beaten out by others, the value of both A's pathway and the whole network is enhanced?

That is because A may bring goods or service to market that others want to buy-- and because A may come to market and buy others' products, to their advantage. And that's beyond valuing the pleasures of friendship, socialization, help in emergency.

In the example thus far, A has an interest in pathways others have made. And others have an interest in A's hook-up pathway, to everyone in the community who joins the network. EVEN THOSE WHO NEVER PERSONALLY TAKE THE PATH TO A's HOMESTEAD.

But then, two points emerge.

Paths need maintenance. Unmantained, they become overgrown, or perilously rutted, or seasonally impassibly muddy. The householder who makes a path to suit herself may not make one to accommodate the carts or bullocks of others. And it's a rare householder who can afford to pave a path of any length.

A path that limits others' access to A's homestead is worth less in the network. A path that limits A's visits to market is worth less to the network.

Secondly, A may say, "I'm not the only one who benefits from this pathway! I will charge a toll!"

In our example people in a geographic area wear paths that ease travel and transort for themselves and others. And as these paths interconnect the value of the network increases faster than the value of any one path. Community can then emerge, and almost surely would.

But just as one household's path adds to the value of the network to everyone, everyone has an interest in each household's care and maintenance of the path it originated.

Whereas the value of a household's path to that household alone is what motivates their maintenance or improvement of their path. And that is also relative to that household's budget of time, strength, and any other resources used.

With all pathways originated and maintained through individual benefit and resources, the network will be worse-maintained and less extensive than the community would value and, as a community, would be able to fund.

Individual households would maintain their paths beyond their own interests, households would improve each others' pathways, only if they felt generous/magnanimous/heroic.

Should the community depend on whimsical individual generosity? Why?

I hope that it's clear how the existence and maintenance of each pathway is in the interests of the geographic community that a network of pathways fosters. That a path one never personally travels can benefit one by bringing a trade partner, a friend, news.**

Now, suppose a pathmaker who is aware that the path's value to the community exceeds the value of the path to them, and establishes a tollgate. "Look!" they might say, "I can't maintain this path as much as you'd like from my own resources. You like to use my path, so help me pay for it."

The cost of maintaining the path has jut increased substantially, because a tollgate keeper is now needed.***

Even if all previous path-takers continue to use the path, then, the cost of the network has increased, and in the form of directly unproductive activity ****.

But we would also expect to see use of that pathway decline-- reducing the valule of the path-network--, and also directly unproductive activity undertaken to evade the toll, another cost increase.

So we have here at least three characteristics of a public good or service. Their benefits to the community exceed the sum of their individual benefits to community members. It is difficult to exclude community members from enjoyment of the benefits-- remember the value of the path one never personally takes? And it is difficult for a producer of the good or service to recoup from the community the value that the good/service brings to the community.

And so individually-produced goods and services of this sort are likely to be underproduced and ill-maintained.


Before I went to England for a week we were working through an example of road-building, to illustrate the concept of public goods and services, which
- have community benefits beyond the sum of individual benefits
- which are hard for investors in the public good or service to receive compensation for
- because it is difficult to exclude community members from those benefits
- and therefore private investors/entrepreneurs tend to produce too little and too low-quality of the inherently public good or service*

I was talking about roads constructed in a community, and mentioned that they can bring bad things as well as good. In fact, by geographically concentrating traffic, including commercial traffic, roadways become a relatively rich hunting grounds for theft.

Beyond the issue of paths and roads made within a village area, consider a roadway between two such pathed communities.

In itself, it lowers transport costs and facilitates trade between two communities, which can thus enjoy mutual gains from trade. (And of course individual entrepeneurs can enjoy greater profit with enhanced markets.)

But as a pathway for people carrying valuables, it is likely to be infested by theft.

So security becomes a concern. Should it be approached by private entrepreneurs?


Now suppose bold traders who take goods or services between two communities wear a path or road between two communities. The path that emerges will naturally tend to be one offering the greatest ease of transport. The maintenance and investment problems mentioned earlier in discussing household-generated paths occur but are multiplied by distance and by the greater dispersal of who benefits.

But I wanted to discuss the issue of the theft such a road would generate. A convenient road attracts more and more valuable traffic and becomes a target for banditry.

Each traveler could be responsible for their own security and risk, which would increase the cost of using the road considerably. The well-heeled who could hire guards would be more able to use the road for trade that could increase their wealth, and concentrating trade among a few well-heeled people would allow them to extract most of the gains from trade, and concentrate wealth further.

Such guards would not be hired to protect the person and Property of anyone but their employer, of course, unless the employer was generous. Though the employer could choose to charge to include other travelers under the security umbrella.
And a staff of private security guards also potentially become bravo/as who can rob for their employer. (And publicly employed law enforcement can become a local crime gang as well, of course. And often enough have.)

The two villages could decide****** to appoint or hire a road authority to maintain road security and maybe the material road. If they gave the authority toll rights to finance such action, the same problems with evasion, underuse, benefits being communty-wide and not limited to road-travelers would emerge as in the case of a within-village path.

Greater benefits to both villages could be achieved by specifying the form and amount of maintenance to be performed, and paying the road authority by village taxes.

But of course if one doesn't approve of taxes, those benefits must be foregone.


So the example of path-making we've been tracing is an attempt to demonstrate the nature of public goods and services, which
- have public as well as private benefits
- that are hard to exclude people from
- and difficult to charge all beneficiaries for
- with the result that they are underproduced on an individual or market basis

Some other things have emerged from this story.

As with fire or spoons, public goods and services can have or draw adverse effects as well as beneficial ones, and that doesn't mean they should not be produced, or produced on a public basis.

As with meals or clean floors, public goods and services typically require maintenance for good functioning, and that doesn't invalidate them.

It is possible and valid to choose tax-avoidance or individualism as your priority, and reject community provision of public goods and services, but it will lose you a lot of efficiency.

And a whisper of this has appeared in the story of the two communities joined by a road-- the efficiency-appropriate community to produce a public good or service is a non-trivial, subtle matter. In that story, should the communities negotiate as two entities or form a one-community unit at least for production of road services?

If the world is networked with transport paths, the people of Hangzhou, China benefit a tiny bit from Highway 13 between Carbondale and Murphysboro, Illinois. And those Illinoisans from roads connecting Hangzhou with its neighbors and the wider world. But financing and decision-making for those highways is likely best to be separate.

* As with markets/non-markets and money/non-money, there is not a simple boundary between public and private goods and services. Many goods and services have both public and private aspects. This will be embodied in examples. I'm going to give a lot of examples.
** Of course paths can bring undesirable things, too! More on this soon.
*** Remember, the economic concept of cost is not about monetary payment, or payment at all. It is about what else the tollgate keeper could be doing, whether productive (hoeing turnips) or pleasurable (playing mumblety-peg). Staffing a tollgate keeps that agent from doing other things, and is therefore costly.
**** A directly unproductive activity may or may not be worth undertaking, but produces nothing that either gives people pleasure or sustenance, nor contributes to the prodction of things that give pleasure or sustenance.
***** Are you thinking to yourself that this means that a supposed infrastructure project that must show a monetary recovered profit excludes the most useful projects or underproduces them? Right!
****** What does it mean for a village to decide? It means there has to be a polity for the decision to occur, whether the village is in the demesne of a noble, or has representatives who make community decisions, or is a democracy making choices in accordance with some voting rule.

Facebook posts incorporated:
Public goods/services examples: Roads
Further development of a privately generated network of roads
Roads: Maintenance and tolls
Individually motivated investment in infrastructure is insufficient by community standards
Why charging for use of public goods/services is not a solution
Infrastructure as attractive nuisance
Law enforcement, private or public?
Public goods/services summary

Some limitations of the Ricardian model

So I went through the Ricardian model that shows how agents' differences in opportunity costs of production give reasons for trade that results in gains all round, contrary to the US folklore of exchange as a battle between Smart and Stupid.

But of course life is more complicated. Though the basic principles David Ricardo discovered are important and valid, there are complications.

For one thing, while the model predicts that the more different nations are the more they have to gain from trading, differences in opportunity cost are often accompanied by differences in tastes or in consumption technology* that limit the scope of trade. In one gaudily dreadful example, the British initiated the Opium Wars to force Chinese authorities to permit British tea companies to sell opium to the Chinese-- because the Chinese had little use for other British goods, and the flows of silver from Britain to China were becoming a problem. (A problem not because Oh Nos Wealth Drain, but because of how the international money system worked-- maybe I'll get to that next year.)


While the Ricardian model of trade shows that full-employment economies both benefit instantly through their trade with each other, it's a different-- and less predictable-- story for economies that are not at full employment. Workers in such economies can be hurt by trade.

But that doesn't mean that nations at less than full employment should forgo trade. Rather, they should use policy to promote full employment.

In fact, there's a general theorem in economics that says that policy to cure an economic problemshould be applied as close as possible to the source of the problem-- fewer side effects.


The Ricardian model of opportunity costs in production as a cause of trade and of mutual gains from trade shows those gains being realized in part by the countries specializing in production of their comparative-advantage output for export.

(In the very simple model we walked through, specialization in the exportible is complete-- in more complex models and of course the actual world production processes are more complex and specialization is not complete.)

But even partial specialization caused by trade means the shifting of productive resources-- labor, and plant and equipment (capital), among others-- from one sector to another.

Those shifts are seldom costless. Labor needs retraining and re-equipping. Plant and equipment need to be converted.

So trade tends to lead to transition costs.

But then, changes in consumption tastes or in technology or anything else that affects production, lead to transition costs even as choice-makers optimize.


The Ricardian model demonstrates mutual gains from trade in the form of a strictly larger choice set for consumption, at the time of trade.

But current choices often have future consequences.

Consider, for example, a country whose comparative advantage lies in its stores of exhaustible natural resources. In this case today's extraction and export decrease tomorrow's ability to extract and export-- in fact, may decrease tomorrow's comparative advantage

Even when comparative advantage comes from renewable natural resources, if action is not taken to maintain them trade gradually depletes one source of the country's wealth.

Here's an example..


I talked about resource depletion as an issue that doesn't appear in the Ricardian model of trade, whch showcases differing opportunity cost as the grounds for mutually beneficial trade.

Another important environmental issue for international trade concerns a cost of production that is not incorporated in the Ricardian model or even more sophisticated models in which both labor and capital (plant and equipment) are assumed to produce output. Most production processes produce waste as well as the desired output, and most economic models, concentrating on other issues, assume this away.

Some waste, such as nuclear waste, produces a problem for future production, consumption, and life even when the producers who create it "dispose" of it.
Some waste, such as dirtied or heated air or water, readily floats away from production sites to create costs for a world that has not consented to be polluted. This is a public bad. It is also a negative externality-- a cost of production that markets typically don't handle well

So while I want readers to remember the value of trade and importance and influlence of the social inventions that support it, I want now to move on to discussing public goods and services, externalities, and the ways societies can optimize in these situations.

* An example of a consumption technology would be the availability of reliable high-enough-voltage electricity, without which many US-consumed items are inoperable.

Facebook posts incorporated:
The roles of consumption technologies and tastes in trade
Trading nations with less than full employment
Transition costs as trade affects national production
Resource depletion and trade
Pollution and other externalities as production/consumption costs

The lessons of David Ricardo's model of trade

May account of David Ricardo's model comparative advantage in production as a cause of trade is almost surely the most arithmetic-y I'll make for #2017econ . And likely you didn't want to bother to work your way through them, if you weren't already familiar with them.

But I wanted to offer a relatively formal proof of the causes of exchange-- comparative advantage in production*-- and that voluntary exchange is mutually beneficial-- positive-sum. And the proof is one I recently taught to sixth graders, so I know it's accessible to the interested.

I wanted to do that because of the persistent US folklore that trade is at best constant-sum, with a rube losing out to a smartypants, and that stupidity and smarts are the cause of trade.

People and nations do not keep on making trades that instantaneously disadvantage them-- why would they?

And I have learned by reading the occasional comments of experienced confidence-game operators that people who want something for nothing and who think they're extra-smart are the natural marks of confidence artists.

The Ricardian model of trade brings us news that trade is not combat, that difference brings the opportunity for mutual gains-- and also brings change as it advantages specialization.

But beyond that, trade is really, REALLY not combat. Though the Vikings traveled with both weapons (to rob weaker villages) and trade goods (to interact with stronger ones), and though both weapons and trade goods were used as means of acquisition, combat abd trade are only very gross substitutes. They differ very fundamentally.

For one thing, trade brings mutual gains, combat not. Combat is at best constant sum, while trade is a positive-sum game.

For another, trade requires trust, as I remarked way back when. And even merely-strategic trust breeds relationship, that eventually brings realer trust.

The Friend, mathenatician, and peace theorist Lewis Fry Richardson noted robust trade as one of the factors that decrease the likelihood of war between nations.

I suspect it also helps in the development of diplomacy, which operates much like a form of trade itself.

* That is, where one party forgoes less production of other goods to make the trade good, than its trading partner(s).

Facebook posts incorporated:
The moral of David Ricardo's story
Trade is fundamentally cooperative, and breeds cooperation

Mutual gains from trade: The Ricardian model

Since January I have talked about economics as a way of analyzing and modeling choice as a comparison of feasible alternatives as ways of fulfilling an objective or objectives.

I have talked about the opportunity cost of an option being the value to one of the most desirable forgone option, in accordance with one's objectives.

I have talked about the set of feasible alternatives as coming from any or all of endowed options, production possibilities, and exchange options.

I have talked about markets, contracts, and firms as social technologies for exchange.

I'd like to take this week to talk about David Ricardo's demonstration of the mutual benefits of trade between agents-- nations or persons. Nobel laureate Paul Samuelson said that it combines simplicity and counter-intuitiveness, and that that makes it a powerful demonstration.

Here are some things human beings seem to find intuitive about trade(s):
- someone (smart) wins; someone (less smart) loses
- a unproductive agent is not worth trading with
- a small country is not worth trading with

None of those things are true, and the Ricardian model demonstrates it.

So here is David Ricardo's famous example showing the grounds for mutually advantageous trade.

Suppose, he said, it requires 15 units of labor to make a unit of wheat in England, and 30 units of labor to make a unit of wine. And suppose it takes 10 units of labor to make a unit of wheat in Portugal, and 15 units of labor to make a unit of wine.

Poor England! So unproductive as compared with Portugal! What's wrong with English labor? We don't know. Is England doomed to be unable to trade?

Well, suppose you are in a fully-employed England and want to make an extra unit of wine. You need to move 30 units of labor out of wheat production and into wine production, because it takes thirty units of labor to make a unit of wine in England. But those thirty units of labor were making two units of wheat. So in England the opportunity cost of one wine is two wheat. (Conversely, the opportunity cost of one wheat in England is 1/2 wine.)

In a fully-employed Portugal, making an additional unit of wine requires 15 units of labor, who have to be moved from producing 1.5 units of wheat. So in Portugal, the opportunity cost of one wine is 1.5 wheat. (And the opportunity cost of one wheat is 2/3 units wine.)

Now, suppose England sidles up to Portugal and says, "How's about we give you 1.75 units of wheat to give us a wine?" Would England do this? Sure! At home in England, making another wine costs 2 wheat. England is better off in trade so long as it can buy wine at any price less than 2 wheat per wine.

Would Portugal accept an offer of 1.75 units of wheat for a unit of wine? Sure! In Portugal, making another wheat costs 2/3 of a unit of wine. Portugal is better off trading wine for wheat at any price greater than 2/3 units of wheat per unit wine.

So despite English ineptitude, England and Portugal can both gain from trading with each other.

We say that England has a comparative advantage in wheat production, while Portugal has a comparative advantage in wine production, based on their opportunity costs.

(But if there is unemployment in either nation, the first smart move is to get to full employment. With unemployment the national opportunity cost of more production is zero.)

The differing opportunity costs of wine (wheat) in the two countries also means that each country could consume absolutely more of both goods through trade than in isolation.

In the graphic you can see here, I suppose that England possesses 3000 units of labor and Portugal 7500.. Each country's Production Possibility Frontier (PPF) shows its consumtion possibilities without trade-- the slope of each PPF is the opportunity cost of wheat. But if England and Portugal both agree to trade 1.75 units of wheat per unit of wine, Portugal specializes in producing wine and England in producing wheat, their trade possibility frontiers lie strictly outside their PPFs.

Both countries-- potentially better off by mutual gains through trade.

Facebook posts incorporated:
Mutual gains from trade: Building blocks and myths
The Ricardian example of comparative advantage: opportunity cost emphasis
The Ricardian example of comparative advantage: consumption possibility emphasis

Money: Another brief interruption

So that concludes the discussion of social technologies for exchange, which make such a part of many opportunity sets people and firms choose from: markets, contracts, and firms beng spotlighted.

Before passing on to talk about mutual gains from trade, I wanted to mention another social technology for exchange-- money, which stuff is defined by the characteristics of being a store of value*, a medium of exchange**, and a unit of account***. (So exchange tokens possess moneyness rather than absolutely being or not being money.)

Quite often people have told me that they think the world would be a better and more humane place without money. A world without money would certainly by necessity be a much more *personal* world than one with money-- but that doesn't cut ust one way.

Consider being a person who wants a bottle of aspirin and has a young calf to exchange. They need to find someone who has aspirin and wants a calf, and then there's almost surely an issue of how to make change.

In this situation the ability to exchange requires an immense amount of social information, and information requires research and storage-- it has an opportunity cost.

Even when it comes to exchange via personal bargaining and contracting, using money makes for tremendous convenience. And it is very important as a tool for facilitating markets, which are so relatively frictionless for the things best exchanged via markets.

When it comes to exchange, convenience and depersonalization go hand in hand, and money makes for both. There are pluses and minuses to that. But in my view, most of the time, more pluses.

* It holds its value-in-exchange reasonably well across time.
** People will nearly always accept it in exchange for goods, services, or assets.
*** People talk in terms of this stuff when talking prices or value.

Facebook posts incorporated:
Money: Another brief interruption

The nature of the firm-- which is not a market

Way back on March 31 I wrote about employment relations as contracts and thus as non-market phenomena. That may have led some of you to think about firms, which-- surprise-- are also not markets.

It was a big surprise to the economics world in 1937 when longterm-to-be University of Chicago economist Ronald Coase published "The Nature of the Firm." I link that paper but do not recommend it, though it's in prose-- it is fairly impenetrable.

But here's the gist of it, with knowing which it becomes more penetrable:

A firm is not a market, but an organizational structure, meaning a set of relationships. Which relationships? It depends on what it is in the best interest (usually assumed most profitable) for the firm to do.

I'll start with one example, and then spend several posts talking about more, because this is profound and counter-intuitive.

A firm that needs a plant and/or equipment (capital) to manufacture something can own or lease either or both of those-- contractual relationships and thus not market transactions-- or they can decide to bet on being able to rent either plant or equipment by the day or by the task. The latter would be a market transaction.

There is of course a market for leases-- one with very imperfect and two-sided information and fulfillment issues, to the best of my knowledge-- but once you've got a lease you're n a non-market, firm relationship.

There are of course markets for buying plants or equipment-- but once you own plant or equipment, you're in a non-market, firm relationship.

We are so used to firms in the US that it can be difficult to envision an enterprise that is neither governmental nor a firm. But think of an artisan using tools they own-- and owning which does not entail any other relationships, such as with licensing, effluent control or payment, taxes, or such. Imagine the artisan using premises that are not separate from their ordinary living quarters (and so entail neither leases nor mortgages, no extra connection with community sewers or water supply or electricity). Suppose this artisan market-purchases all materials to can produce output for sale. (How the output is sold does not constitute a firm or non-firm-- whether it's sold on a market, by contract, or whatever.) That artisan has a non-firm enterprise.

Or think of a fisher with their own nets and/or lines and/or rods, who purchases fishing rights daily, and sells the fish caught. A hunter can similarly operate a non-firm enterprise.

A herder who owns their flock or herd or drove and whose grazing lands and water rights are not contracted for or owned also runs a pure non-firm enterprise.

More simply, a babysitter or scribe, lawyer or storyteller or sex worker can have a non-firm enterprise.

Agriculture immediately moves us further from pure non-firm enterprise, in that land tenure cannot be a spot market thing when crops take time. But a farmer without employees or other long-term contracts can have something close enough to be called a non-firm enterprise.

With the first employee, with the contracts, with in-house production of inputs that are intermediate to the final output, you have begun to substitute organization for market.

So, bearing in mind that a firm is an organization that substitutes for markets, how does a firm decide which activities and relationships to include under its umbrella rather than using market mechanisms? Ronald Coase, Nobel-Prize-winning originator of this understanding of firms said, When the firm's decisionmakers think it advantageous.

There are various reasons why such a decision might be viewed as advantageous. I'm going to spend a few days exploring some.

One example came up in the article I linked on Friday: 3M stopped making the chemical PFOA because of its toxicity, but DuPont wanted to continue to incorporate PFOA in its products, so it began to produce the chemical within the firm.

There's no simple rule about what's more efficient, firm or market. It depends.

And that holds for engaging labor through an employment relation-- a contract-- as well as for whether to manufacture the grommets for the shoes one makes.

As mentioned when I was discussing why employment contracts were invented, they are more advantageous to the firm when:
- labor is scarce*
- search for appropriately-qualified labor is difficult/time-consuming/expensive
- firm-specific skills are desired in workers
- the firm want to keep firm-specific information private
- the firm's customers want relationship with staff
- the firm's owners/managers want relationship with staff
- quality control of output or of service is important and firm-specific
- probably other stuf I'm not thinking of

Those situations that arise pretty frequently.

* I invite you to consider the term "reserve army of the unemployed."

Ronald Coase's "The Nature of the Firm."

Facebook posts incorporated:
The nature of the firm: capital
Envisioning non-firm enterprises
Examples of internalizing activities in firms: unavailability in the market
Employment reconsidered from a firm perspective

Employment: An important instance of contracts

n talking about social exchange institutions, we've been talking about contracts-- which are not markets.

A major category of contracts is employment contracts. Also a substitute for markets. I know, I know-- so not "new economy." But let's consider why they were invented.

Without employment contracts, you can purchase goods produced and sold in shopfronts, or you can hire an hour or a day's labor at a day-labor site, So why wouldn't you?

1. You can't tell the quality of the good or the competence of the worker at a glance, and quality counts.
2. You don't want to risk unavailability of the good you want-- maybe it has special features, and/or general demand for it is so low that people seldom or never make it on spec.
3. You don't want to risk unavailability of workers or of workers with particular readily-detectable qualifications.
4. You need workers with specialized knowledge, talent, or reliability that's not readily detectable.
5. You want your workers to have knowledge that can only be imparted by you / your firm (also not a market), and you need to have the same people available to get the advantage of your investment in ther education.
6. You want your workers to have product-specific or process-specific information that you want to keep private from other producers.
7. Your production process involves teams, and teams communicate and work more effectively when their members know each other.
8. Even if the relevant abilities, skills, and temperament of potential workers are readily observable, even if there is no concern about the availability of workers to hire for very short periods, it may be desirable to employ worker and have them around if the to and fro of going to hire and negotiate payment daily is too costly*.

There may be other reasons I'm not thinking about right now. But that's quite a few.


Across time, civilizations, and individuals, by and large humans do not like to be employees.

I'm not just talking about people griping about how stupid their employers, companies, coworkers, and jobs are. Empirical findings have regularly demonstrated that self-employed people earn considerably less than people employed to do substantially the same work. About thirty percent less, I uncitingly and non-currently recall. This strongly suggests that people are willing to take a pay cut not to be employees.

A major obstacle to wistful employers through millennia was the availability of vacant land people could graze flocks on or move to and farm-- and also the availability of fish and game. In the colonial Americas, where land was plentiful and many property rights were not individually assigned, indentured servants and enslaved persons regularly fled to the frontiers, where they were often kindly received by American tribes, and formed maroon societies.

There's rugged individualism for you, by gum!

*Remember, in economic thought cost is always fundamentally opportunity cost-- the value of the net best choice one could have made. So using time and other resources to search for workers is a cost in itself. We class it as a transactions cost.

Facebook posts incorporated:
Why were employment contracts invented?
Another reason for labor contracts
A little history of employment: opportunity cost

Property rights, promise fulfillment, and authority

So today I just want to summarize where we are. Mostly.

I started by talking about how economists think about choice-- agents with an obective or objectives compare options from an opportunity set. I talked about property rights as an important part of that, and about how property rights are maintained by custom, by law, or by force.

More recently I've been talking about social exchange technologies, which of course depend on the society's property rights system. I've talked about markets, or marketness, in which spot exchanges are made by agents who-- the more markety the market-- don't need to know much or anything about each other.

I've been talking about contracts for future delivery and payment of goods or services, why contracts are emphatically not markets though some markets exist on which contracts are traded, and I mentioned that contracts entail further compliance problems beyond accepting property rights according to the relevant social system.

Contracts typically specify delivery dates, quantities, qualities, and a payment schedule. Any of these can be violated by parties to the contract, and the harder quality is to discern and the more conditions there are in the contract, the more subtle adjudicatung compliance becomes.

It is always in the short-run interests of parties to a contract to cheat on its terms. If they carry reputations that remain with them reneging too often will harm them, but they will leave a trail of collateral damage.

If there are too many renegers in an exchange area, fewer people will want to participate in a contract in that area. The thinner the number of participants, the harder it is to find a participation partner.

Regulators/adjudicators/enforcers can and should act even-handedly if they are to keep exchange opportunities open in an exchange category.

"Caveat emptor" should make potential buyers hesitate to participate. Assigning unlimited liability to producers will limit the desirability of producing and selling in the category.

It is a balance that the general public should think about any time regulation is considered.

Facebook posts incorporated:
Property rights, compliance and authority