A Week, Long Ago, in Biarritz

We take for granted now so much of what is new: personal computers and cell phones, communications satellites and microwave towers, music file-sharing and cable television, copiers and scanners of all sorts, designer molecules and genomic medicine. All involve elements, large and small, for which the fixed cost of development is high, but the cost of an extra copy is negligible.

Nor do we have any difficulty analyzing the markets for these things (no more than the ordinary difficulty, that is: all markets have their secrets).  Every introductory economics text now explains the difference between rival and nonrival goods, based on their degree of excludability.

A rival good can be possessed by only one person at a time: a hamburger, a bank account, a college degree. A nonrival good is one whose consumption by one person doesn’t diminish its availability for others: a movie, say, or computer software or the formula for a wonder drug. Inevitably, a technology is involved.  Nonrival goods have to do with secrets, knowledge and intellectual property. Atoms are rival. Bits (meaning anything that can be written down, or stored as a bit string in a computer, and widely shared) are not — not unless they can be pinned down by a property right, even one as insubstantial as a secret password.

There was, however, a time when this terminology was unknown. Until fairly recently, economists spoke only of public goods and private goods and, sometimes, goods that were “impure” or “mixed” or “ambiguous.”

The rival/nonrival distinction apparently was introduced by Harvard University economist Richard Musgrave in the course of a wonderful conference in Biarritz, on the Basque coast of France, in 1966.

The story of how this distinction emerged, and then became central to economics, in two distinct steps over 25 years, is highly interesting.  It is one of those fundamental discontinuities in its history that economics, like any other science, prefers to disguise, in order to present itself as having built its understanding of the world through the relatively routine mopping-up, puzzle-solving activity that the historian Thomas Kuhn called “normal” science, one fact after another, or, as scientists themselves often describe it, “brick by brick.” (Most readers will prefer to skim along, confident that they will see the point by the end.)

A little background: it was Paul Samuelson who, in 1954, in a three-page mathematical note, established the modern approach to optimal public finance. (How and why it happened as it did is a charming story.  Samuelson was working from a literary exposition by Musgrave, and he later reckoned that his translation, synthesizing the “benefit” and “ability to pay” approaches to taxation, had cost his old friend a Nobel Prize.)

For simplicity’s sake, Samuelson wrote, he would posit just two sorts of goods in the world: completely divisible private consumption goods, which could be parceled out to different individuals, and indivisible “collective consumption goods… which all enjoy in common in the sense that each individual’s consumption of such a good leads to no subtraction of any other individual’s consumption of the good….” Having divided all spending into two sectors, Samuelson then described with just three equations a theoretical “best state of the world” in which some goods were individually priced and others were paid for by taxes.

The trouble with the social economy, Samuelson then stated, was that by departing from, say, the Golden Rule, “any one person can hope to snatch some selfish benefit in a way not possible under the self-policing competitive pricing of private goods…” The worldly Sen. Russell Long would put it slightly differently a few years later: “Don’t tax you, don’t tax me — tax that fellow behind the tree.”

Samuelson’s formulation conquered technical economics, especially after he quickly followed up with a diagrammatic exposition of the theory (whose roots, he noted, had been adduced by Italian, Austrian and Scandinavian writers of the previous 75 years), and, in 1958, a third note, a demolition of all that had been left standing of A.C. Pigou, the authority on public finance for an earlier generation whom Musgrave now replaced. A certain amount of controversy remained, however, as economists sought to fill in the gap between Samuelson’s polar cases.

Kenneth Arrow adopted the convention and extended it in 1960 to describe the production of knowledge as a public good. There were three basic reasons that pure competition would produce too little new knowledge, wrote Arrow: because inventing is risky, because breakthroughs could be appropriated only to a limited extent, and because new knowledge can (and should) be used again and again without cost to make more new inventions (meaning there would be falling costs, or increasing returns).  For all these reasons, markets would fail to achieve the best possible outcome, and governments would have to take a hand, at least, in higher education and basic research.  

In 1963, a contumacious argument about subscription television erupted.  Jora Minasian, of the State University of New York at Buffalo accused Samuelson of opposing pay-TV.  Explained Samuelson in his rejoinder, the analytic problem was one of increasing returns. (“Being able to limit a public good’s consumption does not make it a true-blue private good.  For what, after all, are the true marginal costs of having one extra family tune in on the program? They are literally zero.”) The episode provoked one of the very few displays of temper on the record from that most equable man. (“My remarks have been scandalously misinterpreted,” Samuelson replied.)

 In 1964, Mancur Olson, in The Logic of Collective Action, raised interesting new questions about the definition of public goods, given the predictable behavior of special interest groups.  Then in 1965, James Buchanan, seeking to narrow the chasm between perfectly public and perfectly private, contributed a theory of “club” goods, which turned out to have much to say about congestion.

It was against this backdrop, the International Economic Association in 1966 convened a meeting in the grand old resort town of Biarritz, in collaboration with the French Centre de la Recherche Scientifique. The idea was that the Old Guard of the continent would meet and feel out the leading economic scholars of the New World (including Samuelson, Arrow and Robert Dorfman), on carefully demarcated  grounds, in a splendid old Second Empire relic on the strand, the Hotel Regina. The continental scholars, many of them historians and philosophers of law and economics, called their portion of the meeting “Analysis of the Public Economy.” The economists called theirs, “The Public Economy and Its Relation to the Private Sector.”

Musgrave himself was something of a mediator between the camps.  Born in Germany in 1910, he studied in Munich and Heidelberg before traveling, in 1933, to the University of Rochester, and the next year, to Harvard, where he soon met Samuelson and a host of other bright young men. His familiarity with the Continental literature made him a invaluable contributor to the discussion; his youth enabled him to learn the new, more formal language, mostly mathematical, which economics was adopting as its own.

 “The theory of social goods deals with the features which distinguish social from private goods,” began Musgrave’s 1966 paper in Biarritz. The optimal provision of the polar case had been thought through carefully enough, he said: but its application to an important range of mixed goods, goods whose provision required group action,  “remains to be explored.” What distinguished these goods? Two relevant and interesting characteristics, Musgrave explained:  the first was “nonrivalness in consumption,” meaning the existence of “a beneficial consumption externality.” The second characteristic was “non-excludability from consumption.”

(Among the discussants, Stephen Marglin, then a young assistant professor at Harvard, wondered if the problem wasn’t really one of capital theory. After all, many of the cases Musgrave was talking about involved indivisibilities and increasing returns. His ability to enjoy film, for example, depended on the willingness of others to attend cinema and so cover between them the major part of the capital cost of providing the performance.)

Musgrave’s paper was published in 1969, the discussion was scrupulously recorded by a rapporteur, along with the rest of the conference proceedings, in Public Production: An Analysis of Public Production and Consumption and their Relations to the Private Sectors, edited by Julius Margolis, of Harvard, and H. Guitton, of the University of Paris, the professors who had organized the meeting. Its distinctions, including a little matrix  opposing exclusion on one axis against rivalry and nonrivalry on another, became part of Public Finance in Theory and Practice, a new text by Richard and Peggy Musgrave which appeared in 1973.

Meanwhile, the controversies had continued: in 1969, the English economist E.J. Mishan provoked a flurry of comments when he distinguished among joint products, collective goods and external effects in the Journal of Political Economy, while John Head and Carl Shoup cast the matter in terms of “cost of pricing” in the Economic Journal. By 1973,   Morton Kamien, Nancy Schwartz and John Roberts had clarified the debate over degrees of “publicness” of various goods by sorting out consumption and production approaches to the problem.

Then in 1974, Ronald Coase threw an empirical bombshell into the debate when he noted that lighthouses around the British Isles, textbook writers’ traditional example of “public” good, one requiring government provision, traditionally had been privately provided. As late as 1979, in “On the Public Character of Goods,” with William Loehr, the up-and-coming Todd Sandler was still wrestling with complicated three-dimensional spectrums and taxonomies that displayed the conventional apparatus of indivisibility and appropriability.   

By the first edition of Sandler’s text (with David Cornes in 1986), however, the index entry for “indivisibility of benefits” read “see nonrivalry of benefits.” One of economics’ most confusing terms had been quietly replaced. And it wasn’t until economist Paul Romer, then of the University of Chicago, now at Stanford’s Graduate School of Business, pulled the distinction out of Sandler’s text and plugged it into growth theory to describe the special characteristics of knowledge as a factor of production that “nonrival, partially excludable” (to describe intellectual property)  became part of the lingua franca of research economics and, thereafter, began slowly making its way into the texts. 

True to their traditions, though, most authors behaved as if the distinction had been available to them all along. Indeed, though still quite sharp on the eve of his 96th birthday, Musgrave himself last autumn no longer remembered a time when he didn’t have the use of the term.  Textbooks might have to be rewritten after each scientific revolution — and the emergence of the new economics of knowledge probably is a genuine scientific revolution — but that doesn’t mean that textbook authors won’t contend that they knew it all along. As historian of science Kuhn pointed out fifty years ago, it is in the nature of textbooks that they should do so.

(Frances Woolley of Carleton University has argued to good effect for dropping public goods from the undergraduate curriculum altogether, in order to concentrate on the underlying issues of exclusion, rivalry and public finance/provision. Public goods, she says are “a pedagogical bad.”)

Richard Musgrave died last week at home in Santa Cruz, California, much loved and honored. There will be the usual memorial service in the church in Harvard Yard later this year. He’ll be remembered as an exemplary scholar, teacher, mentor, friend, a man of sterling character.

But Musgrave was also a powerful innovator, who taught economists to ask new questions and draw new conclusions from old data. It would be a very useful contribution to the history of thought if those who were there at Biarritz in 1966 — Samuelson, Arrow, Marglin, Amartya Sen, Edmond Malinvaud, Serge-Christophe Kolm, Larry Westphal — as well as those most affected by the goings-on (Buchanan) would plumb their memories and write down their recollections of what happened there and in all the years thereafter in public economics. It would be more than a fitting memorial.   It would yield a rewarding glimpse of economic science going forward.

Penetrating new distinctions such as that between atoms and bits don’t come along very often.