Blackboard Economics: On the Root of Public Interest Evil. Essay by Terry L. Anderson*
Anyone who has taken an economics course has been dazzled by the graphs that professors like to draw on the blackboard (or whiteboard in more modern times). There is no more dazzling example of these graphs than an article published in the American Economic Review (March 1957) by Francis Bator titled “Simple Analytics of Social Welfare Maximization” (thought it did not seem “simple” to me when I was a graduate student). In it he provides a “rigorous” graphical rendition of how neo-classical principles could lead to maximizing social welfare and justifies his analytics saying, “It appears, curiously enough, that there is nowhere in the literature a complete and concise nonmathematical treatment of the problem of welfare maximization in its ‘new welfare economics’ aspects.
It is the purpose of this exposition to fill this gap for the simplest statistical and stationary situation.” Bator describes the analysis as “a rigorous diagrammatic determination of the ‘best’ configuration of inputs, outputs, and commodity distribution for a two- input, two-output, two-person situation, where furthermore all functions are of smooth curvature and where neoclassical generalized diminishing returns obtain in all but one dimension-returns to scale are assumed constant” (p. 22).
The article begins with the “efficiency locus” of isoquants (seem simple?), transits to a “production possibility frontier,” then to a “grand utility possibility frontier,” which assumes knowledge of individual preferences, then to a “welfare function,” for which “ultimate ethical valuations are involved,” and finally to “Ω,” the “constrained bliss point.” What could be more enticing than understanding how to take society to its bliss point, and what could lead more to public interest evil?
The “root” of public interest evil, however, goes back much farther than Bator to A.C. Pigou’s The Economics of Welfare in 1920. Therein he leads economics down the pernicious road of externalities by distinguishing between “two varieties of marginal net product” which he named respectively social and private. The marginal social net product is the total net product of physical things or objective services due to the marginal increment of resources in any given use or place, no matter to whom any part of this product may accrue. It might happen, for example, , , , that costs are thrown upon people not directly concerned, through, say, uncompensated damage done to surrounding woods by sparks from railway engines. All such effects must be included – some of them will be positive, others negative elements – in reckoning up the social net product of the marginal increment of any volume of resources turned into any use or place. (134)
The upshot of his argument is that individuals acting on the private costs and private benefits they face will over-produce products with negative externalities and under produce those with positive externalities …
* Terry L. Anderson has been a senior fellow at the Hoover Institution since 1998 and is currently the John and Jean De Nault Senior Fellow. He is the past president of the Property and Environment Research Center in Bozeman, MT, and a Professor Emeritus at Montana State University where he won many teaching awards during his 25 year career. Anderson is one of the founders of “Free Market Environmentalism,” the idea of using markets and property rights to solve environmental problems, and in 2015 published the third edition of his co-authored book by that title.
“The public good is not to be considered if it is to be purchased at the expense of the individual.” Lord Acton (1834-1902)
On Zeitgeist and Public Interest | The idea of some sort of common good or public interest as the goal of and guide for practical politics is as old as statehood itself. In various guises it is used by politicians and administrators as a source of legitimacy. But there is no clear definition of public interest, and its meaning keeps shifting with the intellectual winds, with the Zeitgeist. Therefore, a term that once had a restrictive function now has taken on a permissive function. A conceptual shield against what Aristotle and Locke saw as tyrannical government, is now wielded as a weapon, to authorise any kind of government intervention.
What is in the public interest?
“The public interest”, wrote David Hume, “becomes the source of great dissentions, by reason of the different opinions of particular persons concerning it”. F. A. Hayek concluded that “common welfare or the public good has to the present time remained a concept most recalcitrant to any precise definition and therefore capable of being given almost any content suggested by the interest of the ruling group.”
And not just classical liberal thinkers worry about its vagueness. As a modern guide to the concept for public administrators puts it …
Essay by Peter A. Fischer* held on 9 December 2021 at the 5th International CEPROM/ECAEF Conference in Monaco.
After two difficult years, HSH Prince Albert, the very able local , and ECAEF have made it possible that we are able to come to Monaco again to discuss matters of personal freedom, personal responsibility, the rule of law and the public interest. Topics of this conference that could not be more appropriate.
Changing test procedures and border crossing requirements by the day, cancelled or delayed flights would almost have prevented it. What was just a matter of routine two years ago, has become a nail-biting adventure: For too long we have taken the freedom to travel, meet and unite for granted. It was sort of a public good.
And all of a sudden, we were confronted with Covid-19, evidently originating in China.
I think we all have our own memories when the so-called pandemic started. I for my part was on holidays, skiing in the calm and endless wilderness of Northern Finland when in March 2020 Europe almost like a striking rod, enacted severe restriction and declared lockdowns. It took me as a surprise that something like that was possible. Already a week into the crisis, my return flight was cancelled and I was lucky I got an opportunity to return through Helsinki Airport. Armed border guards controlled us. Gone was suddenly the esteemed freedom of Schengen, and the usually busy airport in Zürich was abandoned.
And even more striking was the next morning, when during the usual rush-hour I took the commuter train to my office – and found myself being the only one waiting for it on the platform.
Evidently, a society and an economy cannot work if everybody isolates him/herself. Risk-averse politicians overreacted. Life is dangerous, and there are many trade-offs. It turned out that this virus is particularly dangerous for the elder and the weaker. Out of the 11 200 persons that diseased from or with Corona in Switzerland so far, 22 were aged below 41.
Should we protect the elderly and weaker among us and leave it to the personal responsibility of the rest to protect them? Shouldn’t in a liberal (in the European sense) system every individual be a moral person, that is, she or he is free to choose and to act and is responsible for her or his conduct?
Personal Freedom, no doubt is of the utmost importance for any liberal minded person. Moreover, all the strong restrictions had so many unintended consequences, from preventing us to gather here and exchange our views to hampering future educational career prospects of school kids in closed schools and students at boarded up universities to forced psychological diseases and enormous economic and public costs.
However, I got convinced that a pandemic is an extreme example of individually rational behaviour deviating from the public interest. The reason is simple: if the pandemic exceeds a certain intensity, we all have reason to be frightened and to hide. Even if we are 30 years old and may not fear Covid itself at all, if hospitals are overcrowded with Corona-patients and may no longer treat us properly, we might unnecessarily die from a simple accident or a minor health problem. If the intensity of the pandemic exceeds a certain level, it seems to be in the public Interest that we all are somewhat restricted in our work and life. We would be better off, should everybody behave a bit more cautious and considerate than she or he feels to be in her immediate self-interest.
It might be rational to renounce vaccination and awaits being infected from an individual point of view – but we all would fare much better and this pandemic would more likely be under control if the very large majority of society voluntarily had agreed to be vaccinated.
Some people may disagree, but from my point of view this pandemic is an impressive illustration of what we economists call external effects of one’s own behaviour. It is in the public interest of security and wellbeing, that these external effects of our behaviour are reasonably internalised.
To the best possible extent, this could and should be done through market incentives. But as people are obviously rather binary in their behaviour and act either overly frightened or exceedingly careless, there sadly seems to be no other way than for the government and its institutions to define some mandatory rules that limit individual freedom and self-responsibility. This, I guess, it is in the public interest, as without, we most likely would not have been able to meet here tonight.
I am not in favour of overarching government interventionism. It seems to me clear, that extreme solutions are extremely costly and a zero-covid-policy is impossible in an open and democratic society. I do believe that risk-averse administrations and politicians have often acted overly restrictive and neglected important trade-offs. I analysed health and economic costs of this pandemic in different countries around the world. One sees quite clearly, that the rule of diminishing marginal returns and increasing marginal costs of severe interventions applies to pandemic policy as well.
While wearing face masks in crowded places and adhering to sanitary and hygienic precautionary measures provides great returns at a low price, curfews are extreme limitations of individual freedom with rather little effect on security and public health. The liberal camp of states that include Switzerland could do without.
Stronghold Bavaria and scared Northern Italy that in their corona-policy joined the interventionist camp of states have not fared much better than Switzerland. Relatively liberal regimes provided people with better quality of life, more individual freedom to adapt to the difficult situation and superior economic performance than the strict lockdown policies of e.g. Germany.
The difficult challenge was and is to adhere to the public interest at lowest possible costs and with minimal necessary restrictions of individual freedom.
However, recent experiences provide ample food for thought, I believe. Let me just mention five of them.
First, it seems to me that public administrations around the world tend to be subject to distorted incentives. They have much more to lose if they take risks than if they act overly restrictive and risk-averse. In this spirit, they are generally badly prepared to efficiently interact with business and the private sector, something that would be of outmost importance in a situation as exceptional as a pandemic. I wonder: How could this be altered?
Second, many politicians have biased incentives because the money they spend is not theirs. The costs they impose to the public are not immediately obvious. The image of a protective strongman is likely more supportive to re-election than that of liberal restraint. According to the IMF, Advanced Economies on average mostly debt financed additional spending of 12 per cent of GDP to fight the pandemic and provided another 11 per cent in equity, loans and guarantees. Obviously, this is hardly sustainable and represents a substantial burden on future taxpayers. I wonder: What institutional and other consequences liberal-minded societies should draw from that?
Third, I have of course Hayek’s Road to Serfdom in my mind. This pandemic experience with its unprecedent spending spray has fostered socialist and étatist attitudes. It increased acceptance of authoritarian restrictions of individual freedom and provided countries like China with excuses for policies that are truly Orwellian in nature. Even though I believe some interventions are in the very interest of security and the public, so is personal freedom. How are we going to get out of all this again?
Fourth, I recently met a colleague who was fully vaccinated but had survived a cancer and has a suppressed immune response. His doctor told him, that at current incidences there were too many unvaccinated around that posed a risk to him. Although rather unlikely, should he get infected, he had to fear for the worst. The doctor recommended him therefore no longer to visit restaurants or join crowds of people etc. Despite having behaved fully responsible, his freedom thus already is severely restricted again.
I had thought that once everybody who likes to has been vaccinated, consequences of the behaviour of the anti-vaccinators could be freely left to their individual responsibility again. But now I started to wonder: Do we want to have a society that is ruled by the law of the stronger? Or one that excels by solidarity and protection of minorities? To what reasonable extent?
Fifth, in Switzerland we have our binding public referenda. Recently, for the second time we voted on our corona law that entitles the government to require certificates of vaccination or recovery for certain activities. Even though people voted for the law, a bit more than one third rejected it. Moreover, the debate on it became increasingly uncompromising. It revealed a frightening degree of polarisation and extreme resistance. I wonder: what are the deeper reasons behind this bitterness and mistrust and how can they be overcome?
I believe an important contribution are conferences like this one. These are opportunities to meet in person, to reflect, communicate, listen to each other’s and interact.
I guess, it is part of liberal wisdom to accept that especially in such unchartered territory nobody has perfect information, knows the absolute truth and is without errors.
But I believe that in small states, interaction between government and people and between people themselves is easier than in large, centralised states. Checks and balances usually work more directly, and freedom is better protected. It is easier to enact a relatively liberal set of rules that people accept.
I hope that our reunion tonight and our conference tomorrow is a vivid proof of all this. And that we all will be happy about it all along.
Therefore, first and foremost let me propose a toast to His Serene Highness Prince Albert II, to CEPROM the local organizers and to the ECAEF, which is responsible for the academic conception and arrangement of the conference. However, we all should also toast to liberalism, freedom and commensurability, to toast to personal freedom, responsibility and security. All these topics are in the personal interest.
*Peter A. Fischer is a native of Switzerland and studied economics, business economics, international law and political sciences at the Universities of Berne (CH) and Kiel (D). Currently he serves as Chief Economist of Neue Zuercher Zeitung (NZZ) in Zürich. Fischer obtained an Advanced Studies Certificate in International Economic Policy Research from the ‘Kiel Institute for the World Economy’ (D) and defended his PhD in Economics with summa cum laude in 1998 at the University in Hamburg. After working in academia for several years Dr. Fischer joined the economics department of the Neue Zürcher Zeitung (NZZ) in 1999 and was appointed its Bureau Chief for Russia, Central Asia and the Caucasus Area in 2001. The Russian Association of Entrepreneurs and Industrialists awarded him the Presszwanie Prize for the best foreign economic coverage of Russia. In 2007 Fischer moved from Russia to China and became Bureau chief for the NZZ Beijing Office. His book ‘Quer durch das neue Russland’ was published in 2008 and is in face of the current affairs of special interest today. He returned to Zurich at the end of 2010 and served as Economics-editor-in-chief until the end of 2020. His countless publications focus predominantly on the important issues of migration, integration, and the problems of the new economic geography.
Big size is often propagated as an answer to globalization. The success of Liechtenstein, Monaco or Switzerland, on the other hand, points in a different direction. But these small countries do not act alone in an empty space.
Does technological progress make borders disappear, and does this mean that the future belongs to the big players? No doubt small countries face big challenges. This perfectly explains why the Princely Houses of Liechtenstein and Monaco jointly organized a conference in Monte Carlo. CEPROM (Center of Economic Research for Monaco, MC) and ECAEF (the liberal think-tank European Center of Austrian Economics Foundation) teamed up to find answers to what future small states in Europe still have.
In view of the current pandemic, yet again the subject of this year’s conference was highly topical. Can, should or must a state mandate its citizens to get vaccinated against Covid-19 in the Public Interest? Is it in the Public Interest to restrain a person’s freedom by infringing on some fundamental constitutional rights? Should governments finance the purchase of a rare painting, subsidize the export of wine or rescue a national airline in the Public Interest but at the taxpayer’s expense? Is the funding of higher education serving the Public Interest or is it more self-serving than altruistic? In other words, is the Public Interest always in the public’s interest?
Read the following introduction that Prof. Kurt Leube gave at this year’s CEPROM/ECAEF Conference (download PDF, 46kb) ->
On the Morality of the State
and the State of Political Morals
(Withsome Hints on the Lack of Political Accountability)
Über die Hybris der Staaten und den Zustand politischer Moral
The 16th International Gottfried von Haberler Conference will take place on May 20, 2022 at University of Liechtenstein in Vaduz. Conference topic: On the Morality of the State and the State of Political Morals. The event will be organized and hosted by ECAEF – European Center of Austrian Economics Foundation. The support of the University of Liechtenstein and multiple local and international sponsors is gratefully acknowledged.
By invitation only
Admission: General CHF 150/Euro 150; Students CHF 50/Euro 50
Academic Director: Kurt R. Leube
Tel. +1 650 248 4955 and Tel. +43 676 942 8980 (krleube at gmail com)
Administration: Rosmarie Lutziger
Tel. +423 235 1570 (Rosmarie.Lutziger at lgt.com)
Media Matters: Karin Brigl
Tel. +423 235 2344 (karin.brigl at lgt.com)
Conference Program: Please note: some changes may be necessary due to the pandemic. 09:00-09:30 Registration
09:30-09:45 Welcome and a Comment on the Present State of Geopolitical Affairs by H.S.H. Prince Michael of Liechtenstein
Behind a Democratic Veil: A new Centralism and a Downfall of Standards
20 May 2022, 09:45-10:00 Chair: Karl-Peter Schwartz (AT)
10:00-10:30 “Democratic Dreams: How Impossible Policies Endanger Liberal Democracies” – Pedro Schwarz (ES)
10:45-11:15 Coffee break
11:15-11:45 “Über Bürokratiewachstum, Zentralismus und die zunehmende Staatsmacht” – Christoph A. Schaltegger (CH)
12:00-13:30 Buffet Luncheon for all participants at conference site
On Autocratic Tendencies and the Erosion of Individual Freedom
13:30-13:45 Chair: Peter Fischer (CH)
13:45-14:15 “Restoring Liberty for American Indians”
– Terry L. Anderson (US)
14:30-15:00 “Bemerkungen zum drohenden Bargeldverbot und eine Kritik des digitalen Zentralbankgeldes” – Thorsten Polleit (DE)
15:15-15:45 Coffee break
On Power, Corruption and the End of the Rule of Law
15:45-16:00 Chair: Karl-Peter Schwarz (AT)
16:00-16:30 “A Freeway to Serfdom: On Social Media, Polarization and the Contempt of Civic Institutions” – Michael Leube (ES/US)
16:45-17:15 “Über den Rechtspositivismus, den Mangel an politischer Verantwortung und das Ende des Rechtsstaats” – Henrique Schneider (CH)
17:15-17:45 Discussion (general)
17:45-18:00 Closing Remarks by H.S.H. Prince Michael of Liechtenstein
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