Public Goods, Bads and NASA
In the comments section of this recent post, Steve mentions that governments do space better than the private sector (at least for now). The discussion also includes public goods problems, primarily defense. Since Kevin brings up space and others bring up public goods, I'm going to add public bads and unintended consequences.
Over the past 30 years or so NASA, the Air Force, and both of their prime contractors have been the only organizations doing any serious space work. But the idea that government must do this and is more capable is not a correct understanding of how it really is. The existence and inefficiencies of government space programs has hindered the market development of private space industry. NASA is to the entrepreneurial space community a public bad. Until very recently, when I or any of my friends or associates talked to investors about funding a space program we would get laughed at, nevermind that there is lots of solid market research indicating far better returns than most other technologies. We called it the giggle factor. We had to carefully hone our presentations to minimize this. And even then we would more often hear "what - you intend to compete against NASA?" or "Only governments can do space it's too difficult and too expensive." Followed by laughing. At us. If they were in a good mood. Government programs to provide some good do it badly, and in addition discourage private solutions from coming to market.
Last week that changed, by an event that had such a huge set of positive externalities that mainstream economics would predict that it was a "public good problem." Sure Burt Rutan and Paul Allen have profited from the excercise, even if only emotionally. But the real profit is accruing to Masten Space Systems, XCOR, JP Aerospace, TGV Rockets, and several others. I can talk to investors, and they are not laughing anymore. This is the real point, unlike homo economicus, real people calculate if a good is worth more than its cost and act accordingly, if there are free riders then they either don't care or may even consider it an added benefit. That is if acquiring a good helps their neighbors, many people will value that good higher than if the good was neutral or bad for their neighbors. This is why in most companies "community goodwill" is considered a valid business justification.
There is another case of a good with such incredible positive externalities that many people, who know finance and economics, think it is a communist plot because the standard economic model of public goods predicts the opposite of reality. That good is Linux. Linus Torvalds got his profit in the form of knowlege and emotional gratification. He then saw that others might also benefit. He performed the Austrian method of determining profit, he weighed it against his subjective preferences and acted accordingly. His whole project suffers from every problem in the public choice lexicon, yet it has occurred within the free market, voluntarily and is very successful.
Public goods theory fails to predict or explain reality far too often. In this post-Enlightenment age, I thought we threw away such theories and looked for other explanations. Whether such difficult to assess goods as defense or law needs a government to provide those goods, "It's a public good" is not a valid reason.
fn1. Of course this works the same with negative externalities, and thus why we have zoning laws - there are people who will not consider their neighbors and engage in actions that produce negative externalities as well.