« Paul Krugman: Gold-Plated Indifference | Main | "Copy-Friendly" Businesses »

Monday, January 22, 2007


A nice tribute to Richard Musgrave's work on rival and nonrival goods from David Warsh. Here's a shortened version - there's quite a bit more in the original:

A Week, Long Ago, in Biarritz, by David Warsh, EconomicPrinciples.com: ...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. ...

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. ...

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. ...

Samuelson’s formulation conquered technical economics, especially after he quickly followed up with a diagrammatic exposition of the theory..., 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... A certain amount of controversy remained, however, as economists sought to fill in the gap between Samuelson’s polar cases. ...

[T]he International Economic Association in 1966 convened a meeting in the grand old resort town of Biarritz... “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.” ...

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. ...

(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. ...

    Posted by on Monday, January 22, 2007 at 12:59 PM in Economics, Market Failure | Permalink  TrackBack (0)  Comments (1)


    TrackBack URL for this entry:

    Listed below are links to weblogs that reference Unrivaled:


    Feed You can follow this conversation by subscribing to the comment feed for this post.