The Fallacies of the “Public Goods” Argument for the State

JW Rich
10 min readJan 16, 2023

One of the foremost arguments in favor of the existence of the state is the consequentialist argument. This argument posits that the state’s actions in society are justified because they make society a better place — or in more proper terms — increase society’s total welfare. While not always formally stated or proposed, it is the de facto justification for the state held by the majority of people, including most intellectuals in the humanities such as Steven Pinker.

The Consequentialist Argument comes in numerous forms, as opinions differ on exactly which actions of the state result in a net beneficial impact on society. Nevertheless, the most popular form of the Consequentialist argument is what might be labelled as the “Public Goods Argument”. This argument claims that there are services that only the state can effectively provide (so-called “public goods”) and these services are necessary for the basic functioning of society. Put into a formal argument, it would look something like the following:

P1: If the actions of the state make society a better place, then the existence of the state is justified.
P2: There are certain goods that society needs in order to function.
P3: These goods cannot be provided by the market.
P4: Without the market, the only agent to provide these services is the state.
P5: Because of the necessity of these services, these state-provided services make society a better place.
C: Therefore, the existence of the state is justified.

These “public goods” are often listed to include national defense services, police, courts, construction and maintenance of roads, etc. Because of the nature of these goods — such as the inability to exclude non-payers, and the corresponding free rider problem — the market cannot be relied upon to provide these services. Society is indisputably a better place if we have courts and roads, and given that the state is the only agent able to provide them, then the existence of the state is justified.

Out of the five premises in the argument above, we are only going to examine premise 2. This premise states that absent the state, there are certain goods and services that simply would not be provided. We require these “public goods” for a functioning society, so we need the state to in order to ensure their provision. However, this assertion is dubious at best, and historically ignorant at worst. We can find numerous examples in ages past of goods and services usually classified as “public goods” being provided by non-state actors.

The most famous example of this is Ronald Coase’s paper, “The Lighthouse in Economics”. In the economics profession, the lighthouse is the prototypical example of a “public good” — a good that can only be feasibly provided by the state. This classification seems intuitive, as there is no way for a lighthouse owner to ensure that only paying customers benefit from the light emitting from his lighthouse. Everyone will see it whether they paid or not, which of course raises the question as to why anyone would ever pay at all. In Coase’s article, however, he finds that there are numerous examples in the past of lighthouses that were operated and run profitably by private actors. This was done by going down to the ships in dock and ensuring that the largest ships operated by the largest shipping companies paid dues to the lighthouses. They had the most to lose, so they correspondingly had the largest interest in ensuring that those lighthouses remained operational. They couldn’t get every ship to pay, but they still managed to be financially successful. Contrary to popular belief, it turns out that state action is not a pre-requisite for the building and maintaining of lighthouses.

We can see a similar story for other supposedly “public goods”, such as roads and highways. In early colonial America, for example, roads were often not built by the government, but by turnpike organizations. These were completely private, and ensured that roads were built for the community without any government involvement necessary. This isn’t just limited to pre-industrial times, either, as there is extensive scholarship showing exactly how markets can exist in roads from Walter Block, Benjamin Powell, and others. Similar scholarship exists for other areas such as national defense from Robert Murphy and Hans Hermann Hoppe as well.

Given the theoretical feasibility and historical examples of private provision in “public goods”, it cannot be maintained that the state alone is equipped to provide them. In a society without the state, these goods would still exist in some capacity. Even if one takes the skeptical position that many of these market mechanisms would be unreliable at best, it must be granted that there will be at least some roads, police agencies, defense services, etc.

However, there is a fallback argument that the consequentialist can retreat to. It may not be the case that what we traditionally classify as “public goods” can’t exist without the state, but rather, they will not exist in sufficient quantities. There may be some market-based fire-fighters and court systems, but not the sufficient amount that society needs in order to function. The state can ensure that the proper amount of these goods is provided, which then in turn benefits society as a whole.

This might sound to be a reasonable position at first, but it begs the crucial question: what is the optimal amount of these services? How do we determine if the state is providing the optimal amount of police, courts, roads, etc.? The short answer is that we can’t. There is no clear and objective metric by which we can determine if the state should hire more police officers, invest more in the military, employ more judges, etc. This is not a problem for providing these services on the market, as they have to pass the same test that all goods and services are subjected to: whether they earn a profit or a loss. If consumers value a product more than the inputs it takes to create it, then profit is generated, signaling that it is a useful and value-adding activity. However, if they value that product less than its inputs, then a loss is the result, indicating that those resources are better off being used elsewhere. This standard can easily tell entrepreneurs whether or not consumers desire more law enforcement, national defense, and highways just from the profitability of these ventures. The state, however, does not utilize

This inability of the state to utilize profit or loss gives rise to what Ludwig von Mises referred to as the “Economic Calculation Problem”. Mises raised this argument specifically in response to socialist economic planning where the entire economy is planned by the state, but it applies to all state-provided goods and services. Because the state has no market for products, it does not generate revenue like a normal company. All of the state’s revenue is obtained through taxation, which is a coercive and non-market process. Similarly, the goods it provides are provided regardless of any input from its subjects. As a result, the state stands completely outside the market and has no access to the market-based tools of profit and loss. It does not have the tools of economic calculation that market agents regularly utilize.

This raises a crucial problem. As we pointed out above, if there is no profit and loss test for the state’s products, how can we know if the state is providing the optimal amount of any good? Perhaps society would be better off if there were more policemen, or less roads, or many more judges. But because there is no market for these services when they are provided by the state, we have no way to know. There is no feedback mechanism from the state’s “consumers” to relay to it what should and should not be produced. Because the state cannot economically calculate, it cannot efficiently plan the use of man and material. This is true for state control over an entire economy, but it applies equally to state control over certain sectors of the economy as well. As it exists in nearly every nation today, the state has a monopoly over law, law enforcement, and national defense services at the least. Thus, it cannot calculate in these areas, and as a result, cannot ensure that it is using resources in a productive and cost-effective manner.

Many attempts to get around the Economic Calculation Problem have been proposed in the century since Mises’s original paper. The most famous of these is Oskar Lange’s, often referred to in modern day as “market socialism”. In this model, the factors of production are still operated entirely by the state, but the consumer goods they produce are distributed on markets through supply and demand. This is alleged to dodge the calculation problem, as consumers goods are now being transferred efficiently with market mechanisms.

This proposed model suffers from many defects, however. First, if the market can efficiently allocate consumer’s goods, why shouldn’t it also allocate producer’s goods as well? If we grant that markets can allocate consumer’s goods efficiently, why not extend this to producer’s goods? Why have the state centrally plan any part of the economy at all? Secondly, allowing consumer’s goods to be subject to market forces doesn’t solve the ECP, as there are still no prices for the factors of production. There is still no way for any state economic planners to determine how these goods should be utilized to produced which goods in which quantities. Prices for consumers goods will tell you how to allocate those goods that have already been produced, but the all-important question is what consumer goods should be produced? Without a market, state economic planners are still unable to use economic calculation, and still without a rational solution.

Thus, the “public goods” argument is now caught in a web of its own making. It cannot satisfy the very standard that it itself sets out as the reason for the state’s existence. In fact, this very standard demonstrates the superiority of a stateless order — one where market participants are able to judge the optimality of the goods and services being produced! The Economic Calculation Problem takes what is presented as an argument in favor of the state and flips it on its head, turning it to an argument against the state.

One last fallback argument may be attempted on the part of the exasperated consequentialist. It may not be the case that these goods would not exist without the state, nor that they would be more optimally produced under the state, but that the state is more suited to providing these services than the market. The state does not rely on consumers to receive its revenues, and thus, it is more equipped to provide such socially essential goods. The market has no such stability. For example, if a large national defense service were to go out of business, then the area that it previously serviced might be left without defense from foreign invaders. The inhabitants of that area would certainly prefer to be defended from external threats, and resultingly, would be better off if those services were provided by the steady hand of the state rather than the fickle apparatus of the market.

Again, this argument suffers from several major flaws. First, because the state operates coercively and does not have to attract consumer’s dollars, it is not well-suited to provide anything at all. On the free market, if an entrepreneur fails to provide a satisfactory product to the consumer, then he is swiftly and mercilessly put out of business. In contrast, the state can provide the lowest quality goods and services imaginable, but the population are forced into using them because they have nowhere else to turn. Because of the state’s monopoly, there are no other competitors to which they could take their business. The unavoidable result is a built-in bureaucracy and inefficiency in all state-provided services. For evidence of this fact, spend some time in at the nearest DMV (or your local equivalent).

More importantly, firms going out of business is not a flaw, but a feature of the market process. When we hear of a business going bankrupt and closing down, we generally tend to see this as an unfortunate outcome. In one sense it is, but business closures do have a valuable purpose. The closing of a firm indicates that the resources that firm was using in its production process are more highly valued by the market than the outputs that it sold. Therefore, it is beneficial for those resources to then be distributed away from that inefficient firm to other firms that can more wisely utilize those resources. The same is true for national defense companies as well. If one were to hypothetically go out of business, such as in our example above, then that is a market signal showing that it did not productively use the resources that it possessed. It is beneficial for society as a whole for such a firm to close its doors for good. The producer’s goods and raw materials it owned will then be sold off and given to other firms to provide goods and services for the consumer. Thus, it is not a shortcoming of the market that firms can go out of business, but rather, a shortcoming on behalf of the state. If the state were to go bankrupt and close down, imagine how much better off we all would be!

Despite the popular appeal of the “public goods argument”, it does not stand up to careful scrutiny. Premise 2 of the argument — that only the state can provide these goods — cannot be maintained, nor can any weakened version of it. As a result, the argument fails. For any “public goods” theorists of the state, they must turn elsewhere for justification of the leviathan.

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