Thursday, January 17, 2013

The Market Provision of Social Services

The Market Provision of Social Services

The title of this post is taken from the book “Public Goods and Private Communities: The Market Provision of Social Services,” by Fred Foldvary.

Who is Fred Foldvary?

Fred Emanuel Foldvary (born May 11, 1946) is a lecturer in economics at Santa Clara University, California, and a research fellow at The Independent Institute. He is also a commentator and senior editor for the online journal The Progress Report and an associate editor of the online journal Econ Journal Watch. He lives in Berkeley, California.

In his PhD dissertation (George Mason University, 1992), "Public Goods and Private Communities", he applied the theory of Public goods and Industrial organization to refute the concept of market failure, including case studies of several types of private communities. His research interests include ethics, governance, land economics and public finance.

His support of geoanarchism (a kind of Georgist economics) and his advocacy of civil liberties, anarchy and free markets have gained him a place of high visibility in the geolibertarian movement. [1] In 2000, he ran for Congress in California's 9th District as a Libertarian. [2] He received 3.3% of the total vote to finish third among the four candidates on the ballot.

One of the things I hope to discover as I further my reading of Foldvary’s volume is to what extent Foldvary associates with at least some aspects of what is attributed to “Georgist economics.” 

In his publication Progress and Poverty [Henry] George argued that: "We must make land common property."[4] Although this could be done by nationalizing land and then leasing it to private parties, George preferred taxing unimproved land value. A land value tax would not overly penalize those who had already bought and improved land, and would also be less disruptive and controversial in a country where land titles have already been granted.

By the term “taxing unimproved property,” it is meant to tax all land as if it was unimproved – unlike the typical real-estate property tax of today, which taxes both land and improvements.  In other words, the economic benefits of the improvement would belong to the property owner, while the economic benefits of the improvement in land value would belong to the state to spend or otherwise distribute.

However, the term “taxing” suggests coercion in the relationship.  I don’t believe Foldvary envisions this as a system to be administered by a coercive state agent:

The real world distinction is not community organization versus lack of organization, but what kind of governance or organization an enterprise or a community has, for example consensual governance versus imposed governance.

It is this bent of Foldvary’s – that the relationships must be consensual – and that I could envision the entire process (from street-sweeping all the way up to the big bogeyman of national defense) as being formed in the free market by enterprises driven and disciplined by profit and loss that I chose to look into his work in more detail: a form of homeowners association, acting independent of other like organizations for certain matters and cooperating with other similar organizations for others.

In this book, Foldvary presents a market-based solution to providing goods and services that many sadly believe can only be provided by government actors through coercive tactics. 

Do public goods and services such as streets, parks and dams have to be provided by the government?  The prevailing view is that they do, because agents (persons and organizations) in a market process normally fail to provide them.  According to this view, since people benefit from civic services whether they pay for them or not, many will be ‘free riders’. Not paying for the services unless they are forced to.  For that reason, many economists, as well as much of the public, think that only the government or public sector can provide the collective services that people in a community may desire.

The theme of this book is that this proposition is incorrect.

The book has several chapters outlining his theories and concepts, followed by several chapters of real-world examples of such communities – communities where services typically considered to be possible only through the forced public sector are in fact delivered by private and voluntary means. 

Foldvary is not speaking of privatization, as that term has become to be understood.  He is not speaking of a government entity ‘outsourcing’ a function – street sweeping, for example.  He uses the theoretical community of “Happy Valley” and the possibility of building a dam to illustrate:

Suppose Happy Valley were developed by three firms which turned over the governance of the communities to three respective residential associations, each of which had a mutual contract among the site holders…. If the benefits of the dam were perceived by all, or almost all residents, any uncooperative community that wanted to free-ride would suffer the resentment and economic backlash of the other two and be expelled from the umbrella organization….

I would be more comfortable if the decisions were at the individual level and not the community; Foldvary addresses this when dealing with the problem of the free-rider, “the central issue in the market-failure argument.”

If a product is collectively consumed, how can we make sure that everyone using it will contribute to its cost in proportion to the value received? 

He leans on John Locke to at least frame the issue properly:

“it is fit every one who enjoys his share of the protection should pay out of his estate his proportion for the maintenance of it,” but that the “supreme power cannot take from any man part of his property without his own consent,” since “ the preservation of property” is “the end of government.”

Locke left unanswered the question of how to induce a person to pay his share without taxation; that is, the taking of property.

Foldvary further clarifies how this voluntary system of governance might come to be:

The voluntary financing of a good is equivalent to the unanimous consent of the members of the community….unanimity can be implemented at the constitutional level, that of the initial agreement on and subsequent changes to the basic rules of a community and the choice of joining or leaving a community.

With this, he seems to be in the camp of individual, voluntary relationships in his proposed solution.  However, the free-rider issue remains: what of existing communities, for example?  Or what of those who do not pay even though they voluntary agreed to join the community?

Foldvary goes into some detail to cover this – however, for me this issue is not very important.  All forms of government and taxation today involve massive numbers of “free-riders.”  These range from welfare queens collecting pennies to employees of defense contractors and money-center banks collecting tens-of-millions of dollars, all of whom receive far more benefit than what they pay.  For this reason, I am not concerned if the free-riders can be eliminated or if any free-riders remain; I am looking for a system that is voluntary and that offers the possibility of being effective towards its ends.

As I have done with other books, I will write additional posts in review and consideration of this book.

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