In preparing for an event tomorrow celebrating the 40th anniversary of the publication of Fred Hirsch’s The Social Limits to Growth, I’ve naturally been re-reading the book. It’s full of comments that leap out from the page, such as this: “The extent of interdependence of many forms of consumption in advanced, urbanized societies has brought increasing recognition that to give effect to public choice among the available economic alternatives represents a still unresolved intellectual and administrative problem, rather than requiring merely the sweeping away of impediments to the working of the market mechanism.” And, “To see total economic advance as individual advance writ large is to set up expectations that cannot be fulfilled, ever.”
These comments reminded me very much of Will Baumol’s long overlooked book (his PhD thesis!), Welfare Economics and the Theory of the State, which I read quite recently. Part of his argument is that interdependence is far more extensive than in textbook world. The changes in the character of the economy since 1977 have made this ever more true. Hirsch is of course famous for the concept of positional goods, where there are negative consumption externalities – I am worse off if you have the status symbol and I don’t. Some of this has been absorbed in modern signalling models. However, positive consumption externalities – network effects, direct and indirect – are now becoming widespread too.
The conventional matrix of goods (according to whether they are easy or hard to exclude and rivalrous in consumption or not) needs extending:
—————————-Easy to exclude Hard to exclude
Rivalrous+neg externality Positional Commons good
Rivalrous Private good Commons good
Non-rivalrous Club good Public good
Non-rival+pos externality Network club Network commons
In only one of these boxes does the standard ‘free market’ presumption apply.