An essay on the properties of semi-public goods

Conventional microeconomic theory admits that markets fail---i.e. that they are not "Pareto efficient"'---in the presence of nonconvexities in technology (e.g. increasing returns) or preferences (e.g. altruistic preferences), externalities in production or consumption, public goods, and noncompetitive market structures, inter alia. (See, for example, Mas-Collel et al. (1995, part III) or Varian (1992 , chapters 14, 16, and 22-25).) In the presence of these phenomena, the social net benefits of upholding the exclusive ownership rights over wealth that underpin markets become negative. Since social benefits and costs are viewed in opportunity terms, i.e. by comparison to alternatives, the existence of these phenomena implies that nonmarket mechanisms of resource allocation become optimal by comparison to markets.

This essay argues that there exists a general direct relationship between productivity, the nonrivalry or shareability of means of production and the costs of exclusion.  Said differently, if the costs for society of enacting, administering, enforcing, and adjudicating exclusive or private ownership rights increase as a result of increasing productivity, then---to paraphrase Arrow (1969)---the social costs of "running the system" increasingly outweigh its benefits, i.e. the historical suitability or rationality of markets as processes for the allocation of society's productive forces decreases vis-a-vis alternative social arrangements.  (The phrase, "the costs of running the system" is Arrow's (1969) reinterpretation of Coase's (1937) "transaction costs" of markets.)

In fact, the connection between growing productivity and the increasing historical irrationality of capitalist societies is one of the central tenets of Marxist socialism. (See, for example, Marx (1859, preface) and Engels (1878, part III, chapter 2).) Thus, this essay offers a restatement and elaboration of Marx and Engels' classical thesis in the terms of modern economic analysis.