The Myth of Underprovision
Public goods and the statism trojan horse
Every economics undergraduate learns the mantra: markets underprovide public goods. The reasoning is drilled in as orthodoxy, and it seems airtight. A public good is defined by two properties — non-rivalrous, meaning my consumption does not diminish yours, and non-excludable, meaning you cannot stop non-payers from enjoying it. If you cannot exclude non-payers, people free ride. If people free ride, private actors will not fund enough. Therefore coercive taxation is justified to fix the underprovision. Four steps from a pair of definitions to a mandate for the state.
The canonical illustration, recited in a thousand lecture halls, is the lighthouse. Its beam sweeps the sea for every ship alike; no keeper can chase down a schooner to collect a fee; therefore no private party will build one, and the state must. The trouble with the illustration is that the lighthouses got built. In Britain they were privately constructed and privately financed, funded through fees collected at port, for generations — until the state nationalized them. The example chosen to prove that markets cannot provide a good is a record of markets providing it.
That inversion is worth dwelling on, because it is not an isolated embarrassment. It is the shape of the entire argument. Of the standard indictments of markets I answer in Capitalism on Trial, the public-goods charge is the one wearing the most impressive technical dress, and so it deserves the fullest reply: the underprovision claim is not a discovery about the world. It is a model output whose assumptions contain its conclusion, and both history and technology testify against it.
A Model, Not a Finding
Nobody surveyed human societies, counted the goods, and found the voluntary sector falling short. The underprovision claim is the output of a model, and like every model output it is true only given its assumptions — all truth is, and the honest response to a theorem is to ask what it was conditioned on. Here the assumptions are three:
- No way to exclude non-payers exists or could evolve.
- Voluntary cooperation is insufficient at scale.
- A central planner knows the optimal level of provision.
Grant all three and the conclusion follows with the crisp inevitability of geometry. But look at what was granted. The first assumption freezes exclusion technology at whatever the modeler imagined — it declares, as a premise, that no entrepreneur, no contract, no institution will ever find a way to tie payment to use. The second writes off everything humans have ever done between the poles of shopping and taxpaying: the clubs, congregations, subscriptions, mutual societies, and pledge drives that fill the actual historical record. The third hands the planner exactly the knowledge the argument needs him to have — a known social optimum against which the market’s output can be scored and found wanting.
In other words, the inevitability of the state is baked in from the start. The model does not discover that coercion is necessary; it assumes a world in which nothing else could possibly work, and then announces the necessity as a theorem. That is not economics finding a market failure. That is statism doing arithmetic on its own premises.
History Doesn’t Agree
Each of the three assumptions has been falsified — not once, as a curiosity, but repeatedly, across centuries and continents.
Exclusion evolves. The British lighthouses are the cleanest case: you cannot bill a ship at sea, but every ship eventually docks, and light dues collected at port funded the beams for generations. Roads and bridges tell the same story — historically toll-based, privately built and maintained turnpikes, exclusion accomplished by nothing more exotic than a gate.
Voluntary cooperation scales. Education flourished through churches, guilds, and subscription schools long before governments monopolized it. Law and order — the good statists reach for when all others fail — emerged in frontier zones and in medieval Iceland from voluntary associations and competing legal systems; the Icelandic commonwealth ran on chieftains whose adherents could leave for a rival, and it kept the peace for centuries without anything a modern textbook would recognize as an executive state. Scientific discovery, the paradigm non-rival good, was propelled by prizes, patrons, and voluntary societies — knowledge bought into existence by people who wanted it found, not extracted from people who never asked.
And nobody planned the optimum. No welfare function dictated how many lighthouses Britain needed or how much science the prize societies should fund. The provision that occurred was whatever the people who valued these goods were willing to pay for — which is not a defect of the record; it is the record’s lesson.
Far from being anomalies, these cases show people consistently solving so-called public goods problems without the state. Where exclusion was feasible, it was invented. Where it was not, cooperation found other channels. The three assumptions do not describe constraints on human societies; they describe the modeler’s refusal to look at them.
The Sleight of Hand
Underprovided relative to what? Here is the pivot on which the whole doctrine turns. When economists say markets “underprovide,” they mean: less than the quantity a planner’s social welfare function demands. That is not an objective analysis. It is a political judgment smuggled in under the banner of science. It presumes that more of the good is always better, and — the deeper smuggle — that coercion has no real cost.
But coercion is never costless. Taxation requires threats. It warps incentives, crowds out the voluntary alternatives that would otherwise evolve, and entrenches monopolies in exactly the goods it claims to rescue — the nationalized lighthouse, the compulsory school. The tidy diagram in the textbook, with its shaded triangle of recovered welfare, leaves out the destruction of agency: every unit of “corrected” provision is financed by payments that were not choices. And a payment extracted under threat reveals nothing about what the payer values — that is the value-theory half of the free-rider argument, and I have made it in full in Value as Sacrifice: benefit is not valuation, and taxed “demand” is the state’s preference wearing the taxpayer’s name. What remains for this chapter is the economic half.
What Markets Actually Show
Voluntary markets reveal what people actually value enough to pay for. This is the funding test of The Price Illusion — a project no one will fund voluntarily is, by that very fact, not valued enough to exist — generalized from single projects to whole categories of goods. If there is less of X than a theorist wants, that is not “failure.” That is the truth of preferences. The theorist’s disappointment is data about the theorist.
Meanwhile the supposedly fixed wall of non-excludability keeps eroding, because non-excludability was never a metaphysical property of goods — it is a snapshot of current technology and institutions, and the snapshot keeps changing. Micropayments make it economical to charge fractions of a cent for marginal use. Assurance contracts let contributors pledge conditionally, binding only when enough others join, dissolving the free-rider’s advantage by design. Cryptographic exclusion — encrypted signals, access keys, blockchains — makes it trivial to gate goods that were open to all comers a generation ago. The first assumption of the model is not merely false about the past; it is being falsified again every year.
So what looks like underprovision is usually provision in unfamiliar forms: messy, decentralized, diverse, voluntary. The complaint was never really about scarcity. It is about a refusal to conform to the state’s preferred template — one uniform good, one funding stream, one administrator.
Owing at the Margin
The marginalist revolution that McCloskey rightly celebrates already contains the refutation of totalist accounting. You can only ever owe at the margin, never for the whole past — no one presents you a bill for the entirety of civilization and demands your gratitude in tax. Likewise, markets only ever provide at the margin, according to voluntary demand, one willing payment at a time. Labeling marginal, voluntary provision “insufficient” against a totted-up social aggregate is not economics. It is ideology — the pre-marginalist habit of pricing wholes, revived exactly where it flatters the state.
The myth of underprovision is statism’s Trojan horse. Accept it, and you have handed over a blank check: any good whatever can be declared underprovided relative to somebody’s welfare function, and every such declaration arrives pre-approved for coercion. Reject it, and the picture clarifies. There is no “failure” in voluntary cooperation — only the actual arrangements free people choose to build, which is what provision, honestly measured, has always meant.