Public Goods, Private Uses?

What is a public good?

Photo: Ed Yourdon. Source: Wikimedia

Economics is at the heart of financial capitalism. After all, companies can’t pay their debts and grow if they can’t make sustainable, economic profits. Financial engineering may redirect where their cash goes, but without economic growth, we won’t see financial growth or improvement in market values.

As a result, it’s crucial that we understand some economic principles in order to understand today’s market. And one key element in economics today is the notion of a “public good” – a resource that anyone can enjoy without depleting it for someone else. National defense is a public good: my sense of security from invasion doesn’t decrease your security at all. So is a beautiful view, or a tree-lined boulevard. Public goods aren’t free. They cost something to produce. But they can be enjoyed by everyone

People often mistake public infrastructure for public goods. Clearly, there’s a public need for infrastructure. Roads and the electric power grid are important parts of the economy, and locating and building them require political compromises. But they can easily be overused, as anyone caught in a traffic jam can attest. They’re more like a commons, like public parking, or an open range for grazing livestock.

Global knowledge is a public good. Official statistics on employment, productivity, language are universally helpful, and my understanding doesn’t deplete the resource for anyone else. Books containing knowledge may wear out, but the information they contain endures. That’s one reason why public libraries now also provide internet services, although it seems those computers often just get tied up by kids playing online games.

New York Public Library. Photo: OptimumPx. Source: Wikimedia

Public goods tempt folks to become free riders – people who enjoy the benefits without contributing to defray the costs. With national defense, I may appreciate my personal safety without wanting to join the military. For centuries, countries got around this through national conscription – drafting all military-aged youth. Now, with technology being increasingly important to defense, taxes are the main way we contribute to our national security.

Is software a public good?

Clearly, it costs something to produce. But my use of a computer program doesn’t degrade it, or stop someone else from using it. There are aspects of software – like streaming services across the web – that are more like public infrastructure. But software is a hybrid: part knowledge, part commons. It’s non-depletable, but without a strong view of intellectual property rights, software doesn’t get developed. Open-source software and Wikipedia are exceptions.

Photo: Jae Rue. Source: Pixabay

Five of the top ten most valuable companies in the world are software companies. Trillions of dollars are committed to providing intangible experiences via bits and bytes in our knowledge economy. The industrial revolution of the 18th century led to industrial capitalism and the rise of the corporation. The mobile software revolution of the early 21st century will also lead to dramatic changes. We just can’t see them yet.

Douglas R. Tengdin, CFA

By |2018-02-20T08:04:08-04:00February 20th, 2018|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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