Joshua Gans has a generous post that notes the 25th anniversary of the publication of my 1990 JPE article. I could not agree more with his observation that “there is more to be done …” in understanding the economics of ideas.
His post helped me see how to respond to a conversation I had this summer. I’ll use the excuse of the anniversary to focus for the month on such basics as the meaning of the phrase nonrival good. Doing so will be a shift for this blog, which until now has been concerned primarily with economics as a science and incidentally with my day job, which focuses on the interaction between urbanization and development.
I’m looking forward to revisiting these basics. I’ll never forget the pure joy that came from the sudden clarity that a few abstractions can offer.
For me, the experience was like another I’ll never forget, climbing a mountain in fog and suddenly reaching a vantage point above the cloud layer. Blue sky above. White clouds below. A few other high peaks poking through too. No distracting details.
I cannot share what it felt like to see the world from that mountain at that moment. But the great thing about a nonrival abstraction is that that the clarity and satisfaction, perhaps even joy, it can offer truly is something that we can all share.
As Joshua suggests, the most important abstraction in my paper is a nonrival good. When I was writing, the distinction between nonrivalry and excludability was well established in Public Finance, but was not widely used by theorists working in other areas. I discovered these two concepts accidentally in the midst of revising the paper. (In a recent conversation, Tyler Cowen reminded me of his role in what was unquestionably the turning point in my research career. I’ll have to tell that story in some future post.)
On reading the definitions of rivalry and excludability in the textbook by Cornes and Sandler, I saw instantly how powerful these abstractions were. It was one of those times where I can look back and see me before versus me after. The shift was dramatic. As a result, I find that talking about ideas and growth with people who do not understand these terms is like explaining an equilibrium outcome to someone who does not know what preferences and production possibilities are. They ask “Can’t you just translate what you are saying into statements about supply and demand curves?” I want to ask, “Why do it the hard way?”
Rivalry and excludability map cleanly onto the mechanism design approach to aggregate theory, which starts with a specification of preferences and production possibilities and investigates the mapping from the rules that a society adopts into equilibrium outcomes.
Here is the key:
Rivalry and its opposite nonrivalry are assertions about production possibilities.
Excludability depends on a policy choice about rules.
At the NBER Summer Institute, I mentioned this distinction, thinking it obvious, in a conversation with a young, teched-up macroeconomist who responded with surprise bordering on astonishment.
Joshua’s post jumps right into the analysis of the rules that determine excludability. He is right that these rules are multidimensional, and that policy choices about these rules are subtle because private interests will not take the degree of excludability implied by any set of rules as given, but will instead try to make investments that will typically enhance excludability in ways that offer private benefit but social costs.
But the conclusion that I took away from my conversation at the summer institute is that before jumping into the analysis of the mapping from rules to equilibrium outcomes, there is some value in syncing up first on the basics. I’ll focus on them in posts this month that I tag “Ideas.”