Michael Perelman and the Economics of Nonprivate Goods

During the heydays of the antiglobalization movement of the late 1990s and early 2000s, I was one of the moderators of the MayDay2K mailing list created for the May Day 2000 global day of action. As a moderator, I had to read all the posts made to the list to approve or reject them, and one day, someone cross-posted an email from a list called Progressive Economists Network (PEN-L). This email is how, in 2000, I came to know Michael Perelman.

As I learned later, Michael started this network, the most pluralistic network I have ever seen, as early as in the 1980s a forum for debate among economists and others from any economic school of thought. Intrigued by this cross-post, I subscribed to PEN-L. After a few posts I made to the list, Michael and I started our private communication and developed a close friendship outside the listserv that lasted until he passed away in September 2020. He was not only a dear friend but also a mentor and one of my most influential economics teachers.

In this brief tribute to Michael, I focus on his contributions to the economics of nonprivate goods and leave the rest to Barkin (2022) and Keaney (2022)—except that I must refer to primitive accumulation, a recurrent theme in Michael’s works that Keaney (2022) discusses in detail, because privatization of nonprivate goods “has much in common with classical primitive accumulation” (Perelman 2007: 60). I use the word nonprivate rather than public because not all nonprivate goods are necessarily public, as I clarify below.

Although the concept of public goods can be traced back to Mill ([1885] 2009) and Wicksell ([1896] 1958), among others, Samuelson (1954) introduced the theory of public goods to contemporary conventional economics. Calling public goods collective consumption goods, Samuelson (1954) defined them as:

[those goods] which all enjoy in common in the sense that each individual’s consumption of such a good leads to no subtractions from any other individual’s consumption of that good. (Samuelson 1954: 387)

This property of public goods is now known as nonrivalry. For example, if I learn (i.e., consume) calculus, does calculus disappear because of my learning it? No. That is, public goods are nonrivalrous.

About five years after Samuelson, Musgrave (1959) offered an alternative definition when he wrote:

Let us now turn to situations where the market mechanism fails altogether and where the divergence between the social and private products become all-inclusive. This is the case for social wants proper. Social wants are those satisfied by services that must be consumed in equal amounts by all. People who do not pay for the services cannot be excluded from the benefits that result; and since they cannot be excluded from the benefits, they will not engage in any voluntary payments. (Musgrave 1959: 8)

Of course, there was nothing new in this definition because the ability to exclude others from use is the very definition of private property. This property of public goods is now known as nonexcludability. For example, when I walk on a street at night, can anyone exclude me from benefitting from a streetlight on that street unless they somehow harm me? No. That is, public goods are nonexcludable.

The currently accepted definition of public goods is those goods that are nonrivalrous and nonexcludable (see, e.g., Varian 1992). Similarly, the currently accepted definition of private goods is those goods that are rivalrous and excludable. A simple example of a private good is a pair of shoes. Since there is no consensus on what to call goods that are nonrivalrous but excludable and rivalrous but nonexcludable, I choose quasi-public and common, respectively. A textbook example of a quasi-public good is software, whereas a textbook example of a common good is fish in a pond, although all natural resources qualify. Table 1 is a summary of these four types of goods. Given the current system of social relations, that is, capitalism, what is private and what is not is, of course, not as clear-cut as depicted in table 1 (see, e.g., Reiss 2021). Taking the point of view of neoclassical economics, devoid of class analysis and focusing almost entirely on the contributions of conventional economists, Reiss (2021) gives a detailed account of the state of the art in the economics of public goods. Let me now turn to Michael’s contributions.

OPEN IN VIEWER

Table 1.

Private and Nonprivate Goods.

Property	Rivalrous	Nonrivalrous
Excludable	Private	Quasi-public
Nonexcludable	Common	Public

Michael was most productive between 1998 and 2007, during which the only year he did not publish a book was 2004, and his main contributions to the economics of nonprivate goods came in this period. However, he already had published his first book on the subject, Information, Social Relations, and the Economics of High Technology, in 1991. As Michael wrote in this journal, this book explores why markets are ill-suited for managing information (Perelman 2012: 497), which is a quasi-public good according to the classification in table 1.

Recall that marginal cost is the cost of producing an additional unit of a product after all other costs. In discussing the theory of marginal-cost pricing, Michael observes, referring to Samuelson (1969), that we can arrange goods on a continuum, ranging from pure public goods to goods in which all costs are marginal costs (Perelman 1991: 147). He then proposes to call those goods with a low marginal cost relative to their break-even prices quasi-public goods. Although it is not clear from the book how he defines pure public goods, his definition must be those goods with a zero marginal cost. His definition of quasi-public goods is equivalent to those for which overhead costs make up a large proportion of their overall cost structure and information has zero or near zero marginal cost. So, it can hardly be otherwise. As Arrow, whom Michael cites, wrote:

The cost of transmitting a given body of information is frequently very low. If it were zero, then optimal allocation would obviously call for unlimited distribution of the information without cost. (Arrow 1962: 614–15)

Michael’s quasi-public goods definition enlarges the quasi-public goods set of table 1 by bringing a section of the private goods of the same table into the set of quasi-public goods. And as Michael points out, these quasi-public goods are far more common than the economics literature suggests. Indeed, Keen (2011, 2022) documents many empirical studies showing that most firms have constant or falling marginal costs, so the set of quasi-public goods Michael defines must be broader than previously thought. Since these goods are not treated as public goods but as commodities, Michael then argues that unwarranted faith in the price system becomes an increasingly irrational impediment to the rational use of resources. This argument is consistent with Keen’s conclusion that the neoclassical theory of price set by the intersection of supply and demand schedules is suspect. Constant or falling marginal cost is incompatible with the existence of the short-run and the long-run neoclassical supply schedules for a competitive firm.

To argue for the irrelevance of marginal costs, Michael then quotes Keynes:

Indeed, it is rare for anyone but an economist to suppose that price is predominantly governed by marginal costs. Most businessmen are surprised by the suggestion that it is a close calculation of short-period marginal costs or marginal revenue which dominates their price policies. They maintain that such a policy would rapidly land in bankruptcy anyone who practiced it. (Keynes 1939: 49)

He concludes his discussion of the irrelevance of marginal costs thus:

Although the evidence for marginal cost pricing in an industrial context is slim to non-existent, economists blithely insist on applying a price theory that presumes that marginal costs will determine prices. (Perelman 1991: 148)

This conclusion is reminiscent of Michał Kalecki’s The Determinants of Distribution of the National Income, although Michael does not mention this. Kalecki (1938) argues that prices in the industrial sector are determined as a markup on costs by semi-monopolistic and monopolistic factors, calling them degrees of monopoly:

Here Kalecki was an important originator of the use of reverse L-shaped cost curves, with marginal costs (and, therefore, average variable costs) constant up to the level of full capacity utilization. This, coupled with the postulate of general excess capacity as the norm, results in changes in demand being met by changes in supply, without any changes in costs or prices. (Kreisler 1988: 110)

Michael then turns to Marxian crisis theory and writes:

The upshot of this discussion is that marginal cost pricing did not present a threat so long as fixed capital costs were relatively small, as they were in the era of merchant capitalism. Although marginal costs had been relevant to the formation of costs in the past, the increasing importance of fixed costs implies that marginal costs shrink into irrelevance. Indeed, as we already suggested, if prices actually did adjust to marginal costs, a crisis would occur.

. . .

If the crises grew to sufficient proportions, they could threaten the financial structure of the economy. During such an economic decline, as one producer of intermediate goods lowers costs, it effectively lowers the marginal cost of its customers. As such cost cutting spreads throughout the system, the revenues that firms earned would fall with the price level, perhaps to such a low level that they could not meet their financial obligations. In short, competition can be destructive to the market. (Perelman 1991: 149)

Is this not closely related to the Marxian concept of the tendency of the rate of profit to fall, at least cyclically, not to mention the debt deflation theory of great depressions (Fisher 1933)? Although there is more Michael could have discussed in this book (for an unfriendly review, see Biervert 1992, and for a summary, see Perelman 2012), given my focus on the economics of nonprivate goods, let me move to his Class Warfare in the Information Age, published in 1998.

Michael wrote this book, his second on information, during the happy days of the dot.com boom, when every other day another prominent figure joined the new economy choir, singing the song that “there has been a profound and fundamental alteration in the way our economy works that creates discontinuity from the past and promises a significantly higher path of growth than we have experienced in recent decades” (Greenspan 1998). Singing against the choir, Michael dealt instead with the progressive deterioration of the productive economy and showed that the economy was not accumulating nearly as much productive capacity as would have been the case if investment had taken the form of more durable capital goods (Perelman 2012). Rather than treating information as just another case of market failure as most conventional economists do, he attempted to deconstruct the language of the new economy to show how class conflict remained a contemporary issue. Further, criticizing the conventional account of the then-emerging information economy as not treating information as a means of control, he suggested that in the information age, the subordination of labor to capital was the game (Orhangazi 2003). And if I claim history proved Michael correct, can anyone argue against me these days?

Since there are many excellent articles, such as Burkett (1999) and Orhangazi (2003), that review the book in its entirety, let me concentrate on the economics of nonprivate goods aspects of the book and quote:

The problem is that the modern economists have traditionally seen their discipline as the science of allocating scarce resources (see Robbins 1969: 16). This approach seemed consistent with their well-established practice of restricting their conception of scarce resources to three seemingly well-understood entities: land, labor, and capital.

Economists presumed that markets could somehow measure each of these resources in an unambiguous way in order to ensure that each was put to the most effective possible use. The simplicity of this approach became less meaningful with each passing day as economists’ conception of scarce resources became increasingly nebulous. (Perelman 1998: 85)

Being a quasi-public good in the sense both of table 1 and Michael's extended definition of 1991, can information be a scarce resource? Arrow (1996: 125) provides the answer: “patents and copyrights are social innovations designed to create artificial scarcities where none exists naturally.”

Patents and copyrights (and trademarks) now have an elegant name, intellectual property rights, which Michael explores in detail in his next book associated with the economics of nonprivate goods, Steal This Idea: Intellectual Property Rights and the Corporate Confiscation of Creativity, published in 2002. According to Michael himself, he wrote this book to explain “how the ever-tightening grip of intellectual property rights threatens to undermine science, economic progress, personal liberty, and democracy” (Perelman 2002: 1). The way I see it, he wrote the book also to explain to the uninitiated that these rights are nothing but monopoly rights “designed to create artificial scarcities where none exists naturally.” Compare this with the definition of the World Trade Organization (WTO) we fought in the Battle of Seattle on November 30, 1999 (World Trade Organization, n.d.-a):

Intellectual property rights are the rights given to persons over the creations of their minds. They usually give the creator an exclusive right over the use of his/her creation for a certain period of time.

The WTO Agreement on Trade-Related Aspects of Intellectual Property Rights is another case in point (World Trade Organization, n.d.-b):

The WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) is the most comprehensive multilateral agreement on intellectual property (IP). It plays a central role in facilitating trade in knowledge and creativity, in resolving trade disputes over IP, and in assuring WTO members the latitude to achieve their domestic policy objectives. It frames the IP system in terms of innovation, technology transfer and public welfare. The Agreement is a legal recognition of the significance of links between IP and trade and the need for a balanced IP system.

However, the reality is different to what is advertised. Signed on April 15, 1994, effective January 1, 1995, the advanced industrial countries forced the TRIPS Agreement “on a reluctant developing world” and the “reference to trade was a farce nomenclature designed to shoehorn intellectual property into a trade agreement” (Henry and Stiglitz 2010: 243). Apparently, Henry and Stiglitz are in agreement with Michael:

Knowledge, once produced, is a public good; restrictions on its utilization are therefore inefficient. The justification for any restriction is that there is a dynamic benefit, as a spur to innovation. But in fact, there is increasing concern that intellectual property rights, especially if they are not carefully designed, will impede the production of knowledge. (Henry and Stiglitz 2010: 240)

Calling intellectual property rights enclosures of the mind (Perelman 2002: 9), Michael establishes a link between the Marxian concept of primitive accumulation and intellectual property rights in two sections of the book. Primitive accumulation—the historical process of divorcing the producer from the means of production as Marx defined it—goes back to the start of enclosure of the commons that originated in England “in the fifteenth century and went on, with differing means, ends, and varieties of state involvement, until the nineteenth century” (Boyle 2003: 34). What Michael calls the enclosure of the mind, Boyle calls the enclosure of the intangible commons of the mind. Primitive accumulation, indeed.

Towards the end of Steal This Idea, Michael writes:

I can say with certainty that if ideas and information represent the core of a modern economy, then markets are an inappropriate mechanism for organizing such activity. As I have already shown, ideas and information are, by their very nature, public goods. Rationing them by the market makes no sense whatsoever. (Perelman 2002: 210–211)

Allow me to take this one step further. Markets are an inappropriate mechanism not only for ideas and information but also for all quasi-public goods in the sense of the extended definition Michael gave in 1991, and common goods as defined in table 1, comprising natural resources. And to this list, I add natural monopolies, such as telecommunication, iron and steel, and paper and pulp, in the sense of Baumol (1977). If semi-monopoly and monopoly rents are inevitable for such goods to avoid market failures, as conventional economists call them, why should we allow private interests to collect the rents? If externalities are unavoidable when we allow collecting the rents privately, are they not negative rather than positive most of the time, in the language of conventional economists?

Let me conclude this brief tribute to Michael by expressing my gratitude to him for his friendship and, among other things, for teaching me the economics of nonprivate goods, about which I knew next to nothing before I met Michael on PEN-L in 2000. I have been lucky. We all have been.