Adam Smith and Musgrave’s concept of merit good

Adam Smith and Musgrave’s concept of merit good

Journal of Socio-Economics 31 (2003) 701–720 Adam Smith and Musgrave’s concept of merit good夽 W. Ver Eecke∗ Department of Philosophy, Georgetown Univ...

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Journal of Socio-Economics 31 (2003) 701–720

Adam Smith and Musgrave’s concept of merit good夽 W. Ver Eecke∗ Department of Philosophy, Georgetown University, Washington, DC 20057-1133, USA Accepted 14 March 2002

Abstract In this paper I claim that Adam Smith distinguished between economic activities without labeling these distinctions; and, that those distinctions correspond with the modern concepts of private, public and merit good. Musgrave introduced the concept of merit good, but he himself (and several commentators) limited the applicability of the concept merit good. I argue that a close reading of Adam Smith solidifies the distinction conceptualized by the modern ideas of public and merit good; gives the concept merit good a broader domain of applicability; and makes of the ideas of public and merit good concepts which are ideal concepts, and can therefore be applicable jointly and in degrees to particular economic activities. © 2002 Elsevier Science Inc. All rights reserved. JEL classification: A1, B, H1, H4, H5 Keywords: Adam Smith; Musgrave; Public good; Merit good; Private good; Interference in consumer preferences

1. Introduction Friedrich A. Hayek wrote that a concept is often long in use before it is conceptually discovered and affirmed. I believe that this is the case with the concept of merit good as introduced by Richard A. Musgrave. In my paper, I want to present, first, the definition of the concept of merit good and the way in which Musgrave differentiates it from the concept of a public and of private good. Second, I will briefly review some of the secondary literature. 夽

This essay is a much expanded version of a paper read at the Second Annual Conference of the European Society for the History of Economic Thought, February 27–March 1, 1998 at the University of Bologna, Italy. A summary of that paper appeared in the Proceedings under the title “Adam Smith and the concept of merit good,” pp. 304–307. ∗ Tel.: +1-202-687-7613; fax: +1-202-687-4493. E-mail address: [email protected] (W. Ver Eecke). 1053-5357/02/$ – see front matter © 2002 Elsevier Science Inc. All rights reserved. PII: S 1 0 5 3 - 5 3 5 7 ( 0 2 ) 0 0 1 4 4 - 0

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I will then turn to Adam Smith’s The Wealth of Nations in order to look for places where Adam Smith discusses economic activities which have the characteristics of Musgrave’s merit good. Finally, I will argue that a reading of Adam Smith reveals that he differentiates between what Musgrave would call a public good and a merit good on three grounds. First, the provision of a merit good includes the intention to interfere with consumers. Second, a merit good is justified on moral grounds, not on the basis of a utilitarian calculus. Finally, a merit good is financed in a different way than a public good. The first characteristic is the only one to which Musgrave explicitly and consistently draws attention.1 Adam Smith regularly draws attention to the two other characteristics and thus provides an argument to solidify the difference between the concepts of public and merit good. I will therefore conclude that a careful reading of historical texts forces us to accept that the distinction between public and merit good is necessary for elementary economic reasoning.

2. Musgrave’s introduction of the concept “merit good” In the article that gave a preview of his book The Theory of Public Finance, Musgrave introduced the concept of merit good in order to solve a problem in his own theory of public finance (Musgrave, 1956, pp. 33–43). That is, Musgrave sought to maintain the separation of the service and distribution branches (p. 340) even in the face of such examples as “free hospital care for the poor or public subsidies to low cost housing” (p. 341). Musgrave argues that these services are subsidies in kind and compares them with their opposite: sumptuary taxes. In both cases, public policy intends, according to Musgrave, to interfere with the wishes of the consumer preferences. This is different from public wants which the government intends to satisfy “in line with individual preferences and consumer sovereignty” (ibid.). Therefore he proposes, “for lack of a better name” (ibid.) the new label: “merit wants.” In his book The Theory of Public Finance, Musgrave provides a definition of the concept of merit wants that is independent of his own division of the public budget into the three branches of allocation, distribution, and stabilization by defining them in general terms as wants that are “considered so meritorious that their satisfaction is provided for through the public budget, over and above what is provided for through the market and paid for by private buyers” (1959, p. 13). Musgrave explicitly points to an implication of his definition when he writes: “The satisfaction of merit wants, by its very nature, involves interference with consumer preferences” (ibid.). Musgrave understands very well that his new concept of merit wants is radically different from the well known concept of “social wants,” often referred to in economic literature as “public wants or public goods.” He thus writes: “The satisfaction of merit wants cannot be explained in the same terms as the satisfaction of social wants [public goods]” (ibid.).2 3. Secondary literature3 A reading of Adam Smith will clarify the concept of merit good. To lay the groundwork for this clarification, I wish to examine some defects in the conceptualizations offered by the authors in the secondary literature: they wrongly weaken the sharp opposition between the two

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concepts (Head), mistakenly claim that the merit good concept does not belong to normative economic theory based on consumer sovereignty (McLure), misunderstand in an important way the connection between public and merit goods (Andel, 1968/1969), or believe that the merit good theory can be fully derived from voter preferences without an independent value judgment (Brennan).4 In his three essays on the problem of merit good (Head, 1966, 1969, 1990), Head abandons Musgrave’s primary definition of merit goods, i.e., that they are goods which involve interference with consumer preferences. He substitutes a secondary definition: i.e., merit goods are goods with regard to which there is a need to correct individual preferences.5 Head thus writes: “Individual benefit-evaluation difficulties are clearly intended by Musgrave to constitute the essence of the merit goods problem” (1974, p. 246). Head considers uncertainty and irrational preferences the main causes of bad individual preferences (ibid., passim). This line of thinking assumes that there are true or correct individual preferences which merit good decisions are supposed to aim at. Charles McLure pointedly argues “that Head has misinterpreted Musgrave’s concept of merit wants in placing primary emphasis upon imperfect information rather than upon violation of individual preferences” (1968, p. 474). McLure is, in my opinion, right in insisting that the concept merit good is defined as interference with individual preferences but is wrong in then arguing that “merit wants, as Musgrave defines them, have no place in a normative theory of the public household based upon individual preferences” (ibid.). One can point to the fact that even McLure cannot avoid arguing for merit goods policies when he writes: “If knowledge is less than perfect or if preferences are distorted by misleading advertising, consumers can be expected to make decisions which are sub-optimal, judged in light of complete information and distortion-free preferences. In such cases the proper solution is for the government to provide . . . accurate information and prevent preference-distortion misinformation” (p. 481). Clearly, for the government to provide correct information is less intrusive than to interfere directly with consumer preferences by either changing the price (subsidies for education or taxes for cigarettes). Still it is changing the level of consumption of information as it would have arisen in the free market and thus falls under Musgrave’s definition of merit good. In his first article on Musgrave’s concept of merit good, Andel tries to mediate between the opposite positions of Head and McLure (Andel, 1968/1969). One of Andel’s strategies is to point out that there is no practical criterion for distinguishing between benevolent and authoritarian interference which the merit good concept can defend. This consideration allows Andel to conclude that “McLure is substantially right” (p. 212). Andel then points out that the same difficulty arises for the application of the public goods’ theory because individual preferences cannot, in practice, be exactly determined. Implementation of public goods policies thus also have an arbitrary dictatorial quality. Still economic theory finds public goods provision justified. This allows Andel to support Head in claiming that in general—and for Andel that seems to include both merit and public goods policies—“the transition from an economic suboptimum to the optimum . . . situation cannot be accomplished without intervention” (p. 213 [transl. WVE]). Thus, Andel’s strategy consists in stressing the fact that implementation of both public and merit good policies result in (arbitrary) intervention in consumer preferences. Andel will be explicitly rebuked on this point by Musgrave when the latter writes: “Although that approach [public goods provision] called for the compulsory acceptance of the voting

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decision and involved some interference with minority views, such interference was but the unfortunate by-product of a procedure designed to meet individual preferences as well as possible. In the situations now considered [merit goods’ provision], such interference is not accidental but the very purpose of public policy” (Musgrave and Musgrave, 1973, pp. 80–81). Geoffrey Brennan (alone and also in a joint article with Loren Lomasky) defended the concept of merit good with the idea that human beings are split personalities (Brennan and Lomasky, 1983, p. 185; Brennan, 1990, p. 116). Both authors argue that human beings have multiple preferences, such as desires and moral ideals (ibid.). In the market place, the multiple preferences may lead to one outcome: e.g., drunken driving. Alone, the morning after, the same person might say that he should not have been drinking if he had to drive. The authors call the latter a reflective preference (Brennan and Lomasky, 1983, p. 196). Brennan and Lomasky explain the apparent change of heart by the fact that in the thinking that occurs the morning after the person is allowed to express his moral ideals without paying the price of actually not drinking (ibid.). In political voting, so the authors argue, the situation is more near to “the morning after situation” than to the market situation (ibid.). The voter will have an influence only if there is a tie vote without him. In that case he will have to pay the price of whatever he votes for. In large scale elections the probability that the own vote will be decisive is minimal. Thus the price to be paid, when multiplied by the probability that his own vote will decide, is diminished. The voting mechanism thus provides a way to express moral ideals at less expense than in the market place (ibid., 198). A drunken driver could therefore be completely rational when he votes for stiff penalties for drunken driving. But clearly, the latter law would interfere with his preferences as expressed in the market. Brennan and Lomasky call such a law a merit good policy compatible with individualism, since it is a self-imposed restraint. Towards the end of their article, the authors acknowledge that the voting mechanism can also be used to express nasty feelings which people restrain from expressing in the market place, such as extreme hate towards minorities (ibid., pp. 203–204, 206). Musgrave’s concept of merit good and its interpretation by Head and Andel clearly demand that what is declared to be a merit good be meritorious and not evil (as could be the case in an election which would result in policies that aim at imposing disadvantages on minorities or even at eliminating them). A purely procedural approach to merit goods as proposed by Brennan–Lomasky will therefore not do.6

4. Adam Smith Adam Smith does not possess the concepts of “private good” or “merit good.” He does not even use their labels. He does use the label “public good” (1937, p. 423), but does not give it the technical meaning that modern economics gives it. Rather, its meaning is closer to what other traditions call the “common good.” The label he uses for a meaning which is close to the technical concept of public good is “public works and institutions” (e.g., ibid., p. 651). Nevertheless, there is a clear way in which one can show that the distinctions captured by the three concepts of private, public, and merit goods guide Adam Smith’s thinking.7 After criticizing the Mercantile and the Agricultural (Physiocratic) systems, Adam Smith makes a distinction between economic activities that should be left to the citizens and other activities

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that are the duty of the sovereign (ibid.). If we take into account Adam Smith’s belief in the efficiency of the market we might say that he thought of those economic activities which were to be the prerogative of the citizens and which the citizens themselves could handle optimally as being mainly private goods. If we look carefully to what Adam Smith assigns as duties for the sovereign we notice that he makes a further distinction. He explicitly assigns the sovereign three tasks8 and describes the third task in a way that is close or identical to the modern concept of public good. He says that the sovereign has: thirdly, the duty of erecting and maintaining certain public works and certain public institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expence to any individual or small number of individuals, though it may frequently do much more than repay it to a great society. (p. 651)

Adam Smith also argues that such public works or institutions should be financed as much as possible by a user fee. Thus, about maintaining good roads and communications he writes: This expence, however, is most immediately and directly beneficial to those who travel or carry goods from one place to another, and to those who consume such goods. The turnpike tolls in England, and the duties called peages in other countries, lay it altogether upon those two different sets of people, and thereby discharge the general revenue of the society from a very considerable burden. (pp. 767–768)

About the expense of the administration of justice Adam Smith writes: The persons, however, who give occasion to this expence are those who, by their injustice in one way or another, make it necessary to seek redress or protection from the courts of justice. The persons again most immediately benefited by this expence, are those whom the courts of justice either restore to their rights, or maintain in their rights. The expence of the administration of justice, therefore may very properly be defrayed by the particular contribution of one or other, or both of those two different sets of persons, according as different occasions may require, that is, by fees of court. It cannot be necessary to have recourse to the general contribution of the whole society, except for the conviction of those criminals who have not themselves any estate or fund sufficient for paying those fees. (p. 767)

In the above quotations Adam Smith takes account of the following: (1) public works or institutions must be useful: i.e., the willingness to pay off all people together must be greater than the cost; and (2) public works and institutions are there for satisfying private individual wants as demonstrated by the willingness of individuals to pay fees that ideally cover the cost. In the above quotation Adam Smith does not stress the idea that each individual should pay according to his marginal utility evaluation of the public work or institution and that the contribution of each individual could therefore justifiably be different. Adam Smith does preserve the connection between personal utility evaluation and payment by stressing the importance of payment of fees for the usage of the public works and institutions. Adam Smith’s discussion of public works and institutions is thus close in spirit to contemporary discussions of public goods. The major difference is that Adam Smith does not prove the possibility of differential payment by each consumer of a public good.

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When Adam Smith discusses the first two tasks of the sovereign, he brings forth totally different ideas. These different ideas cannot easily be connected with the concept of public good. I will argue that they are more akin with the concept of merit good. First, Adam Smith points out that in the provision of both military defense and administration of justice, the government uses force to make some people comply. Thus, about military defense he writes: Into other arts the division of labour is naturally introduced by the prudence of individuals, who find that they promote their private interest better by confining themselves to a particular trade, than by exercising a great number. But it is the wisdom of the state only which can render the trade of a soldier a particular trade separate and distinct from all others. A private citizen who, in time of profound peace, and without any particular encouragement from the public, should spend the greater part of his time in military exercises, might, no doubt, both improve himself very much in them, and amuse himself very well; but he certainly would not promote his own interest. It is the wisdom of the state only which can render it for his interest to give up the greater part of his time to this peculiar occupation. (p. 659)

He adds that the government might do this by enforcing the practice of military exercises, and oblige either all the citizens of military age, or a certain number of them, to join in some measure the trade of a soldier to whatever other trade or profession they may happen to carry on. [Italics are mine] (p. 660)

And about the administration of justice, particularly the protection of property, Adam Smith writes: Civil government, so far as it is instituted for the security of property, is in reality instituted for the defence of the rich against the poor, or of those who have some property against those who have none at all. [Italics are mine] (p. 674)

In a footnote to this passage, the editor quotes a sentence from the Lectures which reads as follows: “Till there be property there can be no government, the very end of which is to secure wealth and to defend the rich from the poor” [Italics are mine] (p. 674). Clearly, the above quotations from Adam Smith indicate that the government violates the preferences of some people and intends to do so. It violates preferences in order to bring about something meritorious.9 National defense and the administration of justice—as described by Adam Smith—can therefore be said to be merit goods, according to the definition of Musgrave.10 Adam Smith uses the idea of justified governmental interference not only in the two cases summarized at the end of Book IV, he also uses it elsewhere for additional cases. Thus, he defends some interference with regards to the banking system when he writes: To restrain private people, it may be said, from receiving in payment the promissory notes of a banker, for any sum whether great or small, when they themselves are willing to receive them; or, to restrain a banker from issuing such notes, when all his neighbours are willing to accept of them, is a manifest violation of that natural liberty which it is the proper business of law, not to infringe, but to support. Such regulations may, no doubt, be considered as in some respect a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws

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of all governments; of the most free, as well as of the most despotical. (p. 324, reemphasized p. 329)

In a second series of remarks, Adam Smith addresses the meritorious dimension behind societal institutions. It is worth noting that Adam Smith does not use a utility calculus to defend the merit of those institutions but uses moral arguments. The benefits of having a well trained army are presented in the following moral tone: To a sovereign, on the contrary, who feels himself supported, not only by the natural aristocracy of the country, but by a well-regulated standing army, the rudest, the most groundless, and the most licentious remonstrances can give little disturbance. He can safely pardon or neglect them, and his consciousness of his own superiority naturally disposes him to do so. That degree of liberty which approaches to licentiousness can be tolerated only in countries where the sovereign is secured by a well-regulated standing army. It is in such countries only, that the public safety does not require, that the sovereign should be trusted with any discretionary power, for suppressing even the impertinent wantonness of this licentious liberty. (p. 668)

And about the practice of forcing people to serve in the army he writes: Even though the martial spirit of the people were of no use towards the defence of the society, yet to prevent that sort of mental mutilation, deformity, and wretchedness, which cowardice necessarily involves in it, from spreading themselves through the great body of the people, would still deserve the most serious attention of government. (p. 739)

In the next paragraph, Adam Smith writes about education as follows: The same thing may be said of the gross ignorance and stupidity which, in a civilized society, seem so frequently to benumb the understandings of all the inferior ranks of people. A man without the proper use of the intellectual faculties of a man, is, if possible, more contemptible than even a coward, and seems to be mutilated and deformed in a still more essential part of the character of human nature. Though the state was to derive no advantage from the instruction of the inferior ranks of people, it would still deserve its attention that they should not be altogether uninstructed. (pp. 739–740)

This hypothetical meritorious argument is explicitly distinguished from the utility argument—a public goods’ argument—in the remainder of the paragraph where Adam Smith writes: “The state, however, derives no inconsiderable advantage from their instruction” (p. 740). He then proceeds to enumerate the advantages to the state of educating even the “inferior ranks of people.” In a third series of arguments Adam Smith discusses the financing of societal institutions. For some we saw that he proposed user fees. This is a proposal that is consonant with current economic thinking about public goods. It is difficult to see how the provision of merit goods could be financed in such a way. And indeed, Adam Smith proposes a different financing method. Thus, he writes: The expence of defending the society, and that of supporting the dignity of the chief magistrate, are both laid out for the general benefit of the whole society. It is reasonable, therefore, that they should be defrayed by the general contribution of the whole society, all the different members contributing, as nearly as possible, in proportion to their respective abilities. (p. 767)

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He proposes the same for financing the administration of justice, the maintenance of roads and communications and the provision of education (pp. 767–768). If people are asked to contribute for the payment of public institutions according to their ability to pay, then the connection between payment for the service and anticipated utility from using that service is severed. Such a severance destroys the utility calculus as it is present in the ideal financing method of public goods.11 The above quotations demonstrate, I believe, that Adam Smith, just as Richard Musgrave, makes a distinction between two kinds of governmental activities. Musgrave has a name for both activities (social goods—what other authors call public goods—and merit goods). Adam Smith has no label for merit goods and no label for the strict technical concept of public goods. Musgrave explicitly differentiates the concept of public and merit good mainly by the intention of the government. My analysis of Adam Smith’s writings shows that Adam Smith pragmatically differentiates between goods, that in contemporary theory would be called “public” and “merit goods,” also by their justification and their financing method. Adam Smith justifies what are now called “public goods,” by a utility calculus whereas he justifies what are now called “merit goods,” by moral arguments. He proposes to finance such “public goods,” as much as possible according to a utility calculus, whereas he proposes to finance such “merit goods,” according to ability to pay.

5. Adam Smith and Musgrave Musgrave writes in a more reflective time than Adam Smith’s and is therefore confronted with the difficulty of defining the concepts of private, public, and merit good.12 Adam Smith is more descriptive and is therefore a good guide for discovering what distinctions one should make in order to make sense of the total economic reality. Musgrave’s conceptual distinctions, however, allowed me to see with which distinctions Adam Smith was working, operatively. Nevertheless, the reading of Adam Smith allowed me to broaden the application possibilities of Musgrave’s concept of merit good. Musgrave introduced the concept of merit good in order to give a conceptual name to a couple of economic activities that did not fit either the concept of private or of public good. For Musgrave the new concept was, at first, reserved for residual economic activities. Even though he gives a schema, in the revised edition13 of The Theory of Public Finance, Musgrave (1959b, p. 89), that conceptually widens the field for merit goods, he hastens to add: “the merit-want situation is not so frequent as is sometimes assumed” (ibid.). Similarly, in the last sentence of his review article in The New Palgrave. A Dictionary of Economics, Musgrave gives a minimalist interpretation of the concept of merit good.14 Finally, in his autobiographical essay “Crossing Traditions” he writes: Admittedly difficult to define and dangerous to entertain, communal concerns have been part of the scene from Plato on, and my concept of merit good (applicable to private and social goods alike) was to provide a limited opening for their role. [Italics are mine] (pp. 76–77)

Adam Smith, on the contrary, applies the distinction conceptualized in the modern concepts of public and merit good to a broad group of governmental activities such as national defense, administration of justice, education, and banking regulations. His writings therefore

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encouraged me to claim a broader applicability for the concept of merit good than Musgrave himself has claimed. Adam Smith’s writings also suggest that there is something problematic in McLure’s claim that Musgrave gave the concept merit good undeserved legitimacy by incorporating it into his treatise on public finance (McLure, 1968, p. 483).15 Indeed, the distinction, conceptualized by Musgrave, was already operative for a long time as an unconceptualized distinction in the writings of Adam Smith. Thus one could claim that, what Musgrave did, was conceptualize an already existing distinction.16 The reading of Adam Smith in light of the conceptual distinctions introduced by Musgrave allowed me also to understand better the function of economic concepts. It is a misconception of the three concepts of private, public, and merit good to think that they are concepts pointing to mutually exclusive events like being dead or alive and being a virgin or not. In that case an event would be either a private good (bread), a public good (bridge), or a merit good (obligatory education). Adam Smith teaches us that most goods provided by the sovereign are at the same time public and merit goods. Thus, he argues that the administration of justice, the maintenance of roads and communications, and the provision of instruction are beneficial to the whole society and can be financed according to the ability to pay method which violates the public goods’ principle (pp. 767–768). He thus treats them as merit goods. In the same two pages he also writes that the persons who immediately benefit from these institutions and services can properly be asked to pay for them by user fees. He therefore treats them also as public goods. As a consequence, a reading of Adam Smith invites us, by extension of the argument, to see most economic events as incorporating at the same time aspects of private, public and merit good.17 Thus, bread is not just a private good in the U.S., because it is subject to government regulations. No saw dust can be used to increase the fiber content of bread (merit good) and both pricing and content labeling must be conspicuously available in order to allow consumers to make informed choices (merit good). Reading Adam Smith, finally, invites one to see the three concepts of private, public, and merit goods as ideal concepts which can be more or less realized in concrete economic events.18 They are as Samuelson wrote: “polar concepts” (Samuelson, 1955, p. 350; Samuelson, 1969, pp. 108–109). Thus, Adam Smith writes: “Though the state was to derive no advantage from the instruction of the inferior ranks of people, it would still deserve its attention that they should not be altogether uninstructed. The state, however, derives no inconsiderable advantage from their instruction” (p. 740). Thus in the case of education, Adam Smith makes explicit the argument that it is both a merit and a public good. Contrary to Andel, Adam Smith does reject the notion that the concepts of merit and public good melt together and become semi-indistinguishable. Contrary to Pulsipher (1971/1972, p. 284), Adam Smith does not make the concept merit good dependent upon the latter containing the idea of a public good (or externalities), rather he accepts that a concrete economic event can have characteristics captured by the two concepts of public and merit good.

6. Conclusion A descriptive economist like Adam Smith can teach us what distinctions one has to keep in mind in order to understand all aspects of an economy. I believe I have demonstrated that

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a careful reading of Adam Smith compels one to accept that governmental activities must be analyzed by means of distinctions captured in current economic theory by the two concepts of public and merit goods.19 The attempt to reduce merit goods to public goods deprives the economic profession of a conceptual tool for making distinctions that are operative in many analyses made by Adam Smith. More fruitful than reducing the applicability of the concept of merit good would be an effort to understand its full potential.20 A reading of Adam Smith invites us to see institutional arrangements imposed on the free market—protection of property, banking regulations and obligatory education—as merit goods because they intend to interfere with the wishes of at least some consumers.21 Clearly that is giving the concept of merit good a broader meaning than even Musgrave gave it.22 But this broadening of the concept is inspired by the reading of Adam Smith and that is a respectable authority.23 Notes 1. Musgrave also implicitly points to the moral dimension of the concept of merit good by defining it as goods that are “meritorious” (Musgrave, 1959a, p. 13; Musgrave and Musgrave, 1973, p. 81) or as goods where “preferences should be imposed with certain limits by a chosen elite, be it because its members are better educated, possess greater innate wisdom . . . ” (Musgrave, 1969b, p. 143) or as goods where “Traditional values or values imposed by a controlling individual or group may be preferred” (Musgrave, 1971, p. 314). See also (Musgrave, 1987, p. 452; Musgrave, 1993, pp. 76–77; Musgrave, 1997, p. 187) 2. The claim in this quotation provides a clear but humble epistemological justification for the concept of merit good. As there are some governmental activities which “cannot be explained in the same terms as the satisfaction of social wants [public goods]” it follows logically that the science of economics is unable to conceptualize some governmental activities unless it creates a new concept. If the science of economics does not create a new concept, economics as a science must accept that it is an incomplete science in that it declines to create the necessary concepts to cover the whole domain of economics. I take it that a science has no valid reasons to refuse to create the concepts required to cover its total field. Musgrave accepted the challenge of creating a new concept in order to expand the conceptual reach of the science of economics. Musgrave thus responded to the epistemological need for a new concept. By introducing the label “merit wants or merit goods,” Musgrave created nothing more than a place holder for an epistemologically necessary concept. That concept then needed to be defined. Musgrave himself has vacillated on the wording of his definition, and has tended (rightly or wrongly) to favor a restrictive application of his new concept (Andel, 1984). Thus, Musgrave has defined merit goods by the characteristic of “interference with individual preferences” (Musgrave, 1956, p. 341; Musgrave, 1959a, p. 13) or “imposed choice” (Musgrave, 1971, pp. 313–314). However, he also has defined merit goods as corrections of “a distortion in the preference structure” (Musgrave, 1959a, p. 143) and by a side constraint: “In practice, merit wants tend to be associated closely with redistribution” (Musgrave, 1969a, p. 82). See also Musgrave (1971, p. 318). The secondary literature addresses the unfinished business of defining

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the place holder for an epistemologically necessary concept. John Head stresses that the question of definition of the new concept is not yet settled (Head, 1990, pp. 211–213). However, the difficulty of finding a satisfactory definition should not obscure the fact that the new concept remains epistemologically necessary. This article intends to provide further arguments, based on reading the texts of a classical author, for the epistemological usefulness and necessity of the idea captured by the concept of merit good. For my purpose, I select Musgrave’s most explicit definition of the concept of merit good as my working definition i.e., merit goods intend to interfere with consumer preferences. The concept of merit good raises still a further question: i.e., its legitimacy. The question of legitimate interference combines several problems. There is the question of who has the right to interfere (Congress, judges, the Supreme Court, scientific elites). There is the question of procedure (was the law ordering bussing in order to remedy discrimination arrived at in a procedurally correct way?). There is the question of what the law is constitutionally (or morally) allowed to interfere with (the right to smoke in public places is treated differently than the right to read and receive pornography as far as the acceptability of the law to interfere with consumer preferences). There is, finally, the question of the possible abuse of the concept (mentally retarded persons have been sterilized against their will). Again, the difficulties encountered in trying to answer the different problems associated with the question of legitimacy can, however, not be used to obscure the epistemological necessity of the new concept. In reading Adam Smith’s texts I will draw attention to the fact that Adam Smith analyzes some governmental activities one way and others in a different way. Conceptualizing these two analyzes will require, so I contend, two different concepts: the one of public and the one of merit good. 3. Most authors in the secondary literature are aware of the fact that the concept of merit good creates a paradox for the science of economics. On the one hand, the concept of merit good seems to be epistemologically necessary. On the other hand, the new concept contradicts a basic assumption of economic science: consumer sovereignty (Priddat, 1994, p. 2). I have selected those authors from among the secondary literature who attempt to deal with the paradox in an original way. I do not analyze authors who do not address the conceptual paradox but, for instance, restrict themselves to presenting a mathematical way of incorporating the concept merit good (Pazner, 1972; Roskamp, 1975; Wenzel and Wiegard, 1981; Sandmo, 1983; Besley, 1988; Feehan, 1990). I also do not analyze authors who simply apply the distinction between private, public, and merit good (Godwin, 1991). 4. The need for maintaining a value judgment is accepted by Mackscheidt and Priddat. Mackscheidt insists that consumers determine the goal and allow the political system to decide only about the means (Mackscheidt, 1974). This approach to the problem of merit good restricts the domain to which his solution is applicable because merit good decisions are also sometimes about goals. Priddat interprets the successful role of the government in merit goods to be the creation of new desires within the consumers by changing, through its intervention, the experience of the consumers. Thus, when the government notices that the consumers start abstaining from smoking after the

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government has prohibited advertising of smoking and smoking in public places, Priddat would argue that one has an example of a successful and justified (de)merit good policy (Priddat, 1992, p. 243; Priddat, 1994, p. 9). One could point out, however, that few authors would accept as sole criterion for the success or failure of the merit good policy of making education obligatory the fact that students start liking to go to school. Reluctance of the students to attend school might not be enough to invalidate the judgment that they should be compelled to attend school—a judgment which was the basis of the public policy to make school attendance mandatory up to a specified age. Head, 1974 (pp. 215–216). Head thereby transforms a justification into a definition of merit goods. See Musgrave, 1959 (p. 9): “The reason, then, for budgetary action is to correct individual choice.” The concluding statement of Brennan and Lomasky’s joint article evidences their awareness of this problem: “For this reason, the merit goods concept and the preference evaluation issues it addresses, far from being normatively empty, are actually crucial to any case for government intervention in the market processes: it is simply not possible to compare market and political institutions without a meta-preference norm” (p. 206). In his own article Brennan does not mention the need for a meta-preference norm: “In those cases where one has reason to doubt the normative authority of market choice, there does seem to be some reason to believe that electoral ‘choices’ may reflect ‘true values’ more accurately” (Brennan, p. 118). Folkers too omits introducing explicitly a value judgment (Folkers, 1974, p. 21). He sees a merit good where the social preferences are a restraint on individual preferences in addition to the budget constraint (ibid., pp. 20, 23–24, 29). But a social preference which is declared a merit good could be evil, as was already demonstrated. Folkers’ approach does have the advantage that it clearly differentiates public and merit goods. Buchanan makes the same argument for the distinction between private and public goods in Adam Smith. Buchanan’s aim is to show that Adam Smith had a sense of “publicness” (Buchanan, 1976, p. 276). Buchanan does not here distinguish between “publicness” which can be provided in a Pareto optimal way—and is thus now called a public good, and “publicness” which cannot be provided in a Pareto optimal way—and thus is called now a merit good. This oversight was noted by a commentator: Mishan (id., p. 287). That Buchanan overlooks the “merit good” possibility is clear from his insistence upon compensation for negative evaluations of change (id., pp. 280–810). When Buchanan addresses, elsewhere, the question of justice, he argues that the imposition of rules of the game (e.g., handicapping rules) are best dealt with by a constitution. He also writes: “The whole public goods approach, however, presumes that persons are ‘already in the game’ ” (Buchanan, 1983, p. 65). Here, Buchanan thus distinguishes between “public goods” and “rules of the game.” I believe that there is a great family resemblance between “merit goods” in Musgrave and “rules of the game” in Buchanan. In his essay in honor of Adam Smith, Buchanan did not focus on the distinction between public goods and rules of the game. Buchanan makes that distinction later in his career. That distinction is central to my argument in this paper. While concentrating on the functions that the government (the sovereign) should perform, according to Adam Smith, it is important not to overlook the many occasions

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where he points to misallocation of resources because of ill-advised or self-serving public policies or regulations. Adam Smith summarizes his criticism of Mercantilism and of Physiocratic policies as follows: “It is thus that every system which endeavours, either, by extraordinary encouragements, to draw towards a particular species of industry a greater share of the capital of the society than what would naturally go to it; or, by extraordinary restraints, to force from a particular species of industry some share of the capital which would otherwise be employed in it; is in reality subversive of the great purpose which it means to promote. It retards, instead of accelerating, the progress of the society towards real wealth and greatness; and diminishes, instead of increasing, the real value of the annual produce of its land and labour” (Smith, 1937, pp. 650–651). He points to one source of self-serving policies when he writes: “The proposal of any new law or regulation of commerce which comes from this order [the third order: the employers, the merchants, the master manufacturers, the dealers], ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it” (Smith, 1937, p. 250). On the other hand, the multiple criticisms by Adam Smith of government policies that lead to misallocations of resources should not prevent one from analyzing the arguments which Adam Smith gives for governmental functions which he finds useful and necessary. Buchanan makes a similar point (1976, pp. 273–278). 9. One could object that using the word “preference” for the desire of a robber, a thief, or a mugger to gain property by force is trivializing or abusing the concept of preference. This is not so. First, there is a tradition in economics of “revealed preference” whereby one is justified to infer a preference for something because that something has been chosen. Because of increased thefts of cars there is an increased preference for car-locks, computerized locking devices and electronic devices for tracking stolen cars. There is also a desire to get tougher with criminals. The desire to get tougher with criminals is rational only if one believes that thieves and criminals consider their stealing to be the result of a preference which is less likely to be executed if the price for its execution is increased. Second, the desire to dispute or deny a right to property is present in other cases than in thieves and robbers. Thus, intellectual property rights are often violated. It is sometimes called piracy. The TRIP agreement, which is part of GATT, presents guidelines, valid world-wide, which specify intellectual property rights. In opposition to TRIP, the New Delhi Declaration—the outcome of the Third World Patent Convention (1990)—contains the following statement: “There can be no uniform set of standards and norms of equal validity or relevance applicable to a wide range of . . . countries which are obliged to respond to the imperative of their respective cultural and socioeconomic needs. The holding of a global monopoly of patents representing a massive stock of science and technology by a group of industrialized countries is no justification for common standards and norms to be demanded from the developing countries” (Posey and Dutfield, 1996, p. 94). The reason behind the refusal of developing countries

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to accept the guidelines for intellectual property is that they would lose too much. They simply prefer the status quo which tolerates a number of practices, including piracy. The New Delhi Declaration shows preference for not enforcing intellectual property rights, as defined in TRIPP. Third, to claim that some desires, that are acted upon, are not to be called preferences means that one claims to have the right to distinguish between acceptable and unacceptable desires. It seems to me that the tradition of absolute consumer sovereignty insists that only the consumers have the right to evaluate their own desires. One cannot uphold the absolute consumer sovereignty tradition and at the same time claim to have the right to limit the concept of preference to proper desires. I would not call national defense a pure public good because there are pacifists who oppose national defense. If national defense were treated as a pure public good, pacifists would have to be recompensated just as farmers are whose land is confiscated for building the public good of highways. An objection to my reasoning would be the argument that taxation according to abilityto-pay is a method of taxation inspired by pragmatic reasons. The government needs money and simply taxes where it can find resources. This is however not the line of argumentation taken by Adam Smith. He argues that there are services with identifiable users. For those services Adam Smith advocates user-fees. There are also things that are good for society or simply good in themselves (dignity of the magistrate; educating the members of the lower classes). Adam Smith argues that those things need to be paid by general revenue. The taxation principle that Adam Smith seems to support here seems to be “equal pain,” i.e., you pay more if you have more. Clearly, this is not the principle operative in the ideal financing of public goods. Adam Smith was a philosopher and part of the Scottish Enlightenment. He, of course, contributed to the reflectiveness of economic doctrine by systematically using principles to explain economic phenomena. Still, he often proceeds descriptively and not conceptually or deductively by using theoretical models. Compare Adam Smith’s descriptive observation about “certain public works and certain public institutions” (Smith, 1937, p. 651) with John Head’s modern treatment of the theory of public goods (Head, 1974, pp. 68–92). The latter’s essay is much more conceptual and abstract. On the other hand, Adam Smith covers a lot more territory in the 24 pages following the passage referred to than Head does in the same space in his article. Buchanan makes a similar point (1976, pp. 271–272). The revision is indicated by mentioning in the title page the fact that Musgrave was then at Harvard, whereas before he was at Michigan. First of all, Musgrave introduced his concept of merit good to give a conceptual home for a couple of economic events such as free hospital care for the poor or public subsidies to low cost housing (1956, p. 341). Later, he added some more examples: free education (1957, p. 111); publicly furnished school luncheons (1959a, p. 13). He tentatively conceptualizes all his examples by writing: “and, frequently, such interference carries redistributional implications” (ibid.). He added as examples of demerit goods a category of economic events: “the case of sumptuary taxes [where] public policy aims at interference with individual preferences” (ibid.). He conceptualizes an infinite series when he creates a two-vector classification scheme for all economic events with

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two vectors. The first vector is the degree of externality or percent of benefit that is social. The second vector is the degree to which consumer sovereignty applies. Wherever consumer sovereignty is even minimally interfered with, we have merit goods (1959b, p. 89). Nowhere in that text does he try to sketch a list of the goods and services that would have to be classified as merit goods. In his later publications Musgrave makes one systematic effort to identify all the goods and services that can be called merit goods. He writes: “community values are thus taken to give rise to merit and demerit goods” (1987, p. 452). He continues that line of thinking in two short references in later publications (1993, pp. 76, 97; 1996, p. 187). This conclusion, in my opinion, requires two further developments. First, one should articulate broadly in which domains there must be enforced community standards (redistribution, environmental protection, banking regulations, definitions of property rights etc., Ver Eecke, 1998), in which domains community enforced standards are tolerable and where weighing the pros and the contras should decide (government sponsored social security), and in which domains community enforced standards are not tolerable (freedom of conscience). Second, one should not automatically accept an actual conflict between communal standards and personal preferences as normative. A conflict might be unacceptable as in the case of the decision to eliminate or enslave part of the population. A conflict can be normative only if there exists a proper argument. An example of the latter might be anti-trust legislation imposed on monopolies on the basis of the argument of efficiency and fairness provided by both Simons (1948, pp. 57–62, 81–83), and Eucken (1982, pp. 118–121). 15. This is also Head’s argument against the position of McLure (Head, 1969, p. 261). 16. In survey articles written later in his career, Musgrave himself has drawn attention to the presence of his idea of merit good both in the history of philosophy (Musgrave, 1993, pp. 76–77, quoted on this page) and the German finance theory tradition. About the latter he wrote: “Communal wants and obligations, evidently, are not amendable to ready analysis by the economist’s tools as public goods. It does not follow, however, that Finanzwissenschaft was mistaken in raising the issue of communal concerns, and of motivations which transcend self-interest. Public finance may well have taken too narrow a view by holding that self-interest-based action is all there is. While the state or community ‘as such’ cannot be the subject of wants, a distinction between the private and communal concerns of individuals cannot be rejected that easily. Nor can the role of communal concern be resolved in the utilitarian frame by allowance for interpersonal utility interdependence. There remains an uneasy feeling that something is missing. The concepts of merit wants . . . and of categorical equity . . . address this gap, but much remains to be done to resolve the problem of communal wants in a satisfactory fashion” (Musgrave, 1996, p. 187). 17. Musgrave came to the same conclusion. Thus, he writes: “Wants that appear to be merit wants may involve substantial elements of social wants [public goods]” (1959a, p. 13) or “The mixed situation of case 2 is illustrated by public education, which yields social as well as private benefits. We may grant that cases 1 and 3 describe polar situations, with reality falling somewhere between the two; but this does not invalidate the usefulness of our approach. The general reasoning underlying our theory of social want [public goods] may be applied also to case 2, thereby translating the argument

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from one of complete subsidy (full tax finance) to one of partial subsidy (partial tax finance)” (1959b, p. 89) or “This concept [merit good] must not be confused with that of social goods [public goods]. Merit goods may be either of the private- or the social-good [public good] type” (1971, p. 313) or “As we have emphasized before, the merit-good characteristic is independent of the distinction between social [public good] and private goods” (Musgrave and Musgrave, 1973, p. 612) or “Consumer sovereignty is taken to apply to both cases. The concept of merit (or, for that matter, of demerit) goods questions that premise. It thus cuts across the traditional distinction between private and public goods” (1987, p. 452). In conclusion, for Musgrave merit goods are always also either private or public goods. Furthermore, most economic goods must be analyzed as having both private and public goods” aspects as Samuelson too was forced to admit. Thus, he writes: “What are we left with? Two poles and a continuum [sic] in between? No. With a knife-edge pole of the private-good case, and with all the rest of the world in the public-good domain by virtue of involving some ‘consumption externality’ ” (Samuelson, 1969, p. 108). 18. The quality that modern economists call being a merit good and which guides Adam Smith’s practical advice is not used by him in the absolute and discrete fashion of being either present or absent. Rather, one must suppose that Adam Smith sees that the category now called merit good can be present in degrees. Thus, in any one particular economic event the aspect “merit good” can have more or less weight and so go together with the aspect “public” and “private good,” which can also have more or less weight. Thus, when summarizing his economic approach to defending the society, the support of the dignity of the magistrate, the administration of justice, the maintenance of good roads and communication, and the support for education and religious instruction, he stresses in each case that these activities benefit the whole society. Therefore, he argues “that they should be defrayed by the general contribution of the whole society, all the different members contributing, as nearly as possible, in proportion to their respective abilities” (Smith, 1937, p. 767). According to the previous analyses in this paper, this means that Adam Smith approaches these economic events with recommendations appropriate for what is now called merit goods. However, he qualifies the appropriateness of the financial arrangement for what is now called merit goods in the different events and thus implies that the merit good aspect has a different weight in each case. Thus, for the first two economic events (defending the society and supporting the dignity of the chief magistrate) Adam Smith argues that “it is reasonable” to use “the general contribution of the whole society” (ibid.). For the third economic event (the administration of justice), Adam Smith writes that “there is no impropriety” in using “the general contribution of the whole society” (ibid.). For the fourth economic event (maintaining good roads and communication) he writes that “without any injustice” the financing can be done by using “the general contribution of the whole society” (ibid.). For the last economic event (education and religious instruction) he writes that “without injustice” these activities may be financed by “the general contribution of the whole society” (id., p. 768). The expressions “it is reasonable,” “there is no impropriety,” “without any injustice,” and “without injustice” suggest a decreasing weight of the merit good argument. Thus, the distinction corresponding to the concept merit good seems, in Adam Smith’s mind, to

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have the possibility of being present in degrees. All I do is claim explicitly that such is the case. 19. It is important to stress that Adam Smith had only an operative grasp of the distinction, not a conceptual one. Still, he used the distinction to make policy advice (1937, pp. 767–768). 20. By understanding the full potential of the concept, I mean applying the definition of the concept to as many cases as justified by the definition of the concept, or discovering the full domain to which the concept applies. Examples of other authors who have expanded the applicability of the concept of merit good are Mackscheidt (1981, p. 264) and Molitor. Thus, Bruno Molitor makes use of a characteristic of German language to broaden systematically the applicability of the concept merit good. German language allows for the creation of a verb meritorisieren (making meritorious) and a noun from that verb Meritorisierung (the fact of declaring something meritorious). Indeed, Molitor argues for making the whole area of security a merit good concern for the government (Molitor, 1988). Molitor’s approach allows for two generalizations not present in Musgrave’s texts. Molitor can ask the question: what are the conceivable subfields for providing the merit good category ‘social security?’ Molitor can also ask the question: what are the conceivable techniques that the government can use to promote a whole category of merit goods? This is a much broader problem than asking how one can defend single cases of merit goods such as free school lunches, subsidized housing, subsidized medical care etc. Mackscheidt proposes to use the concept of merit good to deal with private goods that have a public good aspect that is difficult to realize because of free rider strategies. Mackscheidt uses the example of inoculation. Inoculation against a disease is a private good. 35% of the population might buy inoculation, whereas 50% inoculation is required to avoid an epidemic. Of the 65%, those who do not want the illness but do not take the inoculation in the hope that enough others will take it, so that an epidemic is avoided, are free riders. By making the avoidance of the epidemic—but not the individual usage of inoculation—a merit good, the state does not have to pay for the free provision of inoculation. All what the state has to do is to subsidize inoculation so much that 15% more of the population will voluntarily buy the inoculation. As the decision to intervene is a merit good—not a public good—decision, finances for the subsidy can be taken from general revenue and do not need to be related to the expected utility from the avoidance of the epidemic for the different consumers (Mackscheidt, 1997, Appendix 2, pp. 7–10). I therefore feel that both Mackscheidt’s and Molitor’s writings vindicate my approach of expanding the concept of merit good according to its inherent philosophical dimension. Without quoting Mackscheidt and Molitor a non-economist applies similar reasoning to the problem of financing birth control (Godwin, 1991). 21. Extending the concept of merit good to institutional arrangements would allow economic theory to internalize what is often assumed now. The importance of institutional arrangements is highlighted in both the technical World Development Report 1997 of The World Bank (1997), and the report of the European Commission for Democracy through Law (1994) as well as in the moral analysis of the different economic systems presented by John Paul II (1991, pp. 24, 29, 34–36, 40, 42, 48).

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22. In a previous article (1998), I argue for considering property rights; anti-trust legislation and banking regulations; and obligatory education as three categories of merit goods. I rely on Adam Smith for proving that property rights are merit goods. I rely on Henry Simons and Walter Eucken to prove that anti-trust legislation and banking regulations are merit goods. I rely on a publication by Scheer (1975) to develop an argument that obligatory education is a merit good. 23. Many economists are uneasy with the concept of merit good in its restricted usage. (McLure, 1968; Malkin and Wildavsky, 1991). Head points to the reason for the uneasiness when he writes: “As compared with social wants [public goods], however, the merit wants concept raises methodologically much more difficult and controversial issues symbolizing as it does, for the public finance literature, many of the doubts and reservations which have been expressed over generations by economists of varying political persuasions regarding the ultimate normative authority of the consumer sovereignty principle. On these issues the views of economists have traditionally seemed poles apart, with those of a broadly libertarian persuasion, such as Buchanan, steadfastly refusing to look beyond the individual’s overt preferences as the basis for normative evaluation, while others in the mold of Scitovsky and Galbraith have raised serious doubts which go right to the foundations of the given wants approach” (Head, 1990, pp. 211–212). I would assume that some might be even more uneasy when confronted by my attempt to expand the usage of the concept merit good. However, all I have done is draw attention to the fact that if one wants to describe as many economic events as Adam Smith does, one will be forced to make use of the distinction conceptualized by the concepts of public and merit good in ways not done by Musgrave. I claim that describing economic events—where Pareto optimality is violated—as public goods interventions by the state makes that description vulnerable to libertarian objections which argue that the violation of the Pareto criterion cannot be justified by the concept of public good. Consider the following statement: “The moral framework deployed in this chapter, however, also reveals the general limits of the public goods argument’s usefulness. The restriction against coercion inherent in property rights owes its rationale to its role in promoting a cooperative society—the kind of society in which people can develop and pursue their own plans in peace. When coercive production is necessary for the survival of such a society, then the rationale for the restriction against coercion in that case is undermined. On the other hand, when coercive public goods production is not necessary for such a society’s survival—i.e., if people would be able to develop and pursue their own plans in peace without coercion—then the restriction remains very much in force” (Schmidtz, 1991, p. 159). Thus, any violation of consumer sovereignty for the provision of public goods needs, according to Schmidtz, an explicit value judgment such as the idea that the public good under consideration is necessary for the survival of society. Referring explicitly to values for the justification for restricting consumer sovereignty is by definition appealing to the concept of merit good. Acknowledgment I wish to thank Daniel Levine for stylistic improvements.

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Further Reading Brennan, G., 1990. Irrational action, individual sovereignty and political process: why there is a coherent ‘merit goods’ argument. In: Brennan, G., Walsh, C. (Eds.), Rationality, Individualism and Public Policy. The Australian National University, Canberra, pp. 97–118.