Abstract
In this chapter I add the concept of merit goods to the concepts of public goods and the free rider problem as one more economic concept that can be useful in the vocabulary of business ethics. Musgrave defines merit goods as goods that are so meritorious that the government has the right to interfere with consumer preferences. Thus the government can subsidize education and even make it obligatory. Musgrave (and I agree) stresses the fact that the concept of public goods is quite different in that in the provision of public goods the government intends to respect the wishes of consumers. I then produce a Kantian argument to justify and limit merit goods and I defend eleven categories of merit goods. I provide an example of a failed merit good implementation. The food business was successful in preventing the government’s implementation of the merit good program for breast feeding. Our question is whether, and when, business leaders have the obligation not to try to stop the implementation of a proven merit good. At the end of the chapter I argue that the idea of merit good expands the notion of stakeholder beyond what the concept of public good is doing.
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Notes
- 1.
For a list of the growing examples of merit and demerit goods in Musgrave’s writings see footnote 4 in Chap. 2.
- 2.
A current example of such trend in the United States are government bans on trans fat, with major cities like New York and Philadelphia outlawing their use because of obesity and other health concerns (Jennifer Steinhauer 2008). In 2008, California became the first state to ban trans fat in restaurants and over 20 states currently have bills pending in their legislature to enact similar bans. Kiera Manion-Fischer, “States Consider Trans Fat Bans, menu labeling”, Stateline.org available at http://www.stateline.org/live/details/story?contentId=383615 (accessed Nov. 9, 2009). For the past several years, the European Union has debated a Union-wide smoking ban and many countries have already enacted it. The Health Secretary in Britain has gone so far as to advocate that smokers and overweight individuals be denied state-funded medical operations until they get fit. Oakeshott, Isabel, “Hewitt: Smokers Should Stop before They’re Treated” The Times Online http://www.timesonline.co.uk/tol/news/uk/health/article1364697.ece (accessed November 9, 2009).
- 3.
We do not address here the ethical problems connected with bureaucrats and politicians accepting the influence of lobbyists. Lobbyists sometimes contribute important knowledge. Other times lobbyists use methods of influencing which can be considered unethical.
- 4.
For a discussion of both the development of Musgrave’s understanding of the concept of merit good and a survey of the secondary literature, see Ver Eecke 2007.
- 5.
Private goods are goods that can be transacted through voluntary contracts by individuals who are able to exclude its use by others and whose utility is rivalrous. Consumption by one consumer prevents shared utility by another. By consuming a private good, say an apple, a shoe or an automobile, others cannot enjoy it.
- 6.
Musgrave stresses that the difference between a private and a public good (social good in Musgrave’s terminology) is one of degree. “In the case of private wants, the divergence between private and social product is a more or less marginal matter; in the case of social wants, the divergence becomes of the essence. Private wants are provided for adequately by the market. Social wants must be satisfied through the budget if they are to be satisfied at all. For purposes of public policy, the difference in degree thus becomes an important difference in substance.” (Musgrave 1959a, 8; Ver Eecke 2007, 23).
- 7.
The concept of merit good introduces ethical decisions in economics. This contradicts the view that economics is a positive science (Friedman 1953). Hence, several economists, such as Charles McLure and Aaron Wildavsky, object to the concept of merit good (McLure 1968; Wildavsky 1987; Ver Eecke 2007, 73–113; 85–113).
- 8.
Either the good is so expensive that no individual can pay for it but it is still useful for society (say a bridge) or it might be affordable on an individual level but no one will spend the money because they are discouraged by the free rider problem. Non-excludability leads to the free-rider problem. The free-rider problem describes a situation where a non-buyer can enjoy utility from a good or service without paying for it. For example, if a family installs a streetlight in a dark alley, any passerby will reap the benefits of the increased safety without having to pay for it. Moreover, the fact that others feel safe would not diminish the safety of the buyer of the light. If collective action does not take place, a market failure occurs. Suppose there are three families whose houses face the same ally. All want to install a streetlight in the ally for public safety. Family A is willing to pay $100 for the light, Family B is willing to pay $300 and Family C is willing to pay $400. If the cost of the light is $600 then no single family would be willing to buy it even though the cost is less than the $800 combined utility. Hence the combined utility is not realized. Thus, the problem with (pure) public goods is that, often, no individual has an incentive to buy or provide these goods, and even less to buy or provide them in the optimal amount. If the cost was less than $400 but more than $300 then Family C has self-interest to buy it while A and B do not but could still enjoy it, highlighting the free-rider problem. However, if collective action is taken, the group can buy the light even if it costs more than $400 because all three are willing to contribute. Thus, a collective decision (voluntary or forced), instead of the free market, can optimize the provision of these goods because it is able to force would be free-riders to pay their share of the cost. Note however that the government is merely a facilitator to ensure consumer choice can be fulfilled. This is all the more true if the number of potential consumers increases.
- 9.
Musgrave says it as follows: “The satisfaction of merit wants cannot be explained in the same terms as the satisfaction of social wants. While both are public wants in that they are provided through the public budget, different principles apply. Social wants constitute a special problem because the same amount must be consumed by all, with all the difficulties to which this gives rise. Otherwise, the satisfaction of social wants falls within the realm of consumer sovereignty, as does the satisfaction of private wants. The satisfaction of merit wants, by its very nature, involves interference with consumer preferences” (Musgrave 1959a, 13; Ver Eecke 2007, 24).
- 10.
The Fifth Amendment to the U.S. Constitution provides “nor shall private property be taken for public use, without just compensation”. U.S. Const. amend V. This requires only that the government pay for property it takes; it does not prohibit the government from taking property an individual wishes to keep. The Supreme Court recognized this government right to seize property in the 1875 case Kohl v. United States. 91 U.S. 367 (1875).
- 11.
This is referred to as the Samuelson Impossibility Theorem (Samuelson 1954).
- 12.
This is the merit good aspect of imperfectly implementing public goods. Libertarians demand a very high standard (survival of the nation is at stake) for accepting that the government’s use of the power to tax is justified (Schmidtz 1991, 159). We find such a high standard unreasonable as a condition for implementing public goods policies.
- 13.
Examples of incentives that are only marginally or not related to the principal collective good are availability of group health insurance rates, or of group rates for airline tickets, or the possibility of participating in group activities for the children of members of the group. Unions or cultural organizations have indeed used many of these techniques.
- 14.
Properly provided no one should be asked to pay more than they voluntarily would be willing to pay if market conditions prevailed.
- 15.
This is the argument used by Musgrave against Andel’s attempt to equate public goods with merit goods on the grounds that even public goods also include government intervention. Musgrave’s reply is that government intervention in the provision of public goods is necessarily regretted whereas in merit goods it is intended (Musgrave and Musgrave 1973, 80–81; Ver Eecke 2007, 420). This allows the government to look for ways to minimize interventions in public goods (use toll booths; buy and/or pay a market value for the land needed for a road). For merit goods it leads to progressively stronger interventions and restrictions as in the case of prohibition of smoking where at first there was only a warning on packages.
- 16.
“… they [Kant's shorter works] begin with experience and regress upon its a priori presuppositions or principles without which it would not be possible to have that kind of experience….” In L. W. Beck, “Translator's Introduction” in Kant 1956: vii. Where Kant started with experience, we will start with consumer wishes.
- 17.
One could argue that the free market is not a good per se, that it is an institutional or legal arrangement. Still, we want to maintain that institutional arrangements are produced. They involve the use of some resources. They result in something that is desired. In as much as institutional arrangements result in something desirable, they are a good or a service. In as much as they require resources they must be called economic goods.
- 18.
- 19.
We call this method of reasoning Kantian because we see Kant developing both his Critique of Pure Reason and his Critique of Practical Reason on the basis of two facts whose possibility conditions he wants to understand. For Kant’s own summary see: Kant, Critique of Practical Reason, 1956, 166–168.
- 20.
There are at least four other ways of justifying and simultaneously limiting the range of merit goods. A first justification I like to call the search for silver bullets (Burrows 1977, Ver Eecke 2007, 281–294). Burrows argues that some economic goods, such as milk, have the exceptional capability to promote multiple goods. By subsidizing milk, children can be expected to have a healthier diet; the poor will benefit more than the rich form this policy because food is a greater percentage of their budget; the rich will not be jealous because they benefit equally; finally, the redistribution is used for a good cause (provide a better diet) and not for conspicuous consumption (a Cadillac, a TV, expensive sneakers). A second justification is based on the fact that consumers make bad decisions (Head 1966, 1969, 1988, 1990). Head then sees a legitimate place for merit goods as corrections for distorted individual preferences, be it because of lack of information, lack of judgment or lack of will (Aristotle’s akrasia) in the consumers. Head also sees that Musgrave gave a distributional role to his concept of merit good. A third justification observes that individuals act differently in the market than in the political arena when they vote (Brennan and Lomasky 1983, 1993). People who drive when drunk might vote for strong penalties for drunken drivers. For Brennan and Lomasky, a merit good is any political vote limiting market behavior. They imply that mostly the political vote is more rational and more moral than market actions. A fourth justification stresses the fact that the consumption of some goods by other people (poor children having breakfast) provides psychic benefits. The presence of such goods creates psychic utility interdependence. If a pure utility calculus would be made we would be in the presence of public goods. Folkers points out that in democratic societies such psychic utility interdependence gives rise to an ethical debate on what should be done. Often a moral consensus deviates from a utility calculus and leads to merit good policies (Folkers 1974; Ver Eecke 2007, 253–280). An overview of the discussion about merit goods can be found in two reviews of my anthology on merit goods (Ver Eecke 2007). The first is by Kate Henningsen. http://www.amazon.com/gp/pdp/profile/A1KGYMOEYD4G45/ref=cm_cr_dp_pdp (Accessed Jan 15, 2010). The second is by John Head. http://www.amazon.com/gp/pdp/profile/A1JF4CHMTPI0W6/ref=cm_cr_dp_pdp (Accessed Jan 15, 2010).
- 21.
“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] (Adam Smith 1937, 674).
- 22.
For a full study of neo-liberalism, see Nawroth 1961. Some important English speaking representatives are: Henry C. Simons, Milton Friedman, Frank A. Knight and F. A. Hayek.
- 23.
The neo-liberals argue that the free market also promotes certain desirable anthropological virtues such as industriousness, responsibility, reliability, and initiative. They also argue that the free market shows a philosophical predilection for freedom. Finally, they also argue that the free market is conducive to democracy and that a command economy demands a dictatorship. (Ver Eecke 1983, 152; 2008, 78).
- 24.
Currently a new argument is emerging with reference to regulatory control of banking and the goal of establishing a stable monetary system. The obvious argument is that we have in the US several banks which are too big to fail. Hence these banks can expect that the government will have to bail them out if the risks they toke are threatening their survival. This allows such banks to take excessive risks. If the risk does not materialize they can reap the benefits. If the risks hit them they do not have to pay. They can expect the government to bail them out. Clearly, this situation violates a basic principle of the free market which is that one has the freedom of choice but one must bear the negative consequences just as one may enjoy the benefits of one’s choices. This argument of unfairness is made politically potent because it is made by Richard Fisher, president of the Federal Reserve Bank of Dallas (Will). Second, the argument for the breakup of large banks can be made on pure economic grounds. Consider Samuelson when he writes: “‘Perfect competition’ exists only in the case where no farmer, business man, or laborer is a big enough part of the total market to have any personal influence on market price; on the other hand, when his grain, merchandise, or labor is large enough in size to produce depressing or elevating effects on the market prices, some degree of monopolistic imperfection has set in, and the virtues of the Invisible Hand must be that much discounted” (Samuelson 1967, 41). Samuelson’s argument goes beyond the argument “too big to fail” because it argues that even when they do not fail they have the power to escape the rule of free competition and are thus contravening the creation of an optimal economy. This argument is thus an argument of efficiency.
- 25.
Simons recommends sometimes extreme measures in his 1948 book, but he is, in our opinion, correct in pointing out which areas of the economy require regulations. Thus his statement that advertising adds no value is now seen as extreme. But we now have still a less extreme law: truth in advertising. This law is a restriction of freedom to act as one sees fit in the market. This is precisely the line of argument that Henry Simons and other neo-liberals made. Thus currently, the false advertising law makes it illegal to use, in commerce, any false or misleading description or representation of fact, which “in commercial advertising or promotion, misrepresents the nature, characteristics, qualities or geographic origin of his or her … goods, services, or commercial activities…” 15 U.S.C. § 1125(a)(1)(B). Under the law, advertising must be truthful and non-deceptive; advertisers must have evidence to back up their claims; and advertisements cannot be unfair. Federal Trade Commission, “Frequently Asked Questions: A Guide for Small Businesses,” available at http://www.ftc.gov/bcp/edu/pubs/business/adv/bus35.shtm (accessed Nov. 30, 2009). In enforcing the law, the Federal Trade Commission focuses primarily on ads that make claims about health and safety and ads that make claims that consumers would have trouble evaluating for themselves. Id.
- 26.
This introduces the idea that the economy should have no companies that are so big that if they fail the economy would suffer so much that the government has to interfere and help such big failing companies. This seems to have been the situation with the financial crisis of 2007–2008 where failing banks were too big to let go under. When JP Morgan suffered billion dollar losses in 2012 the argument of too big to fail was introduced in congressional hearings. Jamie Dimon –JP Morgan’s CEO—is quoted as having said: “We can not have too big to fail. We have to get rid of too big to fail so that a bank can fail without doing damage to the economy” (See Rushe:http://www.guardian.co.uk/business/2012/jun/19/jamie-dimon-defends-jp-morgan). Clearly, regulating the economy must include breaking up companies which are considered too big to fail. I thank Christian Rice for providing the evidence of the importance of this argument.
- 27.
In the January 7, 2010 WEB issue of The Economist a certain Schumpeter wrote an article analyzing the enlightened character of American bankruptcy laws. He applauds the fact that American law distinguishes between potentially viable companies which can file for “Chap. 11” and terminally ill which can file for “Chap. 7.” “Chap. 11” allows for restructuring which lets the companies survive. “ Chap. 7” aims at liquidating assets. Article available at http://www.economist.com/businessfinance/displaystory.cfm?story_id=15211818 (Accessed Jan 20, 2010). We thank Goutam Jois for this reference.
- 28.
- 29.
Governments also provide stabilizers that automatically go into effect as the economy declines. One such example is obligatory unemployment compensation. When the economy goes into recession, unemployment compensation payments automatically increase as people become unemployed. Progressive tax systems also have a built in stabilizing effect, taking less percentage wise when incomes fall (during periods of recession) and more when incomes rise (during periods of booms).
- 30.
Universal education is one of the eights “Millenium Development Goals.” The eight millenium goals are: 1. End Poverty and Hunger. 2. Universal Education. 3. Gender equality. 4. Child Health. 5. Maternal Health. 6. Combat HIV/AIDS. 7. Environmental Sustainability. 8. Global Partnership.
- 31.
This argument implies that schools should teach students how to evaluate economic goods and services.
- 32.
End Poverty and Hunger is the first of eight “Millenium Development Goals.”
- 33.
Adam Smith said it this way: “By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it” (Adam Smith 1937, 423). This is what Smith summarized by his metaphor of the free market as “led by an invisible hand” (Ibid.).
- 34.
Hegel calls it the right of distress and points out that this idea is the basis for beneficium competentiae, whereby a man in debts may retain the tools of his trade. He is given the right to make a living notwithstanding the legitimate property claims of the creditor. This idea is present in US bankruptcy law where the debtor is allowed to retain up to $2,025 worth of their tools of the trade. See 11 U.S.C. § 522(d)(6).
- 35.
Elizabeth Anderson provides a summary of her arguments about the ethical limitations of the market when she writes: “The realization of some forms of freedom, autonomy, and welfare demands that certain goods be produced, exchanged, and enjoyed outside the market relations or in accordance with non-market norms” (Anderson, 166). Anderson, just as Hegel or Sen, does not use the concept of merit good. All three, though, provide arguments for governmental intervention in the economy on merit good grounds. Allan Buchanan too, another ethicist reflecting on the market economy, concedes that there are plausible grounds to restrict the free market without using the concept of merit good (Buchanan, 101).
- 36.
One example of the influence of value’s is the way a country’s religious heritage often played a role in determining how its modern welfare state developed. Catholic countries, with their emphasis on large and connected families, tend to have a smaller social welfare system in place with mechanisms that encourage the mother to stay home and care for her family. Protestant countries, with their emphasis on individualism, developed larger social welfare systems that did not place as much importance of maintaining a single-earner home. This example simply illustrates that there are different methods of providing a safety net and that some are more cost effective or more vulnerable to moral hazard than others. For additional information on religious influence on modern welfare states see Morgan and Zippel 2003; Morgan 2002; Sigrun Kahl 2005; Gill and Lundsgaarde 2004.
- 37.
Three of the eight “Millenium Development Goals” are connected with health issues: Goal four: Child Health. Goal 5: Maternal Health and Goal 6: Combat HIV/AIDS.
- 38.
Smoking provides an example of where information of health threats is widely disseminated and accepted but yet millions of people continue to smoke regardless of the ill health effects.
- 39.
In discussing a 2009 proposal to finance the expansion of health insurance by taxing “Cadillac insurances” (insurance plans of more than $8,500 for singles and $23,000 for families) Jonathan Gruber, a professor in economics at MIT, uses merit good arguments, not public goods arguments when he writes: “It would be progressive, in that it would take from those with the most generous insurance to finance the expansion of coverage to those without insurance” and there would be an estimated salary increase of “$223 billion over the next decade […] 90 % would go to families with incomes below $200,000” (Gruber, A15). Note: the salary increase would be expected because employers and employees would have more incentive to use employment compensation in the form of wages rather than in taxed luxury insurance policies.
- 40.
Many states are enacting legislation that requires restaurants and fast food chains to post calorie and other nutrition information on their menus. Over 15 states are currently considering these measures. Kiera Manion-Fischer, “States Consider Trans Fat Bans, menu labeling” Stateline.org available at http://www.stateline.org/live/details/story?contentId=383615 (accessed Nov. 9, 2009). Massachusetts and New York are considering mandatory Body Mass Index testing for public school children, (ibid.) and Arkansas has already passed a law that requires schools to “include as part of the student report card to parents an annual body mass index percentile by age for each student.” House Bill 1583; Act 1220 of 2003. New York City’s ban on trans fat in all restaurants is another example of the government overriding individual consumer choice on the grounds that such action will prevent millions of dollars in health care costs. Notice of Adoption of an Amendment (§81.08) to Article 81 of the New York City Health Code (http://www.nyc.gov/html/doh/downloads/pdf/public/notice-adoption-hc-art81-08.pdf). See also (http://www.nyc.gov/html/doh/html/pr2006/pr114-06.shtml) (accessed Oct. 23, 2009).
- 41.
See Sect. 4.2 of this chapter.
- 42.
Protection against corruption requires clever regulations such as those regulating the position of the chairman of the Federal Reserve in the United States. He is appointed to a four-year term and cannot be an officer or director of any bank or hold stock in any bank or banking institution.
- 43.
The World Bank includes among its eleven themes two explicitly relating to our merit good category number eight. They are Public Sector Governance and the Rule of Law. Under the first we find Other Accountability/Anti-corruption. Under the second we find Legal Institutions for a Market Economy. See: http://web.worldbank.org/WBSITE/EXTERNAL/PROJECTS/0,,menuPK:51562~pagePK:64133621~piPK:64140076~theSitePK:40941,00.html, accessed August 12, 2009. Another indicator of the importance of our eight merit good category is the fact that among the publications of the World Bank there are 242 which discussion anti-corruption. See: http://books.google.com/books/worldbank?q=anti-corruption&lr=&sa=N&start=190, accessed August 12, 2009.
- 44.
The seventh of the “Millenium Development Goals” is: Environmental Sustainability.
- 45.
Business ethicists did write about the ethical problems related to Nestlé without making use of the concept of merit good. However, looking back over the boycott of Nestlé one can, in retrospect, summarize succinctly the ethical problems related to Nestlé’s business practices about handling the sales of infant formula by stating that Nestlé behaved unethically with reference to several of our series of merit goods. Nestlé’s handling of infant formula created problems with reference to merit good 5 (Safety net: children are a vulnerable population), merit good 6 (public health measures); merit good 2 (Institutional arrangements to promote economic efficiency: lack of understandable information; free infant formula in hospitals which interferes with lactation of mother; pervert incentives to health workers to promote unhealthy product) and merit good 4 (Education: lack of proper information or information in appropriate language). Also fascinating is that the Philosophers Index provides the first article for a search on infant formula as the one by James C. Baker, The International Infant Formula Controversy: A Dilemma in Corporate Social Responsibility in Journal of Business Ethics 1985, Vol 4, 3, p. 181–190. Baker states that Dr. Derick Jelliffe initiated the fight against bottle feeding in 1970 (Baker, 182). The presence of merit good thinking among business ethicists might have drastically shortened the fifteen years time span between the public boycott and the first acknowledged publication in a philosophy journal about the problem. Economic journals published articles already in 1974, 1978, 1980–1981 and 1982 (Ibid. 189–190).
- 46.
John Hasnas on the contrary argues that the “stockholder theory is neither as outdated nor as flawed as it is sometimes made to seem”(1998, 19). Hasnas grounds his view on the principle “that a truly adequate normative theory of business ethics must ultimately be grounded in individual consent” (Ibid.). A theory of merit goods gives a place to individual consent in as much as merit good provision requires some legislative initiative. But legislation is not simply built upon individual consent alone. There is majority rule and there are constitutional rights. The theory of merit goods puts radical limits to the normative validity of the stockholder theory. The theory of merit goods can therefore be used to show an ethical problem in business practices where at least one normative theory of business ethics—stockholder theory—might not see an ethical problem for the business executives involved.
- 47.
See how interested businesses successfully undermined the merit good program of trying to increase breast feeding (Sect. 4.2 of this chapter).
- 48.
Baker contrasts the more ethical handling by Johnsons and Johnson of its case of Tylenol with the more evasive and sometimes combative and misleading strategies of Nestlé in the infant formula debate.
- 49.
In his book, Edward Soule addresses problems not addressed in this chapter, i.e., what is the nature of good regulations. We agree with his overall point of view: “legitimate use of regulatory power over commercial activity is an ongoing and contentious work in progress” (Soule, 1). Thus simply claiming that a good is a merit good is not enough. Serious arguments must be provided and the implementation needs to be done judiciously.
- 50.
Rajan even writes: “Without some change in this trend, destructive class warfare is no longer impossible to contemplate” (Rajan 30).
- 51.
We find that several authors stress the importance of a “well-functioning Social Contract.” Ghesquiere makes the case for the economic miracle of Singapore. Campos and Root and the World Bank 1997 make the case for the success of the Asian Tigers. Reich made the case for what he calls the Great American Prosperity from 1947 to 1975 when he writes: “the basic bargain had ensured that the pay of American workers coincided with their output. In fact, the vast middle class received an increasing share of the benefits of economic growth” (Reich 51). President Bush made an enthusiastic connection between the American dream and home owning (Rajan 37).
- 52.
By 2007, the financial and insurance companies accounted for more than 40 % of the American profits and almost as great a percentage of pay, up from 10 % during the great prosperity period (Reich 56–57).
- 53.
Besides regulations of banks and credit creation the Neo-liberals also advocated anti-trust legislation and obligatory product information (Adam Smith, 308, 313; Simons, passim).
- 54.
Rajan makes it clear that it is not just the corporations, which committed the fraud, which are to be blamed. Also to be blamed are the weak system of oversight created by the government and the laxity by which the existing regulations were enforced.
- 55.
Reinhart and Rogoff, Reich and Rajan all studied the financial crisis. Only Rajan presents an overall view. All three show their excitement in discovering causes and connections. It looks as if they have to invent these causes and connections. The availability of a list of merit goods might make the search for causes and connections easier. Consideration of the full list of merit goods in understanding an economic disaster might become the norm for the completeness of the study. The completeness of this study by Rajan might be one of the reasons for the great regard Rajan continues to hold in the economic profession (The Economist, Feb 10, 2011).
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Eecke, W.V. (2013). Business Ethics and Eleven Categories of Merit Goods. In: Ethical Reflections on the Financial Crisis 2007/2008. SpringerBriefs in Economics. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-35091-7_4
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