But corporations don’t supply public goods!

One of the objections that could be raised to yesterday’s post is that corporations tend not to provide what are known as “public goods”–things that can be enjoyed by many people at the same time or over time without being consumed, and from which people cannot be excluded on the basis of some criterion such as having paid/not paid. While my personal response would be something like a listing of all of the positive externalities of corporations, Dr. Kuran’s talk provided a better answer. He discussed the role of waqfs in the Ottoman economy.

A waqf, as he explained it, is essentially a perpetual trust that can be used as a tax shelter for assets. Rather than investing all of his assets in another business partnership (which, as we discussed yesterday, were subject to more than market risk), he could purchase land to build a school, an inn for travelers (“caravanserai”), and the like. This carried with it the additional benefit of being seen as a pious act in Ottoman culture.

Caravanserai of Qaytbay, held in trust by a waqf

I found this private provision of public goods fascinating, since it was done on a decentralized basis. A merchant in the heart of Istanbul, for example, would have had very little idea where an inn might be needed on the eastern portions of the silk road. A trader who spent most of his time traveling between Cairo and Baghdad, on the other hand, would likely not have the inclination or knowledge necessary to set up a school in Damascus.

It turns out that this arrangement became inefficient as time went on because the assets could not be transferred out of the waqf or easily put to new uses. That meant that a caravanserai established during the era of land trade between Europe and China became almost useless after the circumnavigation of Africa, but the assets tied up in it could not be turned into a school or moved to another location. So what you have is private individuals providing public goods as a form of tax shelter, but institutional arrangements leading to economic inefficiency.

To bring this to our day, Ryan Pevnick (currently of NYU) has a working paper forthcoming in The Journal of Political Philosophy that looks at one possible way to foster decentralized charitable contributions. Here is the abstract:

 Current U.S. tax code renders all claimed donations to qualifying non-profit organizations exempt from taxable income. By foregoing this potential revenue, the state effectively sponsors the existing non-profit sector. While some critics have argued that there are reasons of distributive justice to reject this arrangement, such criticisms neglect the important non-redistributive functions of the non-profit sector and mistake a general criticism of the basic structure for a particular criticism of the non-profit sector. After dismissing this distributive criticism, I argue that the existing system for funding the non-profit sector is inconsistent with a commitment to political equality because it prioritizes the donations of high-income donors and allows such donors to effectively determine the ends at which government aims. Accordingly, I advocate moving to a voucher-based system that retains many of the benefits of the deduction-based system, but distributes the ability to direct public support of nonprofits equally across the citizenry.

I am not prepared to endorse this proposal yet (although on a first reading I’m not opposed to it) but it does seem to indicate that decentralized distribution of charitable contributions could lead to more efficient outcomes and reduce the disproportionate influence of contributions that OWS protestors find so distasteful. It has the added advantage of being flexible across time, which the waqf approach did not. These two aspects–decentralization and flexibility–are elements of pragmatism, which I will leave as a topic for future posts.

One thought on “But corporations don’t supply public goods!

  1. Here and in the previous post you seem to be thrashing a straw man. I have not heard of any significant proposals to do away with corporations. Their “personhood” is an acknowledged legal fiction, and the question is whether corporations do or should enjoy the right of natural persons.

    Also, corporations (joint stock companies) were exceedingly rare in Europe until the mid 19th century. This did not prevent people acting on a continuing basis through a variety of legal mechanisms – there were partnerships, but also trusts, fraternities, foundations and much more. One really should not straitjacket the options in this way.

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