Erik Linberg, Economic History, Uppsala university

The market and the Lighthouse. Public Goods in Historical Perspective

2007-2012

The lighthouse has over the years come to play the role as the classic example of how the state has to create utilities for its citizens when the market cannot provide these utilities. John Stuart Mill, A. G. Pigou, and Nobel laureates Paul Samuelson and Kenneth
Arrow all have used the lighthouse as a metaphor to discuss what goods and services should
be produced privately and what must be produced by the state: the function lighthouses provide - the dissemination of information in dangerous waters - were perceived in mainstream theory as not being able to be priced by private operators. Therefore, the government through regulation and funding must provide this. In the specific case of the lighthouse the underlying cause as why the private sector cannot set a price of the service is the difficulties a lighthouse owners has in charging the passing vessels. Whether a shipper pays or not he can still be guided by the light the beacon spreads. Lighthouses provided is in this theory services characterized by non-excludability, an important characteristic of what is the called public goods. It was not until the 1970s, before another Nobel Prize winner, Ronald Coase (1974), to the surprise of the economic profession pointed out that in historical times it in fact had been common with privately owned lighthouses. These private entrepreurs were able, apparently without insurmountable problems, to provide and make money from services most economists on theoretical grounds hade deemed impossible. Coase's study has since had a huge impact on the economic theory of public goods. The research task of the project is to describe and analyze the Swedish lighthouse system between 1652 and 1890. The time frame extends from the time when the Admiralty had overall responsibility for lighthouses, to the time when the ownership of most of the lighthouses was entirely in government hands. More generally, the project aims to investigate the development of private and government provision of public goods in historical perspective with the empirical material taken from the Swedish lighthouse system.

An important result from the project and that I think will raise most international interest is my connection to the provision of public goods with an agent-principal approach. The existing literature has a very static view of how the lighthouses worked historically. By using an agent-principal approach and link it to various historical forms of procurement, private ownership and government provision of lighthouse services I can explain why different forms of ownership have changed over time and I can also explain why both the English and Swedish light house systems ultimately was nationalized, although they qualitatively worked surprisingly well. The project has raised questions how different contractual relationships between agents and principals affect markets and state action in historical time.

Another result is derived from more specific Swedish conditions. How are we to understand the Swedish beacon system where some lights were managed by the government lighthouse keeper, others were outsourced to the lowest bidder and a couple of lighthouses were directly owned by private capital? First, the State's overall regulatory role in crucial: no owner or entrepreneur, or keeper of a lighthouse was able to operate without the regulations that the state set up in connection with the contract signing on the financial conditions or quality. The traditional theories derived from Paul Samuelson that only the state through taxes can create public goods turns out, just as was the case in England, if not actually incorrect, seriously incomplete. That is becasue it does not take into account how the ownership of the resources that enabled the production of welfare-enhancing services looked like. The expansion of the Swedish lighthouse system from the 1660's was marked by close attention to consumer interests, in this case the skippers and merchants. There is no evidence that the expansion of lighthouses led to the exploitation of shipping interests and that the mariners were forced to pay fees they did not agree on. The mariners were heard and their complaints about poor quality and unnecessary lighthouse dues were reckoned with.

A third result is about the risk sharing between public and private providers looked like. Government investment is of great importance in poor countries as low income in these societies lead to low revenues for private firms which thus have difficulty in finding incentives for investments. If a state with a larger budget than a private company makes these investments social welfare increase. But a poor state has many other priorities and the results of this study suggest that a poor state transfered risk exposure to private contractors in exchange for the privilege of making money in the provision of public goods. As the income from the wealthy business increased, the state could, by various means take over the previous private business. That was just what was happening in the lighhouse administration in England. In Sweden, the rent seeking and privileges in different industry sectors such as manufacturing industry, shipping and customs, have been studied and their role in the continued development lively debated. Unlike factories and shipping, lighthouses are inherently public, and extension of these public facilities during this period highlights that, in parallel with a liberal policy in favor of a few owners of factories, the state conducted a policy which successfully was able to create and fund public welfare facilities in the form of just lighthouses.

A new research question generated during the project involves national defense as a public good. I have investigated some of the problems by looking at how the Swedish salt market functioned during the Great Northern War (1700-1721) and the results of the survey were published in an article in the Scandinavian economic history review.

The project has also generated a new research. I have extended the study of the provision of public goods to the development of the Swedish road network between 1650 and 1910. The problem of the project is about the rivalry in the use of land and time when the roads will be built. Any decision on improved communication leads to a redistribution of asset values between various landowners and other stakeholders in the economy. From English research, we know, however, that land prices during 1700-1800's, rose significantly in close proximity to improved communications as compared to farms with more peripheral location. This leads to interesting differences with regard to the bearing of an investment and who can benefit from it. The project is financed since 2011 with a grant from the Swedish Research Council.

The two most important publications are:

Lindberg, Erik, "Sjösäkerhet på entreprenad: ett kontraktsteoretiskt perspektiv på privata och statliga fyrar 1840", Historisk tidskrift, 132:1 (2012), 3-30.

The paper studied private and government lighthouses in Sweden before the 1840s, from a contract theoretical perspective, which focuses on how the contract between the state and entrepreneurs allocates risks and rewards and how quality is maintained. It was the mariners themselves who paid for the utility they wanted and not taxpayers in general. This was a principle which persisted long after the lights nationalized.

Lindberg, Erik, "The Swedish Salt Trade During the Great Northern War", Scandinavian Economic History Review, 57:2 (2009), 191-206.

The purpose of this article is to study the effects on the Swedish salt market of the extensive sea blockade during the Great Northern War. Previous research has argued that the introduction of the controversial productplakatet (Swedish Navigation Act) in 1724 was caused by the salt shortage that occurred during the Great Northern War and not, as other research had claimed, that the Swedish Navigation Act was designed to give Swedish ship owners and merchants a monopoly on the Swedish sea borne freigt market. The result of the article shows that Swedish Navigation Act did not follow significant salt shortage and the lack of salt was probably no reason for the introduction of the Swedish navigation Act.


Publications

Artiklar

Lindberg, Erik, “From private to public provision of public goods: English lighthouses between the seventeenth and nineteenth centuries” (submitted, under review by Journal of Policy History).

Lindberg, Erik, "Uppbyggnaden av det svenska fyrväsendet 1645-1890: privata och statliga intressen" Forum Navale, 68 (2012), s. 151-189.

Lindberg, Erik, ”Sjösäkerhet på entreprenad: ett kontraktsteoretiskt perspektiv på de privata och statliga fyrarna före 1840”, Historisk tidskrift, 132:1 (2012), 3-30.

Lindberg, Erik, "The Swedish salt trade during the Great Northern War", Scandinavian Economic History Review, 57:2 (2009), 191-206.