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Recuperating from market failure: planning for biodiversity and technological competitiveness.

In discussions of policy analysis and collective action, market-failure theory is the ruling orthodoxy. In public finance, policy analysis, and urban planning, this theoretical construct is applied to subjects ranging from airport noise to fisheries management. Through painstaking deductive reasoning and numbing repetition, the textbooks have instilled in generations of students the rigors of negative externalities and public goods (Musgrave and Musgrave, 1979; Stiglitz, 1988; and Weimer and Vining, 1989).

In this article, I argue that the market-failure diagnosis is a misleading conceptual foundation for public policy making and other kinds of collective action.[1] It is misleading because it assumes that collective resources can be sufficiently understood through analyses of transactions between individual actors.

To make this argument, I use two examples to which market failure theory is commonly applied. The first, the decline of regional species diversity, exemplifies the general topic of environmental deterioration, which is ordinarily attributed to the negative externalities of individual land-use acts. The second, declining U.S. industrial strength in optoelectronics, represents the general issue of insufficient technological progress, which is conventionally understood as the result of the market's failure to compensate innovators for the social benefits of R&D investments.

These market-failure diagnoses are misleading. Pollution has undesirable effects not only because of externalities but because natural regions, such as watersheds and estuaries, encompass multiple interrelationships among hydrology, air quality, wildlife, geomorphology, human settlements, and public health. Individual land users do sometimes exert uncompensated side effects on other economic actors. However, the more serious consequence of individual land-use choices is that they can cause systemic environmental degradation.

Likewise, individual acts of innovation may give benefits to those who did not pay. These innovative acts occur in the context of (and contribute to) the rise of a coherent technological paradigm, like optoelectronics, a collective resource on which many private firms can draw. The greater concern, then, is not that innovation occurs at a socially sub-optimal rate but that public (or other collective) inattention to this technological endowment can lead a nation or region into a debilitating industrial decline.

The conventional microeconomic theory of externalities misses these integral features of the economic world. It does not appreciate that agents can have consequences deleterious to ecosystems, does not grasp the landscape interrelationships through which deterioration occurs, and cannot provide reliable plans for improving landscapes. Similarly, it fails to see that technological progress occurs through the development of coherent bodies of knowledge, engineering skill, standards and protocols, and systems of interrelated devices.

Orthodox microeconomics misconstrues collective resources in this way because it conceives of the environment as an extension of the discrete, commodified good. Biogeographical regions are not discrete goods; they are integral realms composed of multiple human, cultural, and biological relationships. Technological paradigms are not discrete pieces of intellectual property but integral bodies of knowledge, skill, and instrumentation.

After elaborating on these two examples, I conclude by calling for the reinvigoration of those planning disciplines that respect the economy's environmental and intellectual integrity.

Ambiguities in Externalities

There is a peculiarity to the literature on external effects that arises from the ways that negative externalities and collective goods are conventionally treated. The negative externality is defined in terms of exchanges among economic agents and their inability or unwillingness to recompense for harms (or benefits) they cause. Hence factories do not have market transactions that recompense nearby residents for smoke, and stream polluters do not pay fishermen and downstream riparians for killing the fish and dirtying the water.

Another kind of market failure, the collective good (or public good), is similarly defined in terms of individual economic agents. When an economic agent produces a collective good, additional consumers can enjoy the good without recompensing the producer. Moreover, the producer may be unable at reasonable cost to exclude these free riders from enjoying the good. Classical examples are the lighthouse giving protection even to ships that do not pay a subscription for the beacon; upstream flood control, for which downstream beneficiaries do not adequately recompense the controller; and the researcher whose contributions to public knowledge are not fully recompensed. Just as an economic agent is likely to produce too much of the negative externality because he or she does not share in the full social cost, so he or she is likely to produce less than a socially desirable amount of a collective good because many of those who enjoy it would not pay for it.

For both classes of external effects, then, markets fail because economic agents do not adequately recompense other economic agents for harms or benefits.

In orthodox microeconomics, such effects provide the main intellectual framework for understanding environmental problems (Cropper and Oates, 1992). Even recent work that is closely attuned to environmental values and critical of conventional microeconomic analysis has put great stock in the explanatory power of concepts of externality (Daly and Cobb, 1989; chaps. 2 and 7).

Economists offer three kinds of explanations for external effects. First, market transactions might have failed: the transaction costs of recompensing the victim of the negative externality (or extracting compensation from the beneficiary of the collective good) might be too high. One could conceive of sophisticated monitoring instruments that would allow factories to sell to individuals the rights to inflict specific levels of smoke damage to them--a market for pollution transactions is in principle possible. Such instruments are, however, technically infeasible or too costly. Mainstream economists, therefore, generally advocate public intervention to resolve the matter through taxation, subsidy, regulation, or improved voting procedures.

Second, government may have failed to properly assign property rights, as over fish in the stream, or over laboratory findings, leaving private agents with no incentive to use market mechanisms for resolving the allocation of fish stocks or research results. Economists stressing this explanation tend to recommend private ownership over intellectual products or natural resources--proposing, for example, strengthened patent protection or the private ownership of whales (Smith, 1988). The line between these two interpretations of market failure has become one of the main demarcations between mainstream and libertarian approaches to public policy.[2]

A third and related explanation could potentially challenge microeconomics as normally practiced, were it not soundly neglected. According to this explanation, external effects are the consequence of intrinsic features of "goods." The distinction between this and the previous explanations is important. If we say that the externality occurs because we cannot recompense (or extract payment from) those harmed (benefitted), then we are simply repeating the first or second explanation. Such externality can be attributed to market failure because of excessive transaction costs, or to government failure because private property rights are undefined or unenforced. The third explanation holds, by contrast, that the external effect occurs because of a feature of the thing itself--a feature often understood as "indivisibility."

According to this third explanation, some objects inherently resist being traded or exchanged on the market and differ in that respect from the ordinary goods and services that traditional economic analysis has concentrated upon. To be sure, the difficulties of trading these objects do not arise entirely from their innate charactetistics. In accordance with the first two explanations, technological progress and organizational innovations either in enforcing property rights or in reducing transaction costs could possibly make the object efficiently tradeable. Nonetheless, the intrinsic properties of the object are highly relevant because some kinds of objects pose far greater difficulties in market exchange than others. These objects' intrinsic features should be quite interesting subjects of further investigation.[3]

The First Example: Landscape Relationships

An example comes from a field of environmental policy concerned with preserving ecosystem diversity. Island biogeographers, who study isolated ecosystems, have influenced this field through their observation that the rate of species extinction in an isolated patch of habitat, such as a woodlot, increases as the size of the patch decreases. They suggest that when these habitats cannot be enlarged, corridors of various kinds can help maintain species diversity (Soule, 1991).

Practitioners of the related field of landscape ecology point out that corridors have important structural roles in maintaining species diversity by connecting woodlots, forests, and farm fields. These corridors include natural features, like streams and ridges, as well as artificial features, like fences, hedgerows, and power-line rights of way. The corridors allow wildlife to migrate and maintain their populations, provide important habitats for native plant and animal species, give shelter from wind and water, offer sites for nesting, and help in pest management. Greenway corridors are, therefore, important landscape elements for conserving biodiversity (Barrett and Bohlen, 1991; Hay, 1991).

Observing that plant and animal species are in decline in a region, policy analysts influenced by orthodox microeconomic reasoning might well miss the importance of these landscape features. They would be inclined to attribute the decline not to real features of the environmental object but to negative externalities. Individual property owners build fences, cut down woodlots, or replace natural grasses with cultivated crops, thereby affecting the survival of animal and plant species that their neighbors (or public spirited citizens in general) value, but the property owners do not recompense these others for the harm caused to them.

Drawing on such concepts of market failure, analysts may then weigh the costs and benefits of intervention to protect the species whose depletion is causing uncompensated economic harm. Should they find that intervention would be a net benefit, they could propose some of the policies typically derived from market failure concepts: government acquisition of land parcels (an expensive option), regulation of private behavior, or--if species survival could be accurately monitored and attributed to specific owners--subsidy or tax measures that provide incentives for species protection.

Such policies miss the point. The outstanding point is not that some human actors are damaged by the decline of specific species but that species depletion reflects (and contributes to) the decline of the ecosystem as a whole. The issue is not uncompensated side effects but the damage to the ecosystem when it has been divided up and treated by individual landowners as a collection of discrete parcels with discrete rights to its use. To improve the biogeographical region's capacity to carry plant and animal species, the regional planner should focus on the regional endowment of greenways and corridors: their specific forms, locations, patterns, and gaps. The planner should seek to conserve and restore the ecosystem through on-site diagnosis and contextually appropriate intervention (Sargent et al, 1991; Steiner, 1991).

To say so is not to propose a merely biological solution. To be sure, when an ecosystem is located in a preserve and is barely touched by human acts, its disposition and management is a matter for wildlife managers and ecologists relying on the natural sciences to guide conservation policy. Such a preserve's biological functioning is a subject, understandably, on which economists have little to say, just as a firm's productive apparatus has engineering functions on which economists are not well suited to comment.

What is at issue for present purposes is not the management of the wildlife preserve but the management of those areas that constitute much of the world's land surface, where private uses permeate the landscape. It is in these landscapes that heedless land transactions and land uses can become debilitating. In these areas, the ecosystem's viability depends on human factors in the landscape: built facilities such as power lines and fences, land uses for agriculture or recreation, the geometry of land parcel boundaries, and the legal rights and easements that the proprietors enjoy. The area's biodiversity depends on land uses reflecting human and institutional choices, which are very much the objects of economic understanding.

Practitioners of landscape ecology and ecosystem restoration frequently declare that a solely biological and geological effort derived from the natural sciences is an inadequate basis for preserving landscape biodiversity. To preserve ecosystem diversity, policy makers have to reach judgments not just on species counts and water purity but on the area's population growth, development density, and types and mixes of land uses (Clark, 1981; Hudson, 1991). Planners working on ecosystem preservation cannot rely on principles that focus on the specific harms caused by economic agents to other agents. Rather, they must diagnose the integral features of the ecosystem in question, to plan land uses, land features (including easements and corridors), and organizational procedures for ecosystem restoration.

The Second Example: Optoelectronics

The second example is the field of advanced technology that is responsible for lasers, fiber optics, medical imaging, scanners, compact disks, and optical computer memories. Making use of the visible range and nearby ranges of the electromagnetic spectrum, this technology has economically vital applications in capturing images and in detecting, processing, and conveying information. Although the technology is sometimes referred to as advanced optics or photonics, optoclectronics is emerging as the preferred term because most applications combine optics and electronics.

Combined optical and electrical functions have now become essential in the most dynamic and rapidly changing sector of all, in the new information sector that has merged computing and communications. Therefore, in the United States as in other advanced industrial nations, optoelectronics has become one of the critical technological constituents of industrial success in the world economy. From the 1980s to the present, the United States has seen a relative retrogression in its industrial performance in optoelectronics, especially by comparison with Japan (National Research Council, 1988; Sternberg, 1992).[4]

Should government or other collectivities (such as industry-university collaborative research centers initiated through government matching funds) intervene to strengthen the nation's capacities in optoelectronics for the sake of economic competitiveness? This controversial question returns us to the theoretical formula--the theory of public goods--through which those influenced by orthodox microeconomics conventionally form their policy positions.

Those so influenced would suggest that any shortfall in the nation's technological performance, whether in optoelectronics or anything else, can be attributed to a frequently observed feature of technological innovation: the public returns to research investment are higher than returns to the research investors. Because a firm's research results can give to other firms signals about what is technologically feasible, firms that do not pay for the research can reap some of the technological benefits. Therefore, firms invest less in technological research than would be socially desirable.

Drawing on this market-failure logic, mainstream policy analysts reason that, if the benefits of public intervention exceed the costs, government is justified in undertaking certain policies that would increase the rate of private investment. These are generic policies, such as R&D tax credits or vouchers, usable by firms at their discretion. Analysts of a more libertarian hue would assert, however, that proposals for intervention should also be screened for potential failures by government, and government's failure is already suggested by its inability to assign properly the rights to intellectual property. In this latter view, if there is indeed a problem in the nation's technological performance, the first policy priority should be placed on enhancing property rights or encouraging side payments between innovators and beneficiaries.

Despite this disagreement, both sides of the microeconomic debate are likely to hold that, from the point of view of the policy analyst, the particular technological features of optoelectronics are quite irrelevant because individual firms are the ones best suited to making specific decisions about optoelectronic inventions. A generic policy (say an R&D tax incentive) may be appropriate, but a policy specifically directed at improving industrial performance in optoelectronics would be a mistake and harmful.

The reasons for opposing an industrial policy toward optoelectronics parallel those for neglecting landscape planning in environmental policy. The microeconomics of technological change assumes that technology consists of discrete items or pieces of intellectual property that are tradeable on markets. If there is any failure in market allocation of research results, it is to be found in the inabilities of research investors to appropriate the external benefits of research or exclude free riders from these benefits in the state's inability to enforce rights over pieces of intellectual property.

Just as a body of theoretical reflection and research results recognizes the integral features of landscapes, a body of literature contends that certain technologies exhibit integral characteristics. Merging ideas drawn from the economist, Joseph Schumpeter (1975), and from the philosopher of science, Thomas Kuhn (1970), this literature observes that certain technologies, like synthetic chemistry and internal combustion technology, periodically revolutionize market economies because these technologies have paradigmatic features (Freeman, 1987; Dosi, Tyson, and Zysman, 1989). Such technological paradigms consist of evolving bodies of knowledge and skill, sets of standards and protocols, and complexes of interrelated devices, facilities, and software.

Optoelectronics qualifies as a technological paradigm because it is a complex of knowledge and skill built at a particularly sophisticated juncture of optics, quantum electronics, and materials engineering. Its commercial feasibility particularly depends on abilities to fabricate hybrid materials, such as Gallium Arsenide, that combine optical and electronic properties (Seidenberg, 1992). Indeed, at hundreds of laboratories around the world, R&D in optoelectronics increasingly reflects the emergence of a new hybrid field of engineering practice, replete with its own techniques, instruments, principles, methods of calibration, standards, and tacit rules of good practice.

Optoelectronics qualifies as a technological paradigm also because its devices and artifacts gain utility within technical systems. The optoelectronic integrated circuit in particular gains a pivotal economic role at the juncture of optical fiber trunk lines and specific electrical devices like high-definition television, computers, and the many fused information appliances that, so far, lack names. The development of these systems of interacting devices depends on standards and protocols that competitive market allocation can provide slowly, if at all. Optoelectronic devices gain their value, then, not as discrete products but within systems of devices that, on a national scale, constitute an information and communications infrastructure. Independent firms interacting through market mechanisms are poor at developing those systems (Sternberg, 1992; chap. 3).

In Short, acts of optoelectronic research recursively participate in the development of a cohesive body of optoelectronic knowledge and skill. Optoelectronic devices gain value by participating in new systems' that are bridging the information-carrying capacities of fiber optics and the processing capabilities of electronic equipment. These paradigmatic features of optoelectronics are neither tradeable nor patentable, and they cannot be the property of any firm or entrepreneur. Rather, the technological paradigm is better understood as the common resource of a region or nation.

It should be clear that the conventional analysis would neglect these integral features of technology. The microeconomic analyst would, at the start, disparage the idea that any policy problem exists. If optoelectronics research were a good investment, then private firms would notice and invest as needed in producing the relevant devices, in-firm expertise, or pieces of intellectual property.

What is more, even if the orthodox policy analyst admitted that there might be a problem of industrial competitiveness in optoelectronics (that free markets might not be generating industrial innovations at an appropriate rate), he or she could well be led astray by a diagnosis based on market-failure theory. That theory would lead an analyst to suppose that any shortcoming in the nation's optoelectronics performance has occurred because of the reluctance of innovators to. invest sufficiently in research that has unrecoverable benefits spread broadly in the economy. Hence, the analyst would recommend generic technology policies, such as a subsidy or tax incentive, and ignore the possibility that policy could be specifically designed to meet the unique needs of the optoelectronics sector.(5)

A nation dominated by a policy-making establishment unprepare to respond to the integral features of technological change could find, then, that its private firms operate at a disadvantage compared to rivals in a country that has a capacity for intelligent collective action.

By contrast, when policy makers do recognize the integral qualities of optoelectronics, they can begin to plan those collective actions that can direct the paradigms development. They can set out to build the collaborative laboratories, engineering curricula, communications infrastructures, and technical standards that strategically reinforce domestic private sector capability in optoelectronics. They could thereby provide to private firms significant advantages over in international technological competition.

Beyond External Effects

As these examples suggest, concepts of negative externalities and public goods are misleading foundations for policy analysis. These concepts lead policy analysts to assume that the processes transforming the economic world are merely local spillover effects writ large. Environmental degradation is seen to be a large-scale extension of a local nuisance, such as one homeowner's loud music disturbing a neighbor. Technological innovation is understood to be similar to a set of residents whose well-groomed gardens have positive effects on their neighbors' well-being. Environmental and technological changes become merely accretions of spillovers--extensions of the nuisances and pleasures that arise from neighborly propinquity.

To be sure, such neighborhood spillover effects do occur and have significance for public policy. But it is intellectually reckless to presume that environmental and technological change are merely accumulations of such local harms and benefits. This analytical assumption leads the policy maker to focus on the costs and benefits to the affected parties, to the neglect of intrinsic features of the landscape or the technological paradigm.

Consider another example, air pollution, with which microeconomic theorists frequently illustrate the concept of the negative externality. They depict it for analytical purposes as a set of positive and negative valences accruing to those who pollute and those who are harmed.

The policy-maker's attention is thereby directed at the formulation of regulations or market mechanisms that maximize benefits and minimize costs. The policy maker may then neglect the more profound danger that, when sufficiently abused, the atmosphere will undergo systemic deterioration, yielding acid rain or a weakened capacity to screen out ultraviolet solar radiation. Concentrating on the legal or market mechanisms for optimizing individual benefits, the orthodox policy analyst biases himself against policies that would plan comprehensively for atmospheric preservation--for a stewardship of the atmosphere. By a parallel logic, the orthodox policy analyst neglects the integral features of technological innovation, seeing it merely as a set of positive externalities.

This microeconomic thinking leads the analyst to view the negative externality and collective good as the outcomes of economic processes that are near opposites. Note, however, that profound harms and benefits emerge from like features of the economic object: from the integrity that characterizes both the biogeographical region (or the atmosphere) and the technological paradigm. These benefits and harms are byproducts of the strengthened or impaired integrity of a resource realm.(6)

Integral Realms versus Discrete Commodities

Market-failure theory fails to grasp this integrity, because both the region and the paradigm violate an important but rarely mentioned assumption in microeconomic analysis. The well-known and explicit assumptions are that producers and consumers are individual value maximizers of personal utilities, that they exist in large numbers (are price takers), that they have perfect knowledge, and that they vie over homogeneous goods. The additional unmentioned assumption is that the goods that economic actors value are discrete items, commodity units, that lend themselves to being exchanged or contracted for.

Therefore, in addition to its well-known predisposition to see individuals as self-interested economic agents, the dominant tradition of microeconomics also practices the more subtle prejudice of treating the physical and intellectual environments as if they were accumulations of commodities.

Biogeographical regions violate this implicit assumption because they are composed of multiple ecological interrelationships among plant species, soils, climate, territorial forms, human activities, and built artifacts. In a word, the region has integrity. it is composed of ecological, territorial, and cultural interrelationships that are grossly misunderstood when treated as a set of accumulated property units.

Similarly, the idea of paradigms rubs against a naive and superficially commonsensical assumption that is rarely made explicit: that technology consists of discrete artifacts and inventions, and tradeable pieces of intellectual property, as if it were a collection of better mousetraps. Technological paradigms violate this assumption. Indeed, technological paradigms produce successive waves of instability and change in the economy because of their integral features. As coherent bodies of knowledge and skill and systems of devices, optoelectronics and other paradigms set off technological repercussions that transform numerous industries. While individual firms operating in markets do respond to such changes, they can shape such paradigmatic development only slowly and inefficiently.

The theory of market failure leaves the door slightly open to an appreciation of such integral features of the economic world--through the concept of indivisibility, a feature often attributed to national defense. But is a biogeographical region, or technological paradigm (or national defense for that matter), really indivisible? River valleys, estuaries, and streams (and national defense) can, after all, be subdivided. Regions are routinely divided in ownership and land uses and technologies into innumerable inventions and artifacts (and defense can be divided into independent guerrilla units or households bristling with weapons). It is more accurate to say that such realms are characterized not by indivisibility but by integrity. This integrity can be neglected, undermined, broken apart, or violated.

When environmental integrity is violated, the biogeographical region deteriorates, causing erosion, silting and wildlife depletion or extinction. The region deteriorates when treated as if it were composed of discrete commodities and use rights that can be traded on the market.

When technological integrity in the economy is neglected, the nation's industrial strength can deteriorate in comparison to that of other capitalist nations that lend a measure of strategic foresight and direction to their industrial adjustment. When planners can rigorously inquire into these integral features of the economy, they can help create for their country's firms conditions that are significantly advantageous by comparison to those found in nations that practice more naive forms of free enterprise.

To treat these economic realms--biogeographical regions and technological paradigms--as if they were composed of discrete and tradeable units is, in Karl Polanyi's terms, only to make them "fictional commodities" (Sternberg, 1993). Treated as these fictions, as composites of land parcels and use rights, regional ecosystems come to be fragmented among incompatible uses. Erosion occurs, wildlife dies out, streams flood their banks, and toxins migrate through the groundwater, degrading the entire region. This effect is inherent to the operation of markets that treat land as a commodity.(7)

Treating society as a collection of discrete agents, _their environment as a set of discrete commodities, and their technological paradigms as discrete inventions and devices, the conventional microeconomic analyst cannot but overlook those integral realms of the economy that resist market allocation. What began as an innocent assumption--that individual actors have uncompensated effects on other individual actors--returns to shape policy prescriptions. is for that reason that the conventional microeconomic treatment of public policy is not only conceptually misleading also can be profoundly harmful.

Depending on his assumptions and predilections, the orthodox analyst is likely to recommend privatization, taxation, regulation, subsidy, formation of tradeable asset markets (as in pollution rights), compensatory side payments, or voting procedures. All the while, the analyst ignores the actual human and natural habitation in which ecosystem degradation occurs, and the actual technological context in which industries decline. Actual environmental and technological interrelationships disappear from consideration, intellectually obviated by assumptions that are hardly even recognized.

The Formal versus the Substantive

That is not to say that microeconomic applications to policy analysis are logically wrong. Concepts of collective goods and negative externalities have been worked out through impeccable logic. Indeed, they represent some of the most sophisticated midcentury products of the applications of a formal theory of self-interest operating under conditions of resource constraint. But as Karl Polanyi might say, this logic confounds the study of formal economizing (an activity that can be understood through deductive reasoning) and the study of the substantive economy (Dalton, 1968). A study of the latter would require the commitment to learn about the workings of noncommodifiable realms of the economy, such as technological paradigms and landscapes.

Defenders of microeconomic applications to policy analysis cannot dismiss the foregoing argument on the grounds that it would demand of economists tools better wielded by, say, optical engineers or wildlife ecologists. A theory that claims a role as the conceptual foundation for policy analysis cannot so easily ignore those very realms about which so much of public policy is concerned.

Technological paradigms are, after all, not merely technical artifacts but the socially constituted bodies of knowledge and skill through which technologies transform the economy. biogeographical regions are not merely assemblages of land, flora, and fauna but the very settings for (and products of) economic activity. Both entities are collective resources, variously constituted, sustained, neglected, and disposed of through human acts.

Orthodox microeconomics has no conceptual tools for diagnosing and learning about integral features of these substantive realms of the economy. Therefore, microeconomics can have only limited application to public policy, just as the formal syllogism in deductive logic, no matter how perfectly valid, can have only limited value for understanding actual human cognition. Microeconomic applications to public policy are, then, not formally wrong. Rather, they are substantively misleading.

It is for that reason that refinements of market-failure theory will not rescue it. Concepts of "common-property resources" and "network externalities" are pushing the edges of market-failure theory and waver between staying true to microeconomic assumptions and violating them. As long as they succumb to neoclassical assumptions, they perpetuate a mode of reasoning that segments integral economic realms into commodity units, thereby misleading the policy maker. When investigators of common-property resources and technology networks stray into trying to understand the actual conditions of human interaction with fisheries, irrigation systems, ecosystems, technologies, and so forth, they stray into substantive economic realms in which market-failure theory is not a reliable guide.(8) There is no formula within the neoclassical tradition that fixes its shortcomings while staying true to that tradition.

The Economics of Other Realms

With its distinguished intellectual pedigree, market-failure theory has come to enjoy much respect and broad acceptance. It should not be rejected on the illustrative value of merely two examples.

Optoelectronics is, after all, only one technological paradigm. But there are other examples: recombinant DNA technology, advanced microelectronics, and advanced ceramics may all have analogous paradigmatic features, and they, along with optoelectronics, are the technologies reshaping industrial capitalism at the turn of the century. Moreover, not only species diversity but also other ecological features of watersheds, airsheds, river basins, and estuaries interrelate human choices with the natural environment. Together, these economic realms pose some of the most profound issues of public policy.

Other realms may also exhibit integral features. Consider the realm of occupations. Each occupation, whether an old one like cabinetmaking or a new one like computer-assisted graphic design, has a practical integrity that evolves as technologies and industries do, altering the portfolios of skills that jobseekers must acquire, certifiers must recognize, and training institutions must convey.(9) The proper planning of training and apprenticeship programs should not depend merely on studies of labor-market failures but also on studies of the intrinsic features of the occupation itself.

Consider also the built forms of the city. A city's physical and spatial forms emerge in large part through market transactions in real estate. The city is shaped also in the logical interrelationships constituted by streets and avenues, homes and offices, and parks and monuments--all in their variegated forms, conditions, and juxtapositions.

Yet urban land law since World War II has been justified on the grounds that it helps correct for the externalities that users of land impose on each other--especially nuisances like noise and traffic.(10) Implicitly drawing on concepts of market failure, the urban administrator guides urban development through generic regulations ordinances. By contrast, the urban designer, drawing on older traditions of architecture and comprehensive planning,(11) recognizes that the city's forms can be shaped through the exercise of a visual and spatial imagination applied to each city's unique conditions. The urban designer does what the urban regulator schooled in market-failure theory could never do: apply a disciplined imagination to the design of the collective economic object, in this case to the built form of the city.

Landscapes, technological paradigms, occupations, cities--such integral realms pervade the economy. We must be wary of a mode of analysis that leads us to conceive of policy questions in terms of transactions, or failures of transactions, between individuals.

Reinvigorating Planning

To recuperate from market-failure theory, policy makers and planners have to find the conceptual tools by which to re-engage the realms of the economy that are our collective endowments.(12) We have to build the ability to recognize these integral resource realms and, once they are properly identified, to formulate courses of action that preserve and fortify them.

It is worth adding here that, in doing so, policy makers cannot simply rely on ideas derived from systems theory. A full elaboration of the reasons would take us beyond the scope of this article, but it is worth saying that such theory has often made the unhelpful observation that everything is a system. Even discrete tradeable products, like shoes or haircuts, gain systemic interrelationships when traded on the market. Systems language would obscure the important fact that a biogeographical region and a technological paradigm are each very different from a collection of ordinary goods.

Moreover, a despoiled landscape nonetheless remains a "system," even if it has losts its ecological integrity. By contrast to the idea of a system, the concept of "integrity" is explicitly moral. It refers to soundness and probity as well as wholeness and interrelatedness.

A theory of environmental integrity would hold that the quest to sustain and improve life gives to the public an implicit interest in maintaining the environmental wholes on which our lives and livelihoods depend. When we make policy that affects the landscape, the technological paradigm, the occupation, or the city, our acts are inherently tinged with respect or disrespect for that realm's integrity, whether we recognize it or not.

We need to rebuild a discipline that allows us to respect these integral realms in the economy. That discipline may legitimately be referred to as planning, although that is a contested word with numerous and vague meanings (Wildavsky, 1973), of which only some are relevant to the present argument.

Through a revival of this discipline, we can again learn to gain insight into the multiple, context-specific features of the economy's integral realms and thereby to plan collective courses of action. Those engaged in this kind of planning should indeed consider privatization, tax incentives, formation of asset markets, and facilitation side payments. They should also have the ability to do what market-failure analysts cannot: to propose the structure of a wildlife corridor, formulate a strategy to strengthen industrial performance in optoelectronics, design an apprenticeship program, or sketch the shape of an urban downtown.

To help make such judgments, the reinvigorated planning discipline should direct us back to the economic object, so we can recognize the integrity of the regional environment, the technological paradigm, the occupation, or urban settlement. Through such a discipline, we can hope to gain the ability to bring our landscapes, industries, and cities back from the brink of disintegration.

Ernest Stemberg is an associate professor of planning in the School of Architecture and Planning, State University of New York at Buffalo. His past work has focused on regional economic development and technology policy.


Draft versions of this article were presented at the Fifth Annual Conference of the Society for the Advancement of Socio-Economics, the 35th Annual Meeting of the Association of Collegiate Schools of Planning, and the Los Alamos Conference on "Japan as a Techno-Economic Superpower," all in 1993. I am grateful to John Friedmann, Michael W. Spicer, Dwight Waldo, and Edward W. Wilson for their comments.

(1.) In this article, the words "collective" and "public" are, as usual, used in contrast to "private." But this is an inadequate distinction, which should not be taken to imply an interest only in the actions of government bureaucracies. The theoretical problems of public or collective action also extend to the actions of nonprofit organizations, educational institutions, public-private partnerships, associations, political regimes, inter-organizational networks, and other organizations that are not easily classified. A discussion that would address these complexities would take us far beyond the, limits of this article. (2.) These adversarial positions about externalities were laid out early in the century when Frank H. Knight (1924) argued that the externalities that A. C. Pigou (various editions, including 1932) had attributed to market failure were rather the effects of a social failure to assign property rights. (3.) For coherent discussion, for the rest of this article, I stop referring to this object as a "good." The very use of the term with reference to a stream or an air shed (or optoelectronics or recombinant DNA technology) reflects a conceptual confusion. It extends the language of tradeable commodities to things that cause numerous difficulties when entered into market exchange. (4.) For more recent data, consult issues of OIDA News, the newsletter of the Optoelectronic Industry Development Association, located in Washington, DC. (5.) Defenders of orthodox microeconomics may respond that the rise of optoelectronics is a form of technological change; so it is better understood not as a failure in static efficiency, but as a problem in the market's dynamic efficiency. Microeconomists often attribute dynamic inefficiency to the excessive speed at which competitive systems dissipate firms' benefits from innovation, thereby lessening their incentive to innovate (Averch, 1990; 18-19). Note that such dynamic concepts retain the assumption that the objects of economic investigation are transactions by individual economic agents over discrete innovations. Hence, a microeconomic analyst who sought to reassert dynamic efficiency would likely seek to strengthen incentives for innovation as b advocating policy that favors those firm sizes (perhaps large corporate research performers) thought to sustain the benefits of innovation.

Such an analyst would miss the integral features of a technological paradigm, By contrast, when we recognize that technologies sometimes have paradigmatic features, we can understand not only incremental change but also massive technological discontinuities in the economy. Events like the rise of optoelectronics can be understood to occur because of these discontinuous paradigmatic shifts. We can then consider a policy that seeks to reassert domestic capability in optoelectronics, say with a carefully designed industrial strategy that establishes a collection of university-based centers of excellence, a program of technical training, and an effort at collaborative standard setting, all devoted to optoelectronics or its subfields. (6.) Hence, the view I present contrasts with that found in the work of Weimer (1993), who has also sought to express the limits of market-failure theory in policy analysis. He contends that, while such analysis continues to be useful for problem definition, it is too vague for properly designing a policy response. Weimer's refinement (which would be contested by libertarian versions of market-failure theory) retains the assumption that policy problems arise from inefficiencies in allocating external effects. The ideas I propose reverse this logic. Problems conventionally thought to be negative externalities (or benefits considered to be collective goods) are, rather, byproducts of the impaired (or fortified) integrity of a resource realm. Weimer's ideas suggest new procedures for incremental policy tinkering. The ideas I propose here lead me to call for the better planning and stewardship of collective resources. (7.) By pointing out the potential environmental deterioration caused by pure markets in land, this article is not posing common-property regimes as the alternative, but rather pointing toward forms of regional planning that seek to sustain or reconstruct the integral features of landscapes, notably in areas fragmented among private owners. Contrast this to the conventional economic theory of property rights which attributes environmental deterioration almost exclusively to common-property regimes (Furubotn and Pejovich, 1972; and Posner, 1977; chap. 3). (8.) For an accessible discussion of common-pool resources, with irrigation systems used as the running example, see "Management of the Local Commons" (1993), a symposium in the Journal of Economic Perspectives, with articles by Parnab Bardhan, Elinor Ostrom and Roy Gardner, and Paul Seabright. On network externalities, see Berg (1989) and references therein. These elaborations of market-failure theory clearly merit further discussion, but such discussion would require a separate article devoted to that purpose. (9.) A work that proposes a Schumpeterian approach to human resource planning (and could be understood in part through a concept of occupational paradigms) is Lynn (1988). (10.) An early piece suggesting a market-failure approach to city planning is Dunham (1958). (11.) One fine, recent introduction to urban design, with an emphasis on the natural ecosystem integrated into the city, is Spirn (1984). (12.) We can particularly draw on a traditional kind of planning that seeks to exercise a comprehensive intelligence and design sensibility in shaping the perceptible forms of cities and regions. Although this kind of planning focuses on only one of the realms that have been considered here, it holds out important lessons. Founded on Patrick Geddes' search for the more balanced development of cities and regions, comprehensive planning attempts to shape policy through an appreciation of environmental wholes. In principles that are now nearly a century old, Geddes advised us to survey (to investigate and learn) before the plan, to situate specific problems in regional overviews, and to proceed through conservative surgery--through a policy design emanating from a context-specific interpretation (Geddes, 1968; Tyrwhitt, 1947). To overcome the constraints of marker-failure theory in environmental policy, one can find in this literature some of the intellectual breadth by which one can recognize the integral realms of economic life.


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