As a long-time debate aficionado, it seems to become rarer and rarer that I come across a debate that I haven’t heard yet and makes me think. I came across such a debate between Steve Landsburg and Don Boudreaux about socially wasteful spending.
It goes something like this:
Company A has a product that produces value for society, let’s say $100. Company B faces a decision to make a competing product that is slightly better and would add marginally to the overall value for society, let’s say $10. So, Company B’s product would produce value of $110.
Company B faces an incentive to invest more than the marginal improvement in societal value, $10 in this case, because it can also attract Company A’s customers.
So, maybe Company B invests $50 to produce $10 more in value for society, because it can attract the some or all of the $100 of value already served by Company A’s product.
On net, society is worse off because a $50 investment has been made to produce $10 of value, for a net loss of $40. Landsburg says the $50 is socially wasteful spending, though he admits that the simple example doesn’t capture all the complexities of the real world, like the possibility that the $50 investment accidentally produces more than $50 of value.
But, I think his main point is that this incentive to make socially wasteful investments is, perhaps, one weakness in the normal feedbacks of capitalism.
I’m having a hard time fitting the real world onto the simple example, where there is uncertainty, risk, prudence, competition, different value propositions for different people and such.