The Reading Room

John Stuart Mill on Lighthouses

The limits of laissez-faire as a principle by which to limit the role of the government in a market economy has never been without controversy. Among the biggest “hotspots” that is representative of this controversy, still debated amongst economists today, is the degree to which government intervention is necessary for the provision of lighthouses. 
The proximate catalyst of this debate can be traced back to the 5th edition of Paul Samuelson’s seminal textbook, Economics: An Introductory Analysis (1961, pp. 192–193). Samuelson argued that lighthouses are an example of a “public good,” which can be used simultaneously by more than one individual (“non-rivalry” as economists state) but the costs of preventing free riders from not paying to use the service of a lighthouse is prohibitively high. Therefore, since private actors are unable to eliminate the free-rider problem, markets will underprovide lighthouses, requiring government provision. In spite of many challenges that have illustrated the contrary, beginning with Ronald Coase’s famous article, “The Lighthouse in Economics” (1974), this controversy continues because of its implications for the economic role of the state. 
 However, the fundamental basis for this controversy precedes Samuelson, and had been argued but other important economists, such as Arthur Pigou among others, ultimately traced back to John Stuart Mill, who first suggested that the private provision of lighthouses was not possible. As he states in the closing pages of Principles of Political Economy ([1848] 2006, p. 968): 
"[I]t is the proper office of government to build and maintain lighthouses, establish buoys, etc. for the security of navigation: for since it is impossible that the ships at sea which are benefited by a lighthouse, should be made to pay a toll on the occasion of its use, no one would build lighthouses from motives of personal interest, unless indemnified and rewarded from a compulsory levy made by the state.” 
Many economists, such as Coase, have directed to their attention to this particular passage, and pointed out that Mill was only suggesting was that, without government enforcement of contractual agreements by ships to pay fees (at the time known as “light dues”) for using light emitted by a lighthouse, then private actors will not be able to overcome the free-rider problem. To this Coase later responded that “by that logic, since you can't transfer your rights to a house without the examination of title and registration and without obeying a whole series of regulations, many enforced by government.” I do not disagree with Coase’s point, as my co-author and I have tried to illustrate in a series of articles we’ve written looking at the English (and Welsh) lighthouse market (Candela and Geloso 2018, 2019, 2020). My point here is not to summarize this work, nor to point out that Mill was incorrect, because he was writing at time in which English lighthouse market had already been nationalized by 1842 as a result of the counterproductive effects of government regulation. 
Whether or not Mill may, or may have not, been unaware of how the English lighthouse market actually operated, and how government regulation crowded out the possibility of a well-functioning private lighthouse market, I argue, misses the fundamental point. This is because, when you read that block quote from Mill in the context in which he was writing, he actually makes no mention of the government provision of lighthouses for the security of commercial navigation, which is what the crux of the debate has been primarily about. Before this quoted passage, Mill states the following ([1848] 2006, p. 968): “Take for instance a voyage of geographical or scientific exploration. The information sought may be of great public value, yet no individual would derive any benefit from it which would repay the expense of fitting out the expedition.” Immediately after Mill writes why government is necessary to levy light dues onto shipowners by compulsion, he bases this justification on the following:
“There are many scientific researches, of great value to a nation and to mankind, requiring assiduous devotion of time and labour, and not unfrequently great expense, by persons who can obtain a high price for their services in other ways. If the government had no power to grant indemnity for expense, and remuneration for time and labour thus employed, such researches could only be undertaken by the very few persons who, with an independent fortune, unite technical knowledge, laborious habits, and either great public spirit, or an ardent desire of scientific celebrity” ([1848] 2006, p. 968). 
Does this all mean this incessant debate would never occurred had economists read Mill’s comment on lighthouses in the context of scientific navigation, rather than commercial navigation? Or, that this entire debate has all been wasted breath? To the former question, we can only speculate the answer. To the latter question, perhaps the answer is “no,” since it has prompted Coase and other economists to study how lighthouse markets actually work. My fundamental point, to conclude, has been to highlight that the nature of progress in the social sciences, including economics, is not linear, but as Peter Boettke would put it, analogous to a corkscrew. In order to make a few steps forward in the advance of economic theory and history, in the process we have to take a step back and bring history of economic thought into what economist Kenneth Boulding would call our “extended present” (1971). 
Boulding, Kenneth E. 1971. “After Samuelson, Who Needs Adam Smith?” History of Political Economy, vol. 3, no. 2: 225–237.Candela, Rosolino A., and Vincent J. Geloso. 2018. “The Lightship in Economics.” Public Choice, vol. 176, no. 3-4: 479–506.

Candela, Rosolino A., and Vincent J. Geloso. 2019. “Coase and Transaction Costs Reconsidered: The Case of the English Lighthouse System.” European Journal of Law and Economics, vol. 48, no. 3: 331–349.

Candela, Rosolino A., and Vincent J. Geloso. 2020. “The Lighthouse Debate and the Dynamics of Interventionism.” The Review of Austrian Economics, vol. 33, no. 3: 289–314.

Coase, Ronald H. 1974. “The Lighthouse in Economics.” The Journal of Law & Economics, vol. 17, no. 2: 357–376.

Mill, John Stuart. [1848] 2006. Collected Works of John Stuart Mill, Vol. III: Principles of Political Economy (Books III – V, Appendices). Indianapolis: Liberty Fund.

Samuelson, Paul A. 1961. Economics: An Introductory Analysis, (5th Edition). New York: McGraw Hill.