Thursday, August 12, 2010
Posted by dkuehn at 10:37 AM
Trying to address externalities with policy is not the same as central planning. In central planning, the state does the task of economic calculation - an endeavor doomed to failure. In externality policy, the state improves the market's ability to do the task of economic calculation. There are certainly critiques to be leveled against these sorts of Pigovian policies but the economic calculation critique makes no sense, because Pigovian policy doesn't ask the state to do any economic calculation (as it is traditionally conceived in this debate at least).
Jonathan Chait, at The New Republic, makes the distinction in less technical terms when he points out the reaction of the light bulb industry to energy efficiency standards. He is right on target - it's Chait that understands the process of economic calculation, not Weekly Standard writer Andrew Ferguson (to give you a sense of the way Ferguson sees the world, his most recent piece was titled "Are Americans closet statists?").
This is the point I was trying to make when I highlighted the Chinese attempt to increase energy efficiency by centrally identifying a bunch of factories to simply shut down. That is the state doing the task of economic calculation. Policies to address externalities have the market do economic calculation. And when you don't do Chinese central planning and you don't do anything about externalities, you're just ignoring the requisite inputs for market calculation (namely, profit-and-loss prospects, well defined property rights, and internalized costs and benefits).
Some people who object to addressing externalities object on a practicality/public choice basis. That makes some sense but I think these points are usually considerably overblown (what kind of rent-seeking really went on in this Bush-era light bulb energy efficiency decision, for example??), but they do at least make sense. The argument against Pigovian policy from an economic calculation problem perspective, though, makes no sense at all. It completely misunderstands the issue at hand.