I'm shocked he's posted something on this topic that I agree with so much, so I ought to link it.
Don quotes Carl Dahlman who writes:
"This is not science; it is metaphysics: value judgments and political goals will enter into the determination of whether externalities occur in our world. You cannot show analytically that the government, in principle and in all cases, handles externalities better than the market; nor can you prove the opposite: it all depends on what point of reference you choose. And that is not a question of positive economics…. It is doubtful whether the term “externality” has any meaningful interpretation, except as an indicator of the political beliefs and value judgments of the person who uses (or avoids using) the term."
The only thing I disagree with is the first sentence that it's not science - it's metaphysics. This was my comment on the post, which should explain what I mean:
"Exactly right - I'm shocked you've posted something I agree with on this topic! Although I'm not sure this means it's "metaphysics". It means its subjective - and all values in economics are subjective.
In a market transaction, each person acknowledges the standing of the other person in dealing with these subjective values. That's the strength of market transactions. But of course not all actions occur in the market, and when it doesn't occur in a market there are very real questions about a person's standing.
Do I have standing when it comes to the way I subjectively value pollution? That's a much tougher question that people disagree on. It's not metaphysics. Nobody can contest that I bear a subjective value about those things any more than you can contest that I bear a subjective value about the market transactions I make. The question is, what do we do about my subjective values regarding these externalities. But that was never a positive question anyway - that was always a normative question."
Last weekend I read an article by Pete Leeson on the theory of clubs and public choice - but it touched on externalities and dismissed them. The article was good as a whole, but I thought he did a really atrocious job handling the externality question. That and Don's post really make me want to write more about this now.
Wednesday, January 18, 2012
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"...in principle and in all cases..."
ReplyDeleteThis is so abstracted from reality as to lose all meaning apart from the philosophical.
You can't prove the law of gravity applies in all cases. Thousands of people are defying gravity by riding in aluminum tubes over our heads at any given moment.
I think Boudreaux is fighting a defensive game where a delay is a win. Otherwise my even bother with such a banal assertion?
IB
I feel like I'm missing something here.
DeleteDo you think he's wrong? Do you think in all or even close to all cases we can assume - even as a matter of practicality - that government handles externalities better than the market. I would say "no" both on an absolute/scientific level and on a pragmatic/policy level.
I wouldn't compare this to gravity. We may not be able to "prove" the law of gravity applies in all cases, but we have reason to assume it does. The situation is not the same with externalities at all.
It's really a simple rule of thumb: Everything stated as an absolute is always wrong.
ReplyDeleteIB
Irony?
DeleteYes
DeleteIB
I read some of the article at Cafe Hayek- can you provide a more specific definition and an example? It seems odd to say that you cant measure externalities. It sounds more like a methodological issue. It seems like there could be an operational definition of "pollution" that is not subjective (i.e., excessive levels of a toxin that has been demonstrated to cause tissue damage in humans). The only reason why the term seems to be dismissed or deemed subjective is because the definition provided is vague, but it seems like that could be remedied. Is the objection that you cant prove that "all" cases are handled better by the market vs the government? Is it an all or nothing deal? That seems dumb. What Don seems to be saying is really vague and nonspecific - so as to be meaningless. Should I value his subjective opinion? Certainly, when it has demonstrable ramifications for my well being. If its just his opinion, and only gives him a warm fuzzy feeling - why should i value it more than objective evidence?
ReplyDeleteTo follow up a little - does each person acknowledge the other person has standing in dealing with subjective values in a market transaction? That doesn't seem right. What does that mean really when you break down an actual transaction between two individuals (or business)? The way you express subjective opinion is often with a vote in the political system. The fact that I express my preferences by voting in ways that piss off republicans is just an added benefit.
ReplyDeleteNo, I think it's perfectly sensible to say you can't measure externalities. How do you, for example, measure the harms caused by pollutants dumped in a stream by a factory? The pollutants might be swimming out to sea, but then again they might end up locked in place. And what about future generations? If we assume that entropy is a consistent factor in the universe, it stands to reason that energy use by current generations is a consistent negative externality on the resources of future generations (more realistically, we can see something like this in highly polluting industrial nations). This provides an obvious sticking point if your politics call for more responsibility for externalities (more regulation) or less (the typical stance of laissez-faire).
ReplyDeleteMark seems quite tone deaf to reality on this topic. Certainly, if my neighbors have a backyard barbecue, they will generate some amount of toxic fumes that will create some degree of cellular damage for me. Clearly, the question is, how much damage must that be before I have, say, standing in a lawsuit? And it is pretty obvious to me that that question cannot be answered by scientific measurement!
ReplyDeleteRight, because a controlled experiment is impossible - you can't clone the situation (including yourself) and your neighborhood and control for the toxic fumes. It will only be possible to look at circumstantial evidence after the fact, such as measuring the toxicity of bits burned onto the grill, measure ash in the trees neighboring the property, and other circumstantial measurements and comparisons that do not prove (in scientific terms) causality.
ReplyDeleteI suppose that could be a sticking point - obviously a measure appropriate to law (a level of "proof") is different from scientific proof, for precisely these reasons.
Perhaps I misunderstand the definition of externalities - which is a distinct possibility. But, in regards to your last example, you could compare CO2 levels emitted by the BBQ and compare with known safe levels for humans. If your BBQ emitted excessive amounts of CO2 or other toxic material, certainly legal ramifications are possible. In regards to pollutants dumped into the sea - you have to be kidding right? We may not know all of the effects of certain wastes but we can measure how much and where it spreads. We may not be 100% accurate - but consider the mapping of the fallout plume from Chernobly or Fukushima. Are you seriously suggesting that we don't know how to measure radiation levels or the effect it has on the human body? Anyway, you are probably right to say we cant measure or estimate certain externalities because of a lack of evidence. You may not get there with "causality" but correlation gets us close enough. The land of 100% certain is silly, I can be fairly certain smoking is bad for me even if results from studies are only correlative.
ReplyDeleteThe BBQ example is one example on a spectrum and im certain you could formulate more "externalities" that are not sufficiently defined as to be scientifically testable. And remember there are many different ways to conduct scientific research. I think your right to say that "legal" and "scientific" methods can be different - I would hope that the law is informed by science as much as possible.
I think people are throwing up their hands too early and saying "its not knowable" scientifically. Saying "you cant measure externalities" is different from saying "you cant measure all externalities" (which I agree - but some may be more amenable than you might think). If the point was we cant know for 100% certain, then yeah, I guess your right, but I can be certain enough to be convinced. Absolutes are for silly people.
You may be right about the tone deaf comment - and I appreciate the feedback. I just think that you too loosely defined your externalities "that cant be measured".
ReplyDeleteI definitely want to echo again that there is definitely a difference between "law" and "science", I do not refute that. I think that your demanding a certain level of rigor in a very narrow way (is there any value to economics even if studies are correlative? Is there value to mathematical models even if they dont always match up? Of course!). I think that if you gave it a moments thought, you would think of a definition of "cellular" or tissue damage that gives you standing in a lawsuit.
Lets remember that because governments, business or people have a vested interest in hiding or obfuscating information for their own advantage is different than "just not" or "impossible" to measure. Not "taking into account" externalities is a different issue (the market not taking it into account). This is where I think macro thinking obfuscates the issue (because ultimately these instances are the results of the interactions of individuals). Although whenever I hear libertarians talk about how bad the government is, I wonder what fundamental deficit people working in government have compared to those in the public sector.
Daniel may be saying something different, so perhaps he can chime in. I definitely agree with the point of view that it is not possible to say that the government is able to deal with externalities better than the market (all or close to all cases). Who would say such a thing?
ReplyDeleteThis is an interesting discussion and I want to be clear what I am saying and what I'm not saying, so I'm going to write a new post on it and pull some of these comments in.
ReplyDeleteHere's another example of the issue. What about smells? What is an unpleasant smell? My sister lives near a chocolate factory, surprisingly many people who live near her consider chocolate an unpleasant smell because the smell of that factory makes them want to eat chocolate.
ReplyDeleteI once lived near a village that always smelt of the droppings of cows and sheep. Strangely enough the locals quite liked this. I expect Coase wouldn't be surprised about that.
However, I don't think things are as tricky as Daniel and Gene claim. In economics we have "subjective value" which applies to consumers and "objective value" which applies to businesses buying intermediate products. Dealing with the externality issues connected with the latter is the same as dealing with objective cost plus an estimate (inevitably subjective) of the societal discount rate.
(Those who don't believe the discount rate matter, think about this... Above people talked about "harm to human cells". Harm that affects a person's well-being in what time-scale?)
I agree with you - some subjective value is probably reflected in the cost of the transaction. And subjective value can be expressed in what you would think were surprising ways but are probably orderly associated with environmental and biological variables.
DeleteCould you clarify about discount rate? I certainly think that it could alter the behavior of those involved in the transaction (either decreased or increased responding). I think you are agreeing with me about the harm issue - significant harm (not stuff that you dont notice or hardly impacts your ability to function day to day) can be linked to environmental factors (even if you cant ever be 100% certain - im pretty sure that most people who have experienced coal workers pneumoconiosis have been exposed to significantly higher levels of coal dust on a daily basis.
I think that the way economics incorporates subjective value into the cost of a transaction is definitely a strength, and scientifically, if a person demonstrates preferences in somewhat orderly and consistent ways and inferred by data from economic transactions, this might provide sufficient information to make decisions about how to alter behavior if needed. Maybe.
DeleteI was reading some more information on externalities on the interwebs and a clearer picture of what you mean by externalities in an economic sense. I had a broader perhaps inaccurate definition based on the snippet I had read on the Hayek and here. But, just to give you perhaps more fodder to point out the error of my ways, I will throw a few more thoughts in.. from the way I understand it, if externalities are either positive (the individual or business does not receive full benefit from their decisions) or negative (society bears a cost that either the individual or consumer didnt pay the full amount for or didnt pay for), then the major issue at contention is how to incorporate the concerns or beliefs (subjective or objective) of those not involved in the transaction. So let me rephrase it in my novice understanding...
ReplyDeleteIn a market transaction each individual(s) involved in the transaction may recognize any subjective value that other participants have. In a given population or subset, variables may be more proximal or distal in the relative effect and individuals not otherwise engaged in the market transaction, but indirectly affected may think that other variables should weighed more heavily or somehow figured into the financial cost. Subjective values are taken to mean verbal behavior meant to alter the behavior of other individual for whatever reason (those involved in the transaction). The reason why individuals not involved in the transaction may seek to alter the behavior of those involved in the transaction is because the perceived benefit (either immediate or distal) is not sufficient, or the risk is to great compared to the relative benefit those within the transaction experience or requires a cost to mitigate those variables (i.e., pollution cleanup).
The idea of the social validity of certain economic pursuits is an interesting dilemma. Ultimately, the only way for you to alter the behavior of those involved in the transaction are to verbally engage with them, vote, or pursue legal options. The individuals involved probably have more influence over each other than those not involved, so tinkering with the interaction itself (by taxing for example) seems to be one way to alter behavior. It may not be the best and there may be market solutions, if those involved in the transaction agree to participate. The problem seems to arise when those involved dont want to participate. Anyway, enough rambling I guess, I'll let you correct me if Im being silly.