Externalities and Statism

In “Regulation as Wishful Thinking,” I say negative things about the main excuse for regulation, which is the existence of so-called negative externalities. This post focuses on the concept of externality and the absurdities to which it leads.

An externality — in case the term is new to you —

is a cost or benefit … incurred by a party who did not agree to the action causing the cost or benefit. A benefit in this case is called a positive externality or external benefit, while a cost is called a negative externality or external cost.

Economists seem to believe that externalities are “bad,” even positive ones. Why? According to the Wikipedia article quoted above, ”

[w]elfare economics has shown that the existence of externalities results in outcomes that are not socially optimal. Those who suffer from external costs do so involuntarily, while those who enjoy external benefits do so at no cost.

The absurdity of this economistic view of the world is demonstrated easily:

1. If an attractive woman catches my eye, should I compensate her for the enjoyment that I derive from looking at her? If not, why not? Her attractiveness undoubtedly generates a lot of positive externalities.

2. If the same physically attractive woman catches the eye of a crude man, he will leer, wink, and perhaps make suggestive motions or remarks. His actions, which are a reaction to a positive externality (the effect of the woman’s attractiveness) have the effect of offending the woman and causing her psychological discomfort. His actions, in other words, cause a negative externality that can be traced to the same source as the positive externality in 1.

In short, life is full of externalities — positive and negative. They often emanate from the same event, and cannot be separated. State action that attempts to undo negative externalities usually results in the negation or curtailment of positive ones. In terms of the preceding example, state action often is aimed at forcing the attractive woman to be less attractive, thus depriving quietly appreciative men of a positive externality, rather than penalizing the crude man if his actions cross the line from mere rudeness to assault.

The main argument against externalities is that they somehow result in something other than a “social optimum.” This argument is pure, economistic hokum. It rests on the unsupportable belief in a social-welfare function, which requires the balancing (by an omniscient being, I suppose) of the happiness and unhappiness that results from every action that affects another person, either directly or indirectly. To return to the example, forcing the woman to be less attractive may make the woman more or less happy (depending on how she weighs her allure against the unwelcome attention that it draws), but it definitely makes me less happy. And even if the woman is happier, her gain in happiness does not cancel my decrease in happiness.

A believer in externalities might respond by saying that they are of “economic” importance only as they are imposed on bystanders as a spillover from economic transactions, as in the case of emissions from a power plant that can cause lung damage in susceptible persons. Such a reply is of a kind that only an omniscient being could make with impunity. What privileges an economistic thinker to say that the line of demarcation between relevant and irrelevant acts should be drawn in a certain place? The authors of campus speech codes evidently prefer to draw the line in such a way as to penalize the behavior of the crude man in the above example. Who is the economistic thinker to say that the authors of campus speech codes have it wrong? And who is the legalistic thinker to say that speech should be regulated by deferring to the “feelings” that it arouses in persons who may hear or read it?

Despite the intricacies that I have sketched, negative externalities are singled out for attention and rectification, to the detriment of social and economic intercourse. Remove the negative externalities of electric-power generation and you make more costly (and even inaccessible) a (perhaps the) key factor in America’s economic growth in the past century. Try to limit the supposed negative externality of human activity known as “greenhouse gases” and you limit the ability of humans to cope with that externality (if it exists) through invention, innovation, and entrepreneurship. Limit the supposed negative externality of “offensive” speech and you quickly limit the range of ideas that may be expressed in political discourse. Limit the supposed externalities of suburban sprawl and you, in effect, sentence people to suffer the crime, filth, crowding, contentiousness, heat-island effects, and other externalities of urban living.

The real problem is not externalities but economistic and legalistic reactions to them. These reactions are manifestations of rationalism. As Michael Oakeshott explains, a rationalist

never doubts the power of his ‘reason … to determine the worth of a thing, the truth of an opinion or the propriety of an action. Moreover, he is fortified by a belief in a ‘reason’ common to all mankind, a common power of rational consideration….

… And having cut himself off from the traditional knowledge of his society, and denied the value of any education more extensive than a training in a technique of analysis, he is apt to attribute to mankind a necessary inexperience in all the critical moments of life, and if he were more self-critical he might begin to wonder how the race had ever succeeded in surviving. (“Rationalism in Politics,” pp. 5-7, as republished in Rationalism in Politics and Other Essays)

The main result of rationalistic thinking — because it yields vote-worthy slogans and empty promises to fix this and that “problem” — is the aggrandizement of the state, to the detriment of civil society.

The fundamental error of rationalists is to believe that “problems” call for collective action, and to identify collective action with state action. They lack the insight and imagination to understand that the social beings whose voluntary, cooperative efforts are responsible for mankind’s vast material progress are perfectly capable of adapting to and solving “problems,” and that the intrusions of the state simply complicate matters, when not making them worse. True collective action is found in voluntary social and economic intercourse, the complex, information-rich content of which rationalists cannot fathom. They are as useless as a blind man who is shouting directions to an Indy 500 driver.

Here is a good example of that kind of backseat driving:

For the left, political objectives relate to policy ends. We want to expand access to quality health care. We want to lower carbon emissions to combat global warming. We want to reform the lending process for student loans so more young people can afford to go to college. We want to make public investments to create jobs. (Steve Benen, “They’re not parallel ideologies,” Washington Monthly, October 18, 2011)

The list could go on and on, almost without end, of course. Because there is no end of “problems” that cry out for political “solutions.” Political, in this case, refers not to the voluntary processes and organizations of civil society — which are truly political — but to state action on behalf of this and that group and “cause.” It reminds me of the management style of a former boss, whose every whim became a top priority.

In the end, if anyone is better off it is politicians and bureaucrats who rake in above-market wages and outrageously cushy pensions. It is certainly not the members of competing interest groups, each of which vies to make its “cause” the number-one priority, and all of which end up paying for every other group’s favorite “cause.”

Then, too, there is the law of unintended consequences, which ensures that every state-imposed “solution” creates a new problem (a real one) that — you guessed it — cries out for state action. For example:

Night operation of the windmills in the North Allegheny Windpower Project has been halted following discovery of a dead Indiana bat under one of the turbines, an official with the U.S. Fish and Wildlife Service said Monday.

A more serious example:

On the Republican campaign trail, the health care debate has focused on the mandatory coverage that Mitt Romney signed into law as governor in 2006. But back in Massachusetts the conversation has moved on, and lawmakers are now confronting the problem that Mr. Romney left unaddressed: the state’s spiraling health care costs.

After three years of study, the state’s legislative leaders appear close to producing bills that would make Massachusetts the first state — again — to radically revamp the way doctors, hospitals and other health providers are paid.

Although important details remain to be negotiated, the legislative leaders and Gov. Deval Patrick, all Democrats, are working toward a plan that would encourage flat “global payments” to networks of providers for keeping patients well, replacing the fee-for-service system that creates incentives for excessive care by paying for each visit and procedure….

And when that brainstorm fails to solve the very real problems created by Romneycare, the idiots politicians and do-gooders who dictate to the people of the Commonwealth of Massachusetts will try to conscript doctors, hospitals, and other providers of medical care into an overtly socialized system, which will come to be known (appropriately) as Commie-care. Then, predictably, the Commonwealth will try to remedy the flight of providers by some cockamamie scheme or other, which will accomplish the two-fold feat of making Massachusetts a medical wasteland while drying up the funding for Commie-care by driving out wealth-creators.

The fundamental problem with rationalistic “solutions” to “problems” — other than the fact that they do not work — is that they have externalities that make pollution and other undesirable by-products of economic activity seem almost benign. (For an estimate of the magnitude of the externalities of statism, see this post.) It is just that statist politicians are skilled at disguising the destructiveness of statist “solutions” and turning every real problem caused by state action into an excuse for more state action. They are abetted, of course, by the economic illiterates whose votes make democracy an enemy of liberty.

Civil society, left unfettered by statist decrees but protected by a minimal state, would cope very well with negative externalities, were it allowed to function. I have made that case in “Regulation and Wishful Thinking,” and will not repeat it here. (See especially the section of the post that is headed “The Alternatives to Regulation: Markets and Common Law.”) The general point is made by Oakeshott:

To some people, ‘government’ appears as a vast reservoir of power which inspires them to dream of what use might be made of it. They have favourite projects, of various dimensions, which they sincerely believe are for the benefit of mankind, and to capture this source of power, if necessary to increase it, and to use it for imposing their favourite projects upon their fellows is what they understand as the adventure of governing men. They are, thus, disposed to recognize government as an instrument of passion; the art of politics is to inflame and direct desire. In short, governing is understood to be just like any other activity — making and selling a brand of soap, exploiting the resources of a locality, or developing a housing estate — only the power here is (for the most part) already mobilized, and the enterprise is remarkable only because it aims at monopoly and because of its promise of success once the source of power has been captured….

Political conservatism is … not at all unintelligible in a people disposed to be adventurous and enterprising, a people in love with change and apt to rationalise their affections in terms of ‘progress’. And one does not need to think that the belief in ‘progress’ is the most cruel and unprofitable of all beliefs, arousing cupidity without satisfying it, in order to think it inappropriate for a government to be conspicuously ‘progressive’. Indeed, a disposition to be conservative in respect of government would seem to be pre-eminently appropriate to men who have something to do and something to think about on their own account, who have a skill to practise or an intellectual fortune to make, to people whose passions do not need to be inflamed, whose desires do not need to be provoked and whose dreams of a better world need no prompting. Such people know the value of a rule which imposes orderliness without irecting enterprise, a rule which concentrates duty so that room is left for delight…. (“On Being Conservative,” pp. 431-5, Rationalism in Politics and Other Essays)

Related posts:
Fear of the Free Market — Part I
Fear of the Free Market — Part II
Fear of the Free Market — Part III
The Social Welfare Function
Risk and Regulation
A Short Course in Economics
The Interest-Group Paradox
Addendum to a Short Course in Economics
Utilitarianism, “Liberalism,” and Omniscience
Accountants of the Soul
Ricardian Equivalence Reconsidered
The Real Burden of Government
Utilitarianism vs. Liberty
Toward a Risk-Free Economy
Rawls Meets Bentham
The Rahn Curve at Work
The Case of the Purblind Economist
The Illusion of Prosperity and Stability
Estimating the Rahn Curve: Or, How Government Inhibits Economic Growth
More about Conservative Governance
Luck-Egalitariansim and Moral Luck
Understanding Hayek
The Destruction of Society in the Name of “Society”
What Free-Rider Problem?
Human Nature, Liberty, and Rationalism
Utilitarianism and Psychopathy
Regulation as Wishful Thinking