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Source link: http://archive.mises.org/15963/accounting-for-the-unaccountable-the-case-of-externalities/

Accounting for the Unaccountable: The Case of Externalities

March 10, 2011 by

According to the usual definition of externalities, anything we do would qualify for regulation by the state. FULL ARTICLE by Predrag Rajsic


fundamentalist March 10, 2011 at 12:25 pm

Good article! Thanks! Socialists are obsesses with externalities. But they conveniently ignore the positive externalities created by a free market: reduction in poverty and a general increase in wealth.

If you want to internalize externalities, fine. But be honest about it. Weigh the costs and benefits. The costs of government intervention in the market will always outweigh the benefits, especially when opportunity costs are considered.

Ryan Vann March 10, 2011 at 1:22 pm

Moreover, these externality internalizing schemes rarely have a mechanism for compensating those the externality was pressed upon, unlike say a Coase approach would. What is left is an externality argument concerned not righting a wrong inadvertently imposed, but rather attempting to satiate a weird obsession with achieving market optimality.

Daniel March 11, 2011 at 3:35 am

I think of it more as an attempt to achieve a “cosmic justice” whatever that might mean

Allen Weingarten March 10, 2011 at 1:32 pm

I concur that ‘internalization of externalities … is a poor choice … because no action can ever meet this standard.’ More generally, we cannot have an algorithm that guarantees sound policies, but can only provide guides which are necessarily incomplete. Here, I recommend the following:

• Do not reward the irresponsible, nor penalize the responsible.
• (NIF) None has the right to initiate force, but the collective obligation to counter it.
• Treat issues on their merit, and reduce them to one’s moral choice.
• Maximize freedom in culture, while protecting it by government.
• Survival trumps morality, for absent survival there can be no morality.
• Government is to be restricted to its protective role, while politics is to be minimized.
• Present conclusions in as simple, brief, and commonsensical a form as is feasible, adding detail only insofar as it cannot be avoided.

JD March 10, 2011 at 3:12 pm

“Survival trumps morality, for absent survival there can be no morality.”

I think you have that backwards. Which results in the greatest surviability; A group of people immorally plundering, murdering, and defrauding each other, or, the same number of people morally cooperating toward common goals?

Ryan Vann March 10, 2011 at 1:56 pm

Protective roles have to be explicitly constrained, otherwise the definition is too loose and can be used to justify pretty much anything. Case in point, unsavory FEMA, FDA, TSA, etc organization policies are almsot always defended under a protection based pretense.

“Survival trumps morality, for absent survival there can be no morality.”
Survival of what?

Allen Weingarten March 10, 2011 at 3:25 pm

Ryan, ‘survival’ is a generic concept. For example, given a forest fire, it can be imperative to remove people from their home, to prevent the fire from spreading. In war, a commander may have to sacrifice lives to avoid being conquered. Someone who carries a plague may have to be prevented from coming near a population. Given a lifeboat that can only carry 6, it can be necessary to force everyone to draw straws.

Yet it is not merely a human requirement. If a cup is to be used, it must first not be crushed. That is, there is a dichotomy of function and purpose, where unless something is able to function (i.e., survive) it cannot complete its purpose. In mathematical programming there are constraints and an objective function, where unless the constraints are met (i.e., survive) the function cannot be met.

So ‘survival’ can apply to countries, businesses, people, goods, etc., etc. In this paper, the reference is to economic policies, where unless a policy is solvent (i.e., sustainable) it cannot be justified by its avowed contribution.

Old Mexican March 10, 2011 at 5:22 pm

What it simply means is that if we are to be honest about the nature of external effects of human action, we need to admit that internalization of externalities, as an offshoot of the utilitarian theory of rights, is a poor choice for an ethical standard simply because no action can ever meet this standard. Thus, there are good reasons for assessing other methods of evaluating human action.

This is where property rights and the non agression principle (NAP) help solve situations that could be construed as “externalities” (like, for instance, pollution.) The utilitarian ethic requires cost-benefit analysis that, taken to the absurd, are impossible to accomplish.

I do not subscribe to the “externalities” concept as it is, precisely because it ends up being too subjective: “whatever I happen not to like.”

fundamentalist March 10, 2011 at 5:26 pm

Yes, the maximum good for the most people sounds exalted and wise on its face; but it is pernicious and deadly when practiced. It destroys property right, the foundation of all freedom and transforms men into slaves.

The champions of externalities are hypocrites, anyway. They loudly proclaim the problems of small negative externalities while never recognizing the huge positive externalities created by free markets.

As Mises pointed out many times, the entrepreneur causes wages to rise for workers and costs to fall for consumers while making a profit. How do you calculate the huge positive externalities to the workers and consumers there?

Peter March 10, 2011 at 6:04 pm

In war, a commander may have to sacrifice lives to avoid being conquered.

And the people being ‘sacrificed’ might prefer to be conquered…their survival trumps your morality!

Bob Selcoe March 10, 2011 at 10:08 pm

Please forgive the lengthy the reply. I don’t have a blog so there’s no way to link to my comments.


I appreciate your article and the attempt to grapple with a very complex issue in an honest, thoughtful way. However, I strongly disagree with your conclusions. While much of what you say is “right”, I believe it’s an example of being so right that it’s ultimately wrong.

Two minor concerns: First, though it may be true that a “common belief” is that government intervention should be restrictive at the micro level (what you call “coercion”) to mitigate excessive externalities, that is not always the case and certainly not preferred in every case. For example, government investment in R&D can (and does) promote entrepreneurship which otherwise would not occur. But this is a relatively minor quibble – obviously, some form of taxation or “capital extraction” from private sources will be required; of course, this is true for the “encouraging” mechanism (subsidies) you mention to promote “positive” externalities. I merely point this out because the language used gives the analysis an unnecessarily negative – if not somewhat biased – tone.

Second, you are quite correct that there is no a priori basis for determining what constitutes an externality in the abstract. Indeed, it’s a point intelligent progressives should bear in mind, at least when speaking to non-progressives. The mere statement “government should get involved to reduce externalities” is somewhat meaningless. Intelligent libertarians rightly point this out. Many progressives use the term “externality” as a shorthand for something like “clearly attributable and highly predictable far-reaching negative consequences which the most powerful interests in society (they would argue, in today’s world, multinational corporations) pawn off on the public (citizens) through overwhelming influence on (and de facto usurpation of) government, often through surreptitious means and chicanery; and that government needs to divest itself of that influence”. I think many libertarians would agree. It’s just much easier to say “externalities”. It’s worth mentioning because libertarians and progressives often talk past each other, and it’s one of the main difficulties in addressing today’s complex and vexing social problems. Neither understands the other’s shorthand (it goes both ways). Libertarians and progressives agree on so much; I find so much shared understanding and compassion for those who suffer oppression in the writings of both camps. The divergence often is in approach rather than goal, and both could learn from the other. It’s unfortunate that so often, especially as of late, the dialogue has become so vitriolic. If this isn’t an intentional “divide and conquer” strategy, it certainly operates like one.

But back to the issue at hand. As I see it, the central error presented is that the ad absurdum approach, while not incorrect here, is merely quite incomplete. It’s similar to Pascal’s Wager, where he claims that atheists should believe in God on purely mathematical and self-interested terms. Pascal fails not because the math is wrong, but because he neglects the infinitude of equally-plausible alternatives, using precisely his own arguments, methods and logic, which lead to diametrically opposite outcomes (i.e., those who believe in God should become atheists on the same purely mathematical and self-interested basis presented by Pascal).

So here, since the premise is that externalities are potentially infinite and variegated, and thus unsuitable as an ethical basis for evaluating human action, let’s propose the opposite extreme: No concept of externalities (no need to account for indirect effects on others), and nothing but private actors (no government involvement) operating freely in the market. So everyone is “free”. Thus any action that impacts on my “right” to unbridled liberty, such as government “intervention”, should be eliminated. I should be able to put chemicals in food if I can turn a profit, especially cheap, undetectable ones that act as slow-acting poisons (so no one will figure out the source and therefore not purchase from one of my competitors). Hire sweat shop child labor? Toxic dumping? Produce defective airplane parts or substandard medicines? No problem. Very unlikely that I’ll be seen as the culprit so it won’t affect my bottom line. And why stop there? Let’s examine the “marketplace” of interpersonal relations. Blare loud music all night from my house? Fine – who cares if the neighbors can’t sleep. Stop at red lights? Not if I’m in a hurry. Shove someone out of the way to get to the front of a line? Shoot them if I don’t like the color of their clothes? It’s my right. One could argue that there are “natural laws” and “natural property rights” following a model of “spontaneous order” which implies norms to reduce conflict, which cannot be violated. Really? Well, I have a right to my beliefs as a sovereign individual and I choose not to believe in any of this. I will do as I please.

Clearly, the list of individual “rights” so constructed, with no consideration for externalities (costs or effects on others), is as exhaustive as a list of externalities – and equally pointless. So, is it true that there’s a potentially infinite list of externalities? Sure! Does it really matter? Hardly. Significant and (relatively) verifiably harmful effects can, are, and are reasonably mitigated against by some form of regulatory body. In other words, not all externalities are equal. It’s a matter of degree.

Now, your very short conclusion does state that “externalities are a consequence of the laws of nature, not some anomaly in perfect competition. This does not mean, however, that one should not care about how his or her actions affect one another”. We are in complete agreement on the second sentence. But then to conclude later, as you do, that “internalization of externalities” shouldn’t be used as an “ethical standard” because “no action could ever meet such a standard”, simply does not follow. Of course it can be an ethical standard – you’ve simply shown (correctly) that it can’t be the ONLY standard. I’ve similarly shown that excluding internalized externalities is completely undesirable; but this does not suggest that every conceivable externality should be considered in personal choice or public policy, or that every action that can be shown to “benefit society” should become compulsory. Most shouldn’t. Perfect altruism (even presuming perfect information!) can be shown to be equally self-defeating. Again, it’s a matter of degree.

And, if by “laws of nature” you mean that unintended consequences inevitably happen and are fundamentally unpredictable, then yes, that truism holds. But like all truisms, it doesn’t provide much insight into identifying and solving real-world problems. The chaos-theoretic (non-linear) approach implied here fails because, unlike the butterfly which unpredictably causes a perfect storm, we can reflect and act to, for example, perhaps keep butterflies separated to reduce the chance the storm occurs (forgive the strained analogy, I’m not suggesting we can control storms by “butterfly management”. I hope my point here is obvious).

Thus, there’s no reason to raise what amounts to a straw man argument about accounting for externalities inter-alia. Even proponents of rigidly controlled centrally-planned economies don’t go to that extreme. (On the other hand, I read a very recent, fairly lengthy article by another author on this very website, proposing a “rationale” for utterly eradicating all public property in favor of total privatization, under the pretense of “natural law”, starting with the immediate privatization of roads, without any apparent concern for the impact such a policy would have on actual people. Debunking all the logical and structural errors adequately, let alone the moral and ethical implications, would require a small book, at least).

Alternatively, there are meaningful causal relationships in human interaction that can be addressed pragmatically. Two important concepts missing in your analysis which might help flesh this out are: 1) stability of explanation, and 2) individual responsibility and culpability. Your example about waking up 15 minutes later “causing” an accident is (again) not technically incorrect, just incomplete. Given no other information, there’s no basis to think that “sleeping in” has any increased chance of a positive or negative outcome. The explanation that “waking up 15 minutes late causes (or reduces) accidents” cannot be generalized, and thus is unstable. Therefore, if the late sleeper “caused” or was “responsible for” (in some sense) a specific accident, he or she still is not culpable, because there is no reason to suspect the action would matter one way or the other. The sleeper could not reasonably be expected to consider the consequences of the action. Thus, no reason to regulate for this so-called “externality”. On the other hand, a highly intoxicated driver who causes an accident is (under most circumstances) culpable because there’s a reasonable expectation that the action will lead to a significant negative outcome (causing an accident). Hence, a basis for regulation.

Essentially there’s an endless amount and subtle variety of situations which raise questions as to which externalities should or should not be regulated. All are subject to social negotiation, which varies over time, place, context, social and political structure, norms, the introduction and availability of new technologies and information, to name a few. In a complex world, the problems of such negotiations are magnified, partly because there’s so much information available about the impacts of so many activities (positive and negative). No individual could possibly know them all, let alone act on them, even if they wanted. So, is it reasonable to regulate against my “right” to burn a patch of dry grass on my own property, if that patch extends, say, to a neighbor’s property, or to a community park or forest? It is, after all, “my property”, so such regulation would be an infringement on my right to do as I please with it. I would say the regulation is perfectly reasonable, because there’s a reasonable increased expectation (highly predictable) that the fire will spread beyond my property and potentially cause terrible damage. This seems like “common sense”, since most of us hopefully would recognize the danger here (unfortunately, this isn’t always the case). But what if it required special expertise to recognize the danger? What about the amount of benzo(a)pyrene that can be dumped safely into a particular river? To even begin to answer that question requires a team of competent specialists – epidemiological toxicologists, ecological and human health risk assessors (requiring a highly complex mix of art, science and negotiation), hydrogeologists, hydrologists, chemists, remediation experts, etc. And then there are the ancillary agents required to obtain the information (field and sampling technicians, data validators, etc.). Then there have to be mechanisms to oversee, coordinate, integrate and resolve disputes over findings. And that’s just part of it. How could any individual possibly be expected to make a decision about this? How would private interests in a free market deal with them? No amount of “common sense” makes sense here; and ignoring the affects can be lethal.

Ultimately, there’s always a dynamic tension between the right of personal (and group) sovereignty and the problem of protecting the commons (and others’ sovereignty). There is no “right answer” to resolving the tension. Again, it’s a matter of social negotiation. And there are always gray areas. From my perspective, two of the main bugaboos in positivist social science, model misspecification and potential for spuriousness, can never be eliminated. So a subjectivist approach certainly has merit. Austrian economists above all have a wonderful appreciation of this. But like all good observations, they can be taken too far. Eliminating all positivism (including all econometrics and statistical modeling) from social science, is intrinsically self-defeating. You have to draw a line somewhere to make sense of – or at least offer meaningful descriptions about – your observations. (Libertarians and Austrian economists do this, for example, despite claims to the contrary, by relying on “first principles” of natural law and the natural property rights).

So, which externalities require regulation? And how much, and what types of regulation? How much power can private interests wield before becoming oppressive? We could spend all of our time refining the concepts, ad nauseum, in what amounts to little more than high-octane navel gazing; the other extreme is simply to abandon all laws and let the free market run rampant (terribly dangerous). One alternative is “satisficing” (a decision-theory term coined by Herbert Simon, which bears mention) – after a certain point, the gains associated with acquiring and applying new information are less than the effort it takes to acquire and apply it, so we reach a “satisfactory” choice. So, for instance, we set a drinking age in the hopes that it’s a simple way of reducing auto accidents. It’s not perfect – if the drinking age is 21, there are certainly some 19 year olds more responsible than some 23 year olds – but how do we decide on an individual basis who should and shouldn’t drink? We don’t if there’s too much effort and not enough benefit to discovering (though it’s not always clear where the lines are). So we set the drinking age at 21. It may turn out that the policy fails, and the law backfires. (The so-called “drug war” is an obvious example of backfiring, if we suspend disbelief and consider it just “a bad idea” run amok, rather than a cynical, intentionally-oppressive policy). We (in principle) re-examine the problem and seek better solutions. It’s an evolutionary, emergent, imperfect and painful – yet often fruitful – process. And even when these processes fail (and structurally often do – see above comment on the drug-war), the alternative of not using them can be far worse.

I don’t mean to appear overly-critical. For example, you present an excellent insight about government externalities – a good way of capturing the dynamic complexity of the problem. It’s an idea worth exploring. Thoughtful, thorough analysis how both the private and public sectors externalize costs (and the way private/public power structures interact to amplify their power – an increasing problem in the US, where I live) may prove useful in dealing with the problem of balancing size and scope of government and private interests. But the issue, as always, IS figuring that balance. Defining externalities too broadly does not help.

A final thought: the directness of causal links is important when evaluating externalities. I hypothesize that our brains are wired (for lack of a better term) so that direct relationships appear more salient than indirect ones, and the relationship is generally (statistically) non-linear (i.e., decreases at an accelerating rate the farther down the causal chain). So for example, in path analysis, I postulate that 0.9 x 0.9 < 0.81; 0.9 x 0.9 x 0.9 << 0.729; 0.9 x 0.9 x 0.9 x 0.9 <<<0.6561… in how we derive meaning and make sense of the world. This is an empirical question – I may be wrong. Perhaps advances in neuroscience in general and neuroeconomics in particular will eventually shed light on this. If nothing else, I think this is yet another reason (of many) why applying positivist approaches to understanding human behavior requires extreme caution.

I welcome your reply as well as those from others.

André March 11, 2011 at 3:41 am

I agree with you on the excessive use of broad definitions in the article. Also, you make a good point in distinguishing between which externalities are reasonably meaningful and which are just not practical. Of course there is a big difference between (1) waking up too late to prevent some catastrophe in the house and (2) intentionally burn some paper, or a rug, in the middle of the living room to warm up the family. The article, albeit very interesting, somehow tends to be a bit superficial in many occasions.

But I also think you miss one crucial point. Government intervention can be surrogated by court actions. Negative externalities (which are the nasty ones) are about unaccounted damages to other people. If the damager has to pay for his or her “unaccounted mess”, you are going to see soon the spontaneous internalization of externalities. Typically damages lead to juicy lawsuits, fees, imprisonment, and even death. These possible, unpleasant consequences, by themselves, are enough to discourage damaging in many occasions. The conditions is – that the juridical system works efficiently, rapidly, and pervasively (I know, I am a dreamer). So, if a some big, evil corporation pours gallons and gallons of sulphuric acid into their milk formula for toddlers – not only customers will stop buy their products. Someone will bring those in charge before a court and make them regret what they did. Same with air pollution, or whatever other foreseeable negative externalities. If you do something – and you are supposed to know that this something might damage other people – then those who suffer a loss because of your reckless actions have all the right to make you pay. Without any preemptive public attack against potential right-violators, with tobin-taxes or other interventions alike.

Take your own example of driving licensing. How about, instead of forbidding kids of this or that age to drive, enforcing more efficiently street security? Those who are seen driving recklessly, independently of their age, lose their car(s) and their right to drive – also, if they really hurt someone receive a really adequate punishment (with “adequate” I mean some kind of treatment approved by the victims, or by those who have to bury them). I know it seems more brutal – but freedom requires responsibility, and vice-versa.

Andy March 11, 2011 at 5:30 am

Small consolation for someone with a dead baby, unless it’s a robot baby with a subjective market value.

If we are all supposed to be actors looking out for our own well-being, why would I just sit around, acting against someone only after they have damaged me or my property? I don’t want my death to be your “wake-up” call. Call me selfish.

I don’t believe I should be the one to modify where I go or where I work because you want the “freedom” to smoke for instance. (Not anyone specifically) Unreasonable, uncompromising individuals can be just as much a threat to my freedom as government. I may feel compelled to punch you in the face to protect myself, but choose lobbying instead.

My ideas about reasonable intervention are just as subjective as anyone else. Anti-smoking regulation takes away the freedom to smoke anywhere you choose, but also makes it more difficult for me to justify negative actions against you, directly from me, for the same offense.

You can see this unfolding with abortion rights. How long will it be before someone successfully defends themself against a murder charge for killing an abortion provider? The answer may seem obvious to most of us, but not everyone agrees. Is it tyrannical to sentence someone to life in prison for defending life, when the state refuses to define life? Law also acts as a restriction on government as long as WE enforce it.

Jonas March 11, 2011 at 6:50 am

I’m not that good an arguer so I’ll just take the easy one first, and then just take a crack at the rest. The freedom to smoke is up to the owner of the property. If he wants you there, he’ll respond to your request for non-smoking premises. If not, your solution appears to be to force him to. To ask government to forcefully forbid him to allow full use of his property, which amounts to a threat of violence if he failed to comply. That’s wrong in absolute terms, I’m sorry.

There is nothing fundamental stopping someone from (attempting to?) ‘killing your baby’ now, government doesn’t magically make that go away. Only thing keeping that from happening is other peoples’ wishes not to do so, either due to reasons coming from within them, or due to disincentives coming from without. The argument is that the market can provide the disincentives just as well or better.

If wrongdoing can be identified by government, it can be identified by market agents looking to make a profit righting wrongs, more efficiently so due to profit signals.

Andy March 12, 2011 at 5:30 am

Violence exists with or without government. Is the Libertarian argument that coercive force is only exercised by government?

The point that I didn’t illustrate clearly enough is that I am not allowed (not that I would) to punch someone in the face because they are doing something that I FEEL harmed by. Statutory law attempts to objectify something subjective, such as harmful behavior. The same men with guns that infringe upon your right to smoke freely are supposed to assure you of protection from my physical assault, as well. In absolute terms, we have both lost a little freedom because we were unable to come to an agreement. I’m not sure that I would consider our freedom as being taken away in this instance.

What is property? As long as you and I agree to the same terms of what constitutes property, we don’t have a conflict. Basically, your property rights are only as good as your ability to restrict my usage of what you consider yours. The State, so far, has been able to do that more completely than anyone else.
Why would that be different absent State coercion?

John P. Cunnane March 13, 2011 at 8:11 am


The problem with your argument is you are arguing against individual liberty while failing to address the fact that the structure of the society you advocate is, and has been, in place and, in the view of Austrians and Libertarians, it has failed. I don’t have the time or inclination to address all of your points but I’ll grant your view that individual actions may have externalities too egriegous to be simply overlooked. Now let’s consider the externalities of collectivism.

Would we have more or less violence in society with less government? In my experience I see people voluntarily, peacefully cooperating everyday. I have also seen individual bad actors act violently. That individual violence pales in comparison to the constant state of wars between governments and our sitting on the precipice of nuclear annihilation.

You can argue that it is compassionate for the government to intervene in the economy to save lives or create jobs or “spark innovation” (funny I haven’t seen much of that) and that the externalities of a free economy would have damaged the environment or let the poor starve. Again, the actual externalities of the big government\big business partnership involve an economy that creates fewer jobs and less opportunity.

When Austrians view the externalities of the society you seem to advocate we see collectivists claiming the moral high ground in disclaiming a history that has unfolded under their preferred dynamic.

Bob Selcoe March 13, 2011 at 11:13 pm

Hi John,

Thanks for the reply, but I think you’ve inferred much that isn’t contained in my comments. I didn’t argue against “individual liberty” as such, nor did I for one moment advocate any particular “structure of society”. And if you mean by “externalities of collectivism” the externalities caused by government, I specifically did say that was an excellent point raised by Predrag and should be further explored. Indeed, I also PRECISELY note in the second-to-last paragraph that the interrelationship between government and private (corporate) interests are of critical concern – I hope it was clear that I meant the relationship often is pernicious (and let me add that, at its worst, arguably the single most dangerous current threat to human existence). So we appear to be in agreement. Perhaps there are issues of definition. Irrespective of other definitions of “private” I’ve seen bandied about, in the real world, “private interests” – at least those of significant power and ability to impact on people’s lives – are primarily corporate/global capital. And perhaps you mean proposing any regulatory or other state involvement (beyond security perhaps) of any kind is, by definition, an “argument against liberty”. If so, then so be it. I might agree if this were the 18th Century, but it isn’t the 18th Century.

Now, I completely agree about the cooperative nature of society – I, too, see it everywhere and make a point of mentioning this to anyone who’s willing to listen (which unfortunately isn’t too many). This is an area more people need to contemplate deeply, I believe. And as far as innovation goes – that’s an entire other subject. I’ll simply say I expect I have a very different take than most on this website. I’ll leave that discussion for another day.

My main point here is that we need to address the needs of others as an important ethical basis for evaluating human action. I don’t believe Predrag’s approach shed light on that issue one way or the other, and I made that point firmly – though (as I said) I very much appreciated the paper for having the courage to raise the issue. Now, there may be some metatheoretical tap dancing required for those prone to needing that for solace, or to find some elusive “first principle” to justify compassion or concern for others as one (not he only) inalienable function of society. This isn’t my intention, and that may not have come through in my reply. I don’t care about winning or losing debates about this – that’s fine for politicians and certain erudite academics as prelude to wine and cheese parties. I just want people to address the issue seriously and cogently without being ideological. I appreciate anyone who wants to join in. Perhaps it will make a positive difference.

This is a work in progress and I don’t pretend to have any grand conclusions. But for me, in the 21st century, some of the main issues are scale, speed and complexity of global interconnectedness, and the rapidly changing nature of competition in the market (and perhaps of life!) itself. There are others; again, time doesn’t permit detailed discussion here, and it goes way beyond the scope of the initial post and my reply to it. But simply put, as I see it, the world is too complex, changing too quickly and too interconnected for any individual to make reasonable decisions about a nearly exhaustive array of things. As such market “distortions” are intrinsically vast and overwhelming to “the system”, and thus “the market” is no solution in and of itself. It is past the point of self-correction, certainly in the short term (and as far as I can see in any foreseeable future, but my crystal ball, like everyone else’s is prone to cracks and cloudiness). So we need planning and coordination and integration and trust in people who know more about some things than we do; and unfortunately, that doesn’t mean private interests alone, because they are prone to the same oppressive vices as the state when unchecked. We can’t go back to some (frankly unrealistic) conception about man in a “state of nature” or rely on 18th century precepts – or even precepts from 50 years ago – about economics, epistemology and “human nature” (we don’t really know what that is, anyway, if we’re honest about it) to understand today’s world. That may not be as comforting as thought experiments concerning natural law and and spontaneous order, and a belief that if we emasculate the state and just do (essentially) as we please, everything will balance and we’d all cooperate and life will be grand. That’s simply not reality; I’m not saying you think it is either, John – I don’t know. But even if one wants to construct a theoretical argument toward some utopian vision about “total liberty” that in some hypothetical world could exist, I say take a tip from Icarus and be careful what you wish for.

I’m just hoping we can find a workable balance somehow in today’s world. It’s an evolving process that’s going to take a lot of effort from a huge number of people with lots of different perspectives – whatever labels you prefer to ascribe to them.

John P. Cunnane March 14, 2011 at 8:51 am


How can a central planner better address the complexity of each individual’s existence better than the individual? Even Mustapha Mond struggled with that. Do you believe there are those so smart that they know what is best for Bob Selcoe, now multiply that complexity by the amount of people in a country and then, in the world. Now that you have completed that exercise, no it again now because everyone just reacted to everyone else’s actions. The problem with your solution is scale, a central planner by necessity groups people. He realizes there are too many individuals to reach, small groups and businesses are also too small to piddle with (could you imagine the time commitment necessary to become acquainted with me and then my small business). Hence he foucuses on the largest groups he can satisfy with one act.

You see the complexity of the world and ask, how could an individual possibly advocate on his own behalf. I see the complexity of each individual and ask how could a planner possibly advocate on behalf of each of us particularly given the fact that things are so dynamic and preferences change with time?

I realize you don’t ascribe to some of the positions I implied were yours, I only meant that is where I believe your position leads, regardless of your motivations or preferences.

Bob Selcoe March 14, 2011 at 9:52 am

“Do you believe there are those so smart that they know what is best for Bob Selcoe…”??

The short answer is, yes, I do, for certain things. Far better than other mechanism, at this point in time.

“…now multiply that complexity by the amount of people in a country and then, in the world.

The short answer, is, unquestionably, for certain things – Yes.

I’m not sure why you seem to be suggesting the choice is between 1984 and paradise. Personally, I prefer concerning myself with slippery slopes for skiing, and for foreseeable problems. Ad absurdum arguments are useful for fine-tuning ideas (I use them all the time with my kids, much to their chagrin), not for providing “evidence” or making specific policy.

John P. Cunnane March 14, 2011 at 11:18 am


One person wants central planning “for certain things”, others want other “certain things”. The problem I see is that it constantly builds on itself.

I don’t consider less government to be paradise, human nature is competitive and there will always be problems but I do believe government is expansionary in nature and that the end result of centrally planned society is an illiberal one. I prefer a voluntary society to one based on coercion. Where do I draw the limit? Positive and negative rights seem to make the most sense to me but I honestly have not reached a conclusion on the acceptable limits of government. I understand Hayek’s concerns and confusion on this issue.

As to foreseeable problems versus the current state of affairs, I consider the treatment of individuals around the world by governments to be an immense problem today; one that we are far from immune to. It appears that you acknowledge that point so I won’t bother listing grievances. If world history tells us anything, it is that government cannot be trusted and should always be viewed skeptically.

Predrag March 11, 2011 at 6:51 am

Thank you all for reading the article. Some of your criticisms are addressed in the last two sentences of the article. Also, the definition of externalities is not mine.

Bob Selcoe March 11, 2011 at 8:59 pm

Hi Pedrag,

For my reply, please read “definition of externalities” as “reasonable conceptualization of externalities”.

I don’t see your last two sentences addressing my criticisms. Does your objection to internalizing externalities apply only when used as an “offshoot of the utilitarian theory of rights” (a.k.a., utilitarian theory of justice)?? If so, you wouldn’t need to conceptualize externalities as basically “anything”, because no 21st Century justice theorist worthy of consideration would try to account for “everything”. Actually, that holds true for non-utilitarian theories as well (not all theories which account for externalities are “utilitarian”). Perhaps this link will be more useful than the one for utilitarianism: http://en.wikipedia.org/wiki/Justice (see esp. John Rawls and Robert Nozick. For the record, I think Nozick’s “Utility Monster” critique of Rawls – yet another silly ad absurdum thought experiment attempting to discredit a well-considered theory by attacking one principle of it – is a quintessential example of a straw man argument, especially since Rawls’ approach really isn’t “utilitarian” and the utility function he uses actually is ordinal. Rawls makes fundamental conceptual errors not addressed by Nozick which I will not address here).

So, how would you account for externalities? More importantly, what alternative formulation(s) would you propose, and how might it/they apply in the real world today?

Predrag March 11, 2011 at 11:09 pm

So, how would you account for externalities? More importantly, what alternative formulation(s) would you propose, and how might it/they apply in the real world today?

The question is not how to account for externalities but how to evaluate action in a way that a difference in kind can be delineated between different actions. Answers have been offered by authors before me. The purpose of this article was to show why it makes sense to look into these answers if one is interested in evaluating human action.

Bob Selcoe March 12, 2011 at 2:34 am

Fair enough – but that’s not really what the article is about. It’s a separate issue than what you presented. The litany of and emphasis on externalities therefore seems irrelevant. Externalities matter and need to be addressed in any cogent, serious analysis of human action. You may want to re-title and re-focus the article.

Predrag March 12, 2011 at 7:16 am

The focus of the article was to show that one method of evaluating human action, currently quite prevalent, is problematic. Now, when one sees why this method is problematic, one can turn to assessing other methods. Thus, if we discard the above method of framing human action (externality-creating vs. externality-free action), we can not claim what matters and what does not matter until we select and assess another ethical principle that could be used to evaluate human action. The focus of this article was using internalization of externalities as a norm of human action. Some other article might focus on some other norm (i.e., non aggression principle, responsibility to protect, etc.).

Frank Prust March 25, 2011 at 3:40 am

Externalities are costs or benefits of a production process that are not incurred by, or beneficial to, the producer (i.e. environmental pollution or knowledge spillovers). Consequently these costs or benefits are not expressed in the products market price. Therefore the price mechanism will not create an efficient price (eg one that fully reflects preferences of market participants vs the availibility of scarce resources) and, from a societal viewpoint, ‘too little’ or ‘too much’ of the good will be produced.

External effects can be internalised (expressed in their market price) by properly functioning institutions (NOT necessarily a ‘government’). Institutions are all mechanisms that define and assign property rights, internalise external effects, reduce risk and uncertainty and provide a society with non-rival or non-exclusive goods. Institutions are a vital necessity for a well functioning market economy. Again, NOT necessarily a ‘government’.

Predrag April 13, 2011 at 11:55 am

Frank, I am not arguing that following a particular ethical principle would not result in prices that are different from the prices that result from following some other principle. However, claiming that external effects are only those that are not reflected in the price of a good, presupposes that one knows the “correct” price. In order to know the “correct” price, one first needs to know which actions are right and which are wrong; which actions are allowed in the price-forming mechanism and which are not. Without an ethical principle that precedes the formation of prices, one cannot derive the benchmark price that can be compared with the actual price.

The only other way one could know the “correct” price without regard to the actions taken in the price-forming mechanism is if there was an objective measure of value. Since no one has succeeded measuring value outside their own mind, we rely on the subjective theory of value.

What I am arguing here is that this particular ethical principle (internalization of externalities) does not help us identify which actions (and every action creates an externality) should be allowed in the price-forming mechanism and which should not.

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