An Objective Scientific Case for Intervention?

by Don Boudreaux on April 19, 2011

in Cleaned by Capitalism, Complexity & Emergence, Curious Task, Environment, Other People's Money, Regulation

Economists (and members of the general public) have long known that economic outcomes are distorted to the extent that people make decisions without taking full account of the effects that their decisions have on third parties.  Whenever such “externalities” exist, the outcomes of free choices cannot be correctly assumed to be socially optimal.  Such outcomes are, at least in principle, able to be improved either by changes in the institutional structures that influence individual choices or by direct intervention by some agent sitting, and acting from, outside of the system.

Early 21st-century Americans today suffer from such externalities.  One externality in particular directly and ominously threatens the physical environment in which we live.  If matters continue unabated, not only the health of Americans, but of people worldwide, will decline.  Compared to what would prevail if this externality were ‘internalized,’ our life-expectancies will be lower; the air we breathe will be more foul; the quality of our lives will be reduced.

This externality is the result of private citizens daily making countless private decisions that, while each decision benefits its individual maker, combine in total to threaten the fragile climate that makes our lives prosperous, clean, and healthy.

Many noted scientists – some of them Nobel-prize-winning experts in the field – have long warned against the folly of ignoring this problem.  These experts note that the climate that makes our lives possible – that keeps nearly 7 billion people alive on the globe, and that keeps the vast majority of these people healthier and more prosperous than anyone has been at any time in history – cannot sustain the continued battering it is receiving as a result of these private decision-makers who remain insufficiently constrained in making private choices that add to the accumulating poisonous effluence that is destroying the climate.

Admittedly, there are deniers, even among the scientists.  But we all know that there is no proposition so lunatic that some people will not buy it.  Some people, sad to say, still deny that the Holocaust ever happened.

(Not all of the people accused of being deniers, however, are really deniers.  Some of the ‘deniers’ are simply people who admit that the externality might well exist but who doubt that there is any cure for it that would be better than the ailment itself.  These people, while more reasonable than the outright deniers, are insufficiently aware of the grave and irreversible tragedy that will befall humankind in just a few years if actions are not taken today to solve the externality.)

The externality, of course, is political decision-making – every decision from casting ballots in voting booths to the President of the United States signing legislation that gives government greater power to regulate capitalist acts among consenting adults.  Political decision-makers make their decisions based upon their own private calculus – each decision-maker deciding according to what is in his or her own best private interest.  But, obviously, because every political decision affects countless strangers who have little or no input into each decision being made, each and every political decision emits external effects – ‘political pollution,’ if you will; countless irresponsible private decisions that, set adrift into the body politic, will dangerously change the climate to one of hostility toward markets and enterprise.  The overall outcome of these decisions cannot, scientifically, be presumed to be optimal.

Many economists understand that free markets, and a culture that celebrates bourgeois values and activities, are a powerful force for prosperity and improved human living conditions.  Quality housing without the filthy dirt floors and vermin-infested thatched roofs that our ancestors endured; automobiles that keep our streets clean of animal manure and the resulting swarms of flies; personal-hygiene and first-aid products that keep our persons cleaner and healthier.  The list is very long.  Unfortunately, because individual political agents make decisions without having to account for the full effects that their decisions will likely have on the economy’s ability to continue to generate this cornucopia of human-climate-improving benefits, the continuing – indeed, expanding – role of politics in our lives poses a grave threat to humanity’s future.

…..

I actually am not among those persons who believes that the economy will crumble into chaos at the slightest introduction of unwarranted intervention.  But do note that the same sort of story daily told about the threat of climate change to humanity’s future can be told, just as compellingly, about the political interventions aimed at mitigating the effects of alleged market imperfections, including those that bring about climate change.

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{ 38 comments }

Eric April 19, 2011 at 11:49 am

“If you tell a lie big enough and keep repeating it, people will eventually come to believe it. The lie can be maintained only for such time as the State can shield the people from the political, economic and/or military consequences of the lie. It thus becomes vitally important for the State to use all of its powers to repress dissent, for the truth is the mortal enemy of the lie, and thus by extension, the truth is the greatest enemy of the State.”

Joseph Goebbels

Daniel Kuehn April 19, 2011 at 12:13 pm

Fastest convergence on Godwin’s Law ever.

Ken April 19, 2011 at 12:43 pm

Ha!!

Anon April 19, 2011 at 11:33 pm

The longer a Nazi reference remains on the internet the probability that someone will mention Godwin’s Law approaches 1.

Ken Mueller April 19, 2011 at 11:55 am

Thanks Professor. It’s good to hear economic rhetoric that makes sense to us commoners: and particularly when you use a term like “externality” as a weapon to whack our Leftist friends with. Thanks again. Your links were also very helpful, especially the one to McCloskey, an extremely readable economist.

John V April 19, 2011 at 12:00 pm

Well put. The idea that you just conveyed is the number one reason that pushed me from the centrist side of Modern Liberalism to classical liberalism.

It’s also the idea that pounds through my head whenever I see economists with a strong penchant for intervention continue to prescribe meddling based on some sterile economic model of how markets in XYZ situation “fail” and/or lack the perfect conditions to be left alone. The double standard among these economists with regard to their stringent standards towards market outcomes OTOH and their total lack of this stringency toward government outcomes on the other totally astounds me.

In a nutshell, perfect theoretical solutions that breakdown in reality that further need perfectly ideal political processes to realize them as law in first place are NOT sufficient reason to justify such courses of action. As you say, the cure is often worse than the ailment.

Bob April 19, 2011 at 12:28 pm

Don, I never thought that I would call you a “Chicken Little” sky is falling type of guy. There are as many highly accredited scientists that are dubious about climate change and the remedies prescribed by proponents of human caused global warming. Through out time the earth has heated and cooled and will continue to do so despite the efforts of man. Nature and man will adapt as it always has. Interventions to rectify perceived unproven problems are the results of rent seeking crony capitalists and revenue seeking governments and do little to abate and create more problems and are expensive.

Marcus April 19, 2011 at 12:54 pm

Apparently you didn’t read Don’s post. Hint: it wasn’t about global warming.

Ryan Vann April 19, 2011 at 1:23 pm

Bring back voting taxes! It will magically fix the externality.

Dallas Weaver April 19, 2011 at 1:41 pm

Don,

Your previous blog on the Natural Sciences has factors that can be combined with this one.

In particular, in evolutionary microbiological ecology, they have a situation where the mathematics, concepts and results are very similar to economics, with only the language of “fitness functions” instead of other terms like “utility” and the mathematical symbols being different.

Some recent microbiological evolution experiments provided some interesting results, where they showed that the long term competitiveness of an evolving bacterial strain (note that bacteria transmit information — DNA — both vertically to daughter cells and horizontally to other cell types or strains) depends upon its ability to maintain the ability to evolve and not on its short term fitness. A strain with superior short term fitness still lost in the long term to a strain that could adapt faster.

The analogy with economics would be to note that, yes, the government bureaucratic controlled decisions maximizing utility by decreasing externalities could (assuming they know enough) be a short term superior solution. However, the government agency or regulator making these decisions has interests of it own and will become resistant to change. It will also have no death mechanism (failure of programed cell death — Apoptosis — is a signature of cancer in living systems) and would be surpassed by an adaptable system. However, it is in the interest of the regulator to prevent such a competitive evolution.

For an example, lets look at our transportation system. It can be argued that at the present time a very modern fast rail system would be more efficient than our existing human operated automotive system. If we built a government bureaucracy and spent more money that we spend upon or automotive and roads, we could build an alternative system in 50 – 100 years or so that would solve our transportation needs.

However, in < than the next 50 years, automobiles could become driver-less. Autonomous vehicles could communicate with all other local vehicles and form "auto-trains" where cars follow at 2" like NASCAR drivers. By following at these short distances, the thermodynamic efficiency of an "auto-train" can be equal or superior to rail transportation (no empty cars). The auto-trains would split up and reform as people need to join and leave and would triple the capacity of our existing highway system (no spacing). Such a system would be far superior in getting people moved in terms of efficiency, environmental impacts and personal desires and will be a natural evolution somewhere in the world as Moors law continues its course.

Of course, the government bureaucracies will try to slow down such an evolution and will argue for unlimited liability for a system that is more reliable than human operated vehicles. They will also want standards and approval systems.

yet another Dave April 19, 2011 at 5:16 pm

Interesting post. I really like the bacteria comparison, and it fits nicely with something I’ve observed for years: most (all?) advocates for gov’t intervention are static thinkers (even though some deny it) whereas dynamic thinkers tend to oppose such intervention in favor of liberty and voluntary interaction.

Justin P April 20, 2011 at 11:54 am

Excellent post. Please keep commenting Dallas.

jcpederson April 19, 2011 at 1:44 pm

Will there be a no splurge zone established in Washington?

Will Krugman get sent to Gitmo?

Jeff Neal April 19, 2011 at 1:58 pm

I note that many of my interlocutors on various blogs and in everyday conversation tend to make a similar “externality error” in reverse, so to speak.

“Oh, ok, so you want lower taxes – well then, who will pay for the government that invented the internet, makes laws so the air will be clean, the streets paved and water/food you drink/eat healthy?” they ask – it must be taught in a rote memorization class – it never varies!

They seem to think that the government one day waved its magic wand and made the air clean and rid the streets of horse manure and flies – thank you Professor for the exact right counter-point.

In my next discussion, I’m going to ask why that all-knowing and omnipotent government doesn’t simply pass a new law that outlaws global warming, per se – It’ll be a short bill: “Earth, we command you to stop warming.” If good things happen at the stroke of the POTUS’s pen, then, by golly, start writing some laws, would ya!? Next on the list, we’ll outlaw the common cold, skinned knees, acne and erectile dysfunction. Who needs doctors and pills when we have legislators!

As Yul Brynner in the movie, The Ten Commandments, would say: So let it be written, so let it be done.

Gil April 20, 2011 at 4:31 am

Or should the question be whether negative externalities should be dealt with or not? With productive activity for every negative externality there’s a greater positive externality going on. Had pollution during the Industrial Revolution been banned then we’d still be living on Medieval farms. Since producers don’t get rewarded for positive externalities then why should they be punished for negative externalities?

Governments can’t stop Global Warming per se but they can ban internal combustion engine vehicles, coal-fired power stations, cows and sheep, etc., which would drive humanity back into Dark Ages.

JohnK April 20, 2011 at 8:50 am

The Federal Register is the modern day equivalent to a wizard’s book of spells.

Justin P April 20, 2011 at 11:55 am

“So let it be written, so let it be done.” As soon as read that I had to put on Metallica.

Matrim April 19, 2011 at 3:01 pm
WhiskeyJim April 19, 2011 at 7:33 pm

The EU is insane. In perhaps 4 generations, the concept of ‘western European’ will be but a memory. We are watching a society disintegrate and there is nothing that can stop it.

If that sounds alarmist, so be it.

Question: What do pure libertarians say about the disintegration of Europe, assuming it is their culture and rejection of what (I imagine) Conservatives would say are family values that is killing them.

Tim April 20, 2011 at 2:30 am

It’s their rejection of free market capitalism that is hurting them, not being more socially liberal. So long as people have to take responsibility for their actions, society can endure a great deal of allegedly immoral behavior. The problem isn’t with the rejection of family values per say, but with a society that enables those who live irresponsibly to get away with it by leeching off of everyone else.

WhiskeyJim April 19, 2011 at 3:35 pm

Not being an economist, I increasingly struggle with the practical institution of the theory of externality.

Education seems a good place to begin. Or health care. The slippery slope of subsidy inevitably leads to astronomical cost.

I humbly ask if there is a good example of positive externality put to practical use where it has not ended in a boondoggle.

Methinks1776 April 19, 2011 at 5:23 pm

Nicely done, Don. I particularly enjoy your taking every opportunity to inject “bourgeois” into practically every new post.

Growing up with the Communist sneer of “petty bourgeois”, I came to love all things bourgeois. The more bourgeois the better.

As you note that you don’t think the economy will crumble into chaos with unwarranted intervention, I remind that the economy doesn’t have to crumble into chaos for life to become really really horrible.

brotio April 19, 2011 at 11:25 pm

*like*

I’m just waiting for the day when our little Marxian-Who-Isn’t-A-Marxist uses the phrase petty bourgeois while extolling the virtues of Nephew Franklin, and again denying that he’s a socialist.

Steve April 19, 2011 at 6:23 pm

Don,

Marcus says your post “wasn’t about global warming.” Fair enough. You used global warming to illustrate another point. But while doing so, you referred to those who are skeptical of the claims of warming theory as being “deniers”, even using the Holocaust denier comparison. This sounds like something straight out of an Al Gore sermon. There is ample reason to be a warming theory denier—manipulated data, lost data, subversion of peer review, computer models that can’t even account for past temperatures (much less future ones), the fact that there has been no warming since approx. 1998, just to mention a few.

The next time you wish to make a point about externalities, may I suggest you choose a different example. And may I further suggest that you avoid insulting the intelligence of those who, quite rationally, are skeptical of the claims of warming alarmists.

FW Garvin April 19, 2011 at 11:38 pm

Moreover, via the “black swan” principle, the fact that global mean temperatures have been declining for the last decade and more, makes global warming scientifically falsified.

So, the deniers are, more accurately, the deniers of fact who claim that increased C02 concentrations: a) are anthropogenic (where there exist many earlier periods where higher CO2 concentrations that could not have been anthropogenic, making the premise inconclusive at best); b) cause a mean rise in temperature (which is contradicted by both historical and present data); and c) will be harmful to humanity (which is just specious).

It is only in the field of government funded (in the $Billions) climatology where a falsified doctrine can become accepted doctrine.

Given the scientific falsification of the theses, denying global warming is akin to denying that the earth is flat.

Yet, somehow we don’t call the “round earthers” the deniers.

John April 20, 2011 at 12:10 am

Nice plot twist. Worthy of Shyamalan.

Jeff April 20, 2011 at 1:44 am

Don and Russ,
Perhaps a more compelling scientific case for interventionism has been made by Thaler and Sunstein in their book, Nudge, in which they argue for a libertarian “paternalism.” (http://www.amazon.com/Nudge-Improving-Decisions-Health-Happiness/dp/014311526X/ref=sr_1_1?ie=UTF8&qid=1303277909&sr=8-1.

The libertarian community needs your thoughtful and eloquent response to this position.

Tim April 20, 2011 at 3:17 am

Don’s analysis still holds, because the question is how the “libertarian paternalists” will decide to nudge people. There may be a potentially superior outcome in mandating that everyone buy health insurance lest they get hit by a bus; because some people really could be short sighted enough not to purchase it.

However, once the government starts mandating health insurance it can define what health insurance qualifies such that they have to purchase care they aren’t really at risk of needing in order to line the pockets of some medical service provider, drug company, or to make health care “more affordable” to some well connected class citizens. The mechanism by which this would happen is precisely as Don wrote above.

That’s essentially the individual mandate, which although alleged to prevent people from being foolish or gaming the system, it in reality goes beyond that and forces the healthy to pay actuarially unfair premiums so the sick can pay less so as to lower the amount of money government has to explicitly tax and transfer so Obama can say his plan comes in below cost x.

Thus while there may be a superior outcome to the voluntary one, the price of protecting the handful of people who actually realize the risk of their short-sightedness on health insurance is to force everyone of a similar risk cohort to pay more to subsidize some health providers and some sick people. Maybe you think that’s a good thing, but isn’t paternalism that could be billed as in the individual’s self interest.

Jeff April 20, 2011 at 7:23 am

So, in other words, who is going to nudge the Nudgers?

Tim April 20, 2011 at 2:23 pm

In other words, good public policy is essentially the biggest collective action problem; because public policy is rife with external costs, those costs not born by the politicians and those who put them in office.

“Libertarian paternalism” and externalities are two different things. The first is a failure to do what is in one’s own self interest, the second is where acting out of individual self interest harms others.

Nudge refers to the former, and to maintain the libertarian notion it allows for an opt out; something that would cause most policies aimed at internalizing external costs to fail miserably.

Chucklehead April 20, 2011 at 2:50 am

What was the question? My head hurts.

Which one of us gets to decide what is socially optimal?

Chucklehead April 20, 2011 at 3:52 am

According to Demsezt Real social systems design government institutions to insulate them from the influence of free markets. So government intervention to reach Pareto optimization is as futile as resisting the collective Borg.

If you see the waiter, can I have a short mocha latte please.

Keith April 20, 2011 at 8:11 am

I live in a country which is essentially communist. Here in Zimbabwe the state tries to control everything and anything it can. The controls don’t work, the economy has stopped, one third of the population has run off to live in capitalist democracies and they are not coming back.

The bits of the economy that do work are those that are the product of individuals operating in their own enlightened self interest and under the government radar.

Yes I know that we have the most incompetent government in the world but that only serves to make the point more clearly. The government puts out excellent reasons for all of their controls and yet the failure of each directive is complete except insofar as they feed the gatekeepers and the connected.Less incompetence in government would only change the speed of failure but it will not prevent failure.

This is true of the global warming crew too. Every policy sounds OK on the face of it but they are wrong and really only represent some egghead’s concept of what will work for the rest of us.

Individuals working in their own self interest will always result in the least bad outcome whether you are talking economics or climate change. Your Tea Party types calling for less and smaller government and expanding individual rights , freedoms and obligations seem to have a better view of what is needed. I live in an over controlled, inefficient and oppressive culture and it is a really bad idea. Just because this is Zimbabwe doesn’t mean it won’t happen to you, it will just take longer if you don’t take back your individual rights and freedoms and obligations.

I loved this essay.

John Kannarr April 20, 2011 at 12:53 pm

Where’s that Precautionary Principle when we really need it?

Kevin Marshall April 20, 2011 at 4:21 pm

Using the metaphor of global warming is apt, but like any metaphor breaks down once examined closely. I would claim that a global warming “denier” has a more tenable position once the evidence is examined in detail and from different perspectives. Conversely, a denier of the unintended consequences of interventionism, like a holocaust denier, has a less tenable position once the alternative evidence is examined.
This brings me onto a second point. Politicians are selling themselves to get elected, which implies building up coalitions of diverse interest groups. Early Public Choice theory called this Pork-Barrel politics. A more successful approach in the television era is one based on image. That is projecting personality over policy substance. It goes against the notions of weighing up the pros and cons, learning from error in one’s past judgments, and recognizing limitations in one’s abilities and knowledge. Good government requires questioning skeptics, but has a propensity to elect the smooth-talking deniers.

N. Joseph Potts April 20, 2011 at 5:03 pm

Proponents of government intervention into climate change and of intervention into economic developments are advocating the SAME thing: more power for themselves (and by means VERY similar to each other, all ultimately growing out of the having of guns).

Thanks for so eloquently making this undeniably clear.

John Harmon April 20, 2011 at 8:22 pm

Since there never has been a single scintilla of evidence that human gas release into the atmosphere has even the ability to raise the temperature of the atmosphere by more than the measurement error the correct comment on “deniers” must be supportive. Failing to check the science renders the author’s comments silly. The world has cooled for nearly ten years. Use facts and data, not models. Or maybe don’t write about something one knows nothing about.

Keith April 21, 2011 at 12:00 pm

I am a climate skeptic by the way , hence my comment.

I liked the essay because what he was advocating , I think, was individual action is better than top down edicts.

Warm Regards

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