Lately I’ve immersed myself in the literature on externalities – a great deal of writing from Alfred Marshall‘s pioneering 1890 text through A.C. Pigou‘s central work on the topic, and up to and beyond the famous works of Tibor Scitovsky, Francis Bator, Ronald Coase, Jim Buchanan and Craig Stubblebine, and Steven Cheung (including Carl Dahlman’s brilliant assessment of it all).
The ‘why’ and the details of my research are here irrelevant. When I learned yesterday from David Boaz that Nancy MacLean’s fabulist tale Democracy in Chains has been nominated for the National Book Award, I recalled one of the countless instances of childishly uninformed claims that constitute her book, in particular this one on page 98 about the assumptions used by Jim Buchanan and other public-choice scholars:
And, in their assumption that individuals always acted to advance their personal economic self-interest rather than collective goals or the common good, Buchanan’s school went further, projecting unseemly motives onto strangers about whom they knew nothing.
Of course, in reality Buchanan and public-choice scholars make the same assumptions about human motivations that are made by all mainstream (and also by most ‘heterodox’) economists. Nothing more and nothing less. Nearly all economists – whether they be on the political left, in the political middle, on the political right, or anywhere else that you might pinpoint a political position – assume that each of the typical ‘agents’ in his or her models is motivated chiefly to promote that agent’s own individual (or household) welfare rather than “collective goals or the common good.” Indeed, the entire, vast literature on externalities and public goods would not exist were it not for this assumption about the motives of “strangers about whom they [the economists] knew nothing.”
The reasoning (familiar, at least, to all economists) is straightforward. ‘Tis this: because each private market actor acts to maximize his own utility, whenever he confronts opportunities to improve his own welfare he seizes those opportunities even when doing so inflicts uncompensated harm on others. Tire manufacturer Jones, for example, who can profit by producing new tires for customer Smith will produce and sell those tires to Smith, who voluntarily buys them, without either Jones or Smith taking into account the harm that their economic activity inflicts on nearby townspeople in the form of additional pollution from Jones’s factory. The possibility of such “external” harm in market economies is certainly one of the key reasons – perhaps the key reason – that most economists use to justify active government involvement in the economy. The entire theories of externalities and of public goods would collapse, or become unrecognizably changed, if economists did not ‘project’ what Nancy MacLean calls “unseemly motives onto strangers about whom they [the economists] knew nothing.”
I emphasize: The irony is that if economists in general – including the most accomplished economists on the political left such as Paul Krugman, Joseph Stiglitz, and Robert Frank – were not themselves in the habit of “projecting [what MacLean, revealing her ignorance, calls] unseemly motives onto strangers about whom they knew nothing,” the chief economic case – and, perhaps, any economic case – against a policy of laissez faire would disappear. At the very least the case for intervention would have to be rebuilt on an entirely new foundation with materials as-yet unfamiliar to mainstream economists.
If economists were to take to heart MacLean’s implicit advice to stop “projecting unseemly motives [i.e., self-interest] onto strangers” whom economists obviously do not know personally, then the factory owner would instead be assumed to altruistically take adequate account of whatever effects the effluents from his factory have on the environment; this factory owner would then be regarded as producing the socially optimal amount of output and, therefore, need be neither taxed nor regulated by government to lower his pollution rate. Likewise, employers – no longer assumed to act self-interestedly – would pay all of their workers top dollar in altruistic efforts to improve the lives of the less wealthy and to reduce income inequality; therefore, there’d be no need, even from the perspective of the most politically leftwing professor or pundit, for minimum wages or redistributive taxation. These same employers, of course – who, following MacLean’s advice, ought not be assumed to be self-interested – would altruistically ensure optimally safe workplaces; so we in America can get rid of OSHA.
Words are inadequate to describe the inaptness and absurdity of MacLean’s above-quoted accusation, and to convey the depth of her misunderstanding of economic analysis generally and of public-choice scholarship specifically. The nomination of her book – a book that is nothing but a pack of not only fallacies, but of fallacies so ridiculous that modestly intelligent high-school sophomores should howl in pants-wetting laughter upon encountering them – for the National Book Award says a great deal, and none of it good, about modern American intellectuals.