≡ Menu

The Curious Task of Economics

Adam Martin’s excellent recent post at EconLog defending the late Jim Buchanan from a seriously flawed misunderstanding of his work prompted this comment from frequent EconLog commenter Thomas Hutcheson:

I’d like to see a test drive of both models over some familiar ground, say, taxation of net CO2 emissions or income vs consumption taxation.

Mr. Hutcheson’s comment, in turn, prompted this response from me:

Mr. Hutcheson: While Jim Buchanan fully embraced the utility of cost-benefit reasoning, he also understood that the world’s complexities often (although not always) make the performance of cost-benefit measurements dangerous – as in leading to unwarranted conclusions. He also understood the importance of choosing rules in a cost-benefit manner: those rules that are likely over time to produce positive results on net are acceptable while those that are likely over time to produce negative results on net are unacceptable.

One rule that I’m confident Buchanan would have endorsed is a presumption against active government intervention if insufficient knowledge is available to allow a well-grounded conclusion that that intervention is likely to produce benefits on net.

So in this spirit I ask: How does anyone today know that the current level of taxation of carbon-fuel producers and carbon-fuel users isn’t already ‘optimal’ – or that it isn’t even excessive? Oil companies, for example, have been paying lots of taxes for decades, as have buyers of gasoline and diesel. Where’s the evidence that whatever discouragement these taxes have worked, and continue to work, on carbon-fuel production and consumption is suboptimal? It might be, in the eyes of God. But God stubbornly refuses to share with us his full knowledge on this matter. So in the eyes of God we might already be taxing carbon fuels (and emissions) optimally or even excessively.

The case for still-higher carbon taxation gets yet weaker in light of this observation from the science writer Matt Ridley:

Milder winter nights are indeed the biggest effect we see in Britain. Given that roughly ten times as many people die of cold as die of heat globally, and that this is true even of countries like India and Italy, warming has meant fewer people dying.

Would it be reasonable to conclude from the fact that cold kills many more people than does heat that we should subsidize the production and consumption of carbon fuels? Such a conclusion would be no less justified than is the conclusion that we should tax these activities.

Pro-carbon-tax people point to rising global temperatures (and the fact that at least some of this rise is indeed caused by human-induced carbon emissions), and they point also to unsurprising consequences of these rising temperatures (such as rising sea levels). They then leap to the conclusion that we need to tax carbon more heavily. The upsides of global warming (see above) are largely ignored or discounted, while unsupportable assumptions are made about how humans will respond or not to the consequences of global warming.

In all of this the amount of genuine, detailed knowledge of the sort that is necessary to justify government intervention is minuscule.

My argument here is not that costs are so subjective that they cannot be measured. My argument here, instead, is that we don’t know – and practically can’t know – the full consequences of existing taxes and other regulations. We can’t gather this knowledge even if we limit our investigation only to ‘objective’ consequences of the taxes and regulations. When we add in the fact – and a fact it certainly is – that costs, and benefits, and risk preferences are indeed all subjective, the epistemic challenge becomes too great for humans to deal with. Given this reality, we should default to having no government intervention on this front.

UPDATE: As means of raising revenue, carbon taxes might be appropriate (although even here we can never really know). But of course using taxes to raise revenue directly conflicts with using taxes to discourage taxed activities. For the former, the hope is that the tax discourages as little as possible of the taxed activity; for the latter, the hope is that the tax discourages as much as possible of the taxed activity.