Economist James Broughel, writing at EconLib, reviews Ryan Bourne’s great new collection, The War on Prices. In his review Broughel offers this head-scratching bit:
The incentives market prices provide, for example, are often perverse, as when externalities and other market failures are present. In such cases, prices may encourage redirection of production away from efficient uses.
A good example is the high salaries of sports stars, which Deirdre McCloskey defends, but there remain reasons to be skeptical of this free market outcome. Even if those salaries are ultimately the result of intense consumer demand for sports entertainment from athletes exhibiting rare physical ability, society would be better served if consumers had other priorities beyond sitting on the couch watching sports and young people invested their time building more productive forms of human capital. McCloskey is correct to note that market prices don’t tell us anything about what one inherently “deserves.” But a lot of market prices reflect a desire on the part of the public to engage in conspicuous consumption. It would be more economically efficient if we lived in a world where scientists and engineers were as highly valued as actors and athletes are in our own culture.
Upon reading this passage I went back to double-check to ensure that the author of the review isn’t Robert Frank, who famously insists that the Jones’s consumption imposes a negative externality on the Smiths by inciting the Smiths to do that which the Smiths really would prefer not to do, namely, work harder. In Frank’s view, both the Smiths and the Joneses would really prefer to work less and consume less, but the felt need to match the other’s consumption prompts them all to work (and consume) excessively. To eliminate this externality, Frank naturally calls upon the government to raise taxes.
Much is mistaken about Frank’s analysis, and much is mistaken with Broughel’s. But the most obvious error is this: No externality exists simply because Dick can imagine his life being better if only Jane were to choose to live her life differently.
There is no question that I’d be much wealthier if only you, dear reader, and everyone else on earth chose (1) to work, say, 25 percent harder, (2) to produce only those goods and services that I happen to like and nothing that I dislike or find frivolous, and (3) to live as abstemiously as Gandhi. The available stock of goods and services at my disposal would be much larger. By Broughel’s logic, then, I can conclude that the market forces that incite you to work no harder than you do, to produce what you do, and to consume as luxuriously as you do, are a negative externality on me – a downside of the market order.
Broughel, here, is simply incorrect, both as a matter of theoretical economics and in his leaping from his faulty economic conclusion to a normative evaluation.
