01
May
2019
Would We Be Happier Without All That Pesky Output?
I’m actually not opposed to people arguing, “Americans work and consume too much.” But the solution is to persuade them to scale back, not to implement the Green New Deal. My snarky opening in my latest IER post:
Sometimes you have to congratulate the progressive left on their ability to turn that frown upside down. When the laws of economics hand them socialist lemons, they turn right around and make leisure lemonade. Specifically, Kate Aronoff at the Intercept has written an article that says the Green New Deal will make us all happier—in part because who needs all that work and economic output anyway?
That Intercept article seems to be a clear case of what logicians call “affirming the consequent.”
You’re ignoring the benefit that is gained by the robber. It may be better for my neighbor to have that extra $20K in his pocket and have a choice on which car to buy, but it’s much better for me to have his $20K in my pocket and force him to buy the cheaper car. He still gets a car and I get $20K. Win/win.
‘You don’t make people better off by artificially making energy more expensive.’
Imagine an economy that has 2 types of energy than cost the same to produce and can mostly be interchangeably used for the production of consumer goods apart from a few goods where one energy source is significantly more efficient than the other . When one of the types of energy (A) is used in the production of consumer goods it causes everyone disutility (perhaps it causes headaches). The other type (B) has no such effect.
Turns out this is a libertarian society so they call up a free-market judge. He deems that the users of energy type A are causing harm to others and they must pay a per-use penalty to compensate for the disutility they cause. This penalty (paid by the producers of consumer goods who use energy type A) has the effect of making energy more (artificially?) expensive, but (as long as the judge sets the compensation level to the right amount) the overall effect is to make people better off as the economy mostly switches to the the non-polluting energy source (apart from the few cases where use of the polluting source has utility-enhancing benefits that exceed the penalty to be paid for its use.). Most goods are now produced without giving people headaches and the few that still use the heachache-inducing energy source people think the benefits outweigh the cost.
A real free market judge would have a strong background in economics, and therefore know that her judgement in this case doesn’t make any difference either way. Easier to simply collect her fee, explain how the Coase Theorem operates and dismiss the case.
We all understand that a libertarian society would have extraordinarily low transaction costs … being the easiest place in the world to do business.
OK, I’m adding another assumption that in this economy transaction costs are sufficiently high and property rights sufficiently vague to prevent Coarse’s theorem from providing a market solution.
As I see it, Coase’s theorem combined with libertarian property rights would result in fuel A costing more than fuel B.
In Coase’s rabbit/lettuce example he showed that it is the wrong question to ask who is at fault. Who can most easily solve the problem is the right question economically. If it costs $10 to move the lettuce and $20 to move the rabbits and $30 to put up a fence then the $10 solution is the one that should be implemented. Without transaction costs this is what would be the case whoever was liable. Either the lettuce farmer is liable, so he moves the lettuce, or the rabbit man is liable, so he pays the lettuce farmer $10.01 to move the lettuce. If the rabbits do only $5 worth of damage then the solution of doing nothing would be implemented whoever was liable, for the same reasons. Either the lettuce farmer takes the loss or the rabbit farmer pays him $5. What Coase was pointing out that deciding the rabbit man was to blame and therefore requiring him to out up a fence or move the rabbits is an way to solve the problem.
If we combine this with property laws, then the lettuce farmer has a right to keep the rabbit man’s rabbits off his land and therefore the rabbit man must pay. But he should only pay the lowest cost option to restore equilibrium.
In your scenario, fuel A causes some people damage. Coase tells us that it doesn’t matter who is responsible, the most efficient way to restore the equilibrium should be implemented. In the absence of transaction costs this would happen anyway and would make fuel A more expensive than fuel B.
This is not artificial, because without transaction costs it would happen anyway. However, there is no such thing as zero transaction costs, so it does not happen in the real world and fuel A may well remain the same price as fuel B. This would be an inefficient allocation of resources.
Incidentally, Coase explained why firms exist with similar reasoning. With zero transaction costs, everybody would simply work for themselves and contract out their labor to the highest bidder. That cannot work in the real world, so we need firms. As the internet is reducing transaction costs we are finding more people are working for themselves in the gig economy, as Coase explained.
If I were the lettuce farmer I’d be getting $19.99 out of that.
I don’t get you. Your lettuces are suffering more than $10 worth of damage by the rabbits. To solve the problem you could move your lettuce for $10. The rabbit man pays you $10.01. You are making $0.01.
If I’m the lettuce farmer and the judgement comes out in my favor, why would I lift a finger for 1c? I just keep saying no to the rabbit man until he offers something decent.
The normal economic rules apply. You would prefer to be 1c better off.
I’m fairly sure that’s not what he said. How do you define “restore equilibrium”? Who gets to decide what all the costs are?
You are attempting to pretend that the Coase Theorem makes normative statements beyond the hypothetical zero transaction cost environment.
You can’t calculate that unless you have the ability to determine the objective and universal economic cost of a headache. There’s no reason to believe that such a concept even makes sense, but supposing it did make sense there’s no way to do it.
First you have to invent “utils”, then you have to read everyone’s mind.
Here is the paper “The Problem of Social Cost”
http://home.cerge-ei.cz/ortmann/UpcesCourse/Coase%20-%20The%20problem%20of%20Social%20Cost.pdf
To avoid narrow columns I have continued the discussion in a new comment below
But without taxation … who would obstruct the roads to prevent anyone from driving?
“Yes, even though they are on the metric system over there, there’s still the same number of hours per week:” Wait until we push through metric time, like Napoleon wanted! Actually, on looking it up, it was Lagrange. Apparently a centiday was used in china for thousands of years. It is 14.4 minutes, which is seems a very useful and convenient measure of time. It would fit into the TV schedules quite well, for example, although that is a bit archaic now.
“Some might further spend that time engaged in creating sites of low-carbon leisure…” Yes, and some might spend that time organising right wing rallies. It seems a bit optimistic.
To be honest, the original article is a bit rambling and very long. I am not quite sure what point they are trying to make.
You say ” then it only vindicates them to point out that Europeans tend to work fewer hours than Americans.” It may do neither. Preferences do not spring from nothing, fully formed and immutable. The German economic system may not discourage work compared to the USA, but Germans may still prefer to work fewer hours.
It is generally agreed among economists (correct me if I am wrong) that work is considered by most people to be less preferable than leisure. This is why we need incentives like pay to go to work. Ceteris paribus, less work is a good thing. It seems a bit of a stretch to pin the shorter working hours on overbearing taxes and regulations.
Rod Dreher talks about fear.
https://www.theamericanconservative.com/dreher/absence-of-fear-david-brooks/
If one is living in a state of fear, then you might choose to work long hours. Living in fear is not a good state to be in. Reducing that fear may lead to shorter working hours, but that would not really be a bad thing.
On Coase.
The whole paper is about dealing with externalities.
He shows that if there were no transaction costs, we would arrive at the same solution wherever property rights were allocated. As long as the rabbit and lettuce farmers can negotiate without cost they will arrive at the most efficient solution whoever has the property rights.
The point of his paper, as with his discussion of the firm, is that there is no such thing as zero transaction costs, but when deciding policy we should attempt to emulate the result that would have followed if transaction costs were zero.
On equilibria in particular, discussing that the same result is obtained whether the cattle farmer of the crop farmer is liable he says:
” But such manoeuvres are preliminaries to an agreement and do not affect the long-run equilibrium position, which is the same whether or not the cattle-raiser is held responsible for the crop damage brought about by his
cattle… But the ultimate result (which maximises the value of production) is independent of the legal position if the pricing system is assumed to work without cost.”
There is always a symmetry. If fuel A causes $1m cost in headaches we should count that. It this could be reduced by $0.5 investment in pollution control then we should implement that. If we could reduce damage to $0.4m by the people moving away then we should do that. If we could reduce the damage to $0.1m by using fuel B instead of fuel A then we should do that.
His final words in the paper are “In devising and choosing between social arrangements we should have regard for the total effect. This, above all, is the change in approach which I am advocating. ”
Coase is talking about social cost – as the title tells us. The cost of a headache is presumably what someone would pay to not have the headache or what they would accept to suffer it. The fact that we find it difficult to count this is immaterial to the fact that we know such a cost exists. Whilst in the example we don’t know precisely what the extra cost of fuel A is, we do know that it exists and therefore the cost of using fuel A is higher than the cost of using fuel B. If we need to estimate more accurately we can work out ways to get a better estimate.
Coase discusses the use of a well by a brewery as a ventilation shaft. This resulted in bad smell in the well owners yard, so he stopped up the well. the courts spent a lot of effort deciding who had the right to the air flowing through the shaft and well. Coase says to the economist this does not matter, since whoever has to pay, if transaction costs are low the same result would be implemented by a trade between the owners.
“It is always possible to modify by transactions on the market the initial legal delimitation of rights. And, of course, if such market transactions are costless, such a rearrangement of rights will always take place if it would lead to
an increase in the value of production.”
Obviously it matters a lot to the brewer and the well owner, but not to the economist. If he can discuss a bad smell we can apply this to a headache.
If you reject the whole concept of “social cost” because we are all individuals then Coase cannot help you.
That’s a conclusion of what would happen based on certain presumptions … it’s not prescription of what should happen (positive analysis, not normative).
I personally happen to disagree with Coase’s result, but that’s irrelevant because Coase himself admits the whole discussion is hypothetical, in the same paper you cite:
Then there’s Coase’s final point, which is a normative proposal, but only a handwaving appeal to aggregate utilitarianism (not fundamentally new) and not providing any path back to what has been previously discussed:
Sure, “total effect” implies utilitarianism … which is great in theory, but since it’s unmeasurable it becomes useless in practice. Nor is it guaranteed that a hypothetical zero transaction cost economy would deliver the best “total effect” because even in the most optimistic analysis of free market economics the best you can hope for is Pareto Equilibrium which has never implied a universal global equilibrium. Free market equilibrium never even bothers to define the meaning of aggregate utility or “total effect”, and there is reason to believe it has no meaning.
Your effort to put a price on headaches falls into the same category. There is no free market in headaches … therefore there is no market price. You might imagine a world where a market in headaches exists, but you cannot use this imagination to discover the price that the imaginary market produces. It gets worse … for those things we do have a market in, there’s always a certain number of people who choose not to partake in that market. The concept of taking a market price and imposing this on everybody, everywhere as some kind of optimization is just plain wrong.
“That’s a conclusion of what would happen based on certain presumptions … it’s not prescription of what should happen (positive analysis, not normative).”
That was why I added my extra comment. If we want to maximise the value of production.
if you want to take the discussion outside economics and the efficient allocation of resources, then fine. That would be a philosophical discussion. Should we maximise the value of production? If not, then economics as a discipline is defunct and has nothing to offer. If your goal is unrelated to economics then economics cannot not help you. Economics, as I understand it, is about the efficient allocation of resources.
I was responding to your comment: “Easier to simply collect her fee, explain how the Coase Theorem operates and dismiss the case.”
You now explain how Coase theorem cannot be applied in practice. So I guess that sorts that particular comment. Coase theorem does not operate in practice.
But I find your further comments very intersesting indeed.
“because even in the most optimistic analysis of free market economics the best you can hope for is Pareto Equilibrium which has never implied a universal global equilibrium”
I understand (though I may be wrong) that what you are getting at is that you can have a Pareto equilibrium, but there are many Pareto equilibria that are possible. We may have arrived at a “subsidiary summit”. so to speak. We could be at a minor peak where any move makes somebody worse off, but we are ignoring the soaring summit above us.
I take it that you think achieving this ultimate summit is a good thing – yet as you say free market economics cannot get us there.
Does this mean we should abandon free market economics? Or should we settle instead for the minor peak that is at least in principle attainable?
I am not just being argumentative here, I genuinely wonder about this point. I sometimes think that the result from a “perfect market” is the thing we should be striving for. Yet I am also unsure if this result is the best we coud hope for.
When I said “we should”, that should be preceded by “if we wish to maximise the value of production.”