Austrian Economics ignore real world of externalities
I follow the Mises Institute on my Twitter account. Rest assured it is not because I want to display any affection for their misguided philosophies. Simply put, I like to see what the “opposition” is saying, the better to oppose their arguments and the application of their philosophy to public policy.
And make NO mistake! The Mises Institute, the web-mouthpiece for that strain of libertarian Austrian school of economics, is indeed a PHILOSOPHY.
A key position of the adherents to the Austrian School is that their views are “simply economics” and not “political.” This is disingenuous balderdash. First, one cannot separate economics from political philosophy. Economics may have some mathematical aspects to it, but deep down, economics is a HUMAN activity and the application of economics to real life is done so VIA a philosophical outlook, a political position.
One of my primary complaints about the libertarian/Austrian view is their application to “externalities.” This view has infused much of the so-called free market Republican Party approach to economics as well. So it was quite interesting to see the Tweet from Mises today which presented an article ‘Accounting for the Unaccountable: The Case of Externalities Predrag Rajsic ( http://mises.org/daily/5085 ) and The “Externalities” Argument by Stephen P. Halbrook ( http://mises.org/daily/1360 ).
Simply put, in economics, an externality is a cost or benefit not reflected in the price of a good or service.
Rajsic expends a lot of text giving some ludicrous explanation of why we cannot or should not attempt regulate for externalities
“I will use the basic truth that human knowledge of the relationship between one’s own actions and other people’s well-being is always incomplete to show that there is actually no limit to expanding the list of actions that create unaccounted external effects in societies” (P Rajsic).
He then goes on to blather about how if you get up at 600am instead of 530 and you miss a traffic light, etc., etc. In effect, a veritable “butterfly effect.” This is pure misdirection at its best.
From Rajsic’s point of view, presented by way of his butterfly-effect analogies, since human beings have imperfect knowledge and are not omniscient, there’s no way we can even begin to plan for externalities and any possible costs associated with it. But since he uses completely non-economic analogies to illustrate this position I too can do the same.
Two good examples are military operations and manufacturing. We grant that human beings are not perfect and not omniscient. However, any credible society would rightly fault a general who did not do his utmost to plan his battle operations by taking into account all feasible enemy operations and tactics as best as possible. What if such a general said “heck, we can’t possibly know what the enemy might do because we are imperfect human beings, so let’s just attack and charge blindly since the “market” of the battle field will give us the right result”? We’d fire that general and probably courtmartial him! In manufacturing, you try to figure out all the ways a part can be produced incorrectly via a PFMEA (Process Failure mode and Effects Analysis). Defects still occur, but we don’t disregard the initial activity of creating a PFMEA simply because we can’t know every possible failure that might ever occur because human beings are involved in producting the parts.
Additionally, Rajsic complains that because we can’t know all, if we intercede (via government regulations), we can’t know all the possible side effects of our intercession. This is certainly true. But once again, I refer to the above paragraph. A general might commit an action base on the knowledge he had which resulted a battlefield victory but also resulted in civilian deaths. While our military might strive to limit such collataral damage, certainly in some cases, depending on the collateral costs, we could say it was an unfortunate event but in the end necessary to achieve the resulting victory. (This doesn’t of course necessarily sooth the grief of the survivors of the collateral damage).
But let’s address a real-world externality- the effect of CAFOs (concentrated Animal Feed Operations). These can be cattle, hog or chicken operations, but what is crucial about this is that these operations have been documented often to create damage to their surrounding environment by manure run-off and pollution. You buy your ground beef at 98cents per pound. If many of the CAFOs were required to contain manure and dispose or treat it, this does indeed add cost to their operation, thus that cost is passed on to you as a consumer of the ground beef. But at 98cents per pound, you do not see the COST of the manure pollution- THIS is the externality here. The cost in this case is borne by the neighbors of the CAFO in polluted lakes and rivers, contaminated ground water and perhaps smelly air.
Clearly we have a problem here, right? Pollution, odors. But how to assess or evaluate them?
According to Haddock, this can be solved and resolved via property rights. “In the property rights solution to correcting externalities, one is made to pay only for physical harm done to another’s property.”
In short, ONLY an individual property owner can lay claim for damages against another owner. Any “common” lands (or lakes, rivers, streams) can’t really be used by government to lay claim (or enact regulations) because imperfect human beings cannot “… make an interpersonal comparison of utility.”
As with much Mises type thinking, this position is simply kicking the can down the street. If a group of people (legislators, regulators, etc), are not capable of assessing a utility value, then how would a lawsuit be settled if the issue were simply between two neighboring landowners? Each of these human beings would be assessing his damage or utility and a jury (or judge) would also have to evaluate the damages or utility as well. In short, we as people are constantly evaluating utility and damage (or benefit) of a multitude of actions and processes daily. It’s part of how we function as people- and as a society. We do this regularly even when an actual value can’t be ascertained- such as voltage (his example) or dollars. Notice the author uses are really objective concept (voltage) rather than what is really subjective (value, i.e. dollar impact, perhaps).
In fact, both authors claim to be assessing ECONOMICs but in each case, their arguments descend to non-economic examples and analogies. In no case do they actually use an economic example to buttress their argument.
Ultimately, Mises advocates completely MISS the mark. Their argument as it appears in the two linked essays amounts to one huge contradiction.
Because humans are imperfect we cannot know everything, Thus we cannot know all facets of an externality, Thus we cannot apply value or utility to an externality…..
Contradicting…..
…..Externalities can only be settled by two property owners who would assign value to their respective positions.
But how can they assign value when humans are imperfect and thus can’t apply value to an externality?
So even the property rights aspect fails under Mises. Additionally, it ignores the real world (as much of Austrian Economics does), if one posits a single landowner or small group of property owners against a multinational corporation. Under my CAFO example, these owners could sue for damages to a lake they all own property around, but if their assets to sue are minor compared to the vast resources of an Archer-Daniels-Midland, victory would be unlikely and the property owners now suffer from polluted water and depreciated land. (And don’t even consider the related issue of conglomerate-friendly legislators passing so-called tort reform which might limit costs to the corporation from a lawsuit).
Finally, since only individual property owners can “suffer damages,” commons are not protected and cannot be protected because we cannot assess value to their utility. Human beings, being imperfect, simply are not, according to Mises, capable of assessing that they would rather have CLEAN water then polluted water- or CLEAN air rather than smog.
Haddock’s final sentence is revealingly dismissive and ignorant.
“But it is precisely because externalities cannot be revealed through human action that they are irrelevant to the study of economics. As such, the idea of externalities cannot result in any additional knowledge about economics.”
Externalities can and DO become revealed through human interaction. We “reveal” these daily in our lives, much less on a societal level. We assign value and utility, even if not directly monetarily, to many different facets of human society.
Mises thinkers simultaneously want both sides of the argument- “we can’t know, therefore don’t act” and “we can know, but only individually.” In the process of reconciling this contradiction, they ignore the very nature of human societies and how we interact and behave. In other words, Austrian School ignores reality in a drive to advocate an idealistic, yet inapplicable, economic philosophy to human society.
For more on how Austrian economics views externalities- see this article “Public Goods and Externalities: The Case of Roads” by Walter Block
( https://mises.org/journals/jls/7_1/7_1_1.pdf )- in effect- All roads should be private and government should not be building roads- interesting article which also lays out absurd comparisons in order to make a point.
