Monday, July 18, 2005

A Matter of Coase

Will, an avowed non-utilitarian, sure does make a lot of compelling utilitarian arguments. In his latest flaying of Richard Layard (a hedonic utilitarian who assuredly deserves the flaying), Will deploys a fascinating corollary to the Coase Theorem that has implications far beyond his debate with Layard.

Layard has devised a new kind of negative externality argument. He observes that inequality of status makes many people – specifically, envious people – unhappy. As a result, any productive effort to improve one’s position creates a negative externality by reducing the relative status, and thus happiness, of others. Using standard Pigovian logic, Layard concludes that we ought to discourage (e.g., tax) productive effort in order to correct the externality.

Of course, Pigovian externality theory is almost 50 years out of date. Will brings to bear Ronald Coase’s “least-cost avoider principle,” which says that when parties A and B can both take actions to avoid a harm, efficiency dictates that whoever who can reduce the harm at the lowest cost should do so. For example, if an airport imposes noise pollution on nearby residents, the airport should relocate or restrict flights if and only if that’s cheaper than the residents moving away or installing sound-insulation. Will combines this insight with the observation that people can overcome their envy via sublimation or learning of new preferences. As Will puts it, “If you changing your preference is cheaper than taxing me, then you ought to change your preference.”

This reasoning opens a mighty interesting can of worms (and I mean that in a good way). In the traditional Coasean approach, preferences of agents are taken as given, and the only question is whose actions can reduce harm at lowest cost (keeping in mind that all harm is relative to the parties’ preferences). But if actions can change preferences, it follows that changing preferences may in some instances be the least-cost means of reducing harm. This is true even for less exotic forms of externality than Layard’s status-externality. Take the airport noise externality. Maybe the least costly solution is for people to start enjoying the sight and sound of airplanes. Or consider the visual externality created by a factory that obscures the view of a nearby mountain. Perhaps the least costly solution is for people to stop caring so much about natural scenery and learn, Rand-like, to appreciate the man-made beauty of mortar, block, and glass decorated with thousands of electric lights.

As Will’s post indicates, this approach also provides a ready-made response to anti-utilitarian arguments of the “what if lots of people have really monstrous preferences” variety. Consider a Southern town where lots of bigoted white people would be supremely satisfied if a black person were lynched. The Coasean answer: maybe they should just stop being bigoted! (This answer seems especially compelling if we take a multi-generational point of view.) Does an externality arise from people envying others? The Coasean answer: maybe they should stop being so envious!

Clever statists might seize on Will’s Coasean Corollary to justify some scary policy ideas. For example, a Marxist might claim the CC indicates people should stop being greedy and transform themselves – or be transformed by state power – into altruists. But remember, the CC doesn’t mean that preference change is always the preferred alternative, nor does it mean that only one party’s preferences can change. Preferences are malleable, but not infinitely so. Some preferences can change easily within a single person’s lifetime, others can change over generations, and yet others may be so built-in to human nature that changing them is essentially impossible. The Coasean argument is sensitive to the costliness of the actions involved.

7 comments:

Will Wilkinson said...

Glen, If I'm making a utilitarian argument, it's because I'm doing an internal critique of Layard's utilitarian argument. The only thing I add to Layard is Coase, since Layard has no principled reason for ignoring him. Layard himself stresses endogeneity of preferences. Coase + endogenous preference = possibility that least cost avoidance can mean preference change. Layard provides evidence that status seeking is hard-wired, but presents no evidence at all that income-as-status seeking is hard-wired. Indeed, concern about relative income seems to vary with all kinds of attributes.

You'll notice in my Jim Crow/apartheid example, I argue that if the utilitarian calculus tells us that racist oppression is OK, then utilitarianism is false.

Will Wilkinson said...

About your last point. I think it's pretty obvious that preferences are shaped by institutional structure, social expectation, and so forth. This makes a mess for economists. But a lot of policy analysis at least implicitly leans on the idea that different institutional structures create different kinds of "character." I think this is true. And it is better to just talk about it directly. Marxists have always thought this way--that preferences are a function of one's relation to the means of production--so it's not like this is new to them. And vegans, for example, already are campaigning, with some success, for people to change their tastes. The Marxist, however, has an unrealistic idea of the malleability of preferences. The vegan, on the other hand, has a perfectly reasonable notion of preference formation, and it is totally reasonable to provide people reasons to change their tastes for animal products, since it is possible for people to choose to change this kind of taste.

Caliban said...

I'm confused by Layard's hypothesis: that I feel worse when others succeed.

It seems to me that this is his weakest point. For example, I love to hear about the success of others, whether close family or remote foreigners. If someone in Mozambique enjoys some wonderful windfall, I am happier (if only by a little). The only time someone's success might detract from my own is if I feel that it actually comes at my loss -- the other runner wins the marathon, for example.

There certainly may be people who are afflicted by this "fixed pie" sense, and who feel an underlying resentment at the success of others, but the fact that its a choice made by the person indicates that you cannot regulate it in any meaningful way. Especially when its impossible to measure in any worthwhile fashion the "harm" caused to me by this other person's success.

If you have a society that regulates the physical actions of one group based on the "feelings" of another (no matter how widespread those feelings are), you're going to have severe problems.

Joseph Schultz said...

I'd like to express some fairly obvious points that may hold some weight on this argument.

But first, the background. I think we all can agree that preferences do actually change. Whether those changes occur due to institutions or institutions change to reflect changes in preferences I think is an open point. I would argue that both probably occur - which implies that those in chanrge of institutions have some power over people's preferences (1984, anyone?).

Less traditional economists actually thrive on this point, since there are now theories which predict preference changes (loss aversion, hyperbolic discounting, ect.). Even neo-classicalists are able to account for much of this by using bounded-rationality models.

As Glen mentioned in his post, it probably is most efficient for people to simply change their preferences; however, this is not generally possible. Despite recent economic theory criticism, people's preferences are fairly stable (most of the important ones, anyway). This means that it takes time - and a lot of it - to allow people's preferences to adjust. And because people's preferences range in importance from one person to the next, there will always be someone who's preferences do not change sufficiently or at all.

I think the implicit question is whether government should intervene for the 'greater good' with reguard to preference changes - particularly since those changes can be predicted with a reasonable degree of accuracy. In terms of utilitarianism, the answer must be yes. If people will be better off in period t becuase of a government action in period t-1 AND the good produced in period t is greater than the good lost in period t-1, then the government should act.

It is for reasons like this that I'm generally not a utilitarian. But I can't deny the general wisdom of the argument.

Comments?

Glen Whitman said...

Will -- I agree with most everything you just said, with the possible exception of the Jim Crow example. There, I would apply your own point (from your next comment) about degrees of malleability. The Marxist is wrong because people's tendency toward self-interest (or more broadly, the interests of family, friends, and community against the wider world) is too ingrained in human nature to allow the creation of 'Marxist man'. On the other hand, racial bigotry is not so ingrained; history demonstrates that it can be overcome. But what if racial bigotry really were built into human nature? As an extreme case, what if we just couldn't change it at all? Given that counterfactual, I think we *would* have to take racist preferences into account. Ought implies can. (You make a similar argument in your paper about the implications of evolutionary psych for policy, do you not?)

I stand by my initial claim, Will: for a non-utilitarian, you make damn good utilitarian arguments.

Glen Whitman said...

"As Glen mentioned in his post, it probably is most efficient for people to simply change their preferences; however, this is not generally possible."

Well, if it's not possible, then it's not efficient either. The Coase Corollary would indicate that preference change is efficient only when it's less costly than the alternative(s).

"I think the implicit question is whether government should intervene for the 'greater good' with reguard to preference changes - particularly since those changes can be predicted with a reasonable degree of accuracy. In terms of utilitarianism, the answer must be yes."

I don't think that necessarily follows. First, it's not obvious at all that government can predict the changes with that much accuracy. Second, government actors face poor incentives, so they may implement lousy policies even if they could in principle identify good ones. This argues for limiting government's power to manipulate preferences.

Third, and most relevant to the current discussion, the Coase Theorem does not say, "the government should force the least-cost avoider to take action." Rather, it says that the least-cost avoider will automatically take action if property rights are well defined and transaction costs are low. Applying this lesson to preference change, the conclusion is that we should (usually) set the property rights and let people change preferences on their own, if that's the best response. For example, if the efficient solution to Layard's status-externality is for people to be less envious, the appropriate policy is to defend the right of productive people to their wealth. The envious people, unable to force others to accommodate them, will have little option but to get their envy under control. That's very different from having government actively re-educate them.

Ike said...

How charming! An economic justification for government intervention in the marketplace to relieve some psycho's envy! Just delightful. Entirely consistent with the rise in predominently narsisstic personality structures over the last two generations. It is a fine attempt to give coherence to idiocies like "safe space", "hurtful speech" and similar expressions. Utilitarian, indeed!