• On Herzog and McArdle on externalities

    Externalities and Other Parasites, by Donald Herzog, is one of the best, if not the best, takedowns of economics I’ve read. And it’s hard to argue with it. Read the whole thing (ungated).

    Whether a bit of economic methodology illuminates some noneconomic domain is an empirically open question. It can’t be held relevant on the general principle that human agency just has this utility-maximizing or decision-theoretic structure, because that’s the psychological view I find goofy. Nor can it be held irrelevant on the grounds that we are not homo economicus all the way down, in one setting after another. We’re not. But we don’t know that we’re never at all that outside markets, either.

    Some of the analytic structures of modem economics-rent seeking, clearing markets, prisoners’ dilemmas, coordination games, opportunity cost, principal-agent problems, and so on-ought to be in the toolkit of any self-respecting social or political theorist. But no self-respecting theorist will limit her stock of tools to those being retailed by economists, however aggressive their salesmanship, else she’ll fall down on the job, lamentably, over and over again.

    I thank Nicholas Bagley for sharing the paper. I’ll draw from it again in a future post.

    Related, you should read Megan McArdle’s take on the externalities Obamacare might address. I will come back to them and respond to some of McArdle’s points another time, though I’ve written about Obamacare and externalities before (here and here, for instance).

    But, just to put McArdle and Herzog together for a moment, McArdle wrote,

    What if knowing that you and your partner are doing naughty things a few feet from my bed causes me severe mental anguish? That’s surely an externality, so why don’t we take notice of it? The answer is that we don’t simply say “OMG, negative externality! Quick, government, kill it with fire!” Because in that way lies madness. As it’s easy to see, reducing this negative externality itself has a negative externality, which falls on the folks who enjoy doing naughty things a few feet from your head.

    Related, Herzog wrote,

    Suppose June is horrified at the very thought that the lesbians down the hall are engaging in oral sex. Yes, they’re consenting adults, acting in private. But their doing so, she thinks, is disgusting. Their actions move her to a lower indifference curve. Maybe a much lower indifference curve: maybe the thought makes her physically ill. Maybe this is a visceral reaction, or maybe it flows from her deepest religious commitments. Either way, it’s a social cost they don’t have to internalize. […]

    Maybe the lesbians should have to offer June financial compensation in order to go about their business. (It being their business, in this view, can’t be at bottom any claim of individual rights or personal autonomy. It’s just something they want to do, and their wants have no better standing than others’ wants that they not do it. […])

    Ultimately, Herzog and McArdle come to similar views on externalities: when and how they arise in economics arguments doesn’t itself hinge on their economic import. Other principles come into play. Again, more later.

    @afrakt

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