|Intro. [Recording date: February 3, 2014.] Russ: Today we're going to talk about Ronald Coase and your discussion in The Darwin Economy of Coase. He passed away last year at the age of 102. He was a guest on EconTalk in 2012; and last year Don Boudreaux appeared here to discuss Coase's work. And I thought it would be interesting to do a similar conversation with you. And you have a very different philosophical perspective compared to Don or mine. We're going to focus on Coase's work on externalities--his 1959 piece, "The Federal Communications Commission" in the Journal of Law and Economics and his 1960 piece in that same journal, The Problem of Social Cost. Bob, you point out that before Coase--and I just want to say to listeners: You may be wondering why we are doing another episode on the same topic. Besides the fact that Bob has a different perspective philosophically than my own, the other reason is that it's an incredibly deep and rich concept, the ideas that Coase put forward in these two pieces. To quote--Bob, you say, "Despite the incredible attention it has received, scholars still haven't grasped its full significance." I want to include myself in that group. I don't know about yourself. But I thought it's very worthwhile to come at it another time. Guest: Yeah, there's a lot there; and none of us has really plumbed the full depth of it. It's amazing. I think some of the interpretations that persist of his work out there just don't seem at all consistent with what we know about his beliefs and writings on other topics. Russ: And I hope we'll be able to shed some light on that. Bob, you point out that before Coase there was a tendency to look at negative externalities, that is, cases where one person's actions cause harm to another--that's what a negative externality is. So, my action doesn't just affect me in its costs and benefits, but people besides myself. A lot of people tended, and still do tend to look at those kind of situations as there being a perpetrator and a victim. But that's not Coase's perspective. Explain. Guest: Not at all. In fact, that's the chapter title I chose for the discussion of Coase in my book--"Perpetrators and Victims". There was a bad guy and a victim in each of these cases. Coase's famous example in the "Federal Communications Commission" article published in 1959 involved a doctor and a confectioner, a candy-maker. The confectioner was first on the scene. He had machinery that made candy in his orders. The doctor opened an office in the same building. They co-existed without incident for many years. Then the doctor built a new examination room adjacent to the candy maker's machinery, and he found that the vibrations and noise prevented him from doing his work properly. And so he sought a court injunction trying to prevent the confectioner from making the noise that was interfering with his work. And in fact he prevailed in the court decision. Coase said: Wait a minute; where did the presumption come from that the doctor has the right to a noise-free environment? It does seem that the confectioner is harming the doctor; that's clear enough. But what if we tell the confectioner, no, you can't do what you are doing? Then we're harming him. So, no matter whether you turn left or you turn right in a case like that you are going to cause harm. Coase's insight, and I think it's the real, enduring insight he had, was that it's in the interests of both parties, the doctor and the confectioner, to solve this mutual problem that they have, namely that their two activities aren't compatible fully with one another, to solve that problem in the least costly way. Any other way of proceeding would leave open the possibility of making both parties better off. So, who is the guilty party? That's the wrong question to ask. The question is how can this problem be solved in the cheapest way? And there, Coase saw that the law made no difference if they could talk to each other. And that's what I think the people who don't like government regulation in general saw as an idea to celebrate: Look, if the doctor could talk to the confectioner then they could reach an agreement even if the confectioner were not held liable for the noise damage. If it were cheaper for the confectioner to solve the problem, say by putting sound-proofing on his machine, than it would be for the doctor to move to a new location, if that were the best option for him, then the doctor could pay the confectioner to install the sound-proofing. If it were cheaper for the doctor to move, then the doctor could move. So without any attempt for the government to get involved, the problem would be resolved efficiently--that is to say, the cheapest solution would be adopted by the two parties. Russ: When you say, the doctor could move--he'd want to move, because that's cheaper than bribing the candy maker to put up more sound-proofing. In that case. Guest: Yes. If the government doesn't intervene, if they tell people you can do whatever you want, then the confectioner doesn't have to install soundproofing. If it's cheaper for him to install soundproofing than for the doctor to move, then the doctor would find it in his interest to pay the confectioner to install soundproofing. He would do that because the alternative would be to incur even greater costs by moving. If it were cheaper to move than to have the confectioner install soundproofing, then the doctor would just move. Either way we would get the cheapest solution, which is the one we want. So, I think people seized on that example to say, Oh, look; here's an externality and people can resolve it efficiently all by themselves. It doesn't matter whether the government has a noise regulation; we can do quite nicely without that. Russ: If you come to that conclusion, it means you didn't read the rest of the article. Guest: That's right. Russ: So, carry on. Guest: So, Coase was very clear in his piece, and if you read the broader context of his earlier work it's even more clear, that he did not believe that in general people could reach easy solutions through private negotiation about such problems. His very first work conducted when he was a young man on a visit to the United States from England was a detailed study of why we have firms in the first place. Why don't we just do everything through individual contracts in the spot market? It's because all the contracts you'd have to write would be so cumbersome to negotiate that it's just much cheaper to have a firm organize them all internally and then give you a final product that you can buy. So he saw that negotiation was very impractical much of the time. And he sought to understand institutions, laws, social norms, all manner of institutional arrangements as attempts to economize on negotiation costs, making negotiation unnecessary. And what that means here is if you are thinking about how to define rights, who should have the right, the doctor to a quiet environment or the confectioner to make noise as he pleases? Well, you've just got to see what agreement they would have reached if they had been free to negotiate with one another, and then have the law try to set up property rights so as to steer them to that agreement. So in this interesting example that he offered, if it had been cheaper for the doctor to move and they can't negotiate, then having the confectioner not be liable for noise damage results in the efficient solution--the doctor would have every incentive just to move on his own and that's the cheapest solution. If the cheaper solution were for the confectioner to install soundproofing, however, then you would want to have the law say he's liable for damages because now it's not practical for the two to negotiate; the doctor can't bribe him to install soundproofing and he'd had to move as the best solution available to him. If the law makes the doctor [confectioner?--Econlib Ed.] liable for noise damage then he will install the soundproofing because it's cheaper to do that than to pay the damage that the noise would cost. So that's the Coase insight, I think in its simplest and most general form. Laws and regulations, property rights, all such things should be designed in such a way to mimic the agreements that free people would have reached in their own interest had negotiation been practical.
|Russ: Now, in the middle of that you mentioned the 'efficient' solution. You've also talked about the 'cheapest' solution to the problem. Let's have a small digression to the problem, because we may end up using it later, about what economists mean by efficiency. In everyday language efficiency means a variety of things. But economists have a very specific way of using that phrase. Guest: Yes. I think to an economist a situation is efficient if it results in the largest possible economic surplus. And economic surplus is itself a pretty simple concept, although not without controversy of its own. So, if I'd be willing to pay $100 for a radio and I can buy it for $20, then I get $80 of economic surplus by doing it. So if there is some way to rearrange things to make the total economic surplus bigger, then that situation can't be efficient. Russ: So, in this case-- Guest: And if you adopt the more expensive of the two ways of solving the noise problem, that's inefficient in that narrow sense. Russ: Yeah. You've wasted resources. The pie isn't as big as it otherwise might be. Guest: Right. Russ: And it's important to mention--and I'm sure we'll come back to this later--most, if not all discussions of efficiency tend to ignore who gets which pieces of the pie. How the surplus gets divided up. Which we also usually care about. Especially for the confectioner or the doctor. You care a lot about it. But if we think in the abstract about how to design what kind of world we want to live in, obviously efficiency is not going to be only thing we care about; and how much we care about it may differ across people; but there is certainly a virtue in not throwing away stuff. And inefficiency means basically you've lost something, you've wasted a chance. Guest: Right. If you've done something inefficiently then what that means is that there is at least in principle a way to rearrange things so that everybody gets more of what he cares about. Russ: In theory. Guest: That can't be a good thing to do. What would be the possible argument in favor of a situation where people have less of what they care about? Russ: Yeah. The proof of the pudding though is going to be how hard is it to make sure that it is practical to divide up the pie so that everybody share is at least as big as it was before. Guest: Right. Russ: So, just again, to make this clear; we are talking somewhat abstractly. If we have a policy change that leads to a greater surplus, that leads to a greater net output, greater production, greater value, we'd also care about whether your share of it gets larger or not. Right? We wouldn't necessarily like-- Guest: Whether you can reach agreement to do it is often going to depend critically on how individual shares will be affected. It's not just the total that matters to people. It's: How is my share going to change? The clearest example of that I think Russ is the arguments about free trade. Most economists agree that freer trade makes the surplus bigger. It may, however, make the surplus of certain parties smaller. So, in the classical example, capital gains, when you open the market to free trade and labor loses, at least in the American context. And so in principle if the surplus gets bigger it's possible for capital to put money into the pot and transfer it to labor in the form of tax credits or trade allowances and the like, and then everybody is better off. But if you don't do that, then labor is not irrational to vote against free trade. Good that it makes the pie bigger, but my slice is small. Russ: And the same would be true of technological change, and innovation, a topic we've been talking a lot about in the last few months here on EconTalk. Smarter machines are going to make us more productive as a society, but what that does to any one of us depends on a number of factors, in terms of how competitive our skills are with the machines and so on. I would just add that in my book, The Choice, having taught Trade for years and the efficiency arguments in favor of it, I ultimately decided they are not very satisfying. They matter, but I don't think that's the most important--the fact that trade makes the pie as big as it possibly can be is not a convincing argument for most people; and I'm not sure it should be. Economists tend to like it. I think the real reason economists like it is it's elegant. You show the areas in a graph; it's great for exam questions. And you sort of convince yourself--some people do--well, it makes the pie bigger; it's good. But you also care about what happens to a bunch of individuals, particularly poorer individuals, lower-skilled individuals. So to me it's ultimately--and this is a subject for another episode, but to me the argument in favor of free trade does not rest solely on efficiency.
|Russ: Let's move on. So, let's come back to the point that we started this little subsection with, which is the perpetrators and the victims. Now that we've laid out Coase's insight, why is this perpetrator-victim distinction unimportant in Coase's story? Guest: Well, because the perpetrator-victim framework just presumes, without explaining why, that it's the confectioner's fault here. He's the one making the noise; it's the doctor who is suffering from the noise. But Coase's insight was that the doctor's presence on the scene caused for it--the confectioner's noise wouldn't have been a problem but for the presence of the doctor trying to do work that was incompatible with noise. So, why should one concern be elevated above the other? I mean, if the doctor had gotten there first and had made expensive investments on the basis of a presumption that there would be continued quiet and then that was disturbed, that would be one thing. But there was no indication of that being part of the initial situation. If the doctor was poor and the factory-owner was rich, could easily afford the cost of the noise-abatement equipment, that might have been a consideration. There was nothing like that introduced into the example. So you have to explain why one interest should predominate over the other. Why is the doctor's claim to quiet more important than the confectioner's claim to a low-cost production method? Which presumably the noisy one would be compared to a quiet one. Russ: And your wording is that--and it's mine as well; maybe it's in Coase--all externalities are essentially reciprocal, would be the more productive way, more useful way to think about it. Instead of a victim and a perpetrator, the phrase I like to use is, It takes two to tango. So, when you have these kind of externalities, it's better to think of them in a more abstract way, as two people who are tangled up with each other, not one whose fault it is. And the more you think about these kind of problems, you start seeing them in a lot of places. And we'll be talking about some of them. You start thinking about second-hand smoke. Whatever your tastes are in movies or reading might offend me. Your actions--it goes way beyond confectioners and doctors. It deals with pollution. It deals with charity on the positive side. All kinds of places where externalities come into our lives. Now, the Left did not like the Coase theorem. And neither did the Libertarians in certain dimensions. What was the Left's critique of Coase's insights? Guest: Oh, I think many on the Left thought it was tone-deaf to a lot of basic moral intuitions. 'Well, of course, the confectioner is the guilty party here; he's the one making the noise.' But Coase, I think correctly described that as question-begging: Why is he the presumed guilty party? We have to reach a judgment about what's the right thing to do here. And the right thing to do when viewed from the perspective of each of the two actors is to adopt the cheaper solution. And if that's the solution that has the doctor move rather than the confectioner install soundproofing, they would both want that to be the solution offered. Because failure to do that would mean they could slice the pie up another way so that they'd both be better off if they did it, with the cheaper solution. So the cheaper solution is in a very profound sense the right solution. So when people say Coase offended their moral intuitions, well, maybe their moral intuitions didn't lead them correctly to identify the right solution in this case. Russ: I side with the Left on this partially, and we'll come back to this later. I think in this particular case of the candy maker and the doctor, most people would agree that there is nothing immoral about making candy. It's true it looks like there is the harmer, the person causing the harm, is the candy maker. But I disagree with the Left in this situation. I don't think there is anything immoral about making candy. Guest: The real objection of the Left, of course, was that this seemed to open the door for claims that government regulation of externalities isn't really necessary. That was, I think, the real wellspring of criticism of Coase's piece from the Left. Russ: And the libertarians had a similar confirmation bias problem. Why don't you explain that? Guest: You know, if you are a libertarian, you don't want to be interfered with. You want to do what you want to do. And if what you want to do causes harm to others, are you eager to embrace a framework that would say it might be the best thing to do to regulate to keep you from doing that? I think that's an unhappy pill for a libertarian to swallow. So what I see as a practical matter is that libertarians will invoke John Stuart Mill's harm principle. Mill, you'll recall, wrote in On Liberty that the only reason the government can restrict somebody's liberty of action is to prevent harm to others. By which he meant of course undue harm to others. And libertarians are fine with, say, well, yeah, the law can prohibit me from stealing my neighbor's bicycle or from hitting him over the head with a baseball bat; I can't harm him; I have no problem with that. But when it comes to other, more subtle, indirect forms of harm, I think the libertarians' impulse is to say: I have a right to do what I want to do and that trumps somebody else's objection that it's causing me harm. So I think the libertarian framework is kind of a deontological framework. In philosophical terms, they say there are just certain rights and principles that you can't violate no matter what the underlying costs and benefits say. And Coase's framework is very thoroughgoingly consequentialist. The right thing to do is the thing that has the greatest economic surplus, the greatest balance of benefits over costs. And so if someone can show in Coase's framework that the benefit of regulation to those who gain from it outweighs the cost to those who are restricted by it, then it's a good regulation. And libertarians don't find that a congenial message. But I think if you are a true John Stuart Mill libertarian, government can't restrict me except to prevent undue harm to others, then you've got to buy into that. It's very hard to oppose philosophically the claim that the right set of laws is the one that mimics the agreements that free people would have reached had it been possible for them to negotiate with one another.
|Russ: Now, I may disagree with some of that. Guest: I'd be eager to see some examples of that, that you wouldn't buy into. Russ: But, having said that, I think--could you just restate for the non-philosophical among us the distinction, because it's a phrase we might want to use again, the difference between deontological and consequentialist. Guest: The deontologist, the school of moral philosophy by that name, they say that there are certain principles that have to be followed irrespective of the surrounding costs and benefits. And they'll admit that costs and benefits matter, that they are also to be considered. But there are certain bedrock principles you have to follow even when the cost-benefit seems to point in the other direction. The consequentialist, by contrast, they say that the right thing to do is the thing that produces the best overall consequences. That's where the tough part comes in, is how you measure consequences. But in cost-benefit terms, in econo-speak, it would be the option that produces the greatest economic surplus, the greatest surplus of benefit over cost. Russ: So, while both of us are fans of Coase--and I don't know which of us likes him more--you also mention in your book that deontological issues are inevitable and matter to almost everybody. So, for example, you might not like when I am critical of some government policy you agree with, but you recognize that there's a virtue of free speech, and you put that above any of the cost-benefits that might accrue to, say, stopping me from being critical of some regulation. Correct? Guest: No, no. That would not be an example I would point to. Russ: It's in your chapter! Guest: I would say that free speech is very easily defended in consequentialist terms. There's enormous benefit from each of us being able to speak freely. I don't have to enumerate what the benefits are, but they are enormous. And yes, there is harm. You call me a 'fool.' That makes me feel bad. There's harm to me from free speech. But if we try to write a law that would micromanage the speech of individuals and filter out the harmful speech and let the good stuff through, it would be a fool's errand, really. You could never hope to fine tune it in that way. So we just say, except in extreme cases, you can say whatever you want. You can't yell 'fire' in a crowded theater--there are limits. But no, the defense of broad free speech rights is a thoroughgoingly consequentialist notion. You could say that the deontologists are on board with that, too; and of course they are. And interestingly, the deontologists reach exactly the same conclusions as the consequentialists in 99% of the cases. Russ: Well, Bob, it sounds like you are calling me a fool, now. But I would never call you a fool. I did misinterpret, evidently, the example in your book, and I apologize. It does show you how these concepts tend to bleed together, I think. Guest: Right. Russ: Let's take a different example from your book, which I will not interpret. Only you interpret. There's a classic case of--the setting you use is a botanist wanders into a jungle village and is told if he will shoot one person, they'll spare another nine. Is that a good example? Guest: That's one that's often used to illustrate the purported moral blindness of consequentialism. The consequentialist is supposed to say, when confronted with that example, that, well, I guess it's better than one person die than that all 10 die. So you should shoot the innocent victim. The deontologists say no, you just can't go there; to kill is wrong and you don't do that. You can construct very complicated consequentialist arguments that would get you to the same spot, but it's meant to be a case that illustrates the moral blindness of consequentialism. Russ: Do you have a case that illustrates the moral blindness--I guess by definition it's hard to illustrate the moral blindness of deontology. Guest: Yeah. I think a creative consequentialist--there's broad latitude when you think in cost-benefit terms to come up with plausible ways of measuring costs and benefits, so that you could say the thing that we all believe is morally wrong--is in fact producing bad consequences overall. This is an aside really to our main topic, but the question has always been interesting to me: Why is it deontologists feel so contemptuous of the cost-benefit analysts, of the consequentialists? And I think it's because there's such flexibility in making cost-benefit estimates that if you are a person trying to decide what to do--can I do this thing that I want to do if it's going to cause harm to others, that's a classical moral question--you are the person making the estimates of the relevant costs and benefits, and there's usually enough wiggle room in the material we have to work with that you'll figure out a way to say, Yeah, it's okay to do this thing I want to do. So, I think there may be an implicit belief that if you are a consequentialist, you can't really be trusted. Russ: I'm sympathetic to that worry. Guest: And I think--yeah, it's not that deontologists don't find ways to justify and rationalize. They do, too. But I think it's easier to do that if you are a consequentialist. Russ: How does this tie in with utilitarianism? Guest: Well, utilitarianism is one form of consequentialism. It says the best action is the one that results in the highest aggregate utility. The more general form of consequentialism I favor is economic surplus maximization--we don't try to add utility across people; we just take the economic surplus results and figure out how to make that as big as possible. Russ: But that's trickier than it sounds. And we'll talk about that in a second.
|Russ: Before we do, I want to get to your example of interracial hand-holding. Talk about how that example plays out in your chapter. Guest: Well, I use that as an example to take up the supposed moral tone-deafness of consequentialism. So, here's the example. You've got an interracial couple in Atlanta in the 1960s and they want to hold hands when they walk downtown to go shopping. It's a mostly white city; mostly the whites who would see them holding hands would be upset at the sight of it. And each would be willing to pay some amount to avoid the sight of it. You can imagine that the couple themselves want to hold hands and would be willing to pay quite a bit more, each of them, for the right to hold hands; but there are so many more white people who are offended, each willing to pay a small amount, that the total amount of offense caused by the sight of them holding hands would be greater than the amount they'd be willing to pay for the right to do it. And doesn't Coase then seem to say that, well, the right thing to do then is to say they can't hold hands? Russ: Because they can't--because it's too hard to negotiate to get these hundreds of people-- Guest: Well, even if they could negotiate, the outcome would be that they couldn't hold hands, because the white people would pool their funds and compensate them for the injury they felt by not holding hands. Russ: My point though is that because it is costly for all the white people to get together and come to that position, decide who contributes how much, it's better-- Guest: Right, then the rule should be you can't hold hands-- Russ: it's just against the law. Guest: Yeah. Now, I think--I hope all your listeners would agree: That's morally tone-deaf. Russ: I can only speak for myself, and I agree with you. Guest: Let's say, argue [?], that most of your listeners would say well that's obviously a morally tone-deaf position to take. Coase would not take that position. I think if you want to think about Coase, he would say, Look, we need realistic estimates of the various injuries and gains involved here. Seeing people hold hands causes injury to white people in the deep South in the 1960s--okay, I was a college student in the deep South during that time; that sounds accurate to me, and I'll take as given the assumptions of the example, that offense to white people in the aggregate, even though not big for any individual, would have outweighed the gains from holding hands to the interracial couple. But you have to ask: What if the law said you could hold hands? How would things evolve in that context? And here I can report, from the fact that I've been living in the North; I've raised four sons in Ithaca, New York. There are numerous interracial couples who live within a block of our house. They see interracial couples holding hands, raising kids together, and experience no affective reaction whatsoever. That's in fact a known consequence of humans in such environments. They adapt without any difficulty. And so if you said, Which way should the law be formulated, how will the relevant costs and benefits play out in the future, I think it would have been clear to anybody who posed the question that way that the injury suffered by a couple who was told you can't hold hands--well, they are not going to adapt to that. You are forever singled out as being different. You don't have the rights that other people have. They are going to experience that injury; it may even intensify over time. But the people who were ruled against by the law that said you could hold hands, they adapt. They avert their eyes at first; maybe they get used to it. There's no lasting injury to them. And so I think a pure cost-benefit analysis favors a hands-off approach in that case. Russ: So to speak as a [?]. Guest: Or rather, hands-on approach. Russ: Yeah. It's a bit of a stretch for me. I have to say. I'm going to take you in a different direction. My first thought is: I really don't care what the cost-benefit is. I just think a person should have the right to hold the hand of the person next to them. I'm happy to let some social norms evolve. There was never a law, I think, against hand-holding--it certainly wasn't enforced. But over time whatever norms there were against it, they sort of eroded and went away, as you point out, in the North and in the South. But I would want to make a distinction, and maybe it's not an important one, but it seems to be one for me. I want to make a distinction between psychic harm and physical harm. So, the example you gave, for better or for worse, is slightly complicated by the fact that it's psychic harm. And a lot of--for reasons, again-- Guest: In both cases, both the ostensible perpetrator and for the victim. Russ: Correct. And I think in this case--one of the problems I have with it is probably consequentialist in some degree, which is: I think it's hard to measure psychic harm; it's hard to be honest about psychic harm. So to me that's sort of a Pandora's box. Once you start saying that you are allowed to invoke things that annoy you--I don't think that's a good road for a society to go down. I want to give you a physical harm example that I've written about at the Library of Economics and Liberty, and get your reaction to it. Which I think really brings out the moral issue as well. Should you be allowed to steal somebody's car radio? Most of us would say no, you shouldn't be allowed to steal somebody's car radio. It should be against the law. We could debate how many resources, how many policemen, how big the police force should be on the street to deter theft, etc. To use Coase--and he may or may not have liked this application. But the way I use Coase to think about it is, well, Coase would say, What's the cheapest way to get people to not steal other people's radios? It's immoral to steal somebody's radio. There's nothing reciprocal about it. It's not voluntary. It's a physical harm that's measurable. We might not be able to measure the size of the harm, but we have a pretty good dollar measure of the cost to replace it. So the cheapest way to reduce radio theft might be to not make it be illegal. You'd say: That's impossible; it can't--that could never be the case. And I would make the claim; and I have I think some empirical evidence for it, that actually owners of radios prefer a world where it's legal to steal somebody's radio. And the answer is, your point in a different context. Which is that over time, radio-makers, manufacturers, car manufacturers, will find ways to make it useless to steal the radio. And that's likely cheaper--in fact, I'm very confident that it's cheaper than the costs of policing the streets and making sure you lock your car. So the way that world evolved, is that at first, you removed your radio from the car. The car had this innovation that if you left your car on the streets of Boston--because that was a place where the law clearly wasn't very well enforced--you pulled your radio out of the car and you went shopping. [?] in New York City. You'd walk around with your car radio. It had a tape player, it was expensive. And a lot of people found if they didn't do that, their cars were broken into. But ultimately the car makers figured out a way to make a radio that didn't work outside the car. They solved the problem. It was very cheap. It wasn't free; they had to develop resources to do it, etc. But I do think your insight that you have to look at how it plays out over time is crucial. Guest: Right. So, I'm not sure where you come down on that example. Do you think it was a good thing that we in effect declared it legal to steal car radios? Russ: Yeah. I'm a deontologist--I find my sympathies towards the deontology, right? I don't like utilitarianism. It gives me the creeps. And yet, in this case, I have to concede--and I learned this from Coase--that taking a consequentialist approach is pretty appealing.
|Guest: See, I think I'm with you all the way on the importance of moral judgments and how critically important they are for keeping behavior within reasonable bounds in society. All that is true. And it's not in search of a consequentialist explanation. There are good consequentialist explanations for why groups that have moral norms and strong feelings about them prosper in competition against groups that are less inclined. So, I think nobody would really want to live in a society where property was free to be stolen under the law. That's just a bad society to live in. And if you say, all right, car radios are fair game, as a practical matter, does that bleed into other forms of property? Can you really maintain a sense of moral indignation about theft if theft is permissible in some cases but not in others? Yeah, I think all that is easy to justify the idea of a moral norm against theft. We don't really need to go deep into deontology to get that. It's a purely practical kind of prohibition. Russ: But do you think it was--I'll ask it a different way. For decades, in major American cities, maybe not all of them, there were very few negative consequences to stealing a radio. It may have been illegal on the books, but it was not really enforced. Or it was too expensive to enforce. And I think Coase's insight, which is fabulous, is that this seems horrifying; but actually, it turned out pretty well. Guest: If it's too expensive to enforce it, that's a completely separate phenomenon. Then you are using consequentialist arguments for saying the optimal level of enforcement is going to be one that results in a lot of theft. And you adjust as best you can to that reality. And that's what people did, in fact. Russ: But my claim-- Guest: Coase is there. Russ: But my claim is that if you put the car owners in the room--and the car owners are not just car owners. They are also taxpayers and people who walk on the street and have to deal with crime, etc., and you said to them: You want to live in a world where it's okay to steal a radio or it's not okay? You'd think they'd say: I want to live in a world where it's not okay to steal a radio. It turns out, ultimately--I think the right answer to that, in a purely consequentialist approach, is: As a car-radio owner, I'd prefer to live in a world where it's okay to steal one, because that unleashes a set of incentives in response to theft that are cheaper than policing. Guest: Yeah, I'm going to disagree with you there, because I think there's a way to get everything you want without giving up anything. And that's to say: Look, I acknowledge that we don't have enough police to make it possible or practical to investigate thefts of car radios. That's just a practical problem we confront. Do we want to say it's okay to steal car radios? I would say No. Stealing car radios is against the law. If a cop is standing there and sees you do it, he will arrest you. We're not going to develop costly patrols to go around and catch car radio thieves because we've got other more important crimes to investigate. But we want to say it's immoral; we want to say it's illegal. And if motorists and car makers know that as a practical matter, nobody is enforcing it, they will produce the kind of private theft-deterrent strategies that you've described. And we get the outcome you and the car owners like as a second best. But we don't have to say it's okay to steal car radios. Russ: I didn't mean to be that provocative. I was trying to be provocative. I apologize. I was unclear. I just meant, we don't need to make it illegal. In fact-- Guest: [?] illegal. I think the law should say as a matter of principle that you shouldn't do that. Russ: I don't agree. I think it should be a moral principle. Guest: If we can't [?] you doing it, we'll punish you for doing it. Russ: But we don't. Guest: We would. Sure, if a cop was standing there and you stole my radio, of course he would-- Russ: I'm not so sure. You know, scalping is illegal in most American cities, of tickets. There are a lot of places you can make a scalping transaction in front of a policeman and they leave you alone. Guest: Well, there you can argue that it should be legal. Russ: I agree! As you'd expect. Guest: But I think it's much harder to argue that stealing a car radio should be legal. You don't want to go there, Russ. Russ: No, the semantic distinction I'm making is that it shouldn't be illegal. In the following sense. It should be immoral. We should tell our children not to do it; we should tell them it's wrong; we should inveigh against it when we have the chance. But if anyone who is listening, please feel free to write in the comments in this podcast episode, the time that you had your car radio stolen or your car broken into or your iPod stolen on the subway and you went to a policeman and said, Hey, my car radio was stolen. And they said: Yeah, what do you want me to do about it? It's not just that it's too expensive to staff the streets with enough police that they stop it. They are indifferent to it most of the time. Guest: Yeah, but that doesn't mean that they think it's legal. That doesn't mean they approve of it. It just means there's nothing they can do about it. Russ: Okay, fair enough.
|Russ: Now, to move to a more controversial example about this overtime phenomenon--I want to come to an example; I don't think you and I have talked about it, but that's the example of a carbon tax. A lot of economists have argued we should reduce carbon to reduce global warming. And I think the Coase perspective says: That might be a good idea, because obviously negotiation costs are enormous, and we all can't get together. It's just not going to happen. We have trouble doing it as nations around the world. We've failed in many, many attempts to restrict carbon because we have trouble breaking up the cost shares in a way that people are willing to accept these restrictions. And the alternative is to do nothing and to let people adapt to this higher temperature, the higher levels of carbon in the atmosphere. I think Coase would say it's an empirical question which way is the cheapest way to deal with it. Doesn't mean we can measure it. You can argue that it's a bad metric, it's a bad strategy because it's hard to measure. But I think Coase opens your thinking to that possibility. Guest: Yes. I quite agree. If you read the climate science literature, though, I think there's less ambiguity here than many believe. The science is inexact; that's the first thing that the climate scientists themselves will stress. They have no idea really where this is going exactly. What we know, though, is that every estimate that's come in has been dramatically more pessimistic than the one from a year ago. And the best simulation model that we have, the MIT Global Climate Simulation Model, in a recent set of simulations estimated that by the end of this century, by 2095, not even quite the end of the century, there is a 1 in 10 chance that we are going to see an increase of average global temperature by more than 12 degrees Fahrenheit. And if that happened, 1 in 10, the model is uncertain, so it could be 1 in 5, it could be 1 in 3, it could be 1 in 20--we don't know--but let's take their estimate at face value, 1 in 10, then we get 12 degrees increase. All the permafrost melts; all the methane, the billions of tons of methane are released into the atmosphere, each ton 50 times more powerful than CO2 as a greenhouse gas. That's essentially the end of life as we know it on the planet. So the question really has to be, if there is, say, a 1 in 10 chance that we are going to destroy our entire future, is there any price that we can afford to pay that would eliminate that possibility? And there I think the estimates are pretty clear that a carbon tax that wouldn't be that onerous to adjust to would essentially eliminate that disastrous possibility. Russ: Well, in that story, any carbon tax that doesn't reduce us to--well, any carbon tax is better than that. So, again, I think Coase gives you--again, I'm not making a point against a carbon tax. I'm making a point that Coase's insights gives you a way to think about this that is different than the standard ways that people think about, and it's provocative and interesting. What you've just said is that in your mind, the empirical evidence is overwhelming, that the lowest-cost solution to this problem is a carbon tax. Guest: Yes. Russ: I'm just raising the possibility that in other scenarios, maybe this one, the one we are living in right now, maybe the cheapest thing to do is to adapt. It's [?] not proven. Guest: And new evidence could lead me to endorse exactly that approach. Russ: But I think the contrasting view, the non-Coasean view, is either it's immoral to tamper with the earth's atmosphere and so we should always try to reduce the amount of our impact on the environment. It's a different view. It's a legitimate view. Guest: Right. Russ: It's the deontological view. Guest: Right. Russ: And I think there's a place where, again, I find myself relentlessly drawn to the Coasean side, even though in some cases--not this one necessarily, but in many cases--first I'm very uncomfortable. And Coase forces you to deal with your discomfort. Guest: Yeah. And that's a measure of the brilliance of his insight, that he just saw this in a clearer, different way than anyone that put it [?].
|Russ: Now, there's a big problem, though, with it. And you talk about it at some length. And that's the role of income. Let's talk about this challenge. And this cuts across not just Coase but of course arguments in favor of efficiency, cost-benefit analysis, what are typically called 'willingness to pay,' when we try to see, to aggregate benefits across people. So, I agree with most of what you say [?]; I disagree with a little of it. Lay it out. What's the issue of income? Guest: Okay. When we were talking about the confectioner and the doctor, income differences didn't have anything to say about what was the most efficient way to solve the problem. It was just: how much does the soundproofing cost? How much do you have to pay to the movers to get the doctor to a new location? Compare those two dollar amounts and you know what the right thing to do is. Think about another noise example--Sarah wants to play her violin late at night and her neighbor doesn't like it. She's poor, so she'd be willing to pay $5 for the right to play till midnight; he's really wealthy; he doesn't mind the sound of her violin much; it doesn't really disturb his sleep if he wants to sleep. Russ: He just doesn't like Mozart. Guest: But he'd be willing to pay $10,000 to avoid an occasional moment when he would be inconvenienced by it. So, should his view prevail? So people are offended at the idea that the fact that he has so much more money inflates his influence in the cost-benefit analysis. We take her benefit, which depends upon her meager income, therefore small, her benefits from playing late at night. The cost to him of playing late at night on a psychological meter would register almost imperceptible, but because he's so wealthy we get a big number there. That's the offensive part of cost-benefit analysis that causes people to object to its use. But if you really asked-- Russ: That's embedded in the Coase analysis. Guest: Yes. What agreement would they reach if they could negotiate with one another? Ask that question and then the cost-benefit analysis gives you exactly the answer to the question. She values playing late at night a lot in psychological terms perhaps but only a little in monetary terms because she is poor. That means he could pay her an amount that would more than compensate her for not playing at night. She'd be happier than before if he paid her that amount. He'd be happier than before to have paid it because he didn't like the noise, and he'd be free from it then. So everybody would be better off. That's why the solution identified by the Coase framework is the right solution. Now what if you can't implement it? What if you can't implement the transfer? Should you do it anyway? That's an interesting question. Usually, these are very small dollar amounts. My only claim is that we should use Coase and not worry about the transfers whenever it involves small-dollar amounts, just on the reasoning that you win some, you lose some; on average you come out way ahead. So, it's like somebody offers you a chance to flip a coin--heads you win $10, tails you lose $1. Well, I'll flip that coin a million times, if you want. Sure, I'll lose a dollar once in a while. But overall I'm better off taking that set of bets than not. And if we apply this Coase rule to a thousand different policy decisions, each one of which has a small effect on any individual's wellbeing, then you come out ahead whether you are rich or poor. Russ: It's a fascinating point, the point that--and I love the way you think about it. I've never heard it discussed that way. You want the policy, the assignment of liability or the assignment of property rights to mimic what they would do anyway. The problem I have with that is, as you point out, they don't make those side-payments necessarily after the fact. And that's Coase's point. Guest: Right. Russ: So, if you care about--I think you are pushed to argue that you should, in that case--here's the real problem, that you can't really legislate general legislation that is unaffected by these income differences. That is, not all violinists are poor and not all listeners are wealthy. But in this particular case, if I put that to the side, the generality challenge, if I care about these income differences, and if I think the negotiation-transfer problems are challenging, I'm pushed towards saying that she should have the right to play. If he wants to try to compensate her, great. She'll be better off. But that we should start by giving her the property right rather than him, because of this disparity. Guest: See, we don't do that, though. Russ: I agree. Guest: I mean, we say you can't honk your horn in front of a hospital at 2 o'clock in the afternoon. Why is that? Well, it's because there are people up there who have just had surgery who need to sleep; and the value to you of honking your horn is probably less than the value to them of the quiet that they'd have if you didn't honk it. You can honk your horn if you are a mile from the hospital. That's not a problem. But the noise ordinances really do try to ask what agreements the people would have reached if they could have negotiated with one another. Of course, it's not practical for a patient to run down and bribe a motorist not to honk his horn--I'm trying to rest. That's obviously absurd. So we say, all right, on average the motorists are going to suffer less if they can't honk here than the patients are going to suffer if we allow them to. So basically, if I'm a poor person and somebody says we should use cost-benefit analysis, what am I worried about? I'm worried about that, well, the standard argument is that it gives too much influence to the rich. And sometimes the rich want different things than the poor want. And so if that's the objection and there are thousands of different little decisions that are going to be affected, then we can solve that by saying: All right, we are going to tax the rich a little bit more and raise the Earned Income Tax Credit a little bit, and that will make up for the fact that we are using cost-benefit analysis now to decide how to do all these little policy questions instead of some other rule. Russ: I'm just making the point that I think this again brings out my deontological side. And I'm going to throw in a twist, which is: I'm tempted to say--my first thought is--social norms determine whether people play music at night, and those are probably the best way to deal with it. But a lot of times those norms don't work so well in these kind of settings. Does a person have a moral right to play the violin at 3 in the morning? No, probably not. Do they have the right to play Mozart at 2 in the afternoon even if you hate Mozart? I'd say absolutely yes. And I don't really care about the cost-benefit analysis because I'm worried about these income discrepancies that might-- Guest: Although I noted that what your intuition has told you is exactly what the Coasean analysis would have said. Russ: Is that true, though? Guest: Sure! Russ: What about the case where--not the case where she's poor and he--the example you start with, I don't think it gets there. Guest: Well, no. I mean, you don't want to focus on one rich listener and one poor violinist. Violiners are parts of the income scale, and so are listeners. So they are--the reason for the rule is that in the afternoon, most people are not trying to sleep. Most people have something to do that would make noise or doing it during those hours. So the harm for saying you can't do it would be greater in the afternoon. The gain to the listener, who is not offended by the noise, would be smaller then, because he is not trying to sleep. So, you say, 'All right, okay in the afternoon; but late at night, not okay.'
|Russ: So, the only other point I want to add, though, is that all of our discussion so far leaves out the role that the apartment owner can play. So, the apartment owner can say, 'This is a noisy apartment. Anybody who lives in my apartment can play their music any time at night.' And of course, we have evolved, just like my car radio case, we have evolved mechanisms for people to avoid listening to other people. They are cheap. Guest: Right. Russ: They are called headphones. Earbuds. Or whatever. Guest: Right. Russ: And it's the same thing with second-hand smoke. People who are offended by second-hand smoke, my view is: Start a restaurant that doesn't allow it. Of course, many people did. Many bars did. They don't allow smoking. And it worked out fine. But it seems to me the idea that you ban smoking in a city is wrong. Period. Guest: There the question of harm ot others gets more subtle. This might be a good point to finish up on. Because I think it really gets at some of the differences that you and I would probably not be willing to walk away from so easily. So, talk to smokers. They've been interviewed many times: 93, 95% say they wish they'd never started smoking in the first place. They regret having taken up the habit. I've never met a single person who said 'I really hope my kid grows up to be a smoker.' That would be, I think seen by most people a really bizarre view to hold. But I've never met anybody who held it. So, what explains whether your kid becomes a smoker? I became a smoker as a teenager. I grew up in the 1950s and 1960s. Probably 65% of men in America smoked then. And the best predictor of whether you'll smoke is whether your friends smoked. And my friends did. And so I started smoking. I quit a few years after I started. I've raised 4 sons; they are all adults now. And none of them is a smoker, I'm grateful to report. But I'd be willing to bet my whole retirement account that at least two of them would be smokers if they'd grown up when I grew up. And the only difference is that most people don't smoke now. It's something like 19% of Americans smoke now, compared to the 60-some percent when I was a teenager. And that's a huge benefit for me, to be able to raise my kids in a way that they didn't become smokers. And so, when you are a smoker, do you cause harm to others? Well, the mere fact of adding one more to the list, in the numerator that you use to calculate the ratio of smokers in the population increases the likelihood that every other person who is not yet a smoker will become one. So, the answer is: Unequivocally, Yes: that you cause harm to others by being a smoker. And then the question is, does the population have any legitimate right to ask you to rein in? I don't think we have the right to say you can't become a smoker. But what we did do, and what I think we were right to do, was to tax cigarettes heavily. And that was the main reason that smoking became so much, much less prevalent. Russ: It's a fantastic-- Guest: Something, anyway. Russ: It's a fantastic example. Let me counter. And then you can have the last word, okay? First of all, I've never smoked in my life. Anything. I've never put anything smoking into my system. So, I'm sympathetic to the basic point. I've never smoked a cigar--of course, according to my claim. And I could imagine a cigar smoker who savors it, hoping that their kids grow up to be a cigar smoker. But I assume you meant cigarettes. And I certainly agree with you. Nobody wants their kids--even as pleasurable as some people find smoking--I think most of them do agree that it's a bad habit. It's a habit they wish they hadn't acquired. And they don't wish it on their kids. In my case, actually, my father was a very heavy smoker. He smoked 2-3 packs a day. And I immediately decided that it was--I hated it. I didn't like the smell of it. And it made me a non-smoker. So, there was a positive externality from smoking. But I take your point. That, in most cases, smoking creates a sympathy for it, a cultural norm that encourages people to do it.
|Russ: Having said that, I don't want the government to intervene in the way that you suggest. Even though I accept all your points, because I worry about them doing in cases where it's not very helpful. Or where it is advancing some special interest. I agree in the abstract, certainly in a family, it's a good point. I don't want anybody in my family smoking. Nobody does. But to allow the power of the state--and here is I think our fundamental disagreement, which we've--and I just want to say to listeners, Bob Frank is one of the few guests who encourages us to debate, to exchange, so this is a different kind of conversation; and some of our past ones have been literal debates. So I talk more in these; and that's at Bob's encouragement--thank you, Bob. That's one of the reasons you get invited back! But seriously, I just want to make that clear, that this sparring, this verbal sparring, this exchanging of ideas, it's a little different from the average EconTalk episode. So, I take your point. I'm worried about the role of the State. I don't think the state does what--I don't think the state in general enforces bargains that we would like to enforce ourselves. And I think there are differences among us that I think the state is often going to ignore. Guest: I think we need to be vigilant against the state over-reach, myself. Russ: Hear, hear. Oh, but the last thing I want to say--and then I'll let you have the last word, as promised: The last thing I want to say is I don't think it's the tax on cigarettes that is what stopped us from smoking. It was a complicated--and of course many times a high tax just encourages smuggling, into New York City and elsewhere that have high taxes. But I think the real thing that stopped it was a set of cultural norms that changed. And I think government had a role to play in that. I don't mean to suggest that it didn't. But I think, if anything, smoking and other social movements that have led to strong change in your and my lifetimes, such as littering--which when I was a kid was common and acceptable, or at least not as--now it's horrifying to people to litter. When I was a kid, people did it all the time. It was common. And I think those things change. Government often plays a role whether that's [?] or not, open question. Go ahead. You get the last word. Guest: Yeah. Sometimes social norms are effective, and the cheapest way to solve problems about what to do about activities that cause harm others--absolutely. And sometimes they are not sufficient to get at the incentives that are driving people to engage in those behaviors. So, I think it's really a practical question, up for debate case by case. And I think if people would approach questions like that in that spirit, that would be terrific. Instead what we see is assertions--unsupported assertions of inalienable rights to do certain things, with no reference to: Where did these rights come from? How much does it cost to grant people these rights and to enforce them? How much damage is done by the behavior that the rights enable? Those questions are properly part of the discussion, I think.