Public Economics: Tool of Big Government Tools

There are a lot of people who are pissed off they no can longer claim that capitalism hurts ordinary workers.  The 19th- 20th centuries were the longest and most convincing economic-political experiment in human history.

Laughed into oblivion every time they claim capitalism hasn’t improved ordinary people’s lives, they take legitimate economic insights and build them into a new generation of rhetorical weapons to justify reducing choice and controlling the economy.

Enter Public Economics: The New Tool of ‘Tools’.

All people interested in public policy are aware of externalities – costs and benefits that the market doesn’t capture in the market price. They’re aware of market failures, of limitations in self-organising markets for some products and institutions, of information asymmetries (consumers not knowing stuff) and other grit in the gears.

But all too often the economic activist – and there are a lot of those rather than economists – points and screams “Market Failure!” or “Externality!” to justify stupid, ideological, government-expanding and choice-limiting intervention.

It’s easy. It has the aura of economic literacy. It’s rhetorically effective. And it allows members of the Smart Class to define choices they disagree with as market distortions they have an obligation to correct.

I’ve sat in postgrad economics seminars and listened to smug innercity twenty-somethings justify legal restrictions on food choice, car choice, house size and design, school choice, religious choice, name choice, medical choices and a host of others all based on concepts of externalities and information asymmetry.

And it’s not just the hubris of students.

Ross Gittins has embraced a novel conception of externalities from Richard Denniss, of the Australia Institute. Of course, to argue for reducing economic growth.

Consider also the likelihood of dodgy numbers underlying the social cost estimates used to establish externalities. Recently Eric Crampton delightfully skewered – point by point, double-counting by double-counting – those social cost estimates for alcohol use.

Because an intervention for an externality – if real – depends on the magnitude of the social cost it creates. And if you can sex up the social cost…well, you sex up the case for a government response.

Equally, to make the case it is easy to gloss over the benefits of an activity, perhaps understating or ignoring them, particularly if those benefits are small and distributed across millions of people. Again, dodgy benefit estimates are a great way to sex up your case.

And for the most part, the agencies estimating the social costs and benefits are ones engaged in government. What a surprise that intervention is commonly suggested!

Enviro-economists, public health activists, food nazis, free speech controllers and others all resort to these concepts. Sometimes legitimately; after all, the paradigm case of an externality is pollution as a by-product of manufacturing. Frequently however, an outcome they don’t like becomes an externality or market failure; a choice they don’t agree with is due to ignorance from information asymmetry; a lack of self-control becomes something a tax can and should fix.

Paternalism from the Smart Class writ large.

Worse: consider this at Economist’s View, where an Econ professor argues for a carbon tax. Just drop in an Econ101 mention of externalities and away you go. Neglect to address the key questions – is there a negative externality in fact, is the cost impact sufficient to warrant restricting freedom and intervening, will the act of addressing it make things worse, and if we do address it what is the most effective approach?

No, just spout ‘externality’ and government action must follow.

All economists should be embarrassed by this.

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