When a Problem Comes Along, You Must <del>Whip</del> Ban It

Radley Balko has better things to do than debunk this "craptacular" case against efficiency. Believe it or not, I don't.

Since the issue in question is efficiency, it may be helpful to begin by defining it. The late Paul Heyne, a former professor of the blogosphere's very own Andrew Chamberlain, defined efficiency as

a relationship between ends and means. When we call a situation inefficient, we are claiming that we could achieve the desired ends with less means, or that the means employed could produce more of the ends desired.

The important point to note here is that the values efficiency measures are subjective; it doesn't matter what you want to accomplish - accomplishing it efficiently is always desirable. Unless, of course, your desired goal is to simply waste scarce resources for the sake of wasting them, and even then, you will be more successful at achieving this goal if you waste resources as efficiently as possible - that is, as inefficiently as possible.

Whether you are a capitalist, an environmentalist, an altruist, or any other ist, it always makes sense to achieve your goals as efficiently as possible. Efficiency is value neutral.

Nicols Fox, the author of the article in question, doesn't like efficiency. She doesn't do a great job of explaining why, because all of her examples do not demonstrate that pursuing efficiency is a bad idea, but that, as humans, we often make mistakes and do not think about unintended consequences. If we were infallible and were able to avoid these unintended consequences, efficiency would still be the best standard to use.

And what is Ms. Fox's alternative standard? She wishes to replace efficiency with "common sense." But what is common sense? What may be common sense to me may not be common sense to her. The problem with common sense is that it is not at all common among different people. It is one of those fuzzy terms with no precise definition, like "fairness" or "sustainability." It is not a standard at all.

Fox claims that "efficiency operates too often without regard for long-term consequences." Indeed it does. But that is not a problem with efficiency, but with those who misapply it. If our values include long-term consequences, then a proper cost-benefit analysis will discount future costs and benefits back to the present. If we fail to do so, we are acting inefficiently.

Another accusation against efficiency is that it leads us to put all our eggs in one basket for the sake of economies of scale. Fox's example:

The small-scale food poisoning outbreaks of the past, the spoiled potato salad at the family reunion kind of thing, were being supplanted, I discovered, by huge, nationwide outbreaks from contaminated commercial foods that were efficiently mass-produced, mass-processed and widely distributed.

Fox is correct that large systems have a greater potential for disaster than smaller systems, but they also have a greater potential for social benefit. Fox is ignoring the benefits side of the ledger, and only focusing on the costs. And even if we assume, for the sake of argument, that the costs of a larger system outweigh the benefits, that still doesn't mean we should ignore efficiency. Instead, we simply need to readjust our valuations and recalculate accordingly. In such a case, a standard of efficiency would lead us to favor smaller food distribution systems.

It's interesting to note that one of the examples Fox uses against efficiency is addressed in Paul Heyne essay mentioned earlier. Fox claims that

We've become too efficient for our own good. Watching the dwindling catches of local fishermen from my vantage on the Maine coast, it has occurred to me that efficiency is the reason that every bite of haddock feels like it could be my last and the taste of cod is rapidly becoming a distant memory. The giant commercial pair trawlers, dragging their great nets between them and using sonar and other high-tech tools to find fish, are devastating the resource as efficiently as possible. Looking north to the Maine woods, it becomes obvious that efficiency is the culprit in clear-cutting. Huge machines known as feller bunchers strip and stack trees at a rate that virtually precludes the possibility of sustaining the forests, while putting traditional chainsaw loggers out of work.

But as Heyne demonstrates, efficiency is not the culprit; rather, "The crucial missing element is private property." Heyne continues,

Because so many of the key resources employed by commuters are not privately owned, commuters are not required to bid for their use and to pay a price that reflects their value to others. Users pay no money prices for resources such as urban air and urban streets. Therefore, those goods are used as if they were free resources (see The Tragedy of the Commons). But their use imposes costs on all the others who have been deprived of their use. In the absence of money prices on such scarce resources as streets and air, urban dwellers "are led by an invisible hand to promote an end that was no part of their intention," to apply Adam Smith's famous generalization. In this case, however, the end is not the public interest but a result that no one wants.

Fox's last complaint, that more efficient technologies put traditional chainsaw loggers out of work, is repeated throughout her piece using other examples, such as:

  • "Voice mail may be efficient from the business perspective, but it has ended the receptionist's job and transferred the work to the caller."
  • "The filling station's efficiency now has granny trying to figure out how to pump gas and check her oil." (With the implied loss of a job for the gas station attendant.)
  • "Now we are told we must learn how to check ourselves out at the supermarket."

In this last example, Fox is channeling John Derbyshire's equally silly tirade, which I mentioned elsewhere:

The other day I checked myself out at a self-checkout station in my local supermarket. Suddenly these self-checkout gadgets are appearing everywhere ? I notice that my local Home Depot has them too, now. I've resisted using them, partly because I don't like gadgets, partly out of proletarian solidarity with the cashiers, who are obviously going to be out of their jobs if this catches on big-time. The other day, though, I gave it a try, out of sheer curiosity, and it was surprisingly painless. I guess I'll be checking myself out more often in future. I guess a lot of supermarket cashiers will be out of jobs.

While Fox seems to be "of the left," and Derbyshire is a conservative, both make precisely the same argument, and for the same reasons - neither one understands basic economics. Both would benefit from reading Bastiat's famous Candlestick makers' Petition.

If Fox's and Derbyshire's articles demonstrate anything at all, they show that economists have not been doing a very good job educating the public for the last three centuries or so.

Back to Fox's tirade against modernity:

Appliances have certainly become more efficient, yet energy use hasn't gone down. To the contrary, points out energy consultant Andrew Rudin, it has risen, as we simply add new appliances to our lives. Nevertheless, our culture works on the assumption that efficiency is an unquestionable benefit.

Let's see here. Two common household appliances which take up the largest portion of an average person's energy bill are air conditioners and washing machines. Were we living one hundred years ago, instead of writing about how she hates technology (presumably on a computer and not with quill, ink, and parchment), Fox instead would be sweltering or shivering, depending on the time of year, barefoot and pregnant in the kitchen, washing her children's diapers by hand.

There is much more I could criticize in her article, but I think I've said my piece. Before I finish, though, it's important to note one last thing. As I mentioned earlier, efficiency is value neutral. Similarly, laissez faire capitalism is value neutral. If Fox wants to live the simple, luddite life, devoid of all the benefits that technology brings, there is nothing to stop her from doing so in a truly free market system. She could live with others who share her same values, and together they could be self-sufficient and separate themselves from the rest of us.

But that is not what Ms. Fox is seeking. She does not simply want to pursue her own values - she wants to impose her values on the rest of us:

My own preference would be for simply banning certain super-efficient technologies. We could outlaw the fish-finding sonar on the trawlers, return to traditional fish-finding skills and let the inherent inefficiency of the small fisherman help preserve our oceans' fish, not to mention the families and communities and related businesses that depend upon them. Ban the feller bunchers from the forests, localize electric production, go back to telling airplanes what towns they have to serve, put people and their needs before systems, and reduce the risks of massive systemic failure in the bargain.

Ban it. Outlaw it. Tell them what they should do. Put people in their place. The work of a control freak is never done.

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Thanks. I didn't mean to

Thanks. I didn't mean to steal your thunder, and I look forward to reading your TCS piece.

Damn you! I actually just

Damn you!

I actually just finished a fisking of the piece for Tech Central.

But yours is very well done.

Micha, Your criticism is in

Micha,

Your criticism is in some ways valid - mainly because the way that the original writer uses the word "efficiency" is inaccurate. A better word/phrase to describe what irks her might be "unregulated pursuit of pure financial efficiency whilst excluding other objectives and social and environmental costs". Not quite as catchy in a magazine title I admit. But I feel you are being disingenuous in wilfully misinterpreting her use of the word "efficiency" in order to allow you to rail against her basic argument, which is that the unfettered pursuit of purely financial efficiency" is likely to be bad for society and bad for the planet in the long term. Saying you oppose "efficiency" is like saying you are opposed to "justice" or "freedom" - no-one is de facto opposed to it, but the devil lies in the definition of the words.

But what you have not done, as far as I can see, is offer a viable solution to the basic problem that she identifies - that of creating a model for economic life that is sustainable in the long term. It may be that you do not believe that the world contains a finite amount of resources (eg: air, clean water, wilderness landscapes etc), but I'm sure this is not the case, since your understanding of economics must at least include the basic concept of scarce resources. Or it may be that you feel that these resources do not have value unless they reside in private hands. In that case, I would hereby like to stake my formal claim to the ownership of all the air on the planet. I shall be charging you a levy on every lungful of oxygen you use - your invoice is in the mail.

The truth is that we all own the air. Now, I know that's gonna hurt you because from your writings I can tell that the very concept of common ownership is evil as it smacks of filthy communist ideals, but really, if not all of us, then who? The ideas behind the Tragedy of the Commons are undoubtedly valid, but what is the solution? The answer? Sadly, it's regulation, my friend. I know, another word, almost as evil as "common ownership", but what else do you suggest? Trust the market? I'm afraid that the market has no interest in accounting for long-term environmental costs or social evils unless it is forced to do so by (universally applied) legislation. (See: Victorian slums, lead poisoning, toxic rivers, children dying in coal mines, child prostitution).

You may hate the concept of "banning" things but I'd prefer to call it "regulation". If you seriously believe that all regulation is wrong, please give me an alternative.

Ian, The ideas behind the

Ian,

The ideas behind the Tragedy of the Commons are undoubtedly valid, but what is the solution? The answer? Sadly, it's regulation, my friend.

The solution to the Tragedy of the Commons is private property, as has been known for hundreds of years. "Regulation" does nothing to change the preverse incentives underlying the TotC. Even if no physical boundaries exist, it is possible to create property rights in things such as air, land, and water. See REDUCE OVERFISHING BY DEFINING PROPERTY RIGHTS by Lynne Kiesling.

You seem to think that scarcity somehow implies that "regulation" is a must, and that proponents of the free market are missing something when they ignore scarcity. Instead, we recognize scarcity as a fact of life, and see the free market as the best rationing mechnanism for using those scarce resources. The free market also results in productivity gains that effectively reduce the scarcity of those resources, as food production today is the highest it has ever been in history. If you truly want "sustainable" development, a system of enforcable property rights in scarce resources is the way to go.

Jonathan, And what would "a

Jonathan,

And what would "a system of enforcable property rights" consist of, except a framework of regulations?

One definition of a "libertarian" economist would be a person who seeks perfect markets through complete deregulation. And yet, as you've just said, a just system of enforceable property rights would, by definition require some form of regulation. A contradiction, surely?

As it happens, the solution that Lynne Keisling proposes of tradeable quotas for fishing rights is not too far removed from the way I have often thought we could regulate pollution, which would be to provide each person born on the planet with an individual quota for energy/resource consumption which could be traded on an open market. The quota might have both a geographically specicific and a global element to allow flexibility. One important point - companies, governments and other entities would have NO allocation of their own and would have to buy from individuals. Why? Because companies are not people. They can't develop cancer through pollution, they don't have to live near toxic waste dumps, they don't have aesthetic values that are offended by open-cast mines destroying their landscapes.

The problem with the idea of personal quotas of course is that it is completely impractical. It would require global co-operation, global enforcement and global tracking of every transaction at every moment of every day - something that would cause the average libertarian to have a coronary just through thinking about it. Not only that, it would require that we lucky few who live in industrialised countries downgrade our lifestyles by an unacceptable amount, as the cost of buying credits would force us to start accounting for the true cost of our overconsumption, since it would no longer be subsidised by off-balance sheet social and environmental costs.

So, I ask again - what is your solution?

Fox ignores the fact that

Fox ignores the fact that economy of scale itself is relative. "Efficiency" in production reflects a bundle of costs and benefits; so efficiency in terms of unit cost can peak out at differing levels, depending on how costs are manipulated. The large size she complains of, in many cases, results from the fact that the state absorbs or shifts operating costs away from the market actors, and thus artificially raises the level of output at which productive efficiency is reached.

But cost can never be destroyed; it can only be shifted. TANSTAAFL. So the inefficiency costs of large-scale production are still being borne--just not by the market actor. Because the market actor gets a distorted set of price signals as a result of government subsidies and intervention, he finds continued expansion profitable even after total costs outweigh total benefits. He is making "efficiency" evaluations on the basis of distorted date, because of the government's shielding him from the full cost of his decisions.

If subsidized irrigation water weren't provided below cost, or if transportation weren't subsidized, how much smaller would these agribusiness farms be?

Jonathan, Although I take

Jonathan,

Although I take your point, and agree with it, the "tragedy of the commons" is misnamed. The problem is with unappropriated resources, which no owner can internalize the costs and benefits of using.

But a "commons," in the traditional sense, WAS property. The medieval commons were the joint property of the people of a village; each villager had a rational interest, as a property owner, in making sure that no other villager kept more livestock on the commons, raised more food, or took more firewood, etc., than the customary rules allowed. Turning fisheries into commons, jointly owned by the associated fishermen of a particular area, would be a good solution. If such an organized group could internalize all costs and benefits from the fisheries, they would have a rational interest in regulating individual catches to promote sustainability.

"It may be that you do not

"It may be that you do not believe that the world contains a finite amount of resources (eg: air, clean water, wilderness landscapes etc), but I'm sure this is not the case, since your understanding of economics must at least include the basic concept of scarce resources."

Scarce != Finite

This may be difficult to grasp, but it is true. What you have to realize is that the value of a resource is not intrinsic, it depends on our values and our knowledge. For this reason, though the matter that composes our resources is conserved (in the laws-of-thermodynamics sense), their value and productivity is not.

The way it's used by those ignorant of economics, "sustainability" is a bugaboo. They take it to mean the ability to do what we're doing now until the end of time, which is upon a moment's reflection neither desirable nor even relevant. Around the turn of the 20th century, we were facing an impending catastrophic shortage of whale oil, which was widely used for heat and light. As whale oil became scarcer, its price rose, yielding incentives to find an alternative. Up until then, crude oil was a nuisance, something you paid to have drained from your land. The search for an energy alternative revealed its usefulness, and the petrol age was born. I tell this parable frequently, because it's the perfect illustration of the silliness of worrying about running out of resources. Resources don't run out overnight, and they don't vanish with no alternative, the price system ensures that. The danger lies in situations where the functioning of prices is inhibited.

But the whale oil tale teaches another lesson as well. Would the people of a century ago have benefited from a "sustainable" whale oil economy? No! The search for an alternative to a suddenly-scarce resource led us to a superior replacement.

If you want to solve the real problems that "unsustainable" productive processes face us with, look to restraining government meddling as the answer. For it is those policies which you favor, "regulation", that cause the vast majority of such problems.

Ian, I don't think it is

Ian,

I don't think it is disingenuous for me to show how a word is being used incorrectly. Further, Fox's tirade is not simply against "unregulated pursuit of pure financial efficiency whilst excluding other objectives and social and environmental costs". She is an admitted luddite and wants to ban large swathes of modern technology. Her argument includes not only criticisms of externalities, as is your focus, but criticisms of "creative destruction" in the form of job losses, and rational prioritization of objectives, as well as elimination of waste. Your valiant efforts do not save Fox.

I mentioned that the term "sustainable" is fuzzy and undefined, like "fairness" and "common sense." Different people mean different things when they use the term "sustainable" and it is nearly impossible to get a precise definition.

One of the problems with the concept of sustainability is that it is mathematically impossible. Given a fixed amount of a resources, and an infinite (or near infinite) number of future generations, even the smallest amount of resource usage by each generation is unsustainable.

Further, even if we were to use egalitarianism as a standard for resource distribution, the allocation would greatly favor present generations over future generations. Why? Because, historically (at least over the past 200 years or so), each successive generations has been much more wealthy than the previous generation. This indicates that we are are conserving too much.

And yet another point: although we use many non-renewable resources, we also constantly find new reserves. This is why predicitions made by people like Thomas Malthus and Paul Ehrlich have always turned out to be wrong: they assume a fixed quantity of resources based only on known reserves, and they ignore the role technology plays in making resource use more efficient (i.e. more productive per unit of resource) and in creating new alternatives, such as replacing whale blubber and wood with petroleum and coal.

You ask what the solution is to the tragedy of the commons if not regulation. As Jonathan mentioned, assigning property rights is the ideal solution. But in cases where it may be difficult to assign property rights, there are other solutions besides regulation. Common law, for example, is able to deal with torts. If you harm me by poisoning my environment, I can sue you.

You claim that "a just system of enforceable property rights would, by definition require some form of regulation." But libertarians have no objection to "regulations" in the form of tort claims and other judicial activities. We object to regulatory bodies like the EPA which implement top-down, one size fits all solutions.

Now, you also mention that one problem with libertarian pollution controls is that they "require global co-operation, global enforcement and global tracking of every transaction at every moment of every day."

This is true. Global cooperation is often necessary in order to regulate externalities that cross national borders. But that is precisely what we don't have now! We have no world government or any other global authority with the power to enforce international agreements. Countries adhere to such treaties as long as they feel it is in their best interest to do so, and if it isn't, they don't. This isn't a problem for libertarians; this is a problem for anyone who doesn't advocate a single world government.

One way to deal with these kinds of issues is by paying people not to pollute. This was one of Ronald Coase's important discoveries: it doesn't matter how you distribute property rights. As long as transaction costs are low enough, property will be directed towards its most efficient uses. If it is more efficient for Canada to reduce the pollution it sends across the US border, because the costs of pollution to the US are greater than the benefits of pollution to Canada, then, barring large transaction costs, the US will pay Canada to stop polluting.

You can read more about Coase here.

Micha, In a market anarchy,

Micha,

In a market anarchy, I wonder what would be the transaction costs of organizing a common agent to collect fees from American firms, and to negotiate a price with Canadian firms. Any ideas on how this would work?

Another possible solution might be resurrecting the old common law of private nuisance, which has been largely crowded out and supplanted by regulatory remedies. If a polluter had to answer to the free juries of neighboring mutual defense associations, pollution probably wouldn't be worth the cost.

Micha, Thanks for the

Micha,

Thanks for the response. I wasn't actually trying to save Fox - I just felt that you had created a straw man to pull apart and that in fact she had been hamstrung by her wooly use of language. I don't defend her Luddite tendencies however - I seek realistic solutions to our problems, and don't seek to romanticise the good ol' days.

Your mathematical argument about sustainability assumes that a resource, once used, is elminiated from the equation and cannot be re-used. In reality, both ecosystems and truly efficient human societies can (to a greater or lesser degree) recycle resources - water used for washing the car can be re-used for irrigation, for example. Your counter-argument would (I assume) be that recycling only happens when the resource is scarce enough to make recycling cheaper than primary extraction. Fair enough, but once again, what concerns me is that our societies (so far) fail to adequately account for the true costs of new extractions.

It is my opinion that certain natural resources are effectively priceless. What is the monetary value of an animal or plant species? How much would it cost (for example) to replace the Dodo? Or the Panda? Surely the figure approaches infinity - since it is impossible. Likewise, what price can be put on the ecosystems that may be destroyed by the extraction of oil from the Alaskan wilderness? The price might be calculated by working out the rent payable over 3.6 billion years of evolution. Extraction thus becomes inefficient.

Sure, if oil reserves become scarce there is a chance that we can find more oil. Or we can use something else to power our cars, but this argument is based on the concept of substitution. But some things are not substitutable (if there is such a word). If I murder your father, you are unlikely to forgive me, even though I offer you my father as a substitute.

These are tangibles. But I also worry about the intangibles. What is the monetary value of the view across the valley where I grew up in rural Wales? Is it only what I (or someone else) is willing to pay to preserve it? If I can't pay to preserve it, is my emotional attachment to it worthless? If this is the basis of your world view, then I'm afraid I want no part of it, since to me it seems cold and inhuman. I like to think of myself as essentially rational, but I cannot put a price on some of the things that I feel make life worth living. I'm no hippy but if the market dictates that a view is worthless unless someone is willing to pay for it then the market is wrong. If you disagree I suggest you read some Dickens, specifically Hard Times - he expresses what I'm trying to say more eloquently than I could.

My point is essentially this - we can put prices on things if you like, but I would like those prices to reflect the TRUE cost of replacement of the resource in question. For humans, I believe that the concept of substitution is inherently wrong.

Kevin, Just like military

Kevin,

Just like military defense, international environmental pollution involves extraordinarily difficult coordination problems. I don't have a good market anarchist solution, but then, the statists don't have one either.

Ian, Your mathematical

Ian,

Your mathematical argument about sustainability assumes that a resource, once used, is elminiated from the equation and cannot be re-used.

Sorry, you're right. When I wrote that, I was thinking of non-renewable, non-recyclable resources like petroleum.

Fair enough, but once again, what concerns me is that our societies (so far) fail to adequately account for the true costs of new extractions.

I don't see much evidence for this concern. Prices reflect future expectations and take into account all of the available information in order to make these predictions. Can you give me a more specific example and explain why you think the true costs are not being taken into account?

It is my opinion that certain natural resources are effectively priceless. What is the monetary value of an animal or plant species? How much would it cost (for example) to replace the Dodo? Or the Panda? Surely the figure approaches infinity - since it is impossible.

To say that something is priceless - or infinitely valuable - is to say that there is nothing you wouldn't be willing to give up in exchange for it. This would mean that you would be willing to trade every human life for the existance value of a single species. I don't think you actually believe this. The existance value of a single species may be valuable to you, but not infinitely so, unless you are willing to give up everything else you value in exchange for it.

Just because it may be impossible to replace an extinct species (although it may also be possible in the future, depending upon technological discovery) that doesn't mean the species itself is infinitely valuable. Dodo birds might be cute, but what great value do they provide for us?

Likewise, what price can be put on the ecosystems that may be destroyed by the extraction of oil from the Alaskan wilderness? The price might be calculated by working out the rent payable over 3.6 billion years of evolution. Extraction thus becomes inefficient

Why would the cost of extracting oil from ANWAR include rents from 3.6 billion years ago? This is not how CBA is performed. CBA is based on willingness-to-pay, which in turn is based on trade-offs. I don't see what 3.6 billions years has to do with the calculation.

Sure, if oil reserves become scarce there is a chance that we can find more oil.

Not just a chance. We are constantly finding new oil reserves all the time. And because oil is non-renewable and non-recyclable, every time we use it, it becomes that much more scarce, thus increasing the price, thus increasing the incentive to look for new reserves. This is why, when we account for inflation, the price of a gallon of gasoline is the same now as it was many decades ago.

But some things are not substitutable (if there is such a word). If I murder your father, you are unlikely to forgive me, even though I offer you my father as a substitute.

But we can still place a price on my father. The government does this all the time. The value of a human life is around $5 million. This value is calculated in a variety of different ways, all of which lead to a similar result. Why is such a value important? Because it is useful when making health policy decisions, transportation policy decisions, environmental policy decisions, and so on. We must know how much a life is worth in order to make trade-offs.

What is the monetary value of the view across the valley where I grew up in rural Wales? Is it only what I (or someone else) is willing to pay to preserve it? If I can't pay to preserve it, is my emotional attachment to it worthless?

Existence value is based on willingness-to-pay, but it does not necessarily take into account ability-to-pay of a particular individual. But if no one is willing to give up anything in order to preserve the existence of something, then it isn't very valuable, is it?

If this is the basis of your world view, then I'm afraid I want no part of it, since to me it seems cold and inhuman. I like to think of myself as essentially rational, but I cannot put a price on some of the things that I feel make life worth living. I'm no hippy but if the market dictates that a view is worthless unless someone is willing to pay for it then the market is wrong.

But this doesn't make any sense. The market is simply the aggregation of many individual values. If the market "dictates" that something is worthless, that means that all of the individuals that comprise the market dicate that the thing is worthless, in which case, what is the problem? Putting a price on something merely means that you value it in relation to other things, and that you are willing to make trade-offs based on those values. It is not the economist's fault that you don't like having to make trade-offs - none of us do. That is the fault of nature, for placing us in a world of scarce resources and infinite wants.

My point is essentially this - we can put prices on things if you like, but I would like those prices to reflect the TRUE cost of replacement of the resource in question.

But replacement cost is not the value that people use when making decisions regarding trade-offs. Every decision made entails opportunities forgone - this is why economists like to talk so much about opportunity cost. Were we to use replacement costs instead of willingness-to-pay, the costs of every decision would be nearly infinite, because there are often an infinite number of other opportunities forgone with any decision. This would render cost-benefit analysis useless. But we would still be living in a world of scarcity, where trade-offs are necessary. We just simply wouldn't have any useful tools for decision making.

Ian, Speaking for myself

Ian,

Speaking for myself only, nature has exactly zero intrinsic value. A species or a great view is worth exactly what people are willing to pay to preserve it. Just because something has an infinite replacement cost doesn't mean it's infinitely valuable. The matter is primarily about utility, not about (re)production cost.