Boston College Environmental Affairs Law ReviewVolume 1 Issue 4Article 83-1-1972d’Arge and Hunt on Externalities and EconomicOrthodoxy: A Critique AppraisedWilliam W. BrownMorgan ReynoldsFollow this and additional works at: of the Law and Economics CommonsRecommended CitationWilliam W. Brown and Morgan Reynolds, d’Arge and Hunt on Externalities and Economic Orthodoxy:A Critique Appraised, 1 B.C. Envtl. Aff. L. Rev. 837 (1972), is Article is brought to you for free and open access by the Law Journals at Digital Commons @ Boston College Law School. It has been accepted forinclusion in Boston College Environmental Affairs Law Review by an authorized administrator of Digital Commons @ Boston College Law School. Formore information, please contact [email protected]

d'ARGE AND HUNT ON EXTERNALITIESAND ECONOMIC ORTHODOXY:A CRITIQUE APPRAISEDBy William W. Brown and Morgan Reynolds':'In a recent issue of this Journal/ R. C. d'Arge and E. K. Huntpresent a "critique" of the conventional economic analysis concerning external effects. After convincing themselves that "unlesseconomics radically reorients its entire frame of reference" noprogress is possible in "understanding and resolving the socialand economic problem of environmental pollution and degradation," they unveil "a very crude road map toward reorientation."We suggest that the marketplace in economic ideas is rather likeother markets-i t pays to be wary of assertions by anxious sellers.A patient investigation of the sellers' claims is often rewarded,and in this spirit of caveat emptor we propose to subject their segments to a skeptical inquiry.Lest our sympathies be misunderstood at the outset, we admitthat we too agonize over the fact that human wants exceed theability to satisfy them, that mother nature did not create a worldof our choosing and that people do not always act with our interest in mind. However, the discrepancy between the way the worldis, and the way we wish it to be, is not a generally accepted vehiclefor carrying the day in matters economic. On the contrary, economics, if it is a positive science at all, concerns the developmentof a consistent theoretical structure designed to explain and predict an extensive class of observable behavior, not to pass on thedesirability of such behavior.The traditional method for displacing theories in the empiricalsciences is to supply an alternative logical framework with aricher spectrum of refutable implications about the world. Toquote a higher authority, Albert Einstein writes, "A theory is themore impressive the greater the simplicity of its premises is, the837

838ENVIRONMENTAL AFFAIRSmore different kinds of things it relates, and the more extended isits area of applicability. "2 Although general theories are "wholly"displaced in only the rarest of revolutionary instances, they aregradually and continuously modified through marginal extensionsdeveloped in the resolution of specific problems. Modifications ofexisting theory provide infinite avenues for extending our positiveeconomic knowledge of behavior.If this be gran ted as the basis for toppling or modifying a theory, how do our protagonists measure up? What are the allegedweaknesses of "orthodox" economies? Do d'Arge and Hunt provide a more powerful framework for analyzing behavior? Is thereempirical evidence for the predictive success of their alternative?What is the basis of their critique?Apparently, mundane questions about the empirical success orfailure of economic analysis is of no concern for d'Arge and Hunt.Rather, economic orthodoxy is "vulnerable on psychological andethical grounds."3 Perhaps we are simply ignorant of the newstandards for evaluating theories, but we would like to know howa theory yielding empirically refutable implications is vulnerableon psychological and ethical grounds. Can you imagine the reaction of a Newton, Galileo, Boyle, Mendel, or Leaky to the chargethat their theories were vulnerable on psychological and ethicalgrounds? That their "entire normative framework" was partiallydefective? Perhaps d'Arge and Hunt are unwilling to admit to acorpus of positive economic knowledge. We do not know.Much of their critique rests on a peculiar understanding of theresults of economic theory. For example, they assert, "The conventional intellectual tradition in economic theory covering atleast the last two hundred years rests squarely upon hedonisticpreconceptions."4 According to Webster's New World Dictionary,hedonism is the doctrine that pleasure is the principal good. Yetthe predictive success of economics is based upon the denial ofsome immutable principal good. Men will substitute (or trade-off)among goods depending upon relative costs and benefits. Hencethe ability to explain why much of mankind spends Saturdaymorning picking weeds and mowing lawns-a distinctly unpleasurable activity, at least for the authors. Similarly, the success inexplaining why charity expands rapidly after catastrophes restsupon trade-offs. 6 Nowhere in contemporary economics is "hedonism" the dominant force in molding behavior-and rightly so,since the real world would quickly refute such naive assertions.

A CRITIQUE APPRAISED839To confuse the observation that people prefer more goods to lesswith something termed "hedonism" is plainly wrong. Economicsdoes not specify what things are goods, whether they may bebrotherly love, your neighbor's welfare, help for the poor, a weedless lawn, or pecuniary wealth, but only that people behave inpredictable ways to changes in the relative costs and benefits ofgoods.Another instance of their peculiarly distorted view of economicsis that external effects have received casual and/or little attentionby economists. They contend that "the treatment of externalitiesin economics, even in many recent theoretical analyses, borderson the notion that externalities are 'freakish anomalies easilyadjusted for within an otherwise perfectly functioning competitive system.' "6 If this be true, how do they account for the floodof articleson thesubject since, say, 1954when Samuelson published"The Pure Theory of Public Expenditure."7 Certainly sinceCoase's "The Problem of Social Cost"s in 1960, the widespreadliterature on externalities would seem to indicate a "pervasive"concern over these "freakish anomalies."Perhaps economic investigations of information and transaction costs, alternative property right assignments, and uncer-·tainty, all of which bear on the extent to which externalities are"problems," are yielding results which they do not like. Perhapsthey are simply impatient with the progress to date, in which casewe can only agree and join in urging further work.Their suggestion that government (presumably economists aswell) view the "pollution problem not as one of millions of firmsand individuals, each requiring adjustments but as a problem ofthe society as a whole"9 has a nice ring of workability about it.Nothing like seeing the big picture, especially when mere mortalslike us are yet unable to precisely define the "problem." Can weexpect that the "societal viewpoint" will yield useful propositionsabout the behavior of people in the presence of external effects,how they adjust their behavior to induce others to generate moreor less of a given externality? Or explain the development of"planned" communities and how developers internalize the externalities associated with community living? Or why diverseretailers locate in the same area? Or how firms organize to mi tigate external effects arising in production? Or under what conditions administrative actions are a lower cost substitute for marketexchanges? Despite the best of intentions, the "society as a

840ENVIRONMENTAL AFFAIRSwhole" approach falls rather short of an operational frameworkfor analyzing externalities.In their drive to develop the "necessity of a change in economic viewpoint," d'Arge and Hunt point out that the real worldis a complicated place. Though not a new observation, they describe it with an engaging phrase-"pervasive externalities."Recognizing that the actions of an individual, in addition to having private consequences, almost always affect others, they aretroubled by the lack of organized markets where trades in external effects could be consummated. In fact they offer this apparentlack of quid-pro-quo market exchanges as evidence of weakness inorthodox economic theory.There is no doubt that the side effects of our actions, pervasiveas they are, are intriguing and pose the difficult question of determining what institutional arrangements are low cost ways of reducing their relevance. But the absence of an organized marketcannot, on its face, be considered non-economic (i.e., inefficient)nor an indictment of economic theory. In fact it should be obviousthat markets are viable only when the benefits perceived bytransactors outweigh the cost of organizing and operating themarket. Consequently it is not surprising that there are not activemarkets in belching rights, nor rights to pollute the air via automobile exhaust.What do d'Arge and Hunt propose as a means of analyzing theimagined problem of the "pervasiveness" of externalities? Dothey give us a means for assessing administrative versus nonadministrative modes of mitigating external effects? Do they tellus about the "external effects" of governmentally imposed solutions? Do they give us insight into how different institutionalarrangements will induce different flows of information? Presumably these are questions of some concern. Unfortunately the mererecognition of the world's complicated nature is not sufficient forviable analysis.Another matter which apparently concerns d'Arge and Huntis the lack of correspondence between the "restrictive assumptions" of economics and the real world. We wonder if they areequally concerned about the effect of assuming a perfect vacuumupon the ability to predict the flight of a cannon ball. Do the"unrealistic" models of molecular structure prevent a chemistfrom predicting that combining hydrogen and oxygen yieldswater? Does the assumption of negatively sloped demand curves

A CRITIQUE APPRAISED841yield tolerably accurate predictions about the results of minimumwage or ren t con trol laws?On the matter of "restrictive assumptions" we applaud thereference to J. de V. Graaff's book, but not our protagonists'interpretation. Io The first sentence of Graaff's chapter 10 reads:"The measure of acceptance the marginal cost pricing principlehas won among professional economists would be astonishing werenot its pedigree so long and respectable."ll In their eagerness to"devastate" economic orthodoxy, d'Arge and Hunt use thequoted passage in the following fashion: "Many of them are sorestrictive that one must agree with Graaff that 'the measure ofacceptance . [which this theory] has won among professionaleconomists would be astonishing were not its pedigree so long andrespectable."12 Note their substitution of "this theory" for "marginal cost pricing." To equate marginal cost pricing with all ofeconomic orthodoxy and to assert that Graaff led "one of themost devastating attacks" on economic theory is a credit to theirimagination but nothing more. Graaff was concerned with specifying the assumptions which are sufficient to allow an economistto prescribe, for a public enterprise or nationalized industry, setting price equal to marginal cost. Graaff demonstrates that economists cannot recommend or make policy statements about whatallocation or prices ought to be. Such analysis leads Graaff toconclude his book:I do feel very strongly that the greatest contribution that economicsis likely to make to human welfare, broadly conceived, is throughpositive studies-through contributing to our understanding of howthe economic system actually works in practice . In my view thejob of economists is not to reach welfare conclusions for others, butrather to make available positive knowledge-the information andthe understanding-on the basis of which laymen (and economiststhemselves; out of office hours) can pass judgment. 13Graaff's message is strikingly similar to that of Milton Friedman who stresses that normative economics cannot be independent of positive economics because any policy conclusionnecessarily rests upon some positive analysis about why a problem exists and therefore how the recommendation will ameliorateit. Friedman adds:I venture the judgment, however, that currently in the Westernworld, and especially in the United States, differences about economic policy among disinterested citizens derive predominantly from

842ENVIRONMENTAL AFFAIRSdifferent predictions about the economic consequences of taking action-differences that in principle can be eliminated by the progressof positive economics-rather than from fundamental differences inbasic values, differences about which men can ultimately only fight. l4d'Arge and Hunt warn that "attempts by the government tobring about 'workable competition' may result in effects diametrically opposed by those envisioned by the authors of those policies."15 Admirable advice. To what extent does their "radicalreorientation" conform to the prescription? What, in fact, aretheir specific proposals to "ameliorate the effect of waste emissions"? Three policies are suggested-changes in macroeconomicpolicy to reduce waste generation, imposition of a family expenditure limit, and finally, subsidies to encourage "environmentalawareness and an encompassing conservation ethic." What willbe the effects of these schemes?Using macroeconomic policy to achieve environmental goalsseems a blunt instrument at best. What they hope to achieve withparticular changes seems murkier yet. We agree there are conceivable effects on waste emissions from governmental policies,but we find it somewhat unsatisfactory that the particular effectsgo unexplained. For exam pIe, w