Coase’s “Amoralization” of Externalities
Underlying both the “fairness/equity” and “environment as an end” considerations was, in Randall’s (1974, p. 53) words, Coase’s effective “amoralization of the externality issue,” grounded in his emphasis on the reciprocal nature of harm and the suggestion the problem is to avoid the more serious (in value of output terms) harm.
Yet, we noted in Section 9.2 that Coase had argued in “The Problem of Social Cost” that it is “desirable” that policy decisions over issues such as these “be carried out in broader terms” than just efficiency, including “aesthetics and morals” (1960, p. 43). Given this, Randall’s charge against Coase himself is likely too strong, though it may have validity against others - for example, within the property rights tradition - who built upon Coase’s work.[99]Whether or not one agrees with Randall’s contention that Coase amor- alized the externality issue,[100] it is difficult to disagree with his assessment that ethical concerns raised by the Coase theorem, particularly in the environmental and legal contexts, played a significant role in the hostility expressed toward it. Stigler no doubt added fuel to the fire when, rather than carrying through Coase’s emphasis on the reciprocal nature of the problem, said, in his introduction of the “Coase theorem,” that “When a factory spews smoke on a thousand homes, the ideal solution is to arrange a compensation system whereby the homeowners pay the factory to install smoke reduction devices up to the point where the marginal cost of smoke reduction equals the sum of the marginal gains to the homeowners” (1966, p. 113, emphasis added). Demsetz’s emphasis on efficiency net of transaction costs likely only exacerbated the problem.[101]
But was “amoralization” the problem? It could certainly be argued that the Pigovian approach was no more inherently moral than the Coasean.
After all, the thrust of the Pigovian discussion was efficiency. It just so happened that, on the road to efficiency, the Pigovian approach provided ways of dealing with pollution and other harmful acts that resonated with social norms (including traditional legal notions of causation)[102] [103] and with the interests of those who considered environmental preservation an end worth pursuing. The Coasean approach, on the other hand, raised the prospect of putting efficiency on a collision course with these larger concerns, as Randall brought out starkly:In essence, Coase seemed to be saying that in cases where two parties have conflicting interests there are no moral precepts to guide the resolution of the conflict. Viscous criminals being bribed to desist and of little children being regarded as “hitting” automobiles in pedestrian crossings, with Coasians failing to be morally offended, were evoked...24 Mishan scored early points with the issue of income distribution. Surely decent people could see a moral problem in poor citizens bribing an affluent producer of effluents, while Coasians looked on benignly. (1974, p. 53)
John Weld went even further, defending the traditional approach to causation and liability by arguing that polluter liability and similar restrictions exist for a reason - they reflect social norms, an “evolved consensus,” embodied in the common law, that you should “use your land as not to injure another” (1973, pp. 598-599). These norms, then, take precedence over efficiency and override the indifference suggested by the Coase theorem’s invariance claim.
While supporters of the Coasean approach extolled its avoidance of fuzzy concepts such as fairness, Randall (1978, p. 12) held to a very different view, that “The amorality of [this] scholarship is not viewed by critics as a welcome escape from normative methodological traps, but as symptom of failure to understand the fundamental nature of institutions.” Sounding a note from the old institutionalist tradition, Randall argued that “Institutions express a society’s value system and give it effect in the form of working rules” and, in doing so, “tend to shape the individual’s habits of thought and action and his expectations.” This, said Randall, presents a problem in that institutional stability requires that these institutions be “broadly consistent with the ethical values of the society.” The presence or absence of such consistency has powerful effects:
Man responds positively to institutions he sees as ethically right and openly or surreptitiously undermines those he sees as wrong.
When institutions are in harmony with a broad social consensus about what is right and wrong, the day-to-day transactions of individuals and groups will proceed smoothly; when that is not the case, defiance and perhaps social upheaval and insurrection will result. (p. 12)While assessments such as those made by Randall and Weld focused on Coase and the Coaseans as the primary source of the inattention to broader social and ethical concerns, Mishan, for all of his criticism of the Coase theorem, laid the blame more broadly - at the feet of economists and the economic method generally. In his view, economists’ fixation on the Coase theorem was but one example of what he saw as their excessive preoccupation with efficiency at the expense of equity:
It is not, of course, hard to understand the somewhat exaggerated weight attached by economists to the allocative aspects of an economic problem as distinct, say from those concerned with equity. For the former aspects lend themselves nicely to formal theorizing and, with patience and a little finesse, impressive measures of social losses and gains can be foisted on credulous civil servants and a gullible public.
Yet, the priority given to allocative aspects in real economics problems cannot, I think, be justified; certainly not by recourse to welfare economics. The more “affluent” a society becomes, the less important is allocative merit narrowly conceived. And in a society in the throes of accelerating technological change (one in which, of necessity, pertinent knowledge of the human, social, and ecological consequences of what we are doing is generally slight and partly erroneous) complacency on the part of any economist, guided in his professional discussions by considerations alone of allocative merit or economic growth potential, is both to be envied and deplored. (1971b, p. 26)
Samuels (1974, p. 12) offered a similar challenge, questioning why the efficiency criterion should be given privileged status over any other. Yet, in spite of these ethically grounded critiques of the Coase theorem, economists, environmental or otherwise, continued to frame their discussions of externalities largely in terms of efficiency - whether for ideological reasons or out of professional habit.[104] Even so, the fact that the Pigovian subsidy remedy, like requiring victims to bribe polluters to reduce emissions, was and continues to be so roundly panned in the literature - also on fairness grounds - suggests that ethical issues have loomed fairly large in the calculus of environmental economists.
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9.5