This semester, I have been studying Law & Economics with Robin Hanson at GMU. In class, we have been discussing the legal system, how it is structured, and other ways to structure it. Questions we’ve pondered include: why can one appeal on matters of law and not matters of evidence? Why are rules of evidence what they are? Should all contracts be enforced or what limits should be placed on them? Why are property taxes structured they way they are? Why common law in the US as opposed to civil law? Etc.
Simultaneously, I am evaluating a book for my course this summer: Trade-Offs by Harold Winter. Trade-Offs is a public policy-focused look at economic reasoning. In the book, he points out one of the dangers of public policy analysis (Page 5, original emphasis):
Even if there is agreement on the broad objective of maximizing social welfare, policy objectives may differ due to differences in the definition of social welfare. A good example of this can be found in the economic analysis of crime. To deter crime, we must use resources for the apprehension, conviction, and punishment od criminals. But should the benefits that accrue to individuals who commit crime (also members of society) be added to social welfare? If yes, this may suggest that fewer resources can be used to deter crime, because crime itself has offsetting benefits. If not, crime is more costly to society, and more resources may be needed for deterrence. Notice, however, that it is a fact that a criminal reaps a benefit from commiting a crime (or why commit the crime?), yet it is an opinion as to whether that benefit should be counted as social welfare. Policy objectives and definitions of social welfare are subjectively determined.
What is also subjectively determined, as explained by Carl Dahlman in his 1979 Journal of Law & Economics article The Problem of Externality, is the effectiveness of the policy change proposed. When a policy proposal is made, the proposer implicitly assumes that whatever institution he is invoking (government, market, etc) can necessarily solve the problem he’s subjectively identified better than the status quo (otherwise, why would he make such a proposal?).
All this subjectivity means that discussing “optimal” policy gets really tricky. Optimal tariffs, Pigouvian taxes, optimal forms of law, legislation, etc are going to depend greatly on how we measure social welfare. When discussing tariffs, should the welfare of foreign producers and consumers be counted? If so, why? If not, why not? When discussing Pigouvian taxes, should the welfare of clean-up companies be taken into account (eg, the laundromat who loses business because fewer people are washing soot-caked clothes) and is government necessarily the best solution? What makes sense given a certain accounting of social welfare doesn’t with a different accounting.
Answers to these questions can go a long way in helping us consider supposed market failures: whether something optimal or suboptimal will depend a lot on how these trade-offs and welfare are measured (to Winter’s point above, if the welfare of criminals is taken into account, there may be too much police activity. If the welfare of criminals is not, there may be too little). In this sense, optimality is in the eye of the beholder.
I’d argue that the subjective nature of social welfare policy suggests a strong presumption of liberty for people to choose their own way. Indeed, there is no initial reason to believe any given action taken by an individual is somehow sub-optimal given the subjective nature of social welfare. Even something like pollution is subject to these conditions. This realization also should force economists (and their consumers) to ask the question “what are we assuming?” and “how are my biases affecting this analysis?”
Economists rarely argue about data. It’s somewhat rare that someone made a math mistake or jumbled data (ideally, that gets caught long before publication). Outcomes are not in question, but the subjectivity of trade-offs are.