This is an excerpt from a post originally published on LPE Blog. It is also part of a symposium on Alyssa Battistoni’s Free Gifts: Capitalism and the Politics of Nature. Read the rest of the posts here.
In Free Gifts, Alyssa Battistoni traces the concept of the “externality” across the past century. This history begins in 1920, when the economist Alfred Pigou observed how private market transactions could impose uncompensated harms on third parties, such that the prices of goods failed to reflect their true (social) cost. Fortunately, he argued, these external costs could be rectified by government intervention: adding a tax equal to the social cost, which would cause market trading to “internalize” the harm and produce the optimum amount of the activity in question. Free-market advocates viewed such externalities as a rare exception to the general rule of the wisdom of the market.
As Battistoni describes, however, this would change in the coming decades. As the U.S. postwar economy boomed, so did its pollution, and Pigou’s rare “market failures” began to seem ubiquitous rather than exceptional. In 1960, Ronald Coase challenged Pigou’s invitation for widespread government regulation in a landmark article, The Problem of Social Cost. Coase struck at the heart of welfare economics: how was Pigou, or the government, to determine the “optimal” level of pollution? How could they know how much people value the cost of pollution, or their own health? Battistoni dwells on Coase’s understanding of externalities as mutual costs. For Coase, the smokestack can only cause harm to health if people choose to live near it: “both parties cause the damage.”
Rather than dismiss Coase, Battistoni argues that Coase lands legitimate critiques on Pigou’s framework: Pigou makes a moral judgment (the assumption that pollution is bad) in pollution-generating markets, while declining to apply normative standards to any other types of markets or economic goods. But, in Battistoni’s words, “the distinction between pollution and other kinds of goods just doesn’t hold.”
Once Coase’s disciples recognized that pollution was just another kind of market, they launched an attack typical to that of the Chicago School, accusing regulators of paternalism. They argued that the government shouldn’t impose normative judgments on resource allocation; instead, it should set the conditions for people to negotiate the most efficient outcome amongst themselves. Markets all the way down. But Battistoni takes this observation in a different direction: “the burden of social costs is better characterized in terms of struggle between classes with disparate power than as a market exchange between equal individuals.” For Battistoni, “externalities” are the exception that explodes the rule: market allocations can never be assumed to achieve the “optimal” outcome, as they are always the product of unequal power relations.
