The Chinese government relaxed to three children per family its former limit of one child after 1979 and two after 2015 (Lyian Oi, “China Delivers Three-Child Policy, but It’s Too Late for Many,” Wall Street Journal, June 1, 2021). Standard economic analysis provides an easy justification for limiting children: a child can be viewed as a negative externality “for society” because a more numerous population imposes costs on taxpayers and, through reduced family resources for education and other factors, on economic growth. This argument has been used, sometimes via environmentalism (example: a World Bank study of 1990).
This, however, mainly demonstrates the plasticity and omnipresence of externalities and the uselessness or danger of the concept itself. As I suggested before, the concept of externality is much more ambiguous and slippery than most non-economists and even many economists believe. Externalities can mean anything and everything, from pure transfers between individuals (“pecuniary externalities”) to what some individuals like (positive externalities) or don’t like (negative externalities). If externalities are generated by your children, they may be negative externalities for certain people and positive externalities for others. The capacity to transmute all that, plus forecasting and discounting everything over time, into a meaningful “net social cost” or “net social benefit” is an illusion.
Invoking the concept of externalities for public-policy purposes (with cost-benefit analysis, for example) gives rise to an even more crucial problem. Even assuming that all the costs and benefits can be calculated correctly, the benefits of a policy typically accrue to other people than to those who are forced to pay the cost. Coercing the latter (including the parents deprived of a basic freedom) to provide benefits to others is not an economic decision, but at best a moral trade-off by the philosopher-king and, in practice, a purely political decision.
The original one-child policy was probably based on a faulty intuition of the “net cost” of a child for the government or “for society.” Its reversal comes from a correct perception that a larger and younger population constitutes a “national resource,” that is, a resource for the state to plunder—for war and other forced services to Leviathan.
READER COMMENTS
Warren Platts
Jun 2 2021 at 4:20pm
Hmm… The logic here could be applied to U.S. immigration policy as well. Technocrats, rather than the labor market (aka parents) decide how much labor should be supplied.
Craig
Jun 2 2021 at 4:34pm
I took a course on development economics back in the day (early 90s). I might add taught by an actual, card-carrying Marxist. I still recall the basic argument laid out with respect to what they called the ‘demographic dividend’ Basically as they have less kids, the % of the labor force grows in relative terms freeing up resources for economic development. As the labor force ages and facing a situation where it cannot rely on the population pyramid, those individuals need to accumulate resources. I don’t subscribe to it, but that was the basic gist being taught back in the day. Today I think China fears being outnumbered by India.
Jon Murphy
Jun 2 2021 at 8:38pm
Good stuff. I just submitted a paper to a journal where I try to address some of the problem you identify here. Externality (and market failure) is inherently a normative claim, as Carl Dahlman explains in his 1979 paper The Problem of Externality. The claim rests on one’s perception of alternatives (and the realism of those alternatives). When we further add in that the observation of these alternatives is subjective and ephemeral (as Thirlby discusses), we get a pretty squishy method of identifying a market failure (or, by extension, a government failure or expert failure).
To me, all this adds up to a strong presumption of liberty. Whenever someone invokes “externality” or some other optimization scheme (taxes, tariffs, regulation etc), the burden of proof rests upon them that 1) such a failure exists, 2) their alternative is reasonable, and 3) the actors involved in the market should have known they were making a mistake.
Unfortunately, there’s a glibness to the way market failure is treated in economics, and especially in economic pedagogy. People carelessly invoke “pollution!” or “public good!” with no discussion of 1) whether or not the failure exists and 2) why the failure exists.
Warren Platts
Jun 3 2021 at 9:24am
Huh? Why should that be relevant? Whoever is creating an “externality”, say by drilling a gas well that leaks and flares methane and renders the groundwater undrinkable, is behaving rationally in the sense they are maximizing their personal profit. For them, there is never a mistake.
Jon Murphy
Jun 3 2021 at 10:09am
https://www.journals.uchicago.edu/doi/abs/10.1086/466936?journalCode=jle
Pierre Lemieux
Jun 3 2021 at 1:21pm
Jon: I second your reference to Dahlman. Another dose of realism comes from James M. Buchanan, “Politics, Policy, and the Pigovian Margins,” Economica 29:113 (February 1962). And, as you know, Boudreaux and Meiners review these aspects in their Natural Resources Journal article of 2019. One aspect I emphasize in my Regulation article is that one important function of a constitution or some other fundamental law necessarily is to limit the scope of externalities, which is otherwise very large.
Jon Murphy
Jun 3 2021 at 1:46pm
Very true. One cannot really discuss externality without a theory of jurisprudence.
Thomas Lee Hutcheson
Jun 4 2021 at 10:59am
Is this the best way to answer the gentleman’s question, exasperation that he has not read, understood and agreed with a journal article?
Jon Murphy
Jun 5 2021 at 12:22pm
It is the best way to answer Mr Platts. He prides himself on knowing every piece of economic literature. This was a gap in his knowledge. I filled it in
Thomas Lee Hutcheson
Jun 5 2021 at 6:41am
Right off the bat, I disagree with Dahlman that “externalities” have been “central” to the neoclassical criticism of markets. It has also pointed to the issue of collective goods, economies of scale, income distribution, etc., but OK Dahlman is focusing on externalities.
But I also disagree that to conceptualize an externality is to “assume” there is a public policy remedy, that governmental action is “automatically necessitated.” It appears (you may correct me if I am mistaken as I do not have access to the whole article) that Dahlman’s major thrust is to examine why such an assumption of automaticity is not a good starting point for policy making.
But this is a straw man. Any proposed policy to reduce the harm from an eternality is not an assumption but a hypothesis that the specific proposal will pass a cost benefit test. This is an empirical matter that will depend on why there has not already been a market solution, the magnitudes of the harm, how effective the incentives to be created by the policy will be in changing behavior, the cost of carrying out the policy, etc.
Jon Murphy
Jun 5 2021 at 3:08pm
Which, as Dahlman discusses (as does Coase and Pigou) requires that the government be able to provide a better outcome.
Thomas Lee Hutcheson
Jun 3 2021 at 7:06pm
I’d very much like to see someone apply your schema to series of problems to see which ones come out with a recommendation for a change and which with no change in the status quo. It sounds good in theory, but how does it work in practice?
Jon Murphy
Jun 4 2021 at 8:51am
It works surprisingly well. It’s called “the market.”
Thomas Lee Hutcheson
Jun 4 2021 at 11:09am
I do not believe you understood my question.
You have a schema that purports to for lead to a correct decision about when some supposed externality does or does not require a least cost policy to reduce its harm.
I was expressing the wish to see this exercise carried out, ideally twice, once in a fact set showing a negative result and once with a fact set that shows positive results.
Jon Murphy
Jun 5 2021 at 3:07pm
No. I propose a schema that better identifies when an externality occurs.
Fazal Majid
Jun 3 2021 at 6:40am
The obvious rejoinder is that children impose short-term costs to society but bring long-term growth, like any kind of investment.
China’s one-child policy (or Sanjay Gandhi’s failed attempts to do something similarly coercive in India, during the brief stint of dictatorship known as the Emergency) were driven by carrying capacity, after all China regularly experienced famines killing tens of millions (the last ones caused by Mao’s incompetence, not natural disasters).
Thus Malthusian thinking was not irrational at the time, although it should have been reversed much, much sooner when the Green Revolution improved food security and the perfectly predictable long-term effects outweighed the short-term benefits.
Jon Murphy
Jun 3 2021 at 10:14am
Fazal-
The famines in China were not the result of some Malthusian trap but rather the result of government action. The One-Child policy was irrational. It’s a clear case of cascading government failure
Thomas Lee Hutcheson
Jun 3 2021 at 6:44am
Typically, you snipe at the concept of externality, but don’t show the alternative.
Come on, steel-man your argument. Take a clear example of an externality — factory dumps poisonous chemicals into a river, electric generating plant dumps CO2 into the atmosphere — and show that the best public policy is to do nothing or some alternative to Pigou taxation. “What would Coase do?”
“Even assuming that all the costs and benefits can be calculated correctly, the benefits of a policy typically accrue to other people than to those who are forced to pay the cost.”
That is exactly the point. The people who are causing the harm have an incentive to reduce the harm in the lowest cost way, which may include paying those harmed to take protective actions. Basically we want to establish a market in harm reduction where none existed before and expect participants to work out arrangements that are mutually beneficial.
Jon Murphy
Jun 3 2021 at 10:10am
As Coase, Buchanan, Dahlman, Ostrom, Alchian, Demsetz, etc all discussed, those are not clear examples.
Thomas Lee Hutcheson
Jun 3 2021 at 7:07pm
Try anyway. 🙂
Jon Murphy
Jun 4 2021 at 8:52am
I can’t. It’s assuming away the important bits
Thomas Lee Hutcheson
Jun 5 2021 at 6:44am
Please use the unclear example of your choice. 🙂
Pierre Lemieux
Jun 3 2021 at 2:19pm
Thomas: The alternative is, like in other economic and problems, to let individuals or their voluntary associations make their own bargains and, at the very least, not to assume that the angelic and omniscient state (politicians and bureaucrats) can find a better solution. In the article I cite above, Buchanan writes:
And think about the following (go upstream, young man! that is, don’t balk before bbasic questions). Assuming a nearly angelic and omniscient state intent on imposing a Pigovian tax, Buchanan and Stubblebine as well as Coase himself argue that it should be a double tax, on both the “polluter” and the “polluted” in order to generate the right (Pigovian) incentives: it may be less costly for river swimmers to go and swim elsewhere than for the paper mill (which produces paper for “our children”) to move elsewhere. In fact, Coase himself presents this argument (see his “Notes on the Problem of Social Cost”).
Complex subject, no doubt. My forthcoming Regulation article (in the Fall issue) tries to present a sort of synthesis.
Thomas Lee Hutcheson
Jun 3 2021 at 7:29pm
If the emitter can bribe the swimmers to swim elsewhere, that will reduce the harm from the emission to zero and therefore the tax to zero. I guess that in the limit, no tax ever needs to be levied at all; the polluter will take the least cost action to reduce harm to zero in anticipation of optimal taxation. [Harder to see this working with net emissions of CO2. though maybe some of the progress in reducing costs of wind and solar has been investment in anticipation of future taxation/regulation.]
It’s sort of like the argument that if everyone knew the Fed were keeping NGDP on an X% p.a. trajectory, it would never have to DO anything to keep it on that trajectory.
But in this sub-lunary world, some policy may be needed.
Thomas Lee Hutcheson
Jun 4 2021 at 11:56am
“The alternative is, like in other economic and problems, to let individuals or their voluntary associations make their own bargains and, at the very least, not to assume that the angelic and omniscient state (politicians and bureaucrats) can find a better solution.”
Today individuals are and voluntary associations are at liberty to reduce net emissions of CO2 into the atmosphere. As I remarked, I suspect a lot of investment is going into reducing CO2 emissions, some of it counter productive like “biofuels.”
Is this the best that can be done?
The argument for a revenue neutral tax on net CO2 is not an “assumption” that an omniscient state can find a better solution, its a hypothesis that an actual state can find a better solution. Is the opposite not to “assume” that no state CAN improve on the status quo? It’s not as if we are living in a Libertarian Eden being tempted by a Pigouvian serpent.
Pierre Lemieux
Jun 5 2021 at 1:21pm
Thomas: Didn’t Buchanan answer this objection in the quote I give above? Focus on the first clause:
Moreover, if we were living in a “libertarian Eden,” there would be less reason to fear “a Pigovian serpent,” for the reason Friedman formulated (in Capitalism and Freedom, p. 32):
Christophe Biocca
Jun 4 2021 at 7:20am
The usual definition of externality involves “a cost or benefit that is imposed on a third party who did not agree to incur that cost or benefit”. But trivially the government did agree to the costs associated with people, and can change their mind on how much to spend on education/other public services consumed and who gets them. So extra children can’t be an externality just because the government chose to spend money on them, anymore than a restaurant changing their prices imposes an externality on their customers.
There’s slippery cases, but this isn’t one of them. It’s completely outside the bounds of even expansive definitions.
Pierre Lemieux
Jun 4 2021 at 12:08pm
Christophe: You are right. What you describe are “pecuniary externalities.” Most economists think that these should not be included in the definition of externalities. But even excluding these, an externality argument for regulating child-bearing (or whatever) can be easily made: for example, larger families imply less parental investment in each child, thus less investment in human capital and future economic growth, or more crimes committed by young men. If you introduce environmental impacts, externality arguments become even easier. That was the larger point I was trying to make.
Phil H
Jun 7 2021 at 7:58pm
There is an empirical problem with all criticisms of Chinese economic policy: China is the most successful major economy in the world. Any economic criticism must take the form: sure, 10% growth sustained for 30 years was impressive, but I know how to do better.
The 1-child policy is a grim example. It seems possible that by imitating advanced-economy family structures, China helped lever itself towards middle-income status. And by grim utilitarian logic, perhaps that was worth it, despite the human cost. (I was forced to leave the country when we got pregnant for the second time, so that we could have no. 2 overseas.)
Pierre Lemieux
Jun 9 2021 at 11:57pm
Phil H: I don’t think you are right. Your argument has at least two problems. One is the following. Suppose that, on June 9, 2019, the government of Ruritania had confiscated all the incomes of the Ruritanians except for what is necessary to live at the subsistence level (assumed very low compared to their usual income). Suppose it had put the collected money in an index fund tracking the S&P500. It can be easily calculated that now, on June 9, 2021, the money invested would have increased at an annual rate of 19% (annually compounded and not counting any reinvested dividend). That’s much better than China. Would it be meaningful to say that the Ruritanian economy has grown at a 19% annual rate? No, and the answer has nothing to do with the fact that no S&P business is Ruritanian. The negative answer is simply because that is not how the Ruritanians wanted to spend their money so the rate of growth is meaningless.
Pierre Lemieux
Jun 10 2021 at 9:39am
Phil H.: Another fundamental problem lies in the following:
What, except brute force, allows the Chinese government (“China”) to impose “human costs” on some in order to confer “human benefits” on others? Even if my first answer were not true, consider Anthony de Jasay’ conclusion:
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