Why do economists who accept a theory oppose putting it into practice? For example, I believe global warming is a rather significant problem. I agree that it is internally consistent that carbon taxes (or some other variation like cap & trade) can reduce carbon emissions to a socially optimal level. So, why then do I oppose carbon tax regulation?
There are many reasons why I (and many other GMU-style economists) oppose regulation even though a logical argument can be made, it could improve a given situation. We tend to focus on public choice reasons (such as rent-seeking and agency capture). The knowledge problem, most famously discussed by F.A. Hayek, is also often cited: government agents can too seldom possess all information and knowledge necessary to regulate desirably and much less “optimally.”
There is an element of the knowledge problem that warrants further attention, an element highlighted by Don Lavoie in his 1985 book National Economic Planning: What is Left? In this book, Lavoie greatly expands our understanding of the knowledge problem and its relevance for assessing central planning and more mundane government regulation. He discusses Hayek’s formulation of knowledge as mostly tacit, but Lavoie also emphasizes that knowledge is built upon inarticulable foundations. Attempts to articulate the inarticulate foundations are doomed to fail as each person carries with him or her different nuanced understandings of the language used in legislation authorizing regulations.
Consider, for example, the phrase “2+2=4.” Understanding the phrase’s meaning requires a tacit, inarticulable understanding of the elements: 2, +, =, and 4. If one were to try to rigorously define every element in that phrase, he would eventually fall into a problem of recursivity. As children, when we first encounter mathematics, it may seem weird and arbitrary. We just learn that 2+2=4 by rote. It is only through repeated interactions with mathematics do we start to understand it. To paraphrase the great mathematician John von Neumann, you never really learn mathematics. You just get used to it.
The problem of inarticulable understandings of knowledge comes into play in the field of regulation. The economist has a foundation of knowledge. When he tries to convert that knowledge into policy, we run into a game of telephone. At each step along the way, the knowledge and information get a little distorted. Each person has different foundations from which they understand the message the economist is delivering. As such, the end policy would deviate considerably from theory, even if we assume away public choice issues. In other words, the policy will look considerably different from the theory because of a sort-of language barrier.
Consider, for example, the word “cost” in economics. We define “cost” to mean what one gives up to take a particular action (it is sometimes called “opportunity cost” for this reason). Cost is inseparable from choice. Yet, “cost” takes on a very different meaning for the general public, as it usually refers to a negative consequence (“the cost of reading is a headache”) or the monetary price of something (“the coffee cost me $2”). Thus, the economist already faces a problem communicating his theory to policymakers. But even within the field of economics, “cost” has different understandings. James Buchanan’s excellent short 1969 book, Cost and Choice, discusses how “cost” has changed understandings among the various schools of thought.
I oppose regulation even when I understand the argument because argument and policy are not the same things. When communicating, experts run into the telephone problem: the theory is misunderstood, misapplied, or miscommunicated. Competition among experts helps solve these problems, yes, as experts become incentivized to be less wizardly and more like teachers. But the knowledge problem remains, and regulation can only enhance the communication problems.
READER COMMENTS
Bill Marder
Feb 25 2021 at 11:21am
And how do you think we should individually or collectively deal with the challenge of global warming?
Jon Murphy
Feb 26 2021 at 1:35pm
I think there are many ways. One of the largest, and most counter-intuitive, would be to eliminate or reform legislation that limits trusts. That would encourage people, especially the wealthy, to have a longer-term view of their wealth.
Greg G
Feb 27 2021 at 8:12am
>—“One of the largest, and most counter-intuitive, would be to eliminate or reform legislation that limits trusts. That would encourage people, especially the wealthy, to have a longer-term view of their wealth.”
It seems to me that predicting this specific effect of legislative reform around trusts involves an even bigger knowledge problem than predicting the effects of a carbon tax which is a relatively more straight forward supply and demand problem.
I think of this as the Lump of Regulation Fallacy – the idea that “regulation” “can only” have the bad effect the person opposed to the regulation fears. The knowledge problem also prevents us from predicting the bad effects of the absence of regulation.
Jon Murphy
Feb 27 2021 at 8:58am
Hi Greg-
You raise some good points. Let me try to respond quickly:
Yeah, I probably should have toned it down a little. I’m discussing incentives. The way the current inheritance law works in the US, it creates a disincentive for people to consider the far future, and thus discourages saving and encourages consumption. If we are worried about the consequences of global warming in the future, when we would want legislation that encourages saving and discourages consumption so that we are wealthier in the future to fight the problems of global warming.
Yeah I probably should not have been so absolutist in that sentence. I violated my own rule of epistemological humility 🙂
I disagree. The knowledge problem doesn’t imply epistemological nihilism. We can predict bad effects (and good effects) from the absence of regulation. That’s what theory is for.
Knut P. Heen
Feb 25 2021 at 11:36am
Regulations are often justified by the public good examples, or the externality examples, we see in microeconomics textbooks. The problem is that these examples misrepresent the real problem. In the textbook examples, we know that something is a positive or negative externality or a public good or bad. In the real world, we don’t.
I usually use a neighbor playing the violin as an example. Is this a positive externality (music) or a negative externality (noise)? How would the regulator know? She can’t. Only the person who hears the violin knows (and she can pay the violinist to get more or less of it). Hence, regulation by a third person is necessarily arbitrary and inefficient. The same goes for public goods/bads. A lighthouse is perhaps a good for a sailor, but may be a bad for a neighbor trying to get some sleep. Yet, a lighthouse is always an example of a public good in the textbooks. Why? Because it is a good in the opinion of the author.
Jon Murphy
Feb 25 2021 at 12:15pm
Very true, Knut. I make a similar point here
Thomas Hutcheson
Feb 26 2021 at 6:05am
Regulation of externalities are just substitutes for tort relief. The neighbor goes to the judge and asks for relief from the violin playing and there is a process where the subjective harm the neighbor suffers is evaluated and a decision results. In the case of CO2 emitted into the atmosphere it would be a lot more difficult and costly for millions of people world wide to bring suits against the millions of people who oxidize C into CO2 and emit it, but the principle is the same.
Jon Murphy
Feb 26 2021 at 1:34pm
Strictly speaking, that is incorrect. It is one way to conceptualize Pigouvian taxes, but they do not have to be substitutes for tort relief (indeed, in many cases, they end up being rent-seeking rather than tort)
Robert Schadler
Feb 26 2021 at 10:20am
Would only add: even the neighbor will have difficulty telling the regulator how to define the violin playing in the future. “There are times I enjoy hearing violin mustic and times when I don’t (and times when I may not notice the sounds). But I’ll only know that when I’m in the moment. I may like the music when I’m trying to take a nap, but not if it wakes me up when I’m sleeping. I may like it when it’s quiet in my house, but not when I’m trying to listen to a recording of some other music.”
Jon Murphy
Feb 26 2021 at 10:24am
Good points, Robert.
David Seltzer
Feb 25 2021 at 2:49pm
Jon, Interesting take on language, mathematics and regulation. A little history. Richard Sandor started the Chicago Climate Exchange. The idea was to trade allowable green house gas emissions via carbon futures and options. ICE bought the CCX for about 600 million. Trading was illiquid and ICE finally shut it down. Their stated reason for doing so; there was limited state by state passage of cap and trade legislation. Now comes the question of trade-offs. If climate change is a real concern, are we better off accepting carbon tax-carbon dividend legislation as championed by George Schultz? Are the “costs” of agency, moral hazard and captured regulators less than the market failure costs of carbon trading markets.
Jon Murphy
Feb 25 2021 at 4:24pm
That’s the big question, eh? My thought is no, the costs are not less than the benefits. Aside from the costs of agency, moral hazard, captured regulators, and rent-seeking (which will compound over time significantly), there’s also the issue that the regulation provides no incentive to invent (I know in theory cap-and-trade or a straight carbon tax does, but in reality that’s not the case). Humans are incredibly creative, and regulation tends to prevent that creativity from coming to the fore.
Additionally, there are likely institutional changes we could do that would have a bigger impact. For example, eliminating the restrictions on trusts that limit the power wills have over inheritance would help global warming
David Seltzer
Feb 25 2021 at 4:34pm
“Humans are incredibly creative, and regulation tends to prevent that creativity from coming to the fore.” Alas, while I agree with the choir master, “Therein lies the rub.” Thanks for replying
Thomas Hutcheson
Feb 26 2021 at 6:13am
Why does a revenue neutral tax on net CO2 emissions NOT create an incentive on every margin to invent ways of doing things — generating electricity, making cement, capturing CO2 from the atmosphere — that result in less net CO2 emitted?
Jon Murphy
Feb 26 2021 at 1:33pm
The answer is embedded in the question. Is a carbon tax the best way to address global warming? That is: is carbon the main issue here? A carbon tax would discourage any activity that would reduce global warming on net that increases carbon emissions.
Thomas Hutcheson
Feb 25 2021 at 7:29pm
Doesn’t it seem weird, however that the misunderstandings and information problems are alway just exactly equal to the amount needed to support the status quo of a given regulation?
Jon Murphy
Feb 26 2021 at 1:31pm
Are they?
Steve X
Feb 25 2021 at 11:21pm
This is a really excellent piece.
I work in government as does my partner. From the inside it is remarkable to see well intentioned regulatory ideas wind up as insanity when these rules are actually written and then often misapplied.
The rules on computer security and government’s own compliance with their own rules are a good example.
Jon Murphy
Feb 26 2021 at 2:52pm
Thank you
That was something I witnessed in the private sector when I was a consultant. What one says as an advisor and what the advisee hears can be two very different things.
Phil H
Feb 26 2021 at 4:39am
The reasoning here mostly seems very reasonable, but one big question remains for me: if not regulation, what incentive would push us to emit less greenhouse gases/mitigate climate change? I can’t imagine what kind of long-term financial instrument might do it, or what might drive innovation in that direction without some powerful social organization providing the impetus.
Regulation has been effective: European emissions have not risen since 1990, despite the economy doubling in size. What would have led that to happen if not regulation?
Jon Murphy
Feb 26 2021 at 7:02am
If there’s no incentive to consider the long term in the private sector, why would there be one in the public sector?
robc
Feb 26 2021 at 7:03am
Richer nations prefer greener technology, regardless of regulation.
In many cases, the laws are passed after the people have already changed. Or a vast majority have changed. Child labor regulations came in only after the vast majority of children weren’t working. It works the same for environmental regulation, they are primarily lagging indicators.
Phil H
Feb 26 2021 at 9:42am
Those don’t seem to answer my question. There is an incentive in the public sector because politicians listened to the scientists (a bit; not enough). There is no incentive in the private sector because most of the harms of climate change are too distant in time or geography to drive changes.
Richer nations prefer greener technology, but CO2 is a green gas. It causes no harm to the country it’s emitted in (within a reasonable period of time).
I genuinely think that the post was reasonable, but if you don’t have an answer to my question, then you don’t have any chance of persuading anyone that government shouldn’t be working on climate change.
Jon Murphy
Feb 26 2021 at 10:23am
That doesn’t really answer the question. It just handwaves it away. Why did the politicians listen to the scientists* and private citizens don’t?
*ignoring all the problems associated with that phrase
Jens
Feb 26 2021 at 3:21pm
Perhaps because the politician acts under the impression that what he alone, individually, decides, does or says can have relevant effects on the problem (or at least it is perceived that way)?
While the citizens have the impression that their individual decisions are irrelevant to the greater outcome (which is of course not true if everyone acted in sync, but incentives are an individual issue).
Jon Murphy
Feb 26 2021 at 5:32pm
No, that cannot be it. There are all sorts of ways that people organize outside of government to solve problems that any one individual cannot (eg firms).
Jon Murphy
Feb 26 2021 at 10:27am
Hm…I didn’t think that was my point.
KevinDC
Feb 26 2021 at 11:10am
Hey Phil –
A couple thoughts. You say:
I think this takes far too much for granted. It’s not clear to me that politicians are unusually good at listening to scientists, compared to everyone else, so I’m not sure why “listening to scientists” provides incentives to politicians, but not to private citizens. Nor is it clear why the distance in time in geography would prevent incentivization for private citizens, but not for politicians. It’s not as though politicians are unusually good at focusing on long run benefits compared to everyone else, especially in the face of short run election cycles. Indeed, there is a significant body of research suggesting otherwise – political decisions tend to be especially short sighted. I’m reminded of Nixon’s comment, when he was told that Milton Friedman was predicting a policy of his would look good in the short run but be harmful for the nation in the long run. Nixon’s response – “I don’t give a good goddamn what Milton Friedman says. He’s not running for re-election.” Overall, I just don’t see any reason to think that politicians have any special advantage here.
Also, your claim that there is no incentive in the private sector is demonstrably false. If what you claim was true, there would be no private sector companies dedicated entirely to solving environmental issues – but there are, and the number of them has been growing rapidly. I was also reminded of this article in Slate magazine which points out that multinational corporations actually do more than governments or regulators to halt climate change, reduce emissions, etc. Maybe you think these efforts are insufficient on their own, which is fine. But claiming that there is “no incentive” to take action in the private sector doesn’t seem to make contact with reality.
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