The Problem of Social Cost 2

The Problem of Social Cost

 

X. A CHANGE OF APPROACH

It is my belief that the failure of economists to reach correct conclusions about
the treatment of harmful effects cannot be ascribed simply to a few slips in
analysis. It stems from basic defects in the current approach to problems of
welfare economics. What is needed is a change of approach.
Analysis in terms of divergencies between private and social products con-
centrates attention on particular deficiencies in the system and tends to nourish
the belief that any measure which will remove the deficiency is necessarily de-
sirable. It diverts attention from those other changes in the system which are
inevitably associated with the corrective measure, changes which may well pro-
duce more harm than the original deficiency. In the preceding sections of this
article, we have seen many examples of this. But it is not necessary to ap-
proach the problem in this way. Economists who study problems of the firm
habitually use an opportunity cost approach and compare the receipts obtained
from a given combination of factors with alternative business arrangements. It
would seem desirable to use a similar approach when dealing with questions of
economic policy and to compare the total product yielded by alternative social
arrangements. In this article, the analysis has been confined, as is usual in this
part of economics, to comparisons of the value of production, as measured by
the market. But it is, of course, desirable that the choice between different
social arrangements for the solution of economic problems should be carried
out in broader terms than this and that the total effect of these arrangements
in all spheres of life should be taken into account. As Frank H. Knight has so
often emphasized, problems of welfare economics must ultimately dissolve into
a study of aesthetics and morals.
A second feature of the usual treatment of the problems discussed in this
article is that the analysis proceeds in terms of a comparison between a state
of laissez faire and some kind of ideal world. This approach inevitably leads
to a looseness of thought since the nature of the alternatives being compared
is never clear. In a state of laissez faire. is there a monetary, a legal or a
political system and if so, what are they? In an ideal world, would there be
a monetary, a legal or a political system and if so, what would they be? The
answers to all these questions are shrouded in mystery and every man is free
to draw whatever conclusions he likes. Actually very little analysis is required
to show that an ideal world is better than a state of laissez faire, unless the
definitions of a state of laissez faire and an ideal world happen to be the same.
But the whole discussion is largely irrelevant for questions of economic policy
since whatever we may have in mind as our ideal world, it is clear that we
have not yet discovered how to get to it from where we are. A better approach
would seem to be to start our analysis with a situation approximating that
which actually exists, to examine the effects of a proposed policy change and
to attempt to decide whether the new situation would be, in total, better or
worse than the original one. In this way, conclusions for policy would have
some relevance to the actual situation.
A final reason for the failure to develop a theory adequate to handle the
problem of harmful effects stems from a faulty concept of a factor of production.
This is usually thought of as a physical entity which the businessman acquires
and uses (an acre of land, a ton of fertiliser) instead of as a right to perform
certain (physical) actions. We may speak of a person owning land and using it
as a factor of production but what the land-owner in fact possesses is the right
to carry out a circumscribed list of actions. The rights of a land-owner are not
unlimited. It is not even always possible for him to remove the land to another
place, for instance, by quarrying it. And although it may be possible for him
to exclude some people from using “his” land, this may not be true of others.
For example, some people may have the right to cross the land. Furthermore,
it may or may not be possible to erect certain types of buildings or to grow
certain crops or to use particular drainage systems on the land. This does not
come about simply because of Government regulation. It would be equally true
under the Common law . In fact it would be true under any system of law. A
system in which the rights of individuals were unlimited would be one in which
there were no rights to acquire.
If factors of production are thought of as rights, it becomes easier to un-
derstand that the right to do something which has a harmful effect (such as
the creation of smoke, noise, smells, etc.) is also a factor of production. Just
as we may use a piece of land in such a way as to prevent someone else from
crossing it, or parking his car, or building his house upon it, so we may use it
in such a way as to deny him a view or quiet or unpolluted air. The cost of
exercising a right (of using a factor of production) is always the loss which is
suffered elsewhere in consequence of the exercise of that right-the inability to
cross land, to park a car, to build a house, to enjoy a view. to have peace and
quiet or to breathe clean air.
It would clearly be desirable if the only actions performed were those in
which what was gained was worth more than what was lost. But in choosing
between social arrangements within the context of which individual decisions
are made, we have to bear in mind that a change in the existing system which
will lead to an improvement in some decisions may well lead to a worsening of
others. Furthermore we have to take into account the costs involved in operat-
ing the various social arrangements (whether it be the working of a market or
of a government department) as well as the costs involved in moving to a new
system. In devising and choosing between social arrangements we should have
regard for the total effect. This, above all, is the change in approach which I
am advocating.

Conclusion

Notes

See Also

References and Further Reading

About the Author/s and Reviewer/s

Author: international

Mentioned in these Entries

Common law, The Problem of Social Cost.


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