Austrian school – MarketsWork

Subjective Value and Externalities

One of my lectures at Mises University each summer concerns environmental issues. I make changes every year, but I always mention Murray Rothbard’s essay “Law, Property Rights, and Air Pollution.” In it, Rothbard lays out a libertarian method for handling what mainstream economists usually call externalities—the side effects of production or consumption activity on bystanders. The contrast between Rothbard’s welfare economics and the mainstream is plainly visible. Whereas many mainstream economists try to measure costs and benefits of pollution in order to come up with the most efficient level of pollution, or the appropriate tax to impose on the polluter (a la A.C. Pigou), Rothbard strictly eschews any such effort to measure the immeasurable.

Emissions Taxes and Tradable Permits

The typical presentation of negative externalities involves something like the diagram below, where the costs on bystanders are added to the marginal private costs (MPC) faced by the polluting firm, to come up with a marginal social cost (MSC) that, along with the marginal private benefit (MPB) to the firm from producing its output reveals the ideal level of output. In the presence of these negative externalities, and absent positive externalities that would offset these, the market level of production Q^M is too high, compared to the welfare-maximizing level of production Q*.

Negative externalities and overproduction

As court-made law to settle conflicts over nuisances like pollution has been increasingly regarded as inadequate to deal with externalities, government interventions have typically taken three forms: 1) command-and-control regulation, 2) emissions taxes, or 3) cap-and-trade systems.

Gary North’s Christian Economics

On February 24, 2022, Gary North died at age 80 after a long battle with cancer. A prolific author, with more than 50 books on economics, history, and Reformed Protestant theology to his credit, as well as thousands of articles (e.g., garynorth.com), North was influential in conservative Christian thinking about politics and the economy for over 50 years. His work will doubtless remain so for many more years.

North was a leader in the “Christian Reconstruction” movement that was attractive to some conservative (in the theological and political senses of the word) Reformed (Calvinist) Protestants. Coming out of the philosophical and theological work of Westminster Theological Seminary professor Cornelius Van Til (1895–1987), the movement was given its distinctive character by Van Til’s student Rousas J. Rushdoony (1916–2001), North’s father-in-law. The Reconstructionist view is that the foundations of modern secular society have crumbled, and Christians have a responsibility to “reconstruct” all of society on biblical principles. This put them at odds not only with secularists, but many within Protestantism who were pluralist in their political views. Reconstructionists gained a reputation as abrasive and divisive in church settings, willing and able to write trenchant responses to all critics. North’s style was forceful and direct: this is how it is; take it or leave it. His rejection of the “if-that’s-OK-with-you” tone of many evangelicals became infamous. It was easy to voice complaints about North’s style; it was not so easy for churchmen to refute his work.

Marshall, Menger, and Method

Alfred Marshall (1842-1924) produced an economics textbook, Principles of Economics, that in many ways would be recognizable to students of mainstream microeconomics today. He was immensely influential, partly because of his prolific writing, but also because of his creation of a strong legacy. In 1888, Herbert Foxwell wrote, “Half the economic chairs in the United Kingdom are occupied by [Marshall’s] pupils, and the share taken by them in general economic instruction in England is even larger than this.” (Ekelund and Hebert, A History of Economic Theory and Method, 5th ed., p. 345).

Though Marshall was a mathematician before he became an economist, and used mathematics in economics (early in life he translated Ricardo and Mill into mathematics), he recognized that mathematics had its limits. In 1906, he wrote to a friend, Arthur Bowley:

I had a growing feeling in the later years of my work at the subject that a good mathematical theorem dealing with economic hypotheses was very unlikely to be good economics: and I went more and more on the rules–(1) Use mathematics as a shorthand language, rather than as an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life. (5) Burn the mathematics. (6) If you can’t succeed in 4, burn 3. This last I did often.
Alfred Marshall, quoted in Ekelund and Hebert, 5th ed., p. 346.

Menger, Walras, Jevons, and the Marginal Revolution in Economics

The “marginal revolution” in economics is usually linked to three men: Carl Menger, Léon Walras, and William Stanley Jevons, who wrote on the concept of marginal utility nearly simultaneously in the early 1870s. In 1871, the Austrian economist Carl Menger published his Principles of Economics [Grundsätze der Volkswirtschaftslehre]), While the term “marginal utility” came from Friedrich von Wieser (another “first-generation” Austrian), marginality had been anticipated by some earlier thinkers, notably Jules Dupuit (1804-1866).