Who Owns Your Genes?

Doctor He Jiankui was sentenced to a three year prison term, fined $430,000, and fired from his academic position as Associate Professor at the Southern University of Science and Technology in Shenzhen, China. Did he engage in groping a patient? No. Poisoning a client? Again, no. According to the official Chinese Xinhua News Agency, Dr. He and two others, Zhang Renli and Qin Jinzhou, were convicted of gene editing fetuses.

His clients were a healthy mother and a father who was HIV positive. Dr. He engineered the genes of their twin girl babies so they would be resistant to HIV..

At the outset, this appears to be an agreement between consenting adults to engage in a capitalist act. The couple knew of the risks involved in this new medical technology. According to the defense, He did not hide these from the mother and father. They agreed to the procedure since they weighed the dangers of AIDS for their daughters more heavily than the perils of the new, unproven, technique.

Why, then, were He and his two colleagues arrested and convicted? It is all too easy to surmise that this was done because it occurred in China, withits reputation as a lawless country. The fact of the matter is that if He had performed this CRISPR-Cas9 gene-editing operation in the United States, a similar fate would have befallen him. This is because the Food and Drug Administration has not yet approved of this technique for human beings in terms of reproduction.

What are we to make of all of this? Let us adopt a set of private property rights economic freedom spectacles through which we can best perceive all such controversial acts. We start by asking, who were the owners of the property in question? This, presumably, would be the parents. Did they receive informed consent from the supplier of the service? Not according to the local Shenzhen court. Let us, however, abstract from this finding. Instead, we adopt a Platonic perspective. This is because although we are indeed interested in this one case, we also want to derive a principle to deal with all such violations of the law. So let us assume that there was no fraud involved here.

Should He and his colleagues have then been found guilty? Well, they did break an extant law. This leads to another question: is it a proper law that prohibits voluntary trades of this or any sort? The answer emanating from the free enterprise philosophy is a clear “No.” Rather, this would be a victimless crime, and all those even properly found guilty of violating it, should be set free.

Was there a victim here? Yes, possibly. If the dangers of this procedure were indeed of greater moment than these two children suffering from AIDS, then, yes, they might be considered victims. After all, one day that now manageable disease might be fully cured. But this is clearly a judgement call upon which reasonable people can disagree. The parents would certainly not be guilty of child abuse even were this contrary to fact conditional to come into being. They were doing what they thought best for their children.

What of the doctors involved? It is difficult to see them in any other way than as heroes. They put their careers and their freedom on the line, in order to help this mother and father be good guardians. Yes, Dr. He jumped the legal gun, whether that of the FDA in the United States, or its Chinese counterpart. But the monopoly powers of these government bodies are incompatible with the free enterprise ethic through which we are viewing their behavior. These organizations, too, can err. But when they do (thalidomide, anyone?) they carry on merrily into the sunset. They cannot be bankrupted through erroneous decisions. That is no way to run a railroad.



Walter E. Block is the Harold E. Wirth Eminent Scholar Endowed Chair and Professor of Economics at Loyola University New Orleans.

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Do Externalities Matter for Economic Analysis?

In the analysis of market processes, the concept of externalities has long invoked strong public policy implications among economists regarding the role of government in addressing their alleged presence, or lack thereof.

It is for this reason that analyses of externalities have preoccupied economists, at least since A.C. Pigou. The more important question, however, is how do they matter for economics?

 

In an excellent and thought-provoking article recently written by Don Boudreaux and Roger Meiners (2019), they provide a comprehensive overview of the origins of the concept of externality, its evolution, and its classifications. Boudreaux and Meiners put forth a subtle though sophisticated argument that transcends how economists generally arrive at particular public policy implications regarding externalities. My goal here is not simply to summarize their point, but also to provide my own interpretation of their argument.

To summarize the concept briefly, an externality refers to a spillover cost borne by third parties to an exchange. Externalities arise when the market price at which a good is exchanged fails to account for the full cost (in the case of a negative externality) or benefits (in the case of a positive externality) of producing a good. Such costs or benefits are, therefore, not only involuntary, but more importantly, unexpected by third parties to the exchange. Externalities are indicative of a deviation from the ideal of perfectly competitive equilibrium, in which all potential gains from trade have been exhausted. Thus, the resulting “market failure” associated with externalities arises from the fact that “there exists a reallocation of resources, such as a change in the structure of market activities that will enrich society” (Boudreaux and Meiners, 2019, p. 21). This restructuring not only includes an adjustment in market prices to more fully concentrate the costs and benefits of exchange upon the relevant trading partners, but also, more importantly, an adjustment in the assignment of property rights, the exchange of which gives rise to exchange ratios, or market prices, in the first place. I will return to this last point later.

 

The fundamental aspect on which Boudreaux and Meiners focus is not the involuntary nature of externalities, but the degree to which they are expected or not. As they put it, “Externalities exist only when another party’s actions create unexpected spillover effects” (emphasis in original, 2019, p. 29).

Building on Alchian (1965) and Demsetz (1967), Boudreaux and Meiners make clear that property rights “are a bundle of expectations” (emphasis in original, Boudreaux and Meiners 2019, p. 31) about how individuals can choose to use, exclude, and exchange resources. The expectation in a market economy is that property rights allow “harm” to the exchange value of a good or service, but not to its physical characteristics.

Consider a barber who sets up shop in midtown Manhattan, assuming well-defined and enforced property rights, physical impediments to his expected ability to utilize his physical and human capital for providing haircuts constitutes an externality. For example, theft or other physical damage to the barber’s property rights are assumed to be prohibited. But, under these assumptions, he also has – or, as a reasonable person, should have – the expectation that a competing barber may “steal” away his clientele by providing a better haircut, thus reducing his income and the resale value of the capital he employs.

Here is where the concept of externality gets a bit tricky, and why “the term has become nearly meaningless due to its ubiquity,” according to Boudreaux and Meiners (2019, p. 3). Returning to the previous example, suppose that building construction is taking place on 5th Avenue, requiring the use of jackhammers. These jackhammers, no doubt, are a nuisance to the barber, and therefore might impede his ability to provide haircuts in a safe and productive manner. A bad haircut or the slip of a razor blade while shaving a client will result in a misallocation of resources in terms of “too much” building construction and “too few” haircuts and shaves than would otherwise be optimal. Is this indicative of a negative externality? Does this example prove that building construction should be taxed in order for contractors to take into account the noise pollution resulting from construction?

Not necessarily.

The key here is the role of expectations. No doubt, incurring the noise pollution from jackhammering was involuntary if the building contractors did not get the barber’s consent beforehand. However, we can reasonably conclude that when the barber chose to locate his shop in midtown Manhattan, one of the most densely populated islands on earth, he would have expected and anticipated such occurrences. The fact that he nevertheless located there implies that he expects the cost to him of this particular “externality” to be sufficiently low as to not overwhelm the prospect of greater expected monetary income derived from serving a larger and wealthier clientele than if he located in a less populated area outside the city.

 

What does this way of looking at externalities reveal about the welfare implications of the market process?

The fundamental point that Boudreaux and Meiners raise, as I understand it, is twofold. First, market processes are imperfect, meaning always in disequilibrium, and therefore imply that the expectations of individuals will never fully mutually coincide. If economists start in a world of disequilibrium as their analytic point of departure, then expectations about the costs and benefits of individual decision-making are never perfect (see Hayek 1937), in which case the concept of externalities, in an abstract sense, means everything and nothing. This implies, I would argue, that if the concept of externalities is to have any meaning and tractability, it must be grounded in an analysis of the particular expectations that individuals have in time and place. In doing so, it will provide the economist with a richer understanding of the public policy implications that follow from his or her analysis.

Secondly, to admit or to deny the presence of externalities is not analogous to admitting or denying the presence of market imperfection. Admitting the presence of externalities does not necessarily imply the necessity of government intervention. But, the absence of externalities does not necessarily imply Pareto efficiency in the allocation of resources either. It therefore does not follow that embracing one analytical point of departure or the other implies the dismissal of or appeal to government intervention as a corrective.

 

As I’ve written elsewhere, imperfect markets do not imply suboptimality or an inherent flaw as compared to the ideal of equilibrium. Rather, imperfection implies “incompleteness” and therefore that markets are processes incessantly moving towards completion. That completion process is facilitated by greater mutual coordination of expectations, requiring corrections in expectations, which makes market processes necessary to addresses misallocations of resources in the first place! As Boudreaux and Meiners make clear, “nothing said here suggests that the absence of spillovers implies a Pareto-optimal allocation of resources” (2019, p. 30). It simply implies the failure of the conditions of the market process to exist, not the existence of market failure (see Candela and Geloso 2020). “The problem, if one asserts there is a problem, is the structure of property rights” (Boudreaux and Meiners 2019, p. 30).

If I have correctly interpreted Boudreaux and Meiners, the question is not whether or not externalities matter for economists, but when they matter for economics, and how they matter for our analysis.

 

As an example to illustrate and conclude this point, let’s take the example of the solution devised by Julian Simon to the problem of airline overbooking (see Simon 1968). Generally speaking, airlines tend to overbook flights on the expectation that there will be a certain number of cancellations. Airline overbooking can then be reframed as problem of assigning property rights, since it creates a situation in which more than one individual has a claim on an assigned seat. When an airline involuntarily “bumps” an individual to another flight, can we conclude that represents an externality? Again, we must take into the context of time and place.

Indeed, the airline has generated a misallocation of resources through its decision-making. It exchanges a claim to a seat for money with a customer, but by assigning more than one customer to the same seat, there is a potential spillover cost on an individual bumped to a future flight, the full cost of which is not borne by the airline. However, we must conclude in this case that though bumping individuals to a future flight may be involuntary, it is not completely unexpected. Prior to the introduction of Simon’s auction proposal, an individual booking a flight could not rule out the possibility that a flight is overbooked. The anticipation of this possibility by individuals implies that this is not an example of an externality. However, to conclude this is not an externality does not imply this is a Pareto-optimal situation. There is indeed a misallocation of resources, since there are too many claimants to the available seats on a flight. Therefore, there is a profit opportunity to devise an institutional innovation to realize such potential Pareto improvements.

The introduction of the auction solution to the problem of airline overbooking can be understood as private property right solution, and therefore introduces new expectations between the airline and its customers about allocation of property rights. Given the transaction costs associated with correctly estimating the number of cancellations by customers, the introduction of the auction system (whether through a voucher or cash payment) grants all existing claimants to airline seats the ability to exchange, in effect creating private property rights in seats (Alchian 1965). Customers, in effect, not only become buyers of seats, but the auction system allows them to become potential sellers back to the airline in the case of overbooking. This exemplifies the point made by Phillip Wicksteed, namely that the supply curve for a good or service (in this airline seats) is part of the total demand curve for a good or service (see Wicksteed 1914, p. 13). More importantly, the exchange process generated through the auction system not only reduces the transaction costs associated with discovering the individuals with the lowest opportunity cost of moving to another flight (at a particular price that reflects such opportunity cost), it also reduces the transaction cost of economically calculating the minimum price necessary to pay an individual to be moved to a future flight. Such knowledge only arises in the context of the exchange of property rights (see Mises 1920 [1975]), which creates more consistent dovetailing of expectations between individuals.

Thus, the ability to assign private property rights in seats with the introduction of the auction system thereafter creates an expectation that individuals will be compensated if an airline mistakenly overbooks a flight. This brings me to the case of the United Airlines 3411 incident that took place on April 9, 2017, in which a passenger, Dr. Dao Duy Anh, was involuntarily dragged off the flight for refusal to give up his seat. This would seem to be a case of an externality, since the situation represents not only an involuntary cost borne unfortunately by the individual, but also because it was unexpected. Given the expectation that, through the auction system, an individual more willing to give up his or seat could likely have been discovered and paid a lower price than what Dr. Anh would have probably demanded as compensation for the airline’s error in overbooking.

 

Connecting this example back to Boudreaux and Meiners, the point here is that however one approaches this analysis, the existence or non-existence of externalities does not eliminate the fact that airline overbooking was representative of a misallocation of resources. And, the fact that this imperfection in the market process facilitated an institutional innovation to erode an existing inefficiency in the allocation of airline seats did not depend upon whether or not there existed an externality. And yet, the presence of an externality does not automatically presume a market failure, requiring government intervention, but a failure to secure the conditions of the market process, namely the voluntary exchange of property rights, due to government intervention. We can therefore conclude that the unfortunate circumstances that transpired during the United Airlines 3411 incident indicated the presence of a negative externality, but that this was a result of government failing to provide clear expectations about the security and enforcement property rights in airline seats, not a market failure.

 

The focus of analyses for economists, therefore, should not be to look backward at a presumed consistency or inconsistency in expectations between individuals, and then to pass normative judgment on it in terms of its conformity with Pareto-optimality or an efficient allocation of resources. Rather, the economist must always approach each analysis of any state of affairs as “nothing but a seething mass of unexploited maladjustments waiting to be corrected” (Kirzner 1979, p. 119), and focus on the constant adjustments that market processes facilitate in an open-ended world of uncertainty.


Rosolino Candela is a Senior Fellow in the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics, and Associate Director of Academic and Student Programs  at the Mercatus Center at George Mason University

 

Further References

Candela, Rosolino A., and Vincent J. Geloso. 2020. “The Lighthouse Debate and the Dynamics of Interventionism.” The Review of Austrian Economics 33(3): 289–314.

Hayek, F.A. 1937. “Economics and Knowledge.” Economica 4(13): 33–54.

Kirzner, Israel M. 1979. Perception, Opportunity, and Profit. Chicago, IL: University of Chicago Press.

Mises, Ludwig von. 1920 [1975]. “Economic Calculation in the Socialist Commonwealth.” In F.A. Hayek, ed. Collectivist Economic Planning (pp. 87–130). Clifton, NJ: August M. Kelley.

 

 

 

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NASA Is Paying for Moon Rocks

NASA is creating financial incentives for private companies to market lunar resources. This could be a first step to developing lunar mining capabilities. The biggest benefit of the program, though, is precedent. It puts the U.S. government’s imprimatur on space commerce. Given the ambiguities in public international space law, this precedent has the potential to steer space policy and commerce in a pro-market direction.

This is a key paragraph in Alexander William Salter and David R. Henderson, “NASA is Paying for Moon Rocks. The Implications for Space Commerce are Huge,” AIER, September 16, 2020.

Read the whole thing. It’s short.

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Armen Alchian and Bill Meckling on Goals and Incentives

And the men of Kharkov and Karachi are not different from the men of Kalamazoo. The specific objects of wealth and power may differ between Kalamazoo and Kharkov. But if Kalamazoo teems with thieves and brigands while Karachi is serenely industrious, the explanation lies not in differences in goals. Differences in goals will not explain differences in the way individuals pursue those goals.

This is from William H. Meckling and Armen A. Alchian, “Incentives in the United States,” American Economic Review 50 (May 1960): 55-61, reprinted in The Collected Works of Armen A. Alchian, Vol. 2, Property Rights and Economic Behavior.

I’ve been working on a chapter on Alchian and property rights in a short book on the UCLA School. (Steve Globerman, a fellow UCLAer, and I are writing it for the Fraser Institute.)

So I’ve been going though the Collected Works volume published by Liberty Fund.

So what does explain differences in the way people pursue their goals. The answer is in the title of their piece: incentives.

 

 

 

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Will Property Rights be Permanently Diminished?

On Saturday, the federal government’s Center for Disease Control will issue a new regulation barring eviction of millions of residential tenants around the country. If it survives likely legal challenges, the new policy would set a dangerous precedent undermining federalism, the separation of powers, and property rights. Conservatives, in particular, will have reason to regret it when a Democratic president inherits the same sweeping powers.

The CDC policy bars eviction, until the end of the year, of any residential tenant who makes a sworn declaration to the effect that they 1) have “used best efforts to obtain all available government assistance for rent or housing,” 2) they expect to earn less than $99,000 ($198,000 for joint tax filers) in 2020 or did not have to report any income to the IRS in 2019, or received a stimulus check under  CARES Act, 3)  “the individual is unable to pay the full rent… due to substantial loss of household income… , a lay-off, or extraordinary out-of-pocket medical expenses” 4) “the individual is using best efforts to make timely partial payments that are as close to the full payment as the individual’s circumstances may permit” and 5) “eviction would likely render the individual homeless—or force the individual to move into and live in close quarters in a new congregate or shared living setting.”

So writes Ilya Somin at The Volokh Conspiracy.

This is an amazing power grab by the Trump administration. It violates property rights and federalism. And its based on what looks like a narrow regulatory power that was not intended for its current use.

Somin goes on to point out the legal basis for the measure:

Such sweeping action by the executive normally at least requires authorization by Congress. As co-blogger Josh Blackman explains, the claimed authorization here is 42 CFR Section 70.2 a regulation that gives the Director of the CDC the power to “take such measures to prevent such spread of the [communicable] diseases as he/she deems reasonably necessary, including inspection, fumigation, disinfection, sanitation, pest extermination, and destruction of animals or articles believed to be sources of infection.” The CDC can take such measures anywhere it deems local and state regulations to be “insufficient” to limit the spread of disease across state borders.

The measure in itself is scary. The precedent is even scarier. Somin writes:

This broad interpretation of the regulation would give the executive the power to restrict almost any type of activity. Pretty much any economic transaction or movement of people and  goods could potentially spread disease in some way. Nor is that authority limited to particularly deadly diseases such as Covid-19. It could just as readily apply to virtually any other communicable disease, such as the flu or even the common cold.

Moreover, governors in most states have taken a meat ax to property rights of business owners in the last few months. So the answer to my question “Will property rights be permanently diminished?” is, I think, yes.

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Free to build

You would think that if conservatives could agree about anything it would be zoning reform. Making it easier to build new housing would increases freedom (something libertarians like), increase economic growth (something businesspeople like), and help lower class Americans afford homes (something all conservatives like.)

Recently, however, a split has developed in the conservative ranks, as exemplified by a recent National Review article by Stanley Kurtz.  Here he criticizes the idea of having the federal government pressure cities to make it easier to build housing:

They will lose control of their own zoning and development, they will be pressured into a kind of de facto regional-revenue redistribution, and they will even be forced to start building high-density low-income housing. The latter, of course, will require the elimination of single-family zoning. With that, the basic character of the suburbs will disappear. At the very moment when the pandemic has made people rethink the advantages of dense urban living, the choice of an alternative will be taken away.

Before getting into zoning, let me acknowledge that the specific complaint here has some merit. It’s not obvious that the federal government has any business telling local governments to reform zoning.  (Is this more like schooling, where local control is best, or more like free speech and interstate commerce, where you want the federal government to guarantee certain freedoms? I don’t know.)

But Kurtz doesn’t stop with defensible complaints about the merits of federalism; he also disagrees with the claim that zoning reforms to boost density would be welfare improving.  And that argument is very hard to make.

Residents often complain about new apartment complexes because it increases traffic and brings in lower income residents.  But these arguments are very weak.  In aggregate, greater density reduces traffic.  People must drive farther in less dense suburbs.  And lower income people need a place to live.  Surely its better to allow them to live closer to job opportunities than to force them into slums, or even homelessness.

Nor would these proposals “destroy” the suburbs.  Even the NYC metro area—which is a sort of poster child for dystopian density in the minds of many zoning fans—the vast majority of the region is devoted to low density suburbs, including much of Long Island, northern New Jersey, Westchester County and southwest Connecticut.  When people hear the term ‘New York’ they think of Manhattan, but there are plenty of nice suburban communities for people who prefer that sort of living.

You might argue that removing zoning would turn American suburbs into New York City-style dystopias, but there are far to few people in America to densify more than a tiny, tiny fraction of suburbia.

And some densification is optimal.  Suppose Midtown and the Upper East and West Sides of Manhattan had not been allowed to densify, because residents who liked the formerly quiet neighborhoods had used NIMBY lawsuits to hold up development.  Think about how much less impressive New York City would be today.

The goal should not be to have all dense cities, or all sprawling suburbs, but a mix of the two.  Zoning reform helps to allow America to develop organically, according to the wishes of the public.  Each family will move to the sort of area that they prefer.

Conservatives often oppose progressive policies that are intended to help the poor.  In many cases, conservatives are correct to oppose those initiatives, as government involvement in the economy often does more harm than good.  But if conservatives were then to turn around and support government regulations that made it hard to build affordable apartments, even though those regulations reduced freedom and reduced economic growth, all because growth might inconvenience some affluent people who like things to always stay the same, then there are going to have to accept the fact that their motives will be questioned.  (I say “some affluent people”, because I favor more density in Orange County.)

Isn’t the conservative view that higher minimum wages reduce freedom and economic growth?  OK, but doesn’t zoning also reduce freedom and growth? Or is something else motivating conservative opposition to higher minimum wages?

I know why I oppose higher minimum wages, but I’m no longer confident I know why other conservatives do.

Of course many on the left oppose new low-density suburban developments.  I also disagree with that view.  So I’m not taking sides on the overall housing density debate, just the specific idea of relaxing zoning rules to allow greater density.

Some progressives have a vision for how people should live—densify.  Some conservatives have a very different vision for how people should live—suburban sprawl.  My vision is freedom.

PS.  The American Conservative has an article by Charles Marohn that points to numerous federal regulations that have subsidized suburban sprawl.  Stanley Kurtz mostly ignores those market distortions when he advocates a hands off approach by the federal government.

 

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Transaction Costs are the Costs of Engaging in Economic Calculation

This year marks the 100th anniversary of the publication of Ludwig von Mises’s seminal article, “Economic Calculation in the Socialist Commonwealth,” which marked the first salvo in what later became the socialist calculation debate. Though the contributions of F.A. Hayek to that debate, and to economic science more broadly, have been well recognized, what is somewhat forgotten today is that the fundamental contributions of another economist were also born out of the socialist calculation debate. I am referring to none other than Ronald Coase.

 

As Coase outlines in his Nobel Prize Address, he had been a student of Arnold Plant in the Department of Commerce at the LSE, who introduced him to Adam Smith’s invisible hand, and the role that the price system plays in coordinating the allocation of resources to their most valued uses without central direction. The insights of Coase, like Mises, were both motivated from the attempt by the Bolsheviks to implement central planning in Soviet Russia. As Coase writes, “Lenin had said that the economic system in Russia would be run as one big factory. However, many economists in the West maintained that this was an impossibility,” a claim first put forth by Mises in his 1920 article. “And yet there were factories in the West, and some of them were extremely large. How did one reconcile the views expressed by economists on the role of the pricing system and the impossibility of successful central economic planning with the existence of management and of these apparently planned societies, firms, operating within our own economy?” The answer put forth to this puzzle was what Coase referred to as the “costs of using the price mechanism,” (Coase 1992, 715). This concept, which later came to be known as “transaction costs,” was first expounded in his seminal article, “The Nature of the Firm” (1937) and later developed in subsequent articles, “The Federal Communications Commission” (1959) and “The Problem of Social Cost” (1960). But, it is interesting to note that Coase also states that “a large part of what we think of as economic activity is designed to accomplish what high transaction costs would otherwise prevent or to reduce transaction costs so that individuals can freely negotiate and we can take advantage of that diffused knowledge of which Hayek has told us” (1992: 716).

My point here is not to trace the historical origins of the parallel insights drawn by Mises and Coase, or other economists working in the Austrian tradition and the transaction-cost tradition for that matter. Rather what I wish to suggest here is that what Coase (not just Hayek) had been stressing in his insights learned from the socialist calculation debate cannot be fully appreciated without placing his contributions in the context of what Mises had claimed regarding the problem of economic calculation. Reframed within this context, I would argue that the concept of transaction costs can also be understood as the costs of engaging in economic calculation. However controversial my claim may seem, this reframing of transaction costs as the costs of associated with economic calculation has a precedent that can be found not only in Coase, but also in more recent insights made by economists working in the Austrian tradition (see Baird 2000; Piano and Rouanet 2018).

How do transaction costs relate to the problem of economic calculation? According to Coase, the most “obvious” transaction cost is “that of discovering what the relevant prices are” (1937: 390). The costs of pricing a good (i.e. transaction costs) are based, fundamentally, on the costs of defining and enforcing property rights in order to create the institutional conditions necessary for establishing exchange ratios, hence prices, in the first place. This also entails not only cost of negotiation and drawing up contracts between trading partners, but also discovering who are the relevant traders partners are, as well as discovering what are the actual attributes, such as quality, of the good or service being exchanged.

Carl Dalhman (1979) argues that all such transaction costs can be subsumed under the umbrella of information costs, but the nature of such information is not one that can be obtained only through active search per se, as if all such information is already “out there” and therefore acontextual. Rather, the very nature of such information is not just tacit and dispersed (Hayek 1945), but contextual (see Boettke 1998). The discovery of relevant trading partners, the valuable attributes of a good being exchanged, and the price to which trading partners agree, emerges only within a context of exchangeable and enforceable private property rights. This last point is precisely the argument that Ludwig von Mises had meant in his claim that economic calculation under socialism is impossible! Outside the context of private property, subjectively held knowledge cannot be communicated as publicly held information without first establishing the terms of exchange in money prices to allocate resources to their most valued uses.

In his Presidential Address to the Society for the Development of Austrian Economics, published in The Review of Austrian Economics as “Alchian and Menger on Money,” Charles Baird (2000) best illustrates the point I’m making here. Carl Menger (1892) and Armen Alchian (1977) had made distinct, though complementary stories as to why money emerges spontaneously, namely to reduce transaction costs. Menger argued that money emerges to avoid the costs associated with the double coincidence of wants between exchange partners. On the other hand, Alchian emphasized that money emerges to reduce the costs of calculating and pricing the value of the various attributes of a good, such as in comparing the quality of different diamonds. Money prices reduce the costs of pricing the quality of diamonds, thereby providing information, discovered by middlemen, to non-specialists about what kind of diamond they are purchasing (i.e. higher quality or lower quality). As Baird writes, “Menger’s story is incomplete. But so, too, is Alchian’s. On the other hand, both stories are complete on their own terms. Clearly what is needed is someone to put these two stories together” (2000: 119). Thus, reframing transaction costs from an Austrian perspective, money, firms and other institutional arrangements emerge to reduce the costs associated with economic calculation.

In a lecture written to honor F.A. Hayek in 1979, later published posthumously in The Review of Austrian Economics, James Buchanan boldly declared the following: “The diverse approaches of the intersecting schools [of economics] must be the bases for conciliation, not conflict. We must marry the property-rights, law-and-economics, public-choice, Austrian subjectivist approaches” (Buchanan 2015: 260). The link that “marries” these distinct schools, including the Austrian School, is the notion of transaction costs. However, this underlying link cannot be understood without first reframing, I would argue, the concept of transaction costs as the costs of engaging in economic calculation. The “marriage” of these intersecting schools, as Buchanan and others have suggested, highlights distinct aspects of the economic forces at work in the market process, as well as the alternative institutional arrangements that emerge to reduce the cost of transacting and thereby exploit the gains from productive specialization and exchange.

 

 


Rosolino Candela is a Senior Fellow in the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics, and Associate Director of Academic and Student Programs  at the Mercatus Center at George Mason University

 

 

References

Alchian, Armen A. 1977. “Why Money?” Journal of Money, Credit and Banking 9(1): 133–140.

 

Boettke, Peter J. 1998. “Economic Calculation: The Austrian Contribution to Political Economy.”  Advances in Austrian Economics 5: 131–158.

Buchanan, James M. 2015. “NOTES ON HAYEK–Miami, 15 February, 1979.” The Review of         Austrian Economics 28(3): 257–260.

Coase, Ronald H. 1937. “The Nature of the Firm.” Economica 4(16): 386–405.

Coase, Ronald H. 1959. “The Federal Communications Commission.” The Journal of Law & Economics 2: 1–40.

Coase, Ronald H. 1960. “The Problem of Social Cost.” The Journal of Law & Economics 3: 1–44

Dahlman, Carl J. 1979. “The Problem of Externality.” The Journal of Law & Economics 22(1): 141–162.

Hayek, F.A. 1945. “The Use of Knowledge in Society.”

Menger, Karl. 1892. “On the Origin of Money.” The Economic Journal 2(6): 239–255.

Mises, Ludwig von. [1920] 1975. “Economic Calculation in the Socialist Commonwealth.” In F.A.     Hayek  (Ed.), Collectivist Economic Planning (pp. 87–130). Clifton, NJ: August M. Kelley.

Piano, Ennio E., and Louis Rouanet. 2018. “Economic Calculation and the Organization of     Markets.” The Review of Austrian Economics, https://doi.org/10.1007/s11138-018-0425-4

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