The Coase Theorem

THE COASE THEOREM
A STUDY IN ECONOMIC EPISTEMOLOGY

Gary North
Institute for Christian Economics
Copyright by Gary North, 1992
Library of Congress Cataloging-in-Publication Data
North, Gary.
The Coase theorem : a study in economic epistemology / Gary
North
p. em.
Includes bibliographical references and index
ISBN 0-930464-61-3 (hardback: acid-free paper) $25.00
1. Economics - Moral and ethical aspects.
2. Pollution - Economic aspects.
3. Property.
4. Law - Economic aspects.
5. Coase, Ronald Harry I. Title
HB72.N67 1992
330.1-dc20
Institute for Christian Economics
P. O. Box 8000
Tyler, Texas 75711
91-40767
CIP
This book is dedicated to
Brian Griffiths
academic economist, politi-
cal advisor, and Christian
moralist.
TABLE OF CONTENTS
Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 1
1. The Persistent Problem of Value 13
2. The Coase Theorem 23
3. Coase vs. Property Rights 36
4. Rothbard's Challenge to Coase 48
5. "Weighing Up the Gains and Losses" 63
6. The Crisis: Living With Dialectical Schizophrenia 87
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... 97
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
Bibliography 120
Index 123
In the development of any science, the first received para-
digm is usually felt to account quite successfully for most of the
observations and experiments easily accessible to that science's
practitioners. Further development, therefore, ordinarily calls
for the construction of elaborate equipment, the development
of an esoteric vocabulary and skills, and a refinement of con-
cepts that increasingly lessens their resemblance to their usual
common-sense prototypes. That professionalization leads, on
the one hand, to an immense restriction of the scientist's vision
and to a considerable resistance to paradigm change. The sci-
ence has become increasingly rigid. On the other hand, within
those areas to which the paradigm directs the attention of the
group, normal science leads to a detail of information and to a
precision of the observation-theory match that could be
achieved in no other way.
Thomas Kuhn*
*Thomas Kuhn, The Structure of Scientific Revolutions (Chicago: University of
Chicago Press, 1962), p. 64.
PREFACE
Today in the sciences, books are usually either texts or retrospective
reflections upon one aspect or another of the scientific life. The scientist
who writes one is more likely to find his professional reputation impaired
rather than enhanced.
Thomas Kuhn1
Science is a sacred cow, as Anthony Standen observed in
1950,2 and modern economists are faithful academic hindus.
They have done their best to hitch economics' wagon to the star
of physical science. They have adopted physical science's use of
mathematics, even when this methodological tool is totally
inapplicable to the topic under discussion, which is most of the
time in the study of individual human action. They have also
imitated physical science's system of professional advancement
by means of publishing scholarly articles in academic journals,
meaning the top dozen or so professional journals.
3
1. Thomas Kuhn, The Structure of Scientific Revolutions (Chicago: University of
2. Anthony Standen, Science Is a Sacred Cow (New York: Dutton, 1950).
3. John J. Siegfried, "The Publishing of Economic Papers and Its Impact on
Graduate Faculty Ratings, 1960-1969," Journal of Economic Literature, X (1972), pp.
31-49. A. W. Coats writes: "In the process of acquiring his professional qualifications,
every fledgling economist is initiated into the prevailing occupational folklore, part
of which consists of opinions about the aims, characteristics, and comparative prestige
ratings of the various periodical publications in the field. . . . [These opinions']
Vlll THE COASE THEOREM
This is a book. It is not a scholarly article. Therefore, if
Kuhn's comment is correct (and I believe it is), then the reader
ought to conclude: (1) North is not trying to advance his pro-
fessional career with this book; (2) North has no professional
career to advance with this book; (3) North is a crap-shooter
with his career; (4) economics is not a science; or (5) more than
one of the above. Because so few economists have ever heard of
me, any economist who stumbles across this book and then
bothers to read it will probably prefer the first two choices. I
can hardly disagree. But point four has a certain plausibility, at
least in the opinion of non-economists. Still, formal discussion
in the economics profession is conducted as if economics were
a science, so we are driven back to points one through three.
In a very real sense, points one, two, and four are the case.
This book presents a sustained argument against the claim of
economists that economics is a hard science in the same sense
that physics is a hard science. Economics is a difficult social
science, but it is not a hard science. Why do I say this? For this
reason: because of a crucial inconsistency in the epistemology of
economics, virtually all of what passes today as economics can-
not legitimately be regarded as scientific, given the presupposi-
tions of economists. The better economists have recognized the
existence of this epistemological Achilles heel for over half a
century, but they have preferred to remain silent about it.
Epistemology
I am hard-pressed to think of any word better suited to
reducing book sales among American academic economists than
epistemology. (The more scientific sounding word, methodology, is
only marginally more saleable.) American economists do not
importance should not be underestimated, for they constitute an essential part of the
shared 'tacit knowledge' which is indispensable to the smooth functioning of the
scientific communications network." A. W. Coats, "The Role of Scholarly Journals in
the History of Economics: An Essay," ibid., IX (1971), p. 39.
Preface IX
spend much time pondering epistemology's challenge: "What
can I know and how can I know it?" At a symposium held at
the annual meeting of the American Economic Association in
1951, Fritz Machlup identified the reality of the economics
profession in the United States: "Usually only a small minority
of American economists have professed interest in methodolo-
gy. The large majority used to disclaim any interest in such
issues.,,4 In this regard, things have not changed much since
1951. Kuhn identifies two types of scientists: the "normal" prac-
titioner and the revolutionary innovator. The typical normal
practitioner of the economics profession has never even consid-
ered the issues that I discuss in this book.
Several years ago, a safely tenured economist at a large
American state university assigned his graduate students an
essay that I wrote in 1976. It dealt with the epistemological
crisis of modern economics.
5
He reported to me that they re-
sented having to read the essay. They did not want to be both-
ered by questions regarding the fundamental presuppositions
of their life's work. They just wanted to get on with it.
This self-imposed blindness to questions of epistemology is,
in the language of the profession, a product of rational self-
interest. It is unwise to spend time pondering solutions to a
problem that cannot be solved, given one's presuppositions,
especially since any public discussion of this problem could
reduce the demand for one's professional services. If I am
correct about the epistemological weakness of all modern eco-
nomic theory, and if economics is correct about the rational
self-interest of acting individuals, then we should expect to
4. Fritz Machlup, "Introductory Remarks," American Economic Review, Papers and
Proceedings, XLII (May 1952), p. 34. Note: the annual Papers and Proceedings issue of
the American Economic Review is regarded by the profession as less relevant than
publication in the other four issues of the A.E.R.: Siegfried, op. cit., p. 34.
5. Gary North, "Economics: From Reason to Intuition," in North (00.), Founda-
tions of Christian Scholarship: Essays in the Van Til Perspective (Vallecito, California: Ross
House, 1976).
x THE COASE THEOREM
encounter great resistance among professional economists con-
cerning the question of epistemology.
What is the nature of the epistemological problem? From the
marginalist (subjectivist) revolution of the 1870's until today,
economists have faced a major dilemma: there is no known link
that can be shown scientifically to connect the supposedly au-
tonomous and totally subjective value scale of the individual
decision-maker to the hypothetical, yet procedurally mandatory,
aggregate known as social welfare or social utility. To make
such comparisons, there must be a common value scale among
all economic actors. No common value scale has ever been
identified. The utilitarians' assumption of each person's equal
capacity for happiness is merely that: an assumption.
Robbins vs. Harrod
This dilemma came into the open, briefly, in 1938, in a pair
of essays by Lionel Robbins and Roy Harrod.
6
Robbins had
cogently argued in his classic study, An Essay on the Nature and
Significance of Economic Science (2nd ed., 1935), that it is scientifi-
cally impossible to make interpersonal comparisons of subjective
utility. In other words, individual utility scales cannot be added
up to produce a social aggregate. Social utility is therefore a
scientific mirage. Harrod saw the inescapable implication of this
position: it makes scientifically impossible any concept of ap-
plied economics. There is no way to discuss scientifically the
social good or social welfare results of any policy, whether it
was produced by a profit-seeking firm or by the State.
Harrod was logically correct regarding the implication of
Robbins' thesis, as Robbins admitted a few months later, but
Harrod's rejection of Robbins' epistemological position was not
based on refuting either Robbins' premise - methodological
6. R. F. Harrod, "Scope and Method of Economics," Economic Journal, XLVIII
(1938), especially pp. 396-97; Lionel Robbins, "Interpersonal Comparisons of Utility:
A Comment," ibid., especially pp. 635-41.
Preface Xl
individualism - or his logic. It was based on his rejection of the
inescapable implication of Robbins' postulate: the removal of all
scientific content from policy-making. Harrod insisted that Rob-
bins' conclusion was professionally unacceptable, not illogical.
Harrod was reviving the old dilemma raised by Jeremy
Bentham: the aggregating of pleasure and pain in a world of
hypothetically autonomous men. Bentham rejected any "anar-
chical" assumption that there are "as many standards of right
and wrong as there are men," but on what basis was Bentham's
rejection valid? As Halevy asked so many years ago: "But why
is it necessary that a science of social man, based on a quantita-
tive comparison of pleasures and pains, should be possible?" He
pointed to the underlying flaw in Bentham's position: "But why
does not the principle of utility enter, in the last analysis, into
the class of 'anarchical' principles? Wherein does the notion of
happiness, or of pleasure, necessarily imply, to use Bentham's
expression, 'dimensions'? Can present pleasure be compared
with past pleasure, which, by definition, no longer exists, or
with future pleasure, which, by definition, does not yet exist?
Can the pleasure experienced by one individual be compared
with the pleasure of another individual?"7 He cited Bentham's
unpublished fragment, "Dimensions of Happiness":
'Tis in vain to talk of adding quantities which after the addition
will continue distinct as they were before, one man's happiness
will never be another man's happiness: a gain to one man is no
gain to another: you might as well pretend to add twenty apples
to twenty pears, which after you had done that could not be
forty of anyone thing but twenty of each just as there was be-
fore.
s
7. E1ie Halevy, The Growth of Philosophical Radicalism, translated by Mary Morris
(1928) (Boston: Beacon, [1901-4)1966), p. 495.
8. Bentham, "Dimension of Happiness," University College manuscripts; cited by
Halevy, idem.
xu THE COASE THEOREM
Bentham did not end his discussion at this point. If he had
ended here, the felicific calculus, his theoretically essential intel-
lectual construct, would have been stripped of all of its real-
world content. Bentham needed this admittedly fictional aggre-
gation: "This addibility of the happiness of different subjects,
however, when considered rigorously, it may appear fictitious,
is a postulatum without the allowance of which all political
reasoning is at a stand...."9 Bentham saw clearly that social
science, meaning the science that undergirds policy recommen-
dations, must assume the ability of the policy-maker to add up
the utilities of different individuals, even though the science of
autonomous man says that this is an impossible task.
In the very next issue of the Economic Journal, Robbins back-
tracked. "But I confess that at first I found the implication very
hard to swallow. For it meant, as Mr. Harrod rightly insisted,
that economics as a science could say nothing by way of pre-
scription."lo This is exactly what it meant, and Robbins, too,
was aghast. But not for long. "Further thought, however, con-
vinced me that this was irrational." Why irrational? Because
economists have always known that their prescriptions "were
conditional upon the acceptance of norms lying outside eco-
nomics.... Why should one be frightened, I asked, of taking
a stand on judgements which are not scientific, if they relate to
matters outside the world of science?"ll Robbins returned epis-
temologically to Bentham's fiction of the common scale of utili-
ty, just as Harrod had.
12
Robbins asked rhetorically why any economist should be
frightened about such an appeal to standards lying outside of
economic science. There is a very good reason why an academic
9. Idem.
10. Robbins, p. 637.
11. Ibid., p. 638.
12. In 1961, Robbins cited Halevy's citations from Bentham: The Theory of
Economic Policy in English Classical Political Economy (London: Macmillan, 1961), p.
180.
Preface Xlll
economist should be frightened: by appealing to ethical norms
outside of the science of economics, he negates every trace of
the scientific content of his policy recommendations and pre-
scriptions. He thereby reduces economic policy-making to the
level of - gasp! - political science, or even worse, sociology.
The exchange between Robbins and Harrod took place over
half a century ago, yet the profession has politely buried all
traces of it in its collective (!) memory. A few quirky people on
the fringe of the profession resurrect this issue from time to
time,13 but the profession takes no notice. Nevertheless, just
like Dracula, it cannot be permanently buried. It will continue
to reappear, though perhaps only in the shadows, for as long as
methodological individualism remains the official philosophical
foundation of economic science. Given the rapid demise of the
appeal of socialism since 1989, this foundation seems secure.
The Coase Theorem
The problem of making interpersonal comparisons of subjec-
tive utility lurks in the shadows of the classic essay by Ronald
H. Coase, "The Problem of Social Cost."14 The problem of the
impossibility of making scientific comparisons of interpersonal
subjective utility is the problem of social cost. Until it is dealt
with forthrightly by Coase and his disciples, the problem of social
cost will remain the bedrock problem of modern economic science. With
the widespread acknowledgment after 1988 of the economic
collapse of socialism in Eastern Europe and the USSR, and with
the substitution of concern over pollution - the economic issue
of "externalities" - as the justification for retaining political
13. Cf. Mark A. Lutz (economist) and Kenneth Lux (clinical psychologist), The
Challmge of Humanistic Economics (Menlo Park, California: Benjamin/Cummings,
1979), ch. 5. The obscurity of both authors and their publisher is indicative of the
problem: fringe critics. But their chapter is on target epistemologically and is a
rhetorical delight to read.
14. R. H. Coase, "The Problem of Social Cost," Journal of Law and Economics, III
(Oct. 1960), pp. 1-44.
XIV THE COASE THEOREM
control over the economy,15 this problem is not likely to stay
buried. I do my best in this monograph to keep it alive and
healthy. I have thereby revealed my status as a fringe figure.
The Origin of This Monograph
The bulk of this monograph appeared as an appendix in my
book, Tools of Dominion: The Case Laws of Exodus (1990).16 In
that form, it is available to few economists. Fewer still would be
likely to discover the section in that book which deals with the
Coase theorem on the economics of externalities (pollution,
noise, and trespassing); the book is almost 1,300 pages long.
This is why I decided to publish this modified version of my
original analysis of the Coase theorem.
An added incentive to publish this monograph came as a
result of Coase's winning of the Nobel Prize in economics in the
fall of 1991. In a Wall Street Journal essay (Oct. 17, 1991), Ken-
neth Lehn summarized the Coase theorem and its impact on
the economics profession. He wrote: "The 'problem' of exter-
nalities is not that one party causes harm to the other. Instead,
the problem is one of conflict over how to use a scarce re-
source. In the case of air pollution, producers wish to use the
air to emit pollutants while the neighboring residents wish to
breathe fresh air. Using his legendary method of combing
15. Robert Heilbroner admitted in 1990 that Ludwig von Mises' critique of
socialism in 1920 had been correct: socialist economic planning is inherently irratio-
nal. Oskar Lange's critique of Mises on this point was incorrect. Heilbroner, "Reflec-
tions: Mter Communism," New lbrker (Sept. 10, 1990), p. 92. He also admitted that
socialism as an economic ideal went down with Communism's ship (pp. 98-99). But
then he added this note of hope for all former socialists: "There is, however, another
way of looking at, or for, socialism. It is to conceive of it not in terms of the specific
improvements we would like it to embody but as the society that must emerge if
humanity is to cope with the one transcendent challenge that faces it within a think-
able timespan. This is the ecological burden that economic growth is placing on the
environment" (p. 99).
16. Gary North, Thois of Dominion: The Case Laws of Exodus (Tyler, Texas: Insti-
tute for Christian Economics, 1990), Appendix D: "The Epistemological Problem of
Social Cost."
Preface xv
through court decisions, Prof. Coase went on to show that the
'problem' of externalities would be resolved, without govern-
ment regulation, in ways that maximize social value if transac-
tion costs are low, and the outcome does not depend on which
party receives the initial property right." This is a misleading
final sentence. There should have been a semicolon after the
word low. It is the heart of the Coase theorem that the econom-
ic outcome does not depend on which party receives the initial
property right. ?tAr. Lehn went on:
"The Problem of Social Cost" spawned a large body of litera-
ture that debated the equilibrium tendencies of the imaginary
world of zero transaction costs, a development that Prof. Coase
found unfortunate. For the major insight of this paper was not
to suggest that we live in this imaginary world, but rather to
show conditions under which legal decisions concerning property
rights do affect resource allocation.
I disagree. The article's major conclusion was that the initial
distribution of property rights is economically irrelevant in
establishing the social (aggregate) economic costs of settling dis-
putes over externalities. If this thesis regarding costs of settling
disputes over externalities is true, then R. H. Coase's theorem
constitutes one of the most subtle yet profound attacks ever
written on the concept of private property rights.
It is my perception of the subdiscipline of law and economics
that it is dominated by scholars who have either accepted the
truth of Coase's theorem or who have at least accepted its terms
of discourse. To the extent that the field's developers have
accepted the Coase theorem, this relatively recent academic
subdiscipline is grounded on a concept of law which is at odds
with the moral and legal foundations of liberty.
As I hope to show in this monograph, the Coase theorem is
thoroughly consistent with the free market economic method-
ology associated with the Chicago School of economics. The
Coase theorem on social cost is in this sense an example of the
XVI THE COASE THEOREM
epistemological crisis of modern economics: grounded in the
hypothetically value-neutral epistemology ofmodern economics,
its conclusions are neither morally neutral nor consistent with
the ideal of private property.
What I argue in this monograph is that the economics pro-
fession is suffering (though not financially) from a delusion. It
is a widely shared delusion, and so is not discussed much or
considered relevant in academic circles. This is to be expected:
the inconsistencies that lie at the very heart of a widely shared
delusion are seldom discussed, let alone taken seriously, by
those who believe in the delusion. The economics profession's
particular delusion - a commonly held one in contemporary
scientific guilds - is the myth of neutrality. It undergirds the
supposedly value-free methodology of economic science. It has
manifested itself as a delusion in discussions, largely ignored, of
the epistemological problem of making scientifically valid inter-
personal comparisons of subjective utility. R. H. Coase's essay
on social cost neglects even to mention this problem, yet the
problem lies at the heart of that subdiscipline of economics
known as welfare economics, in terms of which Coase's essay
took shape.
That such a crucial aspect of welfare economics could be
neglected in an essay that won the Nobel Prize for its author is
evidence of the self-imposed blindness of the profession. That
the field of law and economics, a recent subdiscipline of eco-
nomics, grew to maturity in the soil - the cynic might say night-
soil - of Coase's theorem is even more astonishing.
With the publication of Coase's essay on social cost, the myth
of moral neutrality in economics has ceased to be convenient. It
has become a high-cost, low-return liability. Of course, I am
speaking here of social costs and social convenience. For Coase,
both the essay and the myth that undergirds it have proven to
be a bonanza, both professionally and financially. Professor
Coase won a million dollars for two essays: "The Nature of the
Preface XVll
Firm" (1937) and "The Problem of Social Cost" (1960).17
These articles gained him tenure in one of the most prestigious
and well-remunerated economics departments on earth. He
wrote other articles, of course: "Bacon Production and the Pig
Cycle in Great Britain" (1935), "The Pig Cycle: A Rejoinder"
(1935), "The Pig Cycle in Great Britain: An Explanation"
(1937), and, of course, "Rowland Hill and the Penny Post"
(1939). But he is not renowned for these, nor for his one book,
published in 1950, in a career that exceeds half a century.
Coase's career provides evidence (admittedly anecdotal) that
Kuhn's statement, cited at the beginning of this Preface, is
correct: the pathway to professional success within any academ-
ic scientific guild today is the journal article, not the book.
Warning
Let the reader beware: I am a Bible-believing Christian. I
have self-consciously used biblical presuppositions regarding
ethics and responsibility, both personal and corporate, in order
to form my negative judgment regarding the "net social cost" of
Coase's theorem. I have also invoked the epistemological in-
sights of the Austrian School economist Murray Rothbard in
dissecting the epistemological problem of collective judgments
and collective value. This no doubt will place the academic
mark of Cain on my forehead. To invoke the Bible positively
and Rothbard negatively in order to make judgments regarding
the validity of economic science is, in the eyes of a modern
economist, the only known practice more reprehensible profes-
sionally than invoking sociology.
17. Only these two essays were cited by the Royal Swedish Academy. Peter Pasell,
"Economics Nobel to a Basic Thinker," New lfJrk Times (Oct. 16, 1991).
If a man shall cause a field or vineyard to be eaten, and shall
put in his beast, and shall feed in another man's field; of the
best of his own field, and of the best of his own vineyard, shall
he make restitution. If fire break out, and catch in thorns, so
that the stacks of corn, or the standing corn, or the field, be
consumed therewith; he that kindled the fire shall surely make
restitution.
Exodus 22:5-6
The traditional approach has tended to obscure the nature
of the choice that has to be made. The question is commonly
thought of as one in which A inflicts harm on B and what has
to be decided is: how should we restrain A? But this is wrong.
We are dealing with a problem of a reciprocal nature. To avoid
the harm to B would inflict harm on A. The real question that
has to be decided is: should A be allowed to harm B or should
B be allowed to harm A? The problem is to avoid the more
serious harm.
R. H. Coase*
*R. H. Coase, "The Problem of Social Cost." Journal of Law and Economics, III
(Oct. 1960), p. 2.
INTRODUCTION
Costs and benefits cannot be compared across individuals, even when
monetary sums are involved, because of the impossibility of interpersonal
utility comparison. This insight is a straightforward application of the
defining principle of the Austrian school: radical subjectivism. I
Since all costs and benefits are subjective, no government can accurately
identify, much less establish, the optimum quantity ofanything. But even
the tort [private law suit over wrongs - G.NJ approach runs up against
the immeasurability of costs and benefits: how are damages to be deter-
mined?2
Another problem is the lack of a method for calculating the effect of a
decision or policy on the total happiness of the relevant population. Even
within just the human population, there is no reliable technique for
measuring a change in the level ofsatisfaction of one individual relative
to a change in the level of satisfaction of another. 3
Economists are a cynical bunch. What is a cynic? I do not
mean the Greek definition. A modern economist would regard
1. John B. Egger, "Comment: Efficiency Is Not a Substitute for Ethics," in Mario
Rizzo (00.), Time, Uncertainty, and Disequilibrium (Lexington, Massachusetts: Lexington
Books, 1979), p. 121. Italics not in original.
2. Charles W. Baird, "The Philosophy and Ideology of Pollution Regulation,"
Gato Journal, II (Spring 1982), p. 303. Italics not in original.
3. Richard A Posner, The Economics ofJustice (Cambridge, Massachusetts: Har-
vard University Press, 1983), p. 54. Italics not in original.
2
THE COASE THEOREM
the cynic Diogenes' search for an honest man - a man whose
support could not be purchased - as a wasteful expenditure of
scarce economic resources. Economists know before they begin
- begin anything - that "every person has his price." There are
therefore no truly honest men. I have in mind rather the defin-
ition of the cynic that was offered by Oscar Wilde in Lady Wind-
ermere's Fan: "A man who knows the price of everything and the
value of nothing" - the economist as cynic.
The economist's dilemma - the dilemma of value vs. price -
is in fact the central dilemma of the academic discipline known
as economics. Economists search for an answer to one question
above all other questions: "What is the verifiable relationship
between value and price?" For over two centuries, generations
of economists have attempted to discover the answer, and it
eludes them today as much as it did in the days of Adam Smith.
The difference is, today the lack of any internally consistent
answer is covered by far more layers of dead ends that were
and are described as successful solutions to the problem.
Value and Price
Let us begin the search. Assume that you are interrogating
a modern economist. You ask: If all value is objective, then why
do prices keep changing? What is it that makes them change?
Answer: Supply and demand change. Why does supply change? In
response to changes in demand. Why does demand change? Because
people change their minds. Why? Because prices change. Why do
prices change? Changing conditions of supply and demand.
Wait a minute. We are going in circles. We had better talk
about demand apart from price. Sorry, you are not allowed to talk
about demand apart from price, or price apart from demand. All right,
let me ask this: If people's changing minds are the source of
the changes in demand, then isn't the price of anything really
based on subjective value? ~ s , that is correct. Personal subjective
value? ~ s , that is correct. But how is personal subjective value
translated into objective value? It isn't; there is no objective value.
Introduction 3
Well, then, how is personal subjective value translated into
objective prices? Through competitive bidding.
This leads to another series of questions. You ask: How can
we be sure that the outcome of the objective individual bids
reflects the true value to society? By denying that there is any true
value to society apart from the outcome of the objective individual bids.
But what if society disagrees? There is no such thing as society; there
are only individuals. But what if individuals vote to change the
outcome? That is their legal privilege in a democracy. Are you say-
ing that democracy is a valid way to achieve social goals? I am
an economist; I can only tell you the outcome of events, given certain
causes. Should democracies vote to change the outcome of the
bids? I am an economist; there is no ultimate ''should'' for an econo-
mist.
You press your case: What is the value of economics? Sorry;
economics does not objectively exist; only economists exist. What is an
economist? An economist is someone who does economics. I see. Well,
then, what is the value of an economist? That must be determined
subjectively. All right, what is the price of an economist? All the
market will bear. Are we paying economists too much? The free
market will decide that. Do we have a free market in economists
today? I'd prefer not to say; I might get fired. I work for a state uni-
versity. It is not in my selfinterest to answer your question.
In my view, the answer is clear: yes, we are paying econo-
mists too much. Is my view correct? That is the question.
In this monograph, I intend to show that all of modern
economics is a gigantic intellectual fraud, an illusion so success-
ful that the vast majority of its practitioners are not aware of
the fraud which they are perpetrating. I will show that the
procedures that economists say they use are not the ones they
actually use, that the presuppositions they say they have adopt-
ed are not actually the ones they have adopted, and that their
ability to make economic judgments is in fact denied by their
very methodology. All you have to do is read the entire mono-
graph, paying attention to my arguments as you read.
4 THE COASE THEOREM
Am I overstating my case? You cannot know for sure until you
read it. Is it worth the risk - the time, energy, and mental effort
- to find out? Only you can say, and only after you read it.
Only you! Therein lies the epistemological problem for mod-
ern economics.
To Read or Not to Read
What will it cost you to read this essay? You will never know
for sure. It is analogous to a far more important question in
life, "What will it cost me to marry this person?" Both questions
really mean: "What will I have to give up forever?" While the
"foreverness" of the marriage decision is more obvious to us -
"till death do us part" is a graphic covenantal phrase - the "for-
everness" of every decision is analogous, though not of the
same order of magnitude.
When I choose this rather than that, I forever forfeit that, as
well as all the little thats which might have been born later on.
Perhaps I can change my mind later on, and buy that, but it
will not be the same that which I choose not to buy today. It is
a later that. Like a high school sweetheart whom you marry
only after your first spouse dies, time has worked its changes on
both of you. Everything a person might have accomplished with
that during the period of "this rather than that" is gone forever.
A Fork in the Road
We know that in making any decision, we must forfeit many
things that might have been but will never be - indeed, a whole
lifetime of things that might have been - but we never know
exactly what. Every decision, moment by moment, is to some
extent the proverbial fork in the road. We do not know the
next twenty moves and counter-moves in a chess game - moves
that will become reality in part because of the next move - so it
is safe to say that we cannot know what life has in store for us
when we do one thing today rather than another.
Introduction 5
If you read this essay, it is because you think it will be
"worth your time." But what is your time worth? What is your
time worth right now? It is worth whatever is the most valuable
use to which you can put it. What is the cost of spending your
time one way rather than another? The most valuable use
foregone. So, what is your decision? "To read or not to read,
that is the question!"
Decisions, decisions. Once our decision is made, we put the
past irrevocably behind us. "The moving finger writes, and
having written, moves on." We then face the consequences of
our decision. But these consequences - these costs - are im-
posed on us after the decision, not before. They are costs, but
they are not costs that affected the original action. Expected costs
affected the original action, not the actual costs that we in fact
subsequently experience. Is this unclear? Ask the person who
married the "wrong" spouse to explain the difference between
expected costs and resulting costs. Nobel-Prize winning econo-
mist James Buchanan distinguishes between two kinds of costs:
choice-influencing costs and choice-influenced costs.
4
Unmeasurable Costs
Choice-influencing costs are inherently unmeasurable by any
scientific standard. The economist insists that, like beauty in the
eyes of the beholder, these economic costs exist only in the
mind of the decision-maker. They are subjectively perceived,
and only subjectively perceived. And yet, and yet . . . there
really are beautiful women and ugly women, and just about
everyone can discern the difference, including the respective
women (especially the women). But how is this possible? How
can we deny the objective reality of beauty in the name of a
"higher" subjective reality, when we know that in order for our
4. James Buchanan, Cost and Clwice: An Inquiry in Economic Theory (Chicago:
University of Chicago Press, 1969), pp. 44-45. Buchanan won the Nobel Prize in
1986.
6 THE COASE THEOREM
subjective appraisals to have meaning, there had better be an
objective reality undergirding them? Mter all, two and two
make four. Or do they? Does the objective answer depend on
the subjective evaluator? The modern mathematician is not
really sure.
5
The costs that influence our decisions are always subjective
evaluations of future potential consequences. This is Buchan-
an's argument. Once we act, however, objective reality takes
over, replacing our mental forecasts with cold, hard facts. (And
yet, and yet ... in order to be perceived by us, these cold, hard
facts must first be warmed in the microwave ovens of our
minds.) Thus, concludes Buchanan: "Costs that are influential
for behavior do not exist; they are never realized; they cannot
be measured after the fact."6 The dream becomes reality, but
the reality is always different from the dream, at least to this
extent: the dream could not be measured; the reality can be.
Supposedly.
Buchanan argues that the choice-influenced costs that are
subsequently imposed on people as a result of some previous
decision are in some sense objective and measurable - so many
forfeited dollars of income, for example
7
- but these real-world
costs did not affect the original decision in any way. Yet even
this doffing of the economist's cap to objective cost theory may
be overly respectful, given the presuppositions of modern sub-
jectivist economics. What do the numbers mean? The meaning
of these objective, choice-influenced costs - e.g., accounting
costs - must be subjectively evaluated by the person who bears
them. A number in a ledger is supposed to convey accurate and
5. Vern Poythress, "A Biblical View of Mathematics," in Gary North (ed.),
Foundations of Christian Scholarship: Essays in the Van Til Perspective (Vallecito, Califor-
nia: Ross House, 1976), pp. 159-88.
6. Buchanan, Cost and Choice, p. vii.
7. Even here, who can be sure just how many dollars were actually forfeited as
a result of the decision? Would the person's perceived alternative use of his money
have been as wise (high return) as the best opportunity the market objectively offered
at the time?
Introduction 7
economically relevant information in order for it to be effective as
a summary of past events. The individual who pays an accoun-
tant thinks he is getting something for his money. What is he
getting? A bunch of numbers on a page? Or information? The
individual must interpret the significance -of this choice-inflenc-
ing information. There is no escape from subjectivism.
The Roads Untravelled
Consider your own situation. You are still reading this essay.
You still have faith in a positive future return on your present
investment of time. Let us consider a hypothetical possibility.
With the time you spend reading this essay (assuming you stick
with it to the bitter end), you might be able to think of an in-
vestment strategy that would make you rich, but because of
something you will read here, you will never think of it or have
the courage to risk it. On the other hand, you may also avoid
an investment that really would bankrupt you. Unlike the man
in the story of the lady and the tiger, you have the option of ig-
noring both doors; instead, you choose to read this essay. But
you could have opened a door. Which would it have been, the
lady or the tiger? You cannot know for sure. You will never
know. You can only guess. So, what is the true cost of reading
this essay? Life with the lady or a brief but colorful encounter
with the tiger?
If we take seriously the modern economist's discussion of
costs and choices, we may find our world disturbing. We never
really know what our actions are costing us, assuming that it is
true that there is no way to relate our subjective evaluations
before we act with objective costs after we act. This disturbing
lack of certainty can be relieved by an act of faith: "And we
know that all things work together for good to them that love
God, to them who are the called according to his purpose"
(Romans 8:28). But this providential word of encouragement is
hardly helpful to the modern humanistic economist.
8 THE COASE THEOREM
We can of course sit around moaning and groaning about a
past cost: the abandoned dream that might have come true. We
can worry retroactively about what our decision has cost us. But
the cost that really counted - "counted" is in fact misleading,
since there was nothing objective to count - at the moment of
our decision was imposed at that moment. What is past is past.
Paul wrote: "... forgetting those things which are behind, and
reaching forth unto those things which are before" (Philippians
3:13). This is what the economist says of all decisions. Decision-
makers are necessarily forward-looking. The past is completely
gone forever. We must do the best we can with whatever we
have today. This is the doctrine of sunk costs.
8
This is not to say that we do not bear the objective costs that
are imposed by a previous decision. We do. Even if we do not
perceive these costs, we bear them. A madman may not under-
stand that he is not Napoleon, but he bears the social costs of
his delusion when he is placed in an insane asylum. This is why
there can be no escape from objective costs, any more than
from subjective costs. But whether we accurately foresaw these
costs or not, they are the result of that action, not its cause.
These costs are borne by us objectively in history, yet they are
always subjectively borne. One person may bear his burden in
good cheer; another is utterly oppressed by what objectively
(i.e., to an outside evaluator) appears to be the same magnitude
of burden. Who is to say whose evaluation is correct? The
Christian answers: only the omniscient God can do this, and
His evaluation is not objectively measurable by the economist.
Remove His evaluation from the discussion of imputed value,
and the world explodes in a kaleidoscope of subjective evalua-
tions.
9
This is the epistemological dilemma of modern man.
8. Gary North, An Introduction to Christian Economics (Nutley, New Jersey: Craig
Press, 1973), ch. 26: "Urban Renewal and the Doctrine of Sunk Costs."
9. On kaleidic imputations, see the works of G. L. S. Shackle and Ludwig M.
Lachmann.
Introduction 9
Some Odd Conclusions
An exclusively subjectivist view of cost and choice can lead to
some very odd conclusions. (So, for that matter, can any other
exclusive line of human reasoning.) G. F. Thirlby follows the
logic of an individual's one-time decision. He concludes: '''Cost
is ephemeral. The cost involved in a particular decision loses its
significance with the making of a decision because the decision
displaces the alternative course of action."lo He says emphati-
cally that "the cost figure will never become objective, i.e. it will
never be possible to check whether the forecast of the alterna-
tive revenue was correct, because the alternative undertaking
will never corne into existence to produce the actual alternative
revenue."ll This is Buchanan's conclusion, too. But if no cost
ever becomes objective, what is the purpose of accounting?
Should lVu Fire Your Accountant?
What does all this mean for the accounting profession? What
does it do to the very concept of personal or corporate budget-
ing? He does not say, but he does not stop, either. Following
the persuasive logic of subjectivism, Thirlby concludes that
"The cost is not the things - e.g., money - which will flow along
certain channels as a result of the decision; it is a loss, prospective
or otherwise, to the person making the decision, of the oppor-
tunity of using those things in the alternative course of action.
A fortiori, this cost cannot be discovered by another person who even-
tually watches and records the flow of those things along those chan-
nels.,,12 Then of what objective use are accountants? Why was
10. G. F. Thirlby, "The Subjective Theory of Value and Accounting Cost," Econo-
mica, XII (Feb. 1946); reprinted in James Buchanan and G. F. Thirlby (eds.), L.S.E.
Essays on Cost (New York: New York University Press, 1981), p. 140. L.S.E. stands for
London School of Economics.
11. Thirlby, "The Ruler," South AfricanJournal of Economics, XIV (Dec. 1946), p.
264; ibid., p. 182.
12. Thirlby, "Subjective Theory," ibid., p. 139.
10 THE COASE THEOREM
the advent of double-entry bookkeeping such a revolutionary
event in the history of civilization?13 He does not say.
Furthermore, what does such a view of budgeting do to the
idea of the free market as a social institution for producing
economic order - objective economic order? What does such a
view do to the idea of the stock market, since money prices for
shares are the means by which decision-makers evaluate the
past performance of all other participants in the market? What
does the price of a share of corporate stock have to do with
expected future performance of that corporation's manage-
ment? What is the link, if any, between present share prices
and future economic performance? How do we get from subjec-
tive value to objective share prices and back again? How do we
preserve our capital? For that matter, how do we measure our
capital? How can we bridge the gap between the world of (1)
exclusively subjective costs and (2) objective market prices? Bu-
chanan insists: "Only prices have objective, empirical content . ..."14
Then precisely what empirical content does a price possess or
reveal, and how do we discover it or make effective use of it -
subjectively and objectively, personally and socially?
In short, what does an objective price have to do with indi-
vidual subjective value? What is the economic meaning of a price
- individually and socially, subjectively and objectively? (This is
the number-one epistemological problem that has beset modern
economics since the 1870's.)
The Realm of Possibility
Consider another example. Buchanan makes this statement:
"Any profit opportunity that is within the realm of possibility
but which is rejected becomes a cost of undertaking the pre-
13. Ludwig von Mises, Human Action: A Treatise on Economics (3rd ed.; Chicago:
Regnery, 1966), p. 230. Published originally by Yale University Press in 1949.
14. Buchanan, Cost and Choice, p. 85.
Introduction 11
ferred course of action.,,15 But Buchanan neglects any consid-
eration of the economics of a rejected opportunity that is not in
fact - objective fact - within the realm of possibility. We normally
call such an opportunity a loss. Wouldn't avoiding it be a benefit
of undertaking the preferred course of action? If the decision-
maker's first choice is to reject the objectively impossible (i.e.,
unprofitable) course of action for whatever reason, and also to
reject the second, objectively possible, course of action for what-
ever reason, won't he remain in the profit column overall? I do
not want to press this line of reasoning too hard because it bogs
us down too deeply in the philosophical problem of available
and unavailable information, but we need to recognize at least
the nature of the epistemological problem: If everything is com-
pletely subjective at the moment of decision, what does "the realm of
possibility" have to do with anything? Maybe the decision-maker
believes that can achieve something great if he just had the
courage of his convictions, when in fact the action will bankrupt
him. Is his true cost the forfeited unattainable greatness or the
forfeited inevitable bankruptcy? If all costs at the time of his
decision are purely subjective, then his cost must be the forfeit-
ed greatness. This, clearly, is nutty -logical but nutty. So is any
theory of cost and choice that is exclusively subjective.
The economist, no matter how hard he tries to tie human
decisions exclusively to the action-taker's subjective evaluations,
cannot escape the bedrock realm of possibility. This is his true
measuring rod for discussing cost, the ruler without which all
economic discussion becomes theoretically impossible. On the
other hand, no matter how hard he tries to make objective that
realm of possibility, through probability theory and other statis-
tical techniques, he cannot escape the inherent subjectivity of
the decision of the acting individual who is responsible for his
actions. The economist needs - yes, needs
16
- a scientific theory
15. Ibid., p. 28.
16. Few concepts are less acceptable to an economist that the concept of need. A
of cost that is both subjective and objective without being eter-
nally dialectical. Such a theory does not exist in the world of
humanistic economics. This is the heart of my critique of all
previous discussions of the problem of social cost.
Conclusion
The epistemological problem of value has bothered econo-
mists from the early days of the discipline'S development. Is
value objective, subjective, or a combination? Is it imputed? If
so, by whom? Who is the voice of authority' who decides the
question: "What is this worth?" How do we decide as individu-
als what anything is worth? How do we decide collectively? For
we must decide collectively if we are to deal institutionally and
legally with the problem of externalities (e.g., air pollution),
which is closely related to the problem of social cost.
R. H. Coase believes that he has discovered the theoretical
basis for discovering practical answers to these questions. The
Nobel Committee seems to agree with him. To evaluate the net
social value of Coase's theorem, we need first to examine in
greater detail the details of the debate over economic value that
has been going on in the economics profession from the begin-
ning, but especially since 1938.
I use Coase's essay as a representative example of almost the
entire economics profession. I argue in this monograph that
Coase's unstated presupposition is mythological, namely, the
ideal of moral neutrality in economic science. The ideal of
neutrality has been dominant in the academic discipline of eco-
nomics ever since the late seventeenth century.I7 It has served
as a professionally convenient myth from the beginning. It will
not be surrendered at zero price or zero cost.
need is something which is not negotiable, and for an economist, everything econom-
ic is defined as negotiable.
17. William Letwin, The Origins of Scientific Economics (Cambridge, Massachusetts:
M.LL Press, 1963). Paperback edition by Doubleday, 1965.
1
THE PERSISTENT PROBLEM OF VALUE
In both political and scientific development the sense of malfunction that
can lead to crisis is prerequisite to revolution.
Thomas Kuhn
1
Economists, as self-consciously humanistic social scientists,
claim to be defenders of a rational academic discipline. Most of
them defend their methodology in terms of the assertion that it
allows them to make accurate predictions of human actions
under limited, specified conditions.
2
These predictions are
supposed to enable people to make economic decisions that are
more profitable than decisions made by flipping a coin, consult-
ing a fortune teller, or throwing darts at a wall covered with
slips of paper, with each slip containing a different suggested
course of action.
To make their claim believable, economists have to make a
myriad of assumptions about reason, the human mind, the
powers of observation, the external world, and the interrela-
2. Milton Friedman, Essays in Positive Economics (Chicago: University of Chicago
Press, 1953), ch. 1: "The Methodology of Positive Economics."
tionships between the mind and matter. These assumptions are
very seldom spelled out by economists.
3
Epistemology, the
fundamental question of all philosophy - "What can man know,
and how can he know it?" - is not a popular topic within the
economics profession.
The Problem of Measurement
The advent of modern economics is generally dated from
the early 1870's, when three scholars independently came to
the same conclusion, namely, that economic value is imputed:
the concept of subjective value.
4
Value, they concluded, is sub-
jectively determined. It is not an objective quantity. The key
unit of value is the value (subjective) of the marginal unit. The
decision-maker asks himself: How much (objectively) of this
must I give up in order to obtain that? By 1900, virtually all
non-Marxist economists had broken with the older objective
value theories of the classical economists, such as the labor
theory of value or the cost-of-production theory of value. By
grounding economics on the subjective valuations of individual
decision-makers, economists today believe that they have es-
caped from the intellectual dilemmas that had arisen as a result
of classical economics' objective value theory. (The most famous
one was Adam Smith's "water-diamond paradox.")5
3. Gary North, "Economics: From Reason to Intuition," in North (ed.), Founda-
tions of Christian Scholarship (Vallecito, California: Ross House, 1976).
4. The three scholars were William Stanley Jevons (England), Carl Menger
(Austria), and Leon Walras (Switzerland). See R. S. Hovey, The Rise of the Marginal
Utility School, 1870-1889 (Lawrence: University of Kansas Press, 1960); Emil Kauder,
A History ofMarginal Utility (Princeton, NewJersey: Princeton University Press, 1965).
5. "The things which have the greatest value in use have frequently little or no
value in exchange.... Nothing is more useful than water: ... A diamond, on the
contrary, has scarce any value in use; ..." Adam Smith, Wealth of Nations (1776), end
of Chapter I\T. The paradox: Why is it that something as valuable to human life as
water is worth so little in comparison to diamonds, which are not really crucial to
mankind? The marginalist-subjectivist's solution: "We never choose between water in
general and diamonds in general. We choose between a specific amount of water and
a specific amount of diamonds at a specific point in time. In the middle of a desert,
15 The Persistent Problem of Value
They are self-deluded. They have not escaped such prob-
lems. They have merely created new intellectual problems for
themselves - problems that are inescapable, given their com-
mitment to the ancient ideal of humanism: "man as the mea-
sure of all things" (Protagoras).6 (The careful economist would
add this cautious corollary: "assuming for the sake of argument
that there can be such a thing as a measure in economics.")
If man is the measure of all things, and man himself is a
subjective, changing, and ultimately "free spirit," then "man"
cannot serve as a measure of anything. Measures must be fixed,
but there are no remaining fixed measures in modern thought
- not even the speed of light (at least in quantum physics).'
They are no longer fixed in biology: Darwinism's world of
process has triumphed over fixed measures.
8
Measures are no
longer fixed in morals.
9
They are no longer fixed in epistemol-
ogy.lO They do not exist in economics.
ll
There are no mea-
someone might buy a canteen of water with a bag of diamonds. Under most circum-
stances, he wouldn't. Water is abundant compared to diamonds most of the time.
Thus, the decision-maker's subjective evaluation at a particular moment of time is
crucial, not the hypothetical (and non-existent) objective value of water in general vs.
the objective value of diamonds in general."
6. Assertion 5 of Humanist Manifesto I (1933) states: "Humanism asserts that the
nature of the universe depicted by modern science makes unacceptable any supernat-
ural or cosmic guarantees of human values." Humanist Manifestos I and II (Buffalo,
New York: Prometheus Press, 1973), p. 8.
7. I refer here to the startling theory of subatomic physics, verified by numerous
experiments; known as Bell's Theorem, which states that at the subatomic level, all
events must be simultaneously related to each other across the entire universe. See
Nick Herbert, Quantum Reality: Beyond the New Physics (Garden City, New York:
Anchor Press/Doubleday, 1985), p. 214.
8. Assertion 2 of Humanist Manifesto I states: "Humanism believes that man is
a part of nature and that he has emerged as the result of a continuous process."
Humanist Manifestos I and II, p. 8.
9. Forty years later, Humanist Manifesto II stated: "Ethics is autonomous and
situational, needing no theological or ideological sanction. Ethics stems from human
need and interest." Ibid., p. 17.
10. Delwin Brown, Ralph E. James, and Gene Reeves (eds.), Process Philosophy
and Christian Thought (Indianapolis: Bobbs-Merrill, 1971).
11. Ludwig von Mises writes: "The truth is that there are only variables and no
sures at all. There may be discrete, permanent numbers - even
this is highly speculative
12
- but there are no measures. Every-
thing is on a continuum, nothing is discrete.
13
This absence of
measures leads, step by step, to radical subjectivism and radical
relativism. Heraclitus' river of historical flux is clearly eroding
Parmenides' fixed logical shore line. Chaos 100ms.
14
Having said this, the economist nevertheless resists making
the obvious conclusion regarding the relativity of all measure-
ment: the denial of the possibility of relevant scientific precision. In
vain, the economist protests: "There are economists who have
propounded the relativity of measure. Apparently, they failed
to see that this view saps the entire foundation upon which the
economic science rests."15 He, too, is inescapably one of these
epistemologically short-sighted economists.
Consider the question of environmental pollution. The con-
sistent economist must conclude something like the following:
"One man's polluted stream is another man's profit for the
fiscal year, and there is no conceivable scientific way to say
which is better for society in general, for there is no scientific
way of identifying such an entity as society in general." This is
the logic of subjective value theory. To admit this, however,
would be to commit methodological suicide in public. Modern
economics has in fact committed suicide, but it has done so in
private. Economists do not leap from tall buildings during the
lunch hour. They much prefer to do away with themselves in
constants. It is pointless to talk of variables where there are no invariables." Mises,
Theory and History: An Interpretation of Social and Economic Evolution (New Haven,
Connecticut: Yale University Press, 1957), p. 13. This was reprinted by the Mises
Institute in 1985.
12. Vern Poythress, "A Biblical View of Mathematics," in North (ed.), Foundations
of Christian Scholarship, ch. 9.
13. Nicholas Georgescu-Roegen, The Entropy Law and the Economic Process (Cam-
bridge, Massachusetts: Harvard University Press, 1971), ch. 3.
14. James Gleick, Chaos: Making a New Science (New York: Viking, 1987).
15. Georgescu-Roegen, Entropy Law, p. 111.
The Persistent Problem of Value 17
private - through an overdose of qualifications. As they depart
from this life, each proclaims a unique theory of value.
The Great Debate
In The Dominion Covenant: Genesis, I discussed at considerable
length the problem of objective and subjective value. I analyzed
the important critique of Cambridge Professor A. C. Pigou by
London School of Economics Professor Lionel Robbins, and
then the subsequent debate in 1938 between Robbins and Roy
Harrod.
16
To review very briefly, Pigou, in his pioneering study
of welfare economics, had argued that since each additional
monetary unit's worth of income is worth less to a man than the
previous unit, the value of one additional unit of income to a
millionaire will necessarily be less than its value to a poverty-
stricken man. Thus, Pigou concluded, the State can increase the
aggregate social welfare of the community by taking a portion
of the rich man's income in the high income brackets and
transferring this money to the poor man. This tax will not hurt
the rich man very much (he puts so little value on the last bit of
money he receives), while the marginal income will greatly
benefit the poor man (who has so little income to begin with).
For several decades, this argument was considered a valid scien-
tific defense of the graduated income tax.
Robbins replied in 1932 that the argument is invalid as a
scientific statement. Since all value is subjective, we cannot, as
scientists, make interpersonal comparisons of subjective utility.
There is no objective column of figures to add up when we are
talking about subjective value. (Conclusion: the technique of
accounting can have no logical connection with either the so-
called science of economics or the vocation of business. This is
the epistemological issue that I raised in the Introduction.)l7
16. Gary North, The Dominion Covenant: Genesis (2nd ed.; Tyler, Texas: Institute
for Christian Economics, 1987), ch. 4.
17. See Appendix, below, "There's No (Autonomous) Accounting for Taste."
Therefore, economists cannot legitimately say anything about
any increase or decrease of "social value" which is produced by
taking a percentage of the rich man's income in the higher
brackets and giving this money to the poor man. IS
No defender of subjectivist (marginalist) economics has been
able to refute Robbins' argument, yet hardly any economist - I
would say no economist - has been able to develop a compre-
hensive economic theory in terms of his argument, including
Robbins.
19
Robbins destroyed the epistemological foundation of
applied economics.
Roy Harrod
20
complained in his rejoinder in 1938 that if
Robbins were really serious about this argument, then he would
have to abandon the idea that it is possible for the economist, as
a scientist, to make any recommendations concerning proper
18. Lionel Robbins,An Essay on the Nature and Significance ofEconomic Science (2nd
ed.; New York: St. Martins, [1935]).
19. Writes Richard Posner: "The 'interpersonal comparison of utilities' is anathe-
ma to the modern economist, and rightly so, because there is no metric for making
such a comparison." Had he let it go at that, he would have been honest. But he
knows what this would mean: the impossibility of formulating any social policy based
on truly scientific economics, so he illegitimately adds the following unproven and
unprovable statement: "But the interpersonal comparison of values, in the economic
sense, is feasible, although difficult, even when the values are not being compared in
an explicit market." Richard A. Posner, The Economics ofJustice (Cambridge, Massa-
chusetts: Harvard University Press, 1983), p. 79. Apparently, the economist needs
to do is change the word "utility" to "values," and he goes from the impossible to the
merely difficult. Let me tell you something about humanistic economists: they cheat.
Maybe not self-consciously, but the resulting confusion is the same. At the very least,
the economics profession is self-deceived.
20. Harrod later became Sir Roy Harrod. He was John Maynard Keynes' hand-
picked successor as editor of The Economic Journal. Together, they controlled access
to England's most prestigious academic economics journal for half a century. Like
Keynes, he never received an academic degree in economics. He did study economics
with Keynes for one year, 1922-23. Neither of them ever earned a degree above the
bachelor's degree: Keynes' was in mathematics and Harrod's was in the humanities.
See Don Patinkin, Anticipations of the General And Other Essays on Keynes
(Chicago: University of Chicago Press, 1982), pp. xv, xvi. John Neville Keynes,
Maynard's father, and Pigou personally paid for young Maynard's salary when they
hired him to teach economics at King's College, Cambridge in 1908. Keynes, Sr. was
of the department for many years.
The Persistent Problem of Value 19
economic policy, since any policy always hurts some participants
and benefits others. If it is impossible to make interpersonal
comparisons of subjective utility, then economists must remain
forever silent about the aggregate (social) economic benefits and
costs of any decision by an individual or by the State.
21
Robbins was correct in his criticism of Pigou, given the pre-
suppositions of modern, subjectivist economics. Harrod was
equally correct in his criticism of Robbins, namely, that his
conclusion, if accepted, would destroy all applied economic science.
Robbins subsequently backed away from this conclusion con-
cerning the inability of economists to say anything about social
welfare or the benefits of social policies in genera1.
22
But he
never explained how he could logically back away from this
conclusion, and he had over four additional decades to provide
the explanation. Even more inconsistently, he also never backed
away from his critique of Pigou's argument in favor of graduat-
ed {"progressive"} income taxation.
The implications of Robbins' position are radical, and econo-
mists have long been unwilling to face them, including Robbins.
Buchanan once wrote that "it is precisely the problems posed in
modern welfare economics that force the economist to come to
grips with the basic issues of political and legal philosophy."23
These issues also force the more astute economist to come to
grips with the fundamental issue of all philosophy: epistemology.
But the ranks of the economics profession are filled with men
and women who have no training in epistemology and care
nothing about it.24 They never answer by means of modern
subjectivism the fundamental philosophical question: "What can
21. R. F. Harrod, "Scope and Method of Economics," Economic Journal, XLVIII
(1938), p. 397.
22. Lionel Robbins, "Interpersonal Comparisons of Utility: A Comment," ibid.,
pp.635-37.
23. James Buchanan, "Good Economics - Bad Law," Virginia Law Review, LX
(1974), p. 488.
24. An exception is the Austrian School.
men know, and how can they know it?" They operate in terms
of an implicit though hidden dialecticism between objective and
subjective value theory.
Social Cost
Pigou also raised another issue concerning welfare econom-
ics. It is a variant of the earlier problem of wealth redistribu-
tion. It has become known in the economics profession as "the
problem of social cost." Pigou argued that there are cases of
market failure
25
in which private benefits from a particular
activity impose costs on third parties. Pollution is the obvious
example, although there are many others, he said. The benefits
to the polluter are immediate and direct, but there is no mar-
ket-produced incentive for him to cease polluting as long as his
costs of operation are less than expected revenues.
26
Part of
these costs are borne by someone else. At most, the polluter
bears only part of the costs (stinging eyes, for example), but he
reaps all of the rewards (lower production costs). He continues
to pollute the environment. Total costs in the community -
social costs - are therefore greater than the polluter's personal
private costs. Followers of Pigou's analysis frequently argue that
the State should redistribute this "stolen" wealth back to the
original owners, perhaps through a tax on polluters and tax
reductions for victims, so as to balance total social benefits (from
production) and total social costs.
There is a hidden problem with this line of reasoning, one
which was not discovered for almost half a century. Buchanan
points to it: "The Pigouvian norm aims at bringing marginal
private costs, as these influence choice, into line with social costs, as
25. Tyler Cowen (ed.), The Theory of Market Failure: A Critical Examination (Fair-
fax, Virginia: George Mason University Press, 1988).
26. Yes, yes, I know: "the present value of an expected future stream of income,
discounted by the prevailing rate of interest." But sometimes I prefer to write in
English.
The Persistent Problem of Value
21
these are objectively measured. Only with objective measurability
can the proper corrective devices be introduced."27 The prob-
lem is this: choice-influencing costs are exclusively subjective,
according to modern economic theory. Only choice-influenced
costs can be "objectively measured" (maybe). How can the
judges impose objective costs that will be appropriate - scientifi-
cally appropriate - to reduce the existing level of pollution to a
socially appropriate level?
This raises many other questions. How can civil judges know
what is the socially appropriate level of pollution? How can they
preserve the legal predictability of the courts if they cannot
specify in advance the appropriate penalties? How can they be
even vaguely confident that "the punishment fits the crime" of
polluting? But these questions did not get asked for half a
century, although they were implied by Robbins' original cri-
tique. What finally got scholars to start asking them was an
essay by R. H. Coase.
Conclusion
The dilemma of modern economics is the dilemma of value
theory. If economic value is exclusively subjectively determined,
then it is impossible for economists as scientists to recommend
socially beneficial policies. There is no valid concept of social
benefit if all economic value is exclusively subjective. The profes-
sional realization of this truth came when Lionel Robbins chal-
lenged A. C. Pigou's defense of the graduated income tax.
There is no common value scale that links the minds of indi-
viduals, Robbins said. Therefore, we cannot legitimately make
scientific interpersonal comparisons of subjective utility.
Harrod understood where this argument necessarily leads,
and he rejected it. So did Robbins, once Harrod challenged
him. But neither of them could escape its truth. Logically, they
27. Buchanan, Cost and Choice: An Inquiry in Economic TMOry (Chicago: University
of Chicago Press, 1969), p. 74.
22
THE COASE THEOREM
had to abandon the scientific basis of policy-making. They
refused. Instead, they implicitly abandoned the scientific ideal
of economics in order to save the policy-making side of the
economics profession. Their legacy is universal today.
The irony is that in order to save the ideal of economic
policy-making, the economists have had to abandon the epis-
temological foundations of modern economic science. This is
not discussed in public. It is doubtful that most academically
certified economists are aware of it. They go about their work
as if this glaring contradiction had not been brought into the
open in 1938. There is a kind of unwritten agreement within
the profession: this problem will not be discussed in public.
This is why there is a crisis in the making, what Kuhn des-
cribes as the basis of a future revolution within the guild. But
the crisis keeps getting deferred because there is no way to
solve this theoretical problem without publicly abandoning the
myth of neutrality which undergirds the economics profession.
The myth of value-free economics was exposed by the Robbins-
Harrod debate, but no one discusses this fact in public. It will
probably take a revolution in epistemology launched from
outside the academic guild - i.e., the rejection of the myth of
neutrality - to transform the economics profession.
Meanwhile, the economics profession pays a heavy price,
though this cost is not subjectively perceived. Modern econom-
ics is impaled on the horns of an inescapable epistemological
dilemma, a dilemma created by the economists' assertion of the
discipline's moral and theological neutrality. R. H. Coase and
his followers have impaled the profession on one of these
horns. In the name of policy-making by free market econo-
mists, Coase has destroyed the epistemological foundation of
the Chicago School's defense of private property, just as Har-
rod and Robbins destroyed the epistemological defense of a
truly scientific economics in the name of policy-making. This is
the primary thesis of this monograph.
2
THE COASE THEOREM
If, as I have already urged, there can be no scientifically or empirically
neutral system oflanguage or concepts, then the proposed construction of
alternate tests and theories must proceed from within one or another
paradigm-based tradition.
Thomas Kuhn1
Economists today freely acknowledge that Coase's 1960 essay
on social cost was one of the most important scholarly essays in
the history of the economics profession.
2
Without warning, it
hit both the economics profession and the world of legal theory.
Coase had been the author of an important study of the firm,
published a generation earlier in 1937.
3
For the next two dec-
ades, he published very little in professional scholarly journals.
4
1. Thomas Kuhn, TM Structure of Scientific Revolutions (Chicago: University of
2. R. H. Coase, "The Problem of Social Cost," Journal of Law &1 Economics, III
(Oct. 1960), pp. 1-44.
3. Coase, "The Nature of the Firm," Economica IV (1937), pp. 386-405.
4. Coase, "Business Organization and the Accountant," TM Accountant (Oct.-Dec.
1938), a series of a dozen brief essays written for non-economists; a shortened version
is reprinted by Buchanan and Thirlby in L.S.E. Essays on Cost; Coase, "The Marginal
Cost Controversy," Economics, XII (Aug. 1946). A bibliography of Coase's works
appears in "On the Resignation of Ronald H. Coase," Journal of Law & Economics,
24
THE COASE THEOREM
In 1959, he published a significant article on the Federal Com-
munications Commision.
5
Then, like a bombshell, came his
essay on social cost. It has become a standard in modern eco-
nomics, still found in other scholars' footnotes two decades after
its publication. (Few essays that appear in scholarly economics
journals ever get cited by anyone else, and certainly not by
numerous economists. Mter five or six years, a scholarly essay
in economics, assuming it ever was noticed, is cited only half as
often, except for those regarded as classics.)6
Richard Posner goes so far as to argue in his widely read
textbook on law and economics that Coase's essay and one by
Guido Calabresi
7
were instrumental in launching an entire
academic discipline, law and economics,s "the application of
the theories and empirical methods of economics to the legal
system across the boards."g The Coase Theorem (he capitalizes
it, indicating his respect for it) "established a framework for
analyzing the assignment of property rights and liability in eco-
nomic terms. This opened a vast field of legal doctrine to fruit-
ful economic analysis."lo Two scholarly journals, both pub-
lished by the University of Chicago, have been heavily influen-
ced by the Coase theorem: The Journal of Law &1 Economics and
The Journal of Legal Studies. (This is understandable, given the
fact that Coase edited the Journal of Law &1 Economics for 19
XXVI (April 1983). The bulk of his academic articles came after 1960.
5. Coase, "The Federal Communications Commission,"Journal ofLaw & Econom-
ics, II (1959). This essay is reprinted in Eirik G. Furubotn and Svetozar Pejovich
(OOs.), The Economics of Property Rights (Cambridge, Massachusetts: Ballinger, 1974).
6. A. W. Coats, "The Role of ScholarlyJoumals in the History of Economics: An
Essay," Journal of Economic Literature, X (1972), p. 42.
7. Guido Calabresi, "Some Thoughts on Risk Distribution and the Law of Torts,"
late LawJournal, vol. 70 (1961), pp. 499ff.
8. For example, A. Mitchell Polinsky, Introduction to Law & Economics (Boston:
Little, Brown, 1983).
9. Richard A. Posner, Economic Analysis of Law (Boston: Little, Brown, 1986), p.
19. But see also "The Fire of Truth: A Remembrance of Law and Economics at
Chicago, 1932-1970," Journal of Law & Economics, XXVI (April 1983).
10. Ibid., p. 20.
The Coase Theorem 25
years, 1965-1983, and the Journal of Legal Studies is a sister
publication.)ll As Posner wrote in 1981, "Until recently, then,
utilitarianism held sway in legal theory, but overt economic
analysis was rare. The position is now reversed.,,12 (Problem:
Has economic analysis escaped the ethics of utilitarianism?)
Coase's essay was perhaps the key one in the revival of inter-
est in the question of pollution and economics, as well as a
crucially important contribution to a free market theory of
property rights. And, let me say from the outset, it is a danger-
ously flawed essay. Few economists have seen its flaws. The first
professional economist I ever heard even mention a really
critical comment against it - essentially, the same criticism I had
also come up with - could not get it published in a convention-
al professional economics journal, and he had to wait three
years after he discussed his criticism with me before he saw it in
print.
13
Coase vs. Pigou
It is interesting that Coase, like Robbins in 1932, began his
discussion by attacking A. C. Pigou. Coase summarized the state
of the debate - it had long ceased to be debated very much - as
of 1960. Pigou's statement of the problem had given the prob-
lem of social cost its traditional framework. This discussion was
categorized under the general rubric of "externalities." The
term refers to the imposition of a firm's costs of operation on
those who are not owners of the stream of income generated by
11. For a survey of this literature, see the footnotes in the article by Elizabeth
Hoffman and Matthew Spitzer, "The Coase Theorem: Some Experimental Tests,"
Journal of Law & Economics, XXV (April 1982), pp. 73-98. The rigor of the limiting
assumptions made by the authors of this article is much greater than Coase's own
formulation; the article is also far less readable or usable.
12. Richard A. Posner, The Economics of Justice (Cambridge, Massachusetts:
Harvard University Press, 1983), p. 51.
13. Walter Block, "Coase and Demsetz on Private Property Rights," Journal of
Libertarian Studies, I, No.2 (1977), pp. 111-15. Dr. Block is presently a professor at
Holy Cross College.
26
THE COASE THEOREM
the production process. In other words, these victims are exter-
nal to the firm or production unit, but not external to its costs
of operation. Almost without exception, previous economists'
discussion of externalities had ended with a consideration of
what government measures are appropriate to reduce or elimi-
nate these externalities. The conclusions reached by most econ-
omists, based on Pigou's analysis in The Economics of Welfare (4th
ed., 1932; originally published in 1920), were as follows, Coase
summarized: the producer of pollution (smoke, noise, etc.)
should (1) pay damages to those injured, or (2) have a tax im-
posed on his production by the civil government, or (3) have
his factory excluded from residential districts.
14
Coase's article
broke with this tradition.
Aaron Levine summarizes Coase's breakthrough: "Assuming
zero transaction costs and economic rationality, Coase, in his
seminal work, demonstrated that the market mechanism is cap-
able of eliminating negative externalities without the necessity
of governmentally imposed liability rules.,,15 Furthermore, the
theorem leads to the conclusion that "if transactions are cost-
less, the initial assignment of a property right will not deter-
mine the ultimate use of the property."16 Free market econo-
mists of the Chicago School have increasingly sided with Coase.
(What is also remarkable is that traditional Jewish law had
adopted the basic features of the Coase theorem many centuries
earlier; English law had not.
l
? Why remarkable? Because Exo-
dus 22:5-6 is clearly on Pigou's side.
I8
)
14. Coase, "Social Cost," p. 1.
15. Aaron Levine, Free Enterprise and Jewish Law: Aspects ofJewish Business Ethics
(New York: Ktav Publishing House, Yeshiva University Press, 1980), p. 59.
16. Posner, Economic Analysis of Law, p. 7.
17. Yehoshua Liebermann, "The Coase Theorem inJewish Law,"Journal ofLegal
Studies, X Gune 1981), pp. 293-303.
18. Gary North, 100is of Dominion: The Case Laws of Exodus (Tyler. Texas: Insti-
tute for Christian Economics, 1990). ch. 18.
The problem is, of course, that there are and always will be
transaction costs.
19
Or, I should say, this is a problem. The ma-
jor problem is that his theorem assigns zero economic value -
and therefore zero relevance - to the sense of moral and legal
right associated with a willful violation of private ownership. It
ignores the economic relevance of the public's sense of moral
outrage when there is no enforcement by the civil government
of owners' legal immunities from invasion, even if this invasion
is done in the name of some "more efficient" social good or
social goal. This is why I conclude that the Coase theorem is
one of the most morally insidious pieces of academic nonsense
ever to hit the economics profession; worse, it has infected the
thinking of a generation of very bright and very glib free mar-
ket economists and legal theorists. Coase has served as the
Typhoid Mary of Chicago School economics for three decades.
His essay drastically compromised the academic case for liberty.
It has imposed private costs on those of us who are attempting
to make a case for free market economics. In this sense, Coase's
theorem is an example of externalities: net private benefits for
Coase and net social costs for the economics profession and any
society whose courts adopt his approach. The victims cannot
sue him in civil court. The best we can do is offer a pollution-
abatement system: proof that his whole argument is specious.
Coase fully recognized from the beginning the nature of the
technical economic problem he had raised, namely, the impossi-
bility of a world in which there are no transaction costs.. (The moral
issues related to property rights he does not even discuss as
relevant in some way to economic analysis, as we shall see.)
Therefore, he allows civil judges to intervene to settle disputes.
But there is a problem here: Coase cannot escape that nagging
problem ignored by Pigou and all welfare economists, namely,
19. For a brief introduction to the question of transaction costs, see Oliver E.
Williamson, "Transaction-Cost Economics: The Governance of Contractual Rela-
tions," Journal of Law & Economics, XXII (Oct. 1979), pp. 233-61.
the problem of interpersonal comparisons of subjective utility. Coase's
"scientific" case against Pigou rests on the implicit assertion that
men, especially judges, can make such comparisons in their act
of formulating social policy. The only professional response
deeply critical of Coase has been made by Austrian School
economists, who recognize the weakness of the Chicago School's
presuppositions concerning interpersonal comparisons of sub-
jective utility. Still, their criticism leaves much to be desired, for
if taken seriously, it would become impossible to defend the
idea of government penalties against polluters.
The Ethical Pea Beneath the Neutral Shell
The astounding fact about the Coase theorem is that every
economist knows that there are no cases of exchanges in which
there are zero transaction costs. They also know that the Coase
theorem applies only where there are zero transaction costs. Yet
they do not identify the Coase theorem as an instance of curi-
ous but utterly irrelevant academic speculation. Instead, they
try to work with his theorem. Richard Posner, an economist
and a judge in the U.S. Appeals Court (Seventh Circuit), admits
that the Coase theorem applies only to zero transaction cost
situations, yet he has devoted much of his academic career to
pursuing the economic implications of the Coase theorem in
the field of law. He knows that Coase's initial assumption - that
transaction costs are zero - cannot be true in the real world.
Posner writes:
The economist does not merely decree that absolute rights [of
ownership - G.N.] be created and then fall silent as to where
they should be vested. To be sure, if market transactions were
costless, the economist would not care where a right was initially
vested. The process of voluntary exchange would costlessly real-
locate it to whoever valued it the most. But once the unrealistic
assumption of zero transaction costs is abandoned, the assign-
ment of rights becomes determinate. If transaction costs are
positive (though presumably low, for otherwise it would be ineffi-
cient to create an absolute right), the wealth-maximization princi-
ple requires the initial vesting of rights in those who are likely to
value them most, so as to minimize transaction costs. This is the
economic reason for giving a worker the right to sell his labor
and a woman the right to determine her sexual partners. If
assigned randomly to strangers, these rights would generally (not
invariably) be repurchased by the worker and the woman; the
costs of the rectifying transaction can be avoided if the right is
assigned at the outset to the user who values it most.20
Posner openly admits that in some cases, even where trans-
action costs are low, the worker or the woman in his example
would not (i.e., could not afford to) repurchase these rights of
ownership. This follows from his definition of value: "The most
important thing to bear in mind about the concept of value is
that it is based on what people are willing to pay for something
rather than on the happiness they would derive from having it.
. . . The individual who would like very much to have some
good but is unwilling or unable to pay anything for it - perhaps
because he is destitute - does not value the good in the sense in
which I am using the term 'value.' ,,21
The conclusion is obvious, and he does not hesitate to draw
it: "Equivalently, the wealth of society is the aggregate satisfac-
tion of those preferences (the only ones that have ethical weight
in a system of wealth maximization) that are backed up by
money, that is, that are registered in a market." In short, peo-
ple's demonstrated preferences - money on the line - are the
only ones that possess "ethical weight" in his definition of
wealth-maximization. Does this include marriage? Of course.
Does this include games of chance? Of course. "Much of eco-
20. Posner, Economics ofjustice, p. 71. For a critique of Posner's approach to the
law, see Buchanan, "Good Economics - Bad Law," Virginia Law Review, LX (1974),
pp. 483-92. See also the biting and incisive essay by Arthur Allen Leff, "Economic
Analysis of Law: Some Realism About Nominalism," ibid., pp. 451-82.
21. Posner, ibid., pp. 60, 61.
nomic life is still organized on barter principles. The 'marriage
market,' child rearing, and a friendly game of bridge are exam-
ples. These services have value which could be monetized by
reference to substitute services sold in explicit markets or in
other ways.,,22
Question: Who should make the initial distribution of an
ownership right to whomever "values it the most"? How does
this sovereign agent know scientifically which potential owners
"are likely to value them [ownership rights] the most"? In
short: By what standard of value does he make the initial distribution?
Dead silence from Chicago School economists. To say anything
at this point would be a public admission that economic science
is no longer regarded by them as being value-free. The Coase
theorem would have to be acknowledged for what it is: an
important component in a giant academic shell game. The
ethical pea is always concealed beneath the seemingly neutral
scientific shell of cost-benefit analysis. To paraphrase the late
John Mitchell, u.S. Attorney General under President Nixon:
"Watch what the economist does, not what he says he is doing."
He is invariably making interpersonal comparisons of subjective
utility every time he recommends a policy decision.
The debate over social costs raises once again the ancient
debate between objective and subjective knowledge. It is one of
the persistent antinomies in all humanist thought. The epistem-
ological problem of social cost is an ethical problem, and as
such, humanists cannot solve it "scientifically."
Harm
Coase reformulated the terms of the debate over externali-
ties. "The question is commonly thought of as one in which A
inflicts harm on B and what has been decided is: how should
we restrain A? But this is wrong. We are dealing with a prob-
lem of a reciprocal nature. To avoid the harm to B would
22. Ibid., p. 61.
inflict harm on A. The real question that has to be decided
is: should A be allowed to harm B or should B be allowed to
harm A? The problem is to avoid the more serious harm."23
Such reasoning is ethically perverse, if accepted as a method-
ological standard governing economic analysis in all instances
involving economic action. It would be just as easy to say of
kidnapping that any restrictions on kidnapping by the State
harm the kidnapper, and that a lack of restrictions harms the
victims. If we are going to build an economic system in terms of
the supposedly "reciprocal nature of harm" - that each eco-
nomic actor suffers harm when he is restricted from acting
according to his immediate whim - then economics becomes
positively wicked, not value-free, in its attempt to sort out just
how much harm the courts will allow each party to impose on
the other.
There are some areas of life - areas governed by biblical
morality - in which such "cost-benefit analyses" must not even
be contemplated. For example, any attempt to impose cost-
benefit analyses on competing techniques of mass genocide,
including abortion, is demonic, not scientifically neutral.
Whether a genocidal society should adopt either gas chambers
or lethal injections for adults, or either saline solutions or suc-
tion devices for unborn infants, cannot be solved in terms of
comparative rates of cost-efficiency, for the economist always
ignores a major "exogenous variable": the wrath of God. God
will efficiently judge those individuals who promote all such
cost-efficient systems, as well as societies that adopt them. If
legal restrictions against mass genocide harm the potential mass
murderers and the purchaser of their services, this is all to the
good. Society faces no "reduction in social benefits" whatsoever.
Justice does cost something, but the net economic effect is
positive, whether the economist sees this or not. There is no
reduction in net social benefits as a result of the thwarted goals
of the now-restricted (or previously executed) genocidal techno-
crats. Yet we live in a society in which the right to life has been
successfully challenged in the courts (including church courts)
in the name of personal and social costs. Should we be sur-
prised that R. H. Coase's essay won him the Nobel Prize?
Coase offered the following example of reciprocal harm.
What about cattle that stray onto another man's property and
destroy crops? This, it should be noted, is precisely the issue
dealt with by Exodus 22:5: "If a man shall cause a field or vine-
yard to be eaten, and shall put in his beast, and shall feed in
another man's field; of the best of his own field, and of the best
of his own vineyard, shall he make restitution." Coase writes:
"If it is inevitable that some cattle will stray, an increase in the
supply of meat can only be obtained at the expense of a de-
crease in the supply of crops. The nature of the choice is
clear: meat or crops?"24
This appears to be correct economic analysis, as far as it
goes. It forces us to think about the problem in terms of what
members of the society must give up, meat vs. crops. But his
next sentence is the very heart of the problem, and he never
shows how economists - or anyone else, for that matter - can,
as scientists, make an economically rational (i.e., value-neutral)
choice in the name of society: crops vs. meat. Indeed, humanis-
tic economics cannot possibly answer this question because of
the inability of economists, as scientists, to make interpersonal
comparisons of subjective utility.25 But the economics profes-
sion refuses to acknowledge the existence of this dilemma.
24. Idem.
25. In other words, we cannot make scientific comparisons of the utility gained
by one person vs. the utility thereby forfeited by another man. There is no unit of
"utility measurement" which is common to both men. We cannot as neutral scientists
legitimately say that one man has gained greater utility (a subjective evaluation on his
part) than another man has lost (another subjective evaluation). I discuss this prob-
lem in The Dominion Covenant: Genesis (2nd ed.; Tyler, Texas: Institute for Christian
Economics, 1987), ch. 4.
Subjective Value vs. Social Policy
Coase never comes to grips with this problem. "What answer
should be given is, of course, not clear until we know the value
of what is obtained as well as the value of what is sacrificed to
attain it.,,26 Value? As economists, we need to ask ourselves
several questions: Value to whom? Society as a whole? The
value to the cattle owner? The value to the farmer? Also, how
can judges make such estimates of economic value, since all
economic value is supposedly exclusively subjective? Questions
of economic value are the main problems raised by his paper,
yet he cannot answer them by means of the "scientific econom-
ics" he proclaims. No economist can. Economist Peter Lewin
has gone to the heart of the matter when he writes in a wither-
ing critique of Coase that
costs are individual and private and cannot be "social." The
social-cost concept requires the summation of individual costs,
which is impossible if costs are seen in utility terms. The notion
of social cost as reflected by market prices (or even more prob-
lematically by hypothetical prices in the absence of a market for
the item) has validity only in conditions so far removed from
reality as to make its use as a general tool of policy analysis
highly suspect. ...
The foregoing suggests that any perception of efficiency at
the social level is illusory. And the essential thread in all the
objections to the efficiency concept, be it wealth effects, distor-
tions, or technological changes, is the refusal by economists to
make interpersonal comparisons of utility. Social cost falls to the
ground precisely because individual evaluations of the sacrifice
involved in choosing among options cannot be compared.
27
27. Peter Lewin, "Pollution Externalities: Social Cost and Strict Liability," Galo
Journal, II (Spring 1982), pp. 220, 222.
The inability of anyone to make scientifically valid interper-
sonal comparisons of subjective utility has once again smashed
all the hopes of the free market's humanist defenders to deal
scientifically (Le., without any appeal to either civil justice or
morality) with a problem of social policy. The more astute
"anarcho-capitalists" have understood this, and have thereby
abandoned the very idea of social utility and social costs. They
have also abandoned the idea of civil government.
28
But they
have not been able to demonstrate how people can deal success-
fully with the problems created by such technological develop-
ments as the internal combustion engine. But at least they are
consistent. They do not search for "fools' gold" intellectual
solutions to "scientifically" insoluble problems. They do not
search for pseudo-market solutions - "What would the correct
market price be in the absence of a market?" - or solutions
involving the hypothetical (and scientifically impossible) ability
ofjudges to make scientifically valid social cost-benefit analyses
in settling disputes. There can be no scientifically valid answers to
such social problems, given the presuppositions ofmodern, subjectivistic,
individualistic economic theory. Yet the approach used by Coase
and his academic followers to deal with these questions assumes
that there are scientifically valid answers to them.
Conclusion
Since there are no "neutral, scientific" answers, Coase's
whole essay is an exercise in intellectual gymnastics - an illusion
of scientific precision.
29
Nevertheless, it is considered a classic
28. "There is no government solution to pollution or to the common-pool prob-
lem because government is the problem." Gerald P. O'Driscoll, Jr., "Pollution,
Libertarianism, and the Law," ibid., p. 50.
29. This same illusion of scientific precision is at the heart of virtually every
professional journal in economics, every mathematical equation, and every call for
scientific policy-making issued by members of the economists' guild. The day an
economist admits to himself that no economist can make interpersonal comparisons
of subjective utility is the day that his public claims of economics' objective, scientific
precision make him a charlatan. The day before, he was simply ignorant.
essay, a pioneering work which literally created a new approach
in both economics and legal theory. What is revealing is that
the economics profession as a whole has refused to face up to
this problem, and it took over two decades for a critical analysis
based on a 1938 observation by Lionel Robbins to be applied to
the Coase theorem by Peter Lewin, who was (1) an assistant
professor (untenured) at (2) an obscure university to be pub-
lished in (3) a new intellectual journal that has no following
within the academic community.30 Such is academia.
31
30. In my 1973 book, An Introduction to Christian Economics, I briefly referred to
"R. H. Coase's clever sophistry," (p. 94n), but did not have space to pursue his
arguments in detail. Some readers may think I should have let it go at that.
31. Lewin presently works for a computer software firm.
3
COASE VS. PROPERTY RIGHTS
Anomaly appears only against the background provided by the paradigm.
The more precise and far-reaching that paradigm is, the more sensitive
an indicator it provides of anomllly and hence of an occasion for para-
digm change. . . . By ensuring that the paradigm will not be too easily
surrendered, resistance guarantees that scientists will not be lightly
distracted and that the anomalies that lead to paradigm change will
penetrate existing knowledge to the core.
Thomas Kuhn
1
We come now to the issue of property rights. The meaning
of "property rights" is this: individuals or associations repre-
sented by individuals possess a legal right to prevent others
from stealing, invading, destroying, or otherwise interfering
with their property. Owners therefore possess a legal right to
exclude others from the use of specified property. This is analo-
gous to covenantal forms of exclusion: the State's right to ex-
clude non-citizens from voting; the married person's right to
exclude others from sexual access to the partner; and the
church's right to exclude non-members or non-Christians from
Coase vs. Property Rights 37
the communion table. The phrase "property rights" means that
there is a legally enforceable "bundle of rights" that is associat-
ed with specific forms of property.
Coase's essay undermines the very concept of private prop-
erty rights. He offers a detailed, carefully constructed argument
concerning the marginal gains to the cattleman vs. the marginal
losses to the farmer from a roaming steer. What the essay dem-
onstrates, assuming that the psychological costs to the farmer of the
cattleman's violation of his property rights are never taken into consid-
eration, is this: excluding transaction costs and information
costs,2 as well as assuming perfect competition (omniscience),
the gain or loss to society is the same, whether the cattleman com-
pensates the farmer for the value of the lost crops, should the
cattle be left to roam, or the farmer compensates the cattleman
for the higher costs of meat production, if the cattle are kept
away from the farmer's crops (higher feed costs, costs of fenc-
ing, etc.). Again, assuming "conditions of perfect competition,"
Coase concludes: "Whether the cattle-raiser pays the farmer to
leave the land uncultivated or himself rents the land by paying
the land-owner an amount slightly greater than the farmer
would pay (if the farmer was himself renting the land), the final
result would be the same and would maximize the value of
production."3
Given his initial, unrealistic hypothetical assumptions about
free goods - transaction costs, information costs, and perfect
competition - this conclusion initially appears to be correct,
assuming that farmers have no commitment to a sense ofjustice con-
cerningproperty rights. I t also assumes that members ofsuch a society
do not and will not suffer any additional economic losses when the civil
government refuses to make cattle oumers responsible for the damage
their animals cause. In other words, it assumes that when civil
2. "... when the damaging business has to pay for all damage caused and the
pricing system works smoothly (strictly this means that the operation of the pricing
system is without cost)." Coase, "Social Cost," p. 2.
3. Ibid., p. 6.
judges use Coase's theorem as a standard of judgment and a
legal precedent, property owners will experience no loss. Both
assumptions are implicit to Coase's thesis, and both are categor-
ically incorrect. Coase begins with an unreal world in which
transaction costs are defined away, and from this he draws his
equally unrealistic conclusions.
4
I say that his conclusion initially appears to be correct - that
in a zero-cost world, the outcome of the bargaining process
would be the same, the value of cattle vs. the value of crops.
Yet in a perceptive essay by Donald Regan, we learn that Coase
has no warrant for making this conclusion. Coase assumes that
the free market's voluntaristic bargaining process will produce
the same economic results that a compulsory civil court's deci-
sion would produce if it were to follow Coase's concept of net
social cost, but why should we believe this? Regan says that
Coase offers no model of how this bargaining process would
inevitably produce such identical results in the absence of specified
and legally enforceable property rights. For example, sometimes a
bargainer makes economic threats of non-cooperation that must
be occasionally enforced in order to persuade the other party
that he should take such threats seriously, even if the actual
carrying out of the threat may injure the threat-maker in the
short run. How does Coase know what the short-run or long-
run outcome of a bargaining process will be? He doesn't.
5
This
is simply another way of saying that we cannot confidently
4. Writes Jules L. Coleman: "No term in the philosopher's lexicon is more
imprecisely defined than is the economist's term 'transaction costs.' Almost anything
counts as a transaction cost. But if we are to count the failure to reach agreement on
the division of surplus as necessarily resulting from transaction costs (I have no doubt
that sometimes it does), then by 'transaction cost' we must mean literally anything
that threatens the efficiency of market exchange. In that case, it could hardly come
as a surprise that, in the absence of transaction costs so conceived, market exchange
is efficient." Coleman, "Economics and the Law: A Critical Review of the Foundations
of the Economic Approach to Law," Ethics, 94 Guly 1984), p. 666.
5. Donald H. Regan, "The Problem of Social Cost Revisited," Journal of Law &
Economics, XV (Oct. 1972), pp. 428-32.
make social and economic evaluations of real-world events by
abstracting economic theory from temporal reality - i.e., by
creating a mental world in which there are no costs, no ignor-
ance of present or future opportunities, and no need of threats
to achieve our goals.
Coase states clearly what he thinks the economic problem is.
"The economic problem in all cases of harmful effects is how to
maximize the value of production."6 Furthermore, he is no
fool. Later in the essay, he drops his essay's initial assumption
of zero transaction costs, perfect competition, and zero informa-
tion costs.
7
Of course, in real life there are transaction costs to
settle disputes. For this reason, there is a role for civil govern-
ment in settling costly disputes.
8
"All solutions have costs,"
including solutions imposed by the civil government.
9
One underlying presupposition distorts all of Coase's analysis
- a presupposition which is all too common (and unstated) in
Chicago School economic analysis: the legitimacy of leaving
aside issues of right and wrong, of justice, of equity. Coase
writes: "Of course, if market transactions were costless, all that
matters (questions of equity apart) is that the rights of the vari-
ous parties should be well-defined and the results of legal ac-
tions easy to forecast."lo Problem: How can we discuss "the
rights of the various parties" if we leave aside questions of
7. There is always the nagging suspicion that once these formal theoretical
assumptions are dropped, the whole intellectual performance becomes nothing more
than a scholarly puzzle game. Will any of the conclusions concerning the world of the
theoretical model still remain accurate, let alone applicable, once we begin to discuss
the empirical world? And how can we know for sure? Only through intuition - a
nonrational, nonlogical category. See Gary North, "Economics: From Reason to
Intuition," in Gary North (ed.), Foundations of Christian Scholarship: Essays in the Van
Til Perspective (Vallecito, California: Ross House, 1976.) See also North, Dominion
Covenant: Genesis (2nd. ed.; Tyler, Texas: Institute for Christian Economics, 1987),
pp.350-53.
8. Coase, "Social Cost," pp. 15-19.
9. Ibid., p. 18.
10. Ibid., p. 19.
equity - questions of right and wrong? In short, how can we
discuss "rights" apart from discussing what is morally right?
This is the problem that the economics profession has faced
from the beginning. Coase's essay denies the relevance of the
question. That is the problem with Coase's essay.
Discounting Moral Outrage to Zero
Questions of equity apart: here'is a continuing assumption in
the "value-free, morally neutral" economic hypotheses of mod-
ern free market economists. They apparently think that ques-
tions of equity, being questions of opinion and morality, cannot
be dealt with scientifically, nor can economists, as scientists, put
a price tag on violations of moral principle. They conveniently
ignore the inescapable conclusion of subjectivist economics and
methodological individualism, namely, that there is no scientific
way to measure costs and benefits of any kind, since interpersonal
comparisons of subjective utility are impossible for mortals to
make. Economists naively believe that there is a neutral, value-
free science of economics, but not of morality.
They are correct about the impossibility of neutral morality;
they are incorrect about the existence of a value-free economics.
Economics deals with value, and there is no value-free value.
The moment an economist raises the question of value - social
value, personal value, value of Gross National Product - he has
left the hypothetical world of value-free science. Such a world
is mythical anyway. But economists have invested so much of
their intellectual and professional capital in this myth for so
long that they find it difficult to abandon it. If they were to
abandon this myth, their peers would not take them seriously,
and they would not get their unreadable and unread essays into
professional journals any more.
One of Coase's academic defenders, Yale Law School's Guido
Calabresi, carries the Coase theorem to distant shores of specu-
lation and social unreality. He says that the Coase theorem
demonstrates that "the same allocation of resources will come
about regardless of which of two joint cost causers is initially
charged with the cost, in other words, regardless of liability
rules."ll He repeats Coase's example of the smoke-producing
factory that damages the wheat crop of local farmers. "For
example, if we assume that the cost of factory smoke which
destroys neighboring farmers' wheat can be avoided more
cheaply by a smoke control device than by growing a smoke
resistant wheat, then, even if the loss is left on the farmers they
will, under the assumptions made, pay the factory to install the
smoke control device. This would, in the short run, result in
more factories relative to farmers and lower relative farm out-
put than if the liability rule had been reversed. But if, as a
result of this liability rule, farm output is too low relative to
factory output those who lose from this 'misallocation' would
have every reason to bribe farmers to produce more and facto-
ries to produce less. The process would continue until no bar-
gain could- improve the allocation of resources.,,12
A Response to Calabresi
It sounds so precise, so logical. It also sounds crazy. Here is
why it really is crazy. First, there are always transaction costs in
life. To begin with any other assumption is to begin with utopi-
anism. It makes as much sense as beginning with the assump-
tion of the omniscience of the participants in exchange, which
is another familiar assumption in almost all modern economic
thought, espetially in the journals. Without this theoretical ideal
of omniscience, economic theory would have no formulas and
equations, but professional economists would rather die than
give up their formulas and equations. The epistemological
problem is this: once the theoretical model is formulated in
terms of a hypothetical set of assumptions that cannot exist in
11. Guido Calabresi, "Transaction Costs, Resource Allocation and Liability Rules
- A Comment," Journal of Law & Economics, XI (April 1968), p. 67.
12. Ibid., pp. 67-68.
the real world, it takes an act of will for the economist to bring
the model to bear on real-world problems without importing
radical utopianism into his analysis. The debate over the Coase
theorem is a Nobel Prize-winning example of an unsuccessful
attempt by an economist to discard an economic model's totally
utopian initial assumptions, yet still retain the model's conclu-
sions for analytic purposes.
13
That it should be taken seriously
by so many economists is evidence of the theoretical bankruptcy
of modern economics. That legal theorists should also take it
seriously is frightening.
Second, the allocation problem and its solutions are not pri-
marily technical and empirical problems but rather ethical and
epistemological. Calabresi poses the problem, and then answers
it (as Chicago School economists usually do) in terms of the
least costly solution technically, not in terms of any visible ethi-
cal principle. "The primary implication is that problems of
misallocation of resources and externalities are not theoretical
but empirical ones. The resource allocation aim is to approxi-
mate, both closely and cheaply, the result the market would
bring about if bargaining actually were costless.,,14 In other
words, the civil judge is to pretend that he can approximate the
13. Calabresi writes: "Thus, if one assumes rationality, no transaction costs, and
no legal impediments to bargaining, all misallocations of resources would be fully
cured in the market by bargains. Far from being surprising, this statement is tauto-
logical, at least if one accepts any of the various classic definitions of misallocation.
These ultimately come down to a statement akin to the following: A misallocation
exists when there is available a possible reallocation in which all those who would lose
from the reallocation could be fully compensated by those who would gain, and, at
the end of this compensation process, there would still be some who would be better
off than before." Ibid., p. 68. This is one more application of Pareto's optimality
theorem, perhaps the most non-optimal and misleading idea ever to get into the
literature of economics. It is conceptually a dead end; it is also quite popular. I agree
with Lutz and Lux: if it were buried forever, we could place a tombstone over it
bearing these words: "Everybody has been made better off and nobody worse off."
Mark A. Lutz and Kenneth Lux, The Challenge of Humanistic Economics (Menlo Park,
California: Benjamin/Cummings, 1979), p. 101. Chapter 5 of their book is delightful:
"The New Welfare Economics: Value-Free or Value-Less?"
14. Calabresi, ibid., p. 69.
allocation that a free market would produce, if free markets
were costless. This, it should be mentioned, is a denial of the
most important of all theorems in economics: scarcity. A civil
judge capable of completing this assigned task would be a
scarce resource indeed! Of course, he would possess this advan-
tage: since the initial limiting condition is impossible - zero
transaction costs - nobody can produce a model that will prove
that his allocation is off the mark, economically speaking. He is
therefore free to decide the case on the basis of net social cost,
and nobody can say for sure that his estimate is incorrect.
How would this utopian task best be accomplished? Calabresi
combines the false precision of the economist with the real
obfuscation of the lawyer to produce this problematical conclu-
sion: "This question depends in large part on the relative cost of
reaching the correct result by each of these means (an empirical
problem which probably could be resolved, at least approxi-
mately, in most instances), and the relative chances of reaching
a widely wrong result depending on the method used (also an
empirical problem but one as to which it is hard to get other
than 'guess' type data). The resolution of these two problems
and their interplay is the problem of accomplishing optimal
resource allocations."15 Some problem!
So, the allocation problem for welfare economics is merely
an empirical problem. But this so-called empirical problem
cannot be solved scientifically, logically, or technically, for there
is no way for the scientific economist to deal with the key epis-
temological problem: the impossibility of making scientific
interpersonal comparisons of subjective utility. Yet the Chicago
School economists babble on in their journals as if more precise
measurements could somehow solve what they admit is the
allocation problem. It is as if a gunnery sergeant were attempt-
ing to hit a target at the edge of the universe by adding just a
bit more gunpowder to the load. It is simply a technical prob-
15. Idem.
lem, you understand. It is as if a sprinter were trying to reduce
his time in the hundred meter race to one second flat by shav-
ing a tenth of a second ,off his time in each preliminary heat. It
is an empirical problem, you understand. If he could just get
better shoes or a track with better traction!
Calabresi knows all this. He acknowledges that the decision
which would be reached if the transactions were costless is an
"unreachable goal."l6 He also acknowledges that "the gains
which reaching nearer the goal would bring are not usually
subject to precise definition or quantification. They are, in fact,
largely defined by guesses. As a result, the question of whether
a given law is worth its costs (in terms of better resource alloca-
tion) is rarely susceptible to empirical proof. ... It is precisely
the province of good government to make guesses as to what
laws are likely to be worth their costs. Hopefully it will use what
empirical information is available and seek to develop empirical
information which is not currently available (how much infor-
mation is worth its costs is also a question, however). But there
is no reason to assume that in the absence of conclusive infor-
mation no government action is better than some action."l7
Please get his argument clear in your mind: welfare econom-
ics is essentially an empirical science, except that empiricism
cannot really solve the issues of welfare economics, so the State
will have to decide what is the appropriate allocation of re-
sources, but economists nevertheless hope that the bureaucrats
will use empiricism as the means of finding solutions to the
specific allocation problems, though only an economically effi-
cient quantity and quality of empiricism should be purchased.
In any case, the State's decision will necessarily be based pri-
marily on guesswork. If this explanation resembles a walk
through a hall of mirrors, it is because it is a hall of mirrors.
Yet virtually all essays in welfare economics are little more than
16. Iw.
17. Ibid., pp. 69-70.
guided tours into (but never out of) this conceptual hall of
mirrors.
The allocation problem of welfare economics cannot be
solved by humanist economics, for the economists are overcome
by a series of antinomies: the subjective-objective dualism, the
individual-society dualism, the problem of fixed law and the
endless flux of circumstances, and the overwhelming and unan-
swered problem of interpersonal comparisons of subjective
utility. It is all premised on this formula: dialectics plus intuition
equals cost-effective justice. This formula does not produce any-
thing except additional scholarly articles for professors' vitae -
in short, negative social returns.
Third, and far more important for social analysis, there
would be a sense of outrage among the victims of the polluting
factory if there were no State-enforced liability rules. The initial
reaction of anyone of the victims, if he knows that the civil law
does not protect his ownership rights automatically, may be to
blow up the factory or murder its owner. The multiplication of
acts of violence would be assured under such a non-liability
legal order. The issue of economic efficiency therefore cannot be separ-
ated from the issue ofjudicial equity. This is what Chicago School
economists and legal theorists never show any signs of having
understood. When righteous men are thwarted in their cause
by seekers of local "efficiency" who care nothing about the
ethics of the solution, there will be serious social consequences.
To discuss the efficiency of any given transaction without also
discussing the equity of it is to begin to deliver the society into
the hands of socialist revolutionaries. Or, to put it in language
more familiar to Chicago School economists, penalizing righteous-
ness in the name of economic efficiency is not a zero-cost decision. Any
approach to economics that ignores righteousness and justice as
valid economic factors is a trip into the hall of mirrors. Yet this
is almost universally the assumption of all schools of modern
economics.
Micro-Efficiency and Macro-Revolution
It is not possible to discover an economically efficient solu-
tion to just one transaction. We cannot be efficient in just one
thing. The question of efficiency is not simply a microeconomic
issue; it is also macroeconomic. We cannot discover an efficient
solution to any economic problem that does not in some way
affect the whole social order. In short, we cannot do just one thing
efficiently. We need to heed the warning of biologist Garrett
Hardin: "The dream of the philosopher's stone is old and well
known, and has its counterparts in the ideas of skeleton keys
and panaceas. . .. We now look askance at anyone who sets
out to find a philosopher's stone. The mythology of our time is
built more around the reciprocal dream - the dream of a high-
ly specific agent which will do only one thing. ... The moral of
the myth can be put in various ways. One: Wishing won't make
it so. Two: Every change has its price. Three (and this one I
like best): We can never do merely one thing."18
The system ofjustice that governs any social order is itself a
net producer or reducer of both macro-efficiency and micro-
efficiency. Equity can never be segregated from efficiency. If our
judges' supposedly economically efficient decisions at the micro
level call into question the moral integrity of the prevailing
legal order, we have not yet reached an efficient solution to our
microeconomic problem. This is why it is astonishing to find
economist and Talmudist Aaron Levine siding with Coase:
"While the principle of equity is promoted by the selection of
appropriate liability rules, economic efficiency is realized when
the negative externality is eliminated by the least-cost method.
Hence, should it be less costly to avoid crop damage by growing
smoke-resistant wheat than by installing a smoke-control device,
the former method should be adopted. Whether the farmer or
18. Garrett Hardin, "The Cybernetics of Competition: A Biologist's View of
Society," in Helmut Schoeck and James W. Wiggins (oos.), Central Planning and
Mercantilism (Princeton, New Jersey: Van Nostrand, 1964), p. 84.
the factory-owner should bear the additional expense of elimi-
nating the negative externality is entirely irrelevant as far as the
efficiency question is concerned.,,19 Charge the farmers for the
cost of the factory's smoke abatement, and you have violated
the principle of justice that governs Exodus 22:5-6. There will
eventually be negative repercussions, whether economists be-
lieve in God or not.
Conclusion
By means of a logically rigorous intellectual defense of the
free market's process of allocating access to property, R. H.
Coase has presented a case against the necessity of the State's
imposing restraints on those who initiate acts that inflict dam-
age on other people. While his discussion centers on damage to
property, the legal issue is not the rights of property, but rather
the legal right of an individual to exclude others from using his
property. I wish Coase would write an article on marriage vows
and adultery in terms of the ethical and legal standards he sets
forth in "The Problem of Social Cost." He should also add an
appendix on rape.
Certified economists are all too often certifiable idiots. They
are revolutionaries who toss equations rather than bombs. The
reductionism of economic logic, even without the equations, has
become so great that it has just about eliminated the real-world
relevance of the academic discipline of economics, especially its
academic journals. That which is obvious escapes these people.
They speak of a world of zero transaction costs and zero rules
establishing legal liability as if it would not be a world of tur-
moil, unpredictability, and violence. It is the establishment of
liability rules that makes civil order possible. Social order is
clearly too important a matter to be left in the hands of econo-
mists, even technically rigorous Chicago School economists.
19. Aaron Levine, Free Enterprise andJewish Law: Aspects ofJewish Business Ethics
(New York.: Ktav Publishing House, Yeshiva University Press, 1980), p. 59.
4
ROTHBARD'S CHALLENGE TO COASE
Often a new paradigm emerges, at least in embryo, before a crisis has
developed far or has been explicitly recognized.
Thomas KuhnI
One economist who has seen at least some of the implica-
tions of Coase's position is Murray Rothbard. Rothbard very
early recognized the truth of Robbins' refutation of Pigou,
namely, that there can be no scientifically valid interpersonal
comparisons of subjective utility.2 He has written a critique of
the Coase theorem which underscores some of the points I
raised in the original draft of this study before I discovered
Rothbard's 1982 essay. But he goes to the full logical conclusion
of the subjectivist school, namely, that there can be no such thing
as social cost - not simply that economists cannot measure it, but
that it does not exist as a category of economics.
3
He discusses
1. Thomas Kuhn, The Strncture of Scientific Revolutions (Chicago: University of
2. Murray N. Rothbard, "Toward a Reconstruction of Utility and Welfare
Economics," in Mary Sennholz (ed.), On Freedom and Free Enterprise: Essays in Honor
of Ludwig von Mises (Princeton, New Jersey: Van Nostrand, 1956). This has been
reprinted by Liberty Press, Indianapolis, Indiana.
3. The Christian economist must reject this thesis. There are indeed social costs
49 Rothbard's Challenge to Coase
the case of the farmer whose orchard is burned by sparks emit-
ted by a passing train. His analysis focuses on the farmer's
subjective costs that are imposed by the railroad's aggression.
Should the State solve this dispute by forcing the railroad to
pay the farmer the market value of the lost trees?
There are many problems with this [Coase's] theory. First,
income and wealth are important to the parties involved, although
they might not be to uninvolved economists. It makes a great
deal of difference to both of them who has to pay whom. Second,
this thesis works only if we deliberately ignore psychological
factors. Costs are not only monetary. The farmer might well have
an attachment to the orchard far beyond the monetary damage.
Therefore, the orchard might be worth far more to him than the
$100,000 in damages....
The love of the farmer for his orchard is part of a larger
difficulty for the Coase-Demsetz doctrine: Costs are purely sub-
jective and not measurable in monetary terms. Coase and Dem-
setz have a proviso in their indifference thesis that all "transac-
tion costs" be zero. If they are not, then they advocate allocating
the property rights to whichever route entails minimum social
transaction costs. But once we understand that costs are subjec-
tive to each individual and therefore unmeasurable, we see that
costs cannot be added up. But if all costs, including transaction
costs, cannot be added, then there is no such thing as "social
transaction costs," and they cannot be compared....
Another serious problem with the Coase-Demsetz approach is
that pretending to be value-free, they in reality import the ethi-
cal norm of "efficiency," and assert that property rights should
be assigned on the basis of such efficiency. But even if the con-
and social benefits. This is one reason why the Bible can and does specify certain
social policies. They are beneficial for the covenanted community. But Rothbard's
logic is correct: in terms of the presuppositions of modern, subjectivist economics,
there is no way to add up subjective costs or benefits. In fact, consistent reasoning
leads us to conclude further that this conclusion applies to any attempt by economists
scientifically to measure intrapersonal subjective utilities. Since actions and evaluations
take place over time, economists would have to construct an "index number of per-
sonal satisfaction" - an impossibility, given the premises of subjective utility.
cept of social efficiency were meaningful, they don't answer the
questions of why efficiency should be the overriding consider-
ation in establishing legal principles or why externalities should
be internalized above all other considerations.
4
In an earlier essay, Rothbard presents perhaps the most
comprehensive challenge to the whole economics profession
that has ever been written. The reason why I quote him at
length is that he is a very clear writer, and he is willing to fol-
low the logic of subjectivist economics to great lengths - not to
a biblical reconciliation of objective and subjective value, but at
least to the far extremes of subjectivism. In a remarkable essay,
"The Myth of Efficiency," Rothbard rejects not only social costs
but the idea of efficiency:
... there are several layers of grave fallacy involved in the very
concept of efficiency as applied to social institutions or poli-
cies: (1) the problem is not only in specifying ends but also in
deciding whose ends are to be pursued; (2) individual ends are
bound to conflict, and therefore any additive concept of social
efficiency is meaningless; and (3) even each individual's actions
cannot be assumed to be "efficient"; indeed, they undoubtedly
will not be. Hence, efficiency is an erroneous concept even when
applied to each individual's actions directed toward his ends; it
is a fortiori a meaningless concept when it includes more than
one individual, let alone an entire society.
Let us take a given individual. Since his own ends are clearly
given and he acts to pursue them, surely at least his actions can
be considered efficient? But no, they may not, for in order for
him to act efficiently, he would have to possess perfect knowl-
edge - perfect knowledge of the best technology, of future ac-
tions and reactions by other people, and of future natural events.
But since no one can ever have perfect knowledge of the future,
4. Murray N. Rothbard, "Law, Property Rights, and Air Pollution," Galo Journal,
II (Spring 1982), pp. 58-59.
Rothbard's Challenge to Coase
no one's action can be called "efficient:' We live in a world of
uncertainty. Efficiency is therefore a chimera.
Put another way, action is a learning process. As the individ-
ual acts to achieve his ends, he learns and becomes more profi-
cient about how to pursue them. But in that case, of course, his
actions cannot have been efficient from the start - or even from
the end - of his actions, since perfect knowledge is never
achieved, and there is always more to learn.
Moreover, the individual's ends are not really given, for there
is no reason to assume that they are set in concrete for all time.
As the individual learns more about the world, about nature and
about other people, his values and goals are bound to change.
The individual's ends will change as he learns from other peo-
ple; they may also change out of sheer caprice. But if ends
change in the course of an action, the concept of efficiency -
which can only be defined as the best combination of means in
pursuit of given ends - again becomes meaningless.
5
51
Two comments are in order. First, we can perceive the whole
corpus of economics steadily slipping through our fingers. If
the question of efficiency is meaningless, what have economists
been arguing about over the last three centuries? An illusion?
The answer must be yes, if we hold to a rigorously subjectivist
epistemology. "Not only is 'efficiency' a myth, then, but so too
is any concept of social or additive cost, or even an objectively
determinable cost for each individual. But if cost is individual,
ephemeral, and purely subjective, then it follows that no policy
conclusions, including conclusions about law, can be derived
from or even make use of such a concept. There can be no
valid or meaningful cost-benefit analysis of political or legal
decisions or institutions."6 Rothbard has shown the intellectual
courage to affirm the validity of the implications that Roy Har-
5. Murray N. Rothbard, "Comment: The Myth of Efficiency," in Mario J. Rizzo
(00.), Time, Uncertainty, and Disequilibrium (Lexington, Massachusetts: Lexington
Books, 1979), p. 90.
6. Ibid., p. 94.
rod used to frighten Lionel Robbins away from his own denial
of the possibility of making interpersonal comparisons of sub-
jective utility. He denies the possibility of policy-making based
on economIcs.
The Problem of Exhaustive Knowledge
Second, we discover in Rothbard's arguments against the
concept of efficiency an argument based on the impossibility of
using a concept which is only meaningful in an imaginary
changeless world. This is a variation of an antinomy (logical
contradiction) of humanism which Cornelius Van Til pointed to
in several contexts, namely, that for the anti-theist, it is neces-
sary to know everything exhaustively in order to know anything
specifically. The heart of the problem, Van Til says, is that there
is no way for the anti-theist to integrate his timeless model of reality to
the ceaseless flux of historical change.
In contrast to the humanists, Van Til argues, Christians have
God's revelation of Himself and His creation to guide them in
making sense of this world, and "it is only by stressing the
comprehensiveness and the inexhaustible character of the idea
of revelation that the process of learning can have meaning and
history have genuine significance. If man is made the final
reference point in predication, knowledge cannot get under
way, and if it could get under way it could not move forward.
That is to say, in all non-Christian forms of epistemology there
is first the idea that to be understood a fact must be understood
exhaustively. It must be reducible to a part of a system of time-
less logic. But man himself and the facts of his experience are
subject to change. How is he ever to find within himself an a
priori resting point? He himself is on the move.... Every
effort of man to find one spot that he can exhaustively under-
stand either in the world of fact about him or in the world of
experience within, is doomed to failure. If we do not with
Calvin presuppose the self-contained God back of the self-con-
Rothbard's Challenge to Coase 53
scious act of the knowing mind of man, we are doomed to be
lost in an endless and bottomless flux.'"
The economist faces this problem continually; it cannot be
overcome logically. Because the Austrian School of economics
focuses above all on two fundamental questions - subjective
knowledge (e.g., valuations) and purposeful human action (e.g.,
the market process over time) - "Austrians" have devoted more
space than most economists to discussions of the interrelations
between historical change and economic knowledge. Members
of the Austrian School understand that the model used to un-
dergird all modern economic theory, namely, the general equil-
ibrium model, hypothesizes a world of perfect foreknowledge,
and therefore zero uncertainty, a world in which human action
cannot even be conceived.
8
Mario J. Rizzo says that "general
equilibrium exists in the mind of the economist and not in the
real world."g Rothbard agrees: "... not only has it never exist-
ed, and is not an operational concept, but also it could not
conceivably exist. For we cannot really conceive of a world
where every person has perfect foresight, and where no data
ever change...."10
This raises a crucial problem for the economist: the problem
of objective cost. Buchanan summarizes this problem: "One of
the central confusions leading to the false objectification of costs
has been the extension of the perfect knowledge assumption of
competitive equilibrium theory to the analysis of nonequilib-
rium choices, whether made in a market or nonmarket process.
7. Cornelius Van Til, An Introduction to Systematic Theology, vol. V of In Defense of
Biblical Christianity (Phillipsburg, New Jersey: Presbyterian & Reformed, 1978),
pp. 166-67.
8. Mises, Human Action (3rd ed.; Chicago: Regnery, 1966), p.248. For my
comments on Mises, see Gary North, The Dominion Covenant: Genesis (2nd ed; Tyler,
Texas: Institute for Christian Economics, 1987), p. 352.
9. Mario J. Rizzo, "Uncertainty, Subjectivity, and the Economic Analysis of the
Law," in Rizzo (ed.), Time, Uncertainty, p. 82.
10. Ibid., p. 93. Cf. Buchanan, Cost and Choice: An Inquiry in Economic Theory
(Chicago: University of Chicago Press, 1969), p. 98.
Genuine choice is confronted only in a world of uncertainty,
and, of course, all economic choices are made in this con-
text."ll Take away equilibrium - from men's thinking, that is;
it never has existed in the real world - and you thereby elimi-
nate the economist's concept of objective cost. Eliminate the
concept of objective cost, and you eliminate the possibility of
scientifically valid policy-making by economists. Eliminate the
concept of objective cost, and you also eliminate that trusty
ideological weapon of all free market economists: the idea of
the objective efficiency of the free market.
Efficiency for Whose Ends?
Here is the problem Rothbard is struggling with: How can
we discuss the question of efficiency - the coherence of plan-
ning and action - in a context of change, both with respect to a
man's plans and the environment which he attempts to change
and yet also must respond to. Rothbard wants to believe that he
can appeal to what he calls "proficiency" in learning, but his
critique of efficiency applies equally well to proficiency. Why is
human action a learning process? Why does anything we
learned a decade, a year, or a moment ago still apply in the
now-changed world of the present? Humanists have no answer
to this fundamental question, at least none which is consistent
with their epistemology of autonomous man.
Rothbard argues correctly that "efficiency only makes sense
in regard to people's ends, and individuals' ends differ, clash,
and conflict. The central question of politics then be-
comes: whose ends shall rule?"12 He attacks modern economics
because it is based on utilitarianism - "the greatest good for the
greatest number" - a system of ethics which assumes that it is
possible to make interpersonal comparisons of subjective utility.
Utilitarianism ultimately asserts that there is a universal common
11. Buchanan, Cost and Choice, p. 98; cr. pp. 49-50.
12. Rothbard, "Comment," Time, Uncertainty, p. 91.
ethical system and a universal hierarchy of values, for if there were
not, it would be impossible for social planners to devise and
enforce social policies. "For utilitarianism holds that everyone's
ends are really the same, and that therefore all social conflict is
merely technical and pragmatic, and can be resolved once the
appropriate means for the common ends are discovered and
adopted. It is the myth of the common universal end that al-
lows economists to believe that they can 'scientifically' and in a
supposedly value-free manner prescribe what political policies
should be adopted. By taking this alleged common universal
end as an unquestioned given, the economist allows himself the
delusion that he is not at all a moralist but only a strictly value-
free and professional technician."13
Rothbard gives an example of the problem of social effi-
ciency. What if one group in society wishes to exterminate all
members of a rival group? "In these cases of conflicting ends,
furthermore, one group's 'efficiency' becomes another group's
detriment. So that the advocates of a program - whether of
compulsory uniformity or of slaughtering a defined social
group - would want their proposals carried out as efficiently as
possible; whereas, on the other hand, the oppressed group
would hope for as inefficient a pursuit of the hated goal as
possible. Efficiency, as Rizzo points out, can only be meaningful
relative to a given goal of the acting individual. But if ends
clash, the opposing group will favor maximum inefficiency in
pursuit of the disliked goal. Efficiency, therefore, can never
serve as a utilitarian touchstone for law or public policy."14
Rothbard's conclusion is extremely important for a study of
Christian economics. By systematically destroying the epistem-
ological foundation for efficiency as a concept of subjectivist
economics, he is then faced with a major question: What is the
proper foundation for social policy? As an anarchist, he does
13. Idem.
14. Ibid., pp. 91-92.
not believe in social policy, meaning a State-enforced policy. He
wants the market's forces to arbitrate in deciding whose plans
become dominant at any point in time. But even these plans
cannot be based on questions of efficiency, as he well knows. He
then calls for a restructuring of economic thought - a reforma-
tion based on ethics.
I conclude that we cannot decide on public policy, tort law,
rights, or liabilities on the basis of efficiencies or minimizing of
costs. But if not costs or efficiency, then what? The answer is that
only ethical principles can serve as criteria for our decisions. Effici-
ency can never serve as the basis for ethics; on the contrary,
ethics must be the guide and touchstone for any consideration of
efficiency. Ethics is the primary....
One group of people will inevitably balk at our conclusion; I
speak, of course, of the economists. For in this area economists
have been long engaged in what George Stigler, in another
context, has called "intellectual imperialism."15 Economists will
have to get used to the idea that not all of life can be encom-
passed by our own discipline. A painful lesson no doubt, but
compensated by the knowledge that it may be good for our souls
to realize our own limits - and, just perhaps, to learn about
ethics and about justice. 16
This represents a major break from contemporary econom-
ics, even from Austrian School economics. Rothbard is no 100-
15. Rothbard attributes the phrase to George Stigler, but Kenneth Boulding is
better known for its use, by which he means "an attempt on the part of economics to
take over all the other social sciences." Boulding, "Economics As A Moral Science,"
American Ecorwmic Review, LIX (March 1969), p. 8.
16. Ibid., p. 95. Rothbard is an advocate of a universal ethics based on natural
rights. See For a New Liberty: The Libertarian Manifesto (rev. ed.; New York: Collier,
1978), pp. 15, 26-28, 134, 239. Not all "Austrians" share his confidence in natural
rights and natural law as the basis of a universal ethics, as John Eggar points out:
"Comment: Efficiency Is Not a Substitute for Ethics," in Rizzo (ed.), Time, Uncertainty,
p. 119. For critiques of natural law doctrines from a biblical viewpoint, see the essays
by John Robbins, Rex Downie, and Archie Jones inJournal of Christian Reconstruction,
V (Summer 1978): "Symposium on Politics."
ger willing to affirm, as Mises the utilitarian affirmed, that
"when the superior efficiency of economic freedom could no
longer be questioned, social philosophy entered the scene and
demolished the ideology of the status system."l? The debate
over the free market is over ethics, not economic efficiency. IS
Methodology: Ethics vs. Efficiency
Rothbard's straightforward abandonment of the concept of
efficiency, and his call to economists to examine ethics as the
source of their policy judgments, are significant intellectual
developments. They constitute an admission that there is some-
thing dangerously wrong with the economists' reliance on the
rational model of equilibrium. If a methodology based on the
idea of economic equilibrium cannot be relied upon to solve
questions of economic efficiency, then in what way can it safely
be used by economists? Rothbard is calling into question the
most important intellectual and technical tool that the econo-
mist has at his disposal, the "ideal type" of the perfectly com-
petitive economy.I9 Challenge this, and you challenge the epis-
temological foundation of modern economic science.
17. Mises, The Ultimate Foundation ofEconomic Science (Princeton, NewJersey: Van
Nostrand, 1962), p. 109.
18. F. A. Harper told me that he had pressed Mises to answer this question: "If
the socialist economy were more efficient than the free market, would you favor
socialism?" Mises replied: "But it isn't more efficient." Harper repeated the question,
and Mises repeated the answer. Harper said that Mises' utilitarian defense of the free
market made him blind to the ethical issue between socialism and the free market
economy, which Harper regarded as the fundamental issue.
19. Perhaps the most influential explanation of the use of "ideal types" or
hypothetical abstract models in the social sciences was offered by Max Weber. See
Weber's book, The Methodology of the Social Sciences, translated and edited by Edward
A. Shils and Henry A. Finch (New York: Free Press, 1949), pp. 43-45, 87-105. See
also Thomas Burger, Max Weber's Theory of Concept Formation: History, Laws and Ideal
'IYpes (Durham, North Carolina: Duke University Press, 1976); Rolf E. Rogers, Max
Weber's Ideal Type Theory (New York: Philosophical Library, 1969); Julien Freund, The
Sociology ofMax ~ b e r (New York: Pantheon, 1968), pp. 59-70; Raymond Aron, "The
Logic of the Social Sciences," in Denis Wrong (ed.), Max Weber (Englewood Cliffs,
NewJersey: Prentice-Hall, 1970), pp. 80-89.
Yet it must be challenged. More than this: it must be scrapped.
The search for a timeless, rational mental construct as the basis
of a science of human action is fruitless. Even the great Mises
was partially sidetracked by this quest. What confidence can we
legitimately have in an explanation of market processes which
argues that as entrepreneurship becomes successful, it "tends
toward" the creation of a world in which human action and
human choice is impossible, a world of automatons rather than
people? Yet this is the explanatory model used by Mises (and
almost all other economists). As he says in Human Action con-
cerning his theoretical construct, the Evenly Rotating Economy:
"Action is change, and change is the temporal sequence. But in
the evenly rotating economy change and succession of events
are eliminated. Action is to make choices and to cope with an
uncertain future. But in the evenly rotating economy there is
no choosing and the future is not uncertain as it does not differ
from the present known state. Such a rigid system is not peo-
pled with living men making choices and liable to error; it is a
world of soulless unthinking automatons; it is not a human
society, it is an ant hi11."20 Nevertheless, he states flatly: "The
theorems implied in the notion of the plain state of rest are
valid with regard to all transactions without exception."21 For
the modern economist, all human action tends toward a final
state in which human beings become omniscient and therefore
take on one of the attributes of God.
22
The problem is, their
view of God is that He could not possibly act if He existed. He
would be a "rule-following automaton,"23 because "A perfect
being would not act."24
20. Mises, Human Action, p. 248.
21. Ibid., p. 245.
22. Mises writes: "No matter whether this thirsting after omniscience can ever be
fully gratified or not, man will not cease to strive after it passionately." Mises, Ultimate
Foundation, p. 120.
24. Mises, Epistemological Problems of Economics (Princeton, New Jersey: Van
Timeless Metaphysical Models
Mises relies on this limiting concept of a hypothetical econo-
my filled with soulless people in order to explain the operations
of real-world market forces. "This final state of rest is an imagi-
nary construction, not a description of reality. For the final
state of rest will never be attained. New disturbing factors will
emerge before it will be realized. What makes it necessary to
take recourse to this imaginary construction is the fact that the
market at every instant is moving toward a final state of
rest.,,25 He calls this movement toward (or "tendency toward")
a final state of rest a fact. But this "fact" is precisely what must
be demonstrated.
26
It is the economists' version of the familiar
pre-Socratic contradiction between Parmenides' changeless and
timeless logic and Heraclitus' ceaseless historical flow. These
two worlds cannot be shown to be connected; nevertheless, they
are correlative in the thinking of humanistic scholars.
To explain this intellectual dilemma, Van Til uses the de-
lightful analogy of someone who is trying to put together a
string of beads, but the string is infinitely long, and the beads
have no holes. The imaginary world of timeless logic (Van Til's
"string") which cannot possibly exist serves as the limiting concept
(to use Kant's terminology for the "noumenal"),27 or limiting
notion (to use Mises' term)28 for our understanding of the
world which does exist - the world of ceaseless flux (Van Til's
"beads"). This world of timeless logic is, in short, a logical back-
drop which cannot ever exist in the real world - and which
Nostrand, 1960), p. 24. Cf. Mises, Ultimate Foundation, p. 3.
25. Idem.
26. The problem Mises is dealing with is the problem of analyzing change in
terms of fixed mental categories. "There is no means of studying the complex
phenomena of action other than first to abstract from change altogether, then to
introduce an isolated factor provoking change, and ultimately to analyze its effects
under the assumption that other things remain equal." Mises, Human Action, p. 248.
27. Immanuel Kant, Critique of Pure Reason, translated by Norman Kemp Smith
(New York: St. Martin's, [1929] 1965), B311, p. 272.
28. Mises, Human Action, p. 249.
really cannot even be mentally conceived
29
- which is used to
explain the world inhabited by men.
Nevertheless, with absolute confidence (even "apodictic
certainty," one of Mises' favorite terms), Mises proclaims that
"These insoluble contradictions, however, do not affect the
service which this imaginary construction renders...."30 Or
even more forcefully: "Even imaginary constructions which are
inconceivable, self-contradictory, or unrealizable can render
useful, even indispensable services in the comprehension of
reality, provided the economist knows how to use them proper-
ly."31 That word, "provided," covers a multitude of epistemol-
ogical sins. So does the word "properly."
Anyone who has ever tried to read an article in such journals
as Econometrica and The Review of Economics and Statistics knows
how rarified economic logic can become.
32
It reminds me of
what little I know about the formal academic debates carried on
by the late medieval scholastics. The number of angels dancing
on the point of a needle is a down-to-earth problem compared
to stochastic analysis applied to a world of perfect foreknowl-
edge. The sophistication of modern econometric analysis is
29. How can we imagine a world in which every actor has perfect foreknow-
ledge? Try to explain the meaning of human choice in a world in which everyone
knows in advance precisely what the others will inevitably do in the future. We may
take such a world on faith; we cannot explain it.
30. Ibid., p. 248. He writes: "The method ofimaginary constructions is indispens-
able for praxeology [the science of human action -- G.N.]; it is the only method of
praxeological and economic inquiry. It is, to be sure, a method difficult to handle
because it can easily result in fallaCious syllogisms. It leads along a sharp edge; on
both sides yawns the chasm of absurdity and nonsense. Only merciless self-criticism
can prevent a man from falling headlong into these abysmal depths." Ibid., p. 237.
Question: Self-criticism in terms of what truth, or by what standard? For a critique
of this position, see North, Dominion Covenant: Genesis, pp. 352-53.
31. Mises, ibid., p. 236.
32. I do not have in mind merely the writings of Nobel Prize-winning economist
Gerard Debreu, which do not pretend to deal with the real world. I have in mind
investigations into the operation of real-world institutions, such as William M. Lan-
des, "An Economic Analysis of the Courts," Journal of Law & Economics, XIV (April
1971), pp. 61-107.
matched ("correlation of at least .9") only by the irrelevance of its
conclusions.
Conclusion
The dilemma faced by modern economists is to explain the
time-bound, uncertainty-bound processes of the market in
terms of timeless logical categories ("models"). They try to ex-
plain change in terms of fixed laws, time in terms of timeless-
ness, uncertainty in terms of omniscience (i.e., equilibrium
conditions). They need to show how the concept of efficiency
applies to (l) objective, real-world decisions of men and (2)
subjectivist economic theory. They need to show how policy-
making can be abstracted from both ethics and the concept of
objective value. They need to show how social cost is a legiti-
mate extension of the idea of subjective cost. They need to
show how expected costs can be linked to retrospective costs,
both individual and social.
Economists have long assumed not only that these epistem-
ological problems can somehow be solved some day in terms of
modern economic theory, but more to the point, that these
problems can safely be ignored until that later day. Economists
have quietly dropped any public discussion of these problems
until that day arrives. But that later day is the equivalent of the
advent of equilibrium: a theoretical limiting concept, not a
target date. Meanwhile, the blessed ones deposit their objective
Nobel Prize checks in the local objective bank accounts. Nice
work if you can get it.
Rothbard has faced this crucial epistemological limit on the
science of economics: "I contend that no advocacy of public
policy, however seemingly 'scientific,' can be value free; none
can escape taking an ethical position. Far better, then, to frame
one's ethics clearly and consciously, instead of smuggling them
in, ad hoc and unanalyzed, as implicit assumptions of one's.
analysis."33 Economic analysis informs us that the reason why
smuggling exists is because of controls that inhibit voluntary ex-
change. In this case, the control is the economics profession's
ban on open discussions of this question: ethics as an inescapable
aspect of policy-making. Rothbard has called attention to the
epistemologically soft underbelly of the economics profession:
the myth of ethical neutrality in economics. This is another
reason why he is not going to win the Nobel Prize.
34
33. Rothbard, "Introduction to the French Edition of Ethics of Liberty," Journal
of Libertarian Studies, X (Fall 1991), p. 14.
34. Gary North, "Why Murray Rothbard Will Never Win the Nobel Prize!"
Man, Economy, and Liberty: Essays in Honor of Murray N. Rothbard, edited by Walter
Block and Llewellyn H. Rockwell, Jr. (Auburn, Alabama: Ludwig von Mises Insti-
tute, 1988), ch. 8.
5
"WEIGHING UP THE GAINS AND LOSSES"
Almost always the men who achieve these fundamental inventions of
a new paradigm have been either very young or very new to the field
whose paradigm they change. And perhaps that point need not have been
made explicit, for obviously these are the men who, being little committed
by prior practice to the traditional rules of nonnal science, are particu-
larly likely to see that those rules no longer define a playable game and
to conceive another set that can replace them.
Thomas Kuhn
1
Coase's theorem deliberately ignores the ethical question of
private property rights and the losses to those whose rights are
violated. "It is all a question of weighing up the gains that
would accrue from eliminating these harmful effects against the
gains that accrue from allowing them to continue.,,2 But here
is the real "problem of social costs": the economist, as a scientist, has
no way to "weigh up" economic gains and losses.
3
Here is the root of
the epistemological crisis of modern economics.
3. Gary North, The Dominion Covenant: Genesis (2nd ed; Tyler, Texas: Institute for
Christian Economics, 1987), ch. 4.
Coase and all of his followers go on blithely as if all this talk
about tallying up costs and benefits - social or individual- has
any epistemologically valid theoretical meaning for a method-
ological individualist, let alone any scientific application. He
writes: "The problem which we face in dealing with actions
which have harmful effects is not simply one of restraining
those responsible for them. What has to be decided is whether
the gain from preventing the harm is greater than the loss
which would be suffered elsewhere as a result of stopping the
action which produces the harm."4 But economists cannot measure
social costs and benefits, according to the logic of modern economics,
since costs and benefits are exclusively subjective categories.
Humanistic economists go about their business as if "equilib-
rium analysis" were anything more than a teaching device, and
very often a misleading one.
5
The assumptions of equilibrium
analysis deny the possibility of human action in a world in
which these equilibrium conditions exist. Why? Because there
is perfect knowledge for market participants in such a universe,
and therefore neither profits nor losses. (Yet even under equi-
librium, there would be transaction costs. There are no free
lunches in the land of equilibrium; it is just that everyone
knows exactly how much lunch will cost.) This is a world of au-
tomatons, not humans, as Mises wrote. Yet all of the "rigorously
scientific" discussions of economic efficiency and optimal distri-
bution are based on the trans-historical model of equilibrium.
Peter Lewin has seen this fact more clearly than most econo-
mists have: "The other important assumption underlying the
efficiency approach is the absence of significant distortions
elsewhere in the economy. The calculation of social costs and
5. Debreau's mathematical analysis of free market equilibrium may have won
him the 1983 Nobel Prize in economics, but it tells us little about how the real world
of supply and demand actually works. Gerard Debreau, Theory of Price: An Axiomatic
Analysis of Equilibrium (New Haven, Connecticut: Yale University Press, 1959). What
is needed are defenses based on real-world categories.
"Weighing Up the Gains and Losses" 65
benefits is profoundly affected if this assumption is violated. In
a world of distortions, where prices are not general equilibrium
competitive prices that reflect marginal costs, the imposition of
a Pigouvian tax or a liability that would achieve efficiency if
distortions were absent may reduce efficiency.... In more gen-
eral terms, outside of equilibrium there is no way to know if
any move is efficiency-enhancing or not."s He goes so far as to
say - quite accurately with respect to a methodology devoid of
the concept of God, revelation, and absolute objective values -
that "the notion of efficiency makes little sense outside of gener-
al equilibrium.'"
Coase is unquestionably correct that "In a world in which
there are costs of rearranging the rights established by the legal
system, the courts, in cases relating to nuisance, are, in effect,
making a decision on the economic problem and determining
how resources are to be employed."s To the extent that Coase's
article helps judges or others to become more aware of this
inescapable reality of economic allocation, it is a useful essay.
But how useful is a rarified academic exercise which overlooks
that most fundamental of economic costs: the cost of suffering a
violation ofjustice? Never forget: he wants to limit his discussion
to costs and benefits, "questions of equity apart."
Optimal Crime and Optimal Punishment
We see the same sort of "add it up" reasoning in a subdivi-
sion of law and economics: crime and punishment. Ever since
Gary S. Becker's pioneering article in 1968, University of Chica-
go-type economists have been analyzing crime and law enforce-
ment in terms of a model that minimizes social losses from
crime. This model treats social costs and optimal social solutions
6. Peter Lewin, "Pollution Externalities: Social Cost and Strict Liability," Cato
Journal, II (Spring 1982), pp. 216-17.
7. Ibid., p. 217.
as if such concepts had scientific validity in a world of subjec-
tivist economic analysis. Please forgive the following; it was
written by an economist:
Optimal policies are defined as those that minimize the social
loss from crime. That loss depends upon the net damage to
victims; the resource costs of discovering, apprehending, and
convicting offenders; and the costs of punishment itself. These
components of the loss, in turn, depend upon the number of
criminal offenders, the probability of apprehending and con-
victing offenders, the size and form of punishments, the potential
legal incomes of offenders, and several other variables. The
optimal supply of criminal offenses - in essence, the amount of
crime - is then determined by selecting values for the probability
of conviction, the penalty, and other variables determined by
society that minimize the social loss from crime. Within this
framework, theorems are derived that relate the optimal proba-
bility of conviction, the optimal punishments, and the optimal
supply of criminal offenses to such factors as the size of the
damages from various types of crimes, changes in the overall
costs of apprehending and convicting offenders, and differences
in the relative responsiveness of offenders to conviction proba-
bilities and to penalties.
9
This all sounds so scientific, but it is all spurious if economics
does not allow the interpersonal comparison of subjective utili-
ties or the aggregating of interpersonal utilities, which it does
not. But sophisticated, intellectually rigorous analyses such as
this certainly do increase the likelihood of academic tenure and
personal career advancement for those who get such things
published - an employment guarantee that some people (myself
included) regard as less than socially optimal.
lO
9. William M. Landes, in Gary S. Becker and William M. Landes (OOs.), Essays in
the Economics of Crime and Punishment (New York: National Bureau of Economic
Research. 1974). p. xiv. Each of the five authors who contributed the book's six
essays was at the time a professor at the University of Chicago.
10. Cf. Robert A. Nisbet, "The Permanent Professors: A Modest Proposal." Public
What the reader should be aware of is that the practitioners
of economics are unhappy with the public's perception of their
trade. On the one hand, the economist as rigorous scientist
cannot do without the concept of equilibrium to build his theo-
ries, and this concept begins with the presupposition of perfect,
zero-cost knowledge. Then the economist attempts to impose
this equilibrium model onto the error-filled real world, "making
appropriate modifications," of course. Problem: the moment
you make any modification, the model disintegrates. At best,
the equilibrium model is useful as a platform for making intu-
itive leaps of faith. Intuitive leaps of faith are inescapable as-
pects of all economic thought, but they are something that
economists prefer not to discuss, even in private.
ll
Becker's Breakthrough
Gary Becker insists that his approach to crime and punish-
ment does not "assume perfect knowledge, lightning-fast calcu-
lation, or any of the other caricatures of economic theory."12
Dr. Becker is self-deceived; this is exactly what all discussions of
socially optimum decision-making must assume. This so-called
caricature is in fact the heart, mind, and soul of modern eco-
nomics as an academic discipline. Without it, there could be no
mathematics or equations in economic analysis, and without
mathematics, one rarely gets into print in the prestigious schol-
arly economics journals.
13
Certainly, Dr. Becker's essay is
made nearly unreadable by page after page of pseudo-scientific
equations, as are most of his other essays. (I have decided to
Interest (Fall 1965); reprinted in Nisbet, Tradition and Revolt: Historical and Sociological
Essays (New York: Random House, 1968), ch. 12.
11. North, "Economics: From Reason to Intuition," in North (ed.), Foundations
of Christian Scholarship (Vallecito, California: Ross House, 1976), ch. 5.
12. Gary S. Becker, "Crime and Punishment: an Economic Approach" (1968), in
Essays in the Economics of Crime and Punishment, p. 9.
13. John Kenneth Galbraith, Economics Peace and Laughter (Boston: Houghton
Mifflin, 1971), ch. 2.
coin a new adjective that describes this pseudo-scientific ap-
proach to economic reasoning: psientific.)
Becker insists that "This essay concentrates almost entirely
on determining optimal policies to combat illegal behavior and
pays little attention to actual policies."14 In this regard, the
essay is representative of virtually the whole field of law and
economics. Becker prefers equations and equilibrium to person-
al responsibility when it comes to suggesting what should be
done about crime. He and his colleagues refuse to honor
Baird's warning: "Since all costs and benefits are subjective, no
government can accurately identify, much less establish, the
optimum quantity of anything."15 Admit this, and 90 percent
of what gets published in the professional academic journals
would have to be rejected by the editors. Where, under such
academically sub-optimal circumstances, would a career econo-
mist publish an essay such as Isaac Ehrlich's representative
example, "Optimal Participation in Illegitimate Market Activi-
ties: A One-Period Uncertainty Model"?l6
Biblical law is the foundation of optimal social and economic
policies - the only foundation that honors God and can there-
fore produce long-term benefits: covenantal blessings. This is
why we need to adhere to the Bible's system of penalties to be
imposed by the civil government; without this, we are flying
blind. We are flying as blind as Gary Becker is when he writes:
''A wise use of fines requires knowledge of marginal gains and
harm and of marginal apprehension and conviction costs; ad-
mittedly, such knowledge is not easily attained."l7 Not easily
attained! In terms of the logic of subjective economics, such
14. Essays in the Economics of Grime and Punishment, p. 44.
15. Charles W. Baird, "The Philosophy and Ideology of Pollution Regulation,"
Galo Journal, II (Spring 1982), p. 303.
16. Actually, this was only a subsection in his influential and equation-filled
article, "Participation in Illegitimate Activities: An Economic Analysis," in Essays in the
Economics of Grime and Punishment.
17. Becker, in ibid., p. 28.
knowledge cannot be attained at all. We cannot make scientific
interpersonal comparisons of subjective utility or disutility.
Professional economists may shudder at the thought of restruc-
turing civil sanctions to make civil law conform more closely to
God's revealed law, but they have nothing to offer in its place
except endless self-deception regarding the scientific possibility
of discovering socially optimal levels of crime and punish-
ment.
IS
Becker's essay does not even consider the possibility of resti-
tution payments by criminals to their victims, but instead focus-
es on the social benefits of fines paid to the State. This is a
remarkable lack of perception on his part, given his position as
a representative of a free market school of thought that pre-
sumably opposes the expansion of the State. What mainly dis-
turbs Becker is that with imprisonment, "some of the payment
'by' offenders would not be received by the rest of society, and
a net social loss would result."I9 He is so concerned with ques-
tions of "net social loss" that he neglects the crucial-question of
the net personal loss suffered by the victim.
20
The word "resti-
tution" does not appear in the index ofEssays in the Economics of
Grime and Punishment. (The book has approximately 170 pages
of equations or parts of equations in its 273 pages, with most of
the remainder devoted to charts, graphs, statistical regression
analysis, briefbibliographies, and the five and a half page index
18. For example, Nobel Prize-winning University of Chicago economist George
Stigler's essay, "The Optimum Enforcement of Laws," ibid, pp. 55-67.
19. Ibid., pp. 24-25.
20. He says that criminal law should deal only with crimes in which victims
cannot be compensated. "Thus an action would be 'criminal' precisely because it
results in uncompensated 'harm' to others." Ibid., p. 33. I have some questions. First,
if someone can serve a prison term or pay a fine to the State, why can't he compen-
sate victims instead? Second, why does Becker refuse to discuss the overwhelming
mcyority of crimes in which there are identifiable victims, preferring instead to fill up
pages with equations? Is he conveniently defining away the problem of crime and
punishment for the vast majority of crimes? Third, why does he feel it necessary to
put quotation marks around criminal and harm? Is it because such language smacks
too much of objective moral norms?
in which the word "restitution" does not appear.)21 Two de-
cades later, Becker is still humming the same old tune: "deter-
rence, not vengeance," fines, not restitution to victims. And he
still has discovered no objective answer to the problem he rais-
es: making the punishment fit the crime: "Obviously, it is hard
to estimate damages for many company crimes and even harder
to determine the probability of conviction."22 Hard? By the
standards of subjective value theory, it is theoretically impossible.
Yet Chicago School economists refuse to admit this in print.
Buchanan is correct in his discussion of the economics of
crime: ". . . any costs which the economist may objectify need
bear little relation to those costs which serve as actual obstacles
to decisions." He is not correct, however, in his next sentence:
"Recognition of this fact need not destroy the usefulness of the
economic analysis."23 Without a scientifically verifiable link
between subjective decision-making and objective fines, the
economist cannot make a coherent case for any outcome other
than judicial chaos. (It should not be surprising that Becker has
argued that the free market would bring economic order even
if all men's decisions were irrational.)24 The economist needs
a ruler, as Thirlby has so accurately identified it. In fact, he
capitalizes it.
25
The economist does indeed need a Ruler, an
"omniscient observer who can read all preference functions," as
Buchanan so professionally describes Him.
26
But economists
21. For an equally arcane academic treatment, see David J. Pyle, The Economics
of Crime and Law Enforcement (New York: St. Martin's, 1983).
22. Gary Becker, "Make the Punishment Fit the Corporate Crime," Business Week
(March 13, 1989).
23. James Buchanan, Cost and Choice: An Inquiry in Economic Theory (Chicago:
University of Chicago Press, 1969), p. 93.
24. Gary Becker, "Irrational Behavior and Economic Theory," Journal ofPolitical
Economy, LXX (Feb. 1962). For my critique of his position, as well as Israel Kirzner's
very different critique, see North, Dominion Covenant, pp. 347-53.
25. Thirlby, "The Ruler," South African Journal of Economics, XIV (Dec. 1946),
reprinted in L.S.E. Essays on Cost (New York: New York University Press, 1981).
have denied His relevance from the beginning of the profes-
sion; economics was the first scientific guild to do so. It was this
self-conscious separation of economics from both theology and
morality that economist William Letwin praises as "the greatest
accomplishment of the seventeenth century.,,27 (It apparently
overshadowed the less significant work of Director of the Mint
Mr. Newton.)
This digression has been necessary in order to demonstrate
what the academic field of economics and law is really all about.
It is all about making scholarly reputations and making prepos-
terous assumptions. The more preposterous the assumptions,
the more scholarly the reputation. And it is all done in the
name of optimality: "The main contribution of this essay, as I
see it, is to demonstrate that optimal policies to combat illegal
behavior are part of an optimal allocation of resources.,,28
The Social Benefits of Criminal Behavior
A unique component of the Becker thesis on criminal behav-
ior is his thesis that the concern of society in prohibiting crimi-
nal behavior ought to be the reduction of net social cost. This is
a very important qualification. In calculating the net cost to
society of any criminal act, Becker insists that we must count as a
positive benefit the gains made by the criminal by committing the crime.
"The net cost or damage to society is simply the difference
between the harm and gain," he writes.
29
How can he say this?
Because of his thesis - the one which undergirds this whole
subdivision of economics - that criminal behavior is no different
from any other profit-seeking behavior. Ethics has no role to play in
distinguishing crime from other profit-seeking activities. "The
approach taken here follows the economists' usual analysis of
27. William Letwin, The Origins of Scientific Economics (Garden City, New York:
Doubleday Anchor, [1963] 1965), p. 159.
28. Becker, "Crime and Punishment," op. cit., p. 45.
29. Ibid., p. 6.
72
THE COASE THEOREM
choice and assumes that a person commits an offense if the
expected utility to him exceeds the utility he could get by using
his time and other resources at other activities. Some persons
become 'criminals,' therefore, not because their basic motivation
differs from that of other persons, but because their benefits
and costs differ.,,30
Notice, first, that he puts the word criminals in quotation
marks, indicating his fear of making an ethical judgment in a
scholarly journal. Second, he hesitates to follow what econo-
mists sometimes call the pure logic of choice.
31
He says that
some persons become criminals "because their benefits and costs
differ" from law-abiding persons. Why not use cost-benefit
analysis to explain the actions of all criminals? Why limit it to
only some? Why bother to distinguish the non-economic motives
of criminals from those of non-criminals? The logic of his argu-
ment is that non-economic motives and personal tastes are
irrelevant for economic analysis; only costs and benefits are
relevant for making predictions regarding people's economic
behavior.
32
Why not follow the logic of the argument? Why
30. Ibid., p. 9.
31. F. A Hayek, "Economics and Knowledge," Economica, IV (1937), reprinted
in Hayek, Individualism and Economic Ortkr (Chicago: University of Chicago Press,
1948), pp. 35, 39,46-47. See also Richard Fuerle, The Pure Logic of Choice (New York:
Vantage, 1986).
32. This is how professional economists assess Becker's argument. Writes Paul H.
Rubin: "Becker essentially argued that criminals are about like anyone else - that is,
they rationally maximize their own self-interest (utility) subject to the constraints
(prices, incomes) that they face in the marketplace and elsewhere. Thus the decision
to become a criminal is in principle no different from the decision to become a
bricklayer or a carpenter, or, indeed, an economist. The individual considers the net
costs and benefits of each alternative and malc.es his decision on this basis. If we then
want to explain changes in criminal behavior over time or space, we examine changes
in these constraints. The basic assumption in this type of research is that tastes are
constant and that changes in behavior tan be explained by changes in prices." But we
all know that tastes do change. This is economically irrelevant, say the economists.
Why? Because economics cannot yet deal with changes in taste. "Tastes are assumed
to be constant because we have absolutely no theory of changes in tastes...." Rubin,
"The Economics of Crime," in Ralph Andreano and John J. Siegfried (eds.), The
Economics of Crime (New York: Wiley, 1980), p. 15.
not conclude in print that there is no theoretically valid eco-
nomic difference between profit-seeking activities and criminal
acts; there are only differences in net social utility? But he does
not go this far. It is almost as if some last remaining trace of
common sense and moral values has kept Dr. Becker from
pursuing the logic of his position.
His followers have not been so reticent: "An individual deci-
sion to commit a crime (or not to commit a crime) is simply an
application of the economist's theory of choice. If the benefits of
the illegal action exceed the costs, the crime is committed, and
it is not if costs exceed benefits. Offenders are not pictured as
'sick' or 'irrational,' but merely as engaging in activities that
yield the most satisfaction, given their available alternatives.,,33
Then what of the warning of God in Proverbs? "All they that
hate me love death" (8:36b). Of course: just redefine suicidal
criminal behavior in terms of the criminal's subjective prefer-
ence for death, assume the existence of subjective ordinal (or
even cardinal) utility in his subjective value preference scale,
and economic analysis still holds! Common sense disappears,
but economic analysis, like the smile of the cheshire cat, re-
mains. (In all honesty, this kind of economic analysis goes back
to the late eighteenth century. Jeremy Bentham used a very
similar approach based on net pleasure or pain. Mercifully, the
academic world had not yet discovered either econometrics or
multivariate regression analysis, so his essays were literate and
coherent.)
Becker was too timid to pursue his remarkable thesis very
far. Let me show you where it leads. What about the net social
cost or net social benefit of murder? He writes that "the cost of
murder is measured by the loss of earnings of victims and
excludes, among other things, the value placed by society on
33. Morgan O. Reynolds, "The Economics of Criminal Activity" (1973), reprinted
in ibid., p. 34.
life itself. .,,34 But this is insufficiently rigorous by the stan-
dards of Chicago School economics. He forgot that the victim's
ability to earn a living also involves costs. The producer must
eat, use public facilities of various kinds, and be a life-long
absorber of resources. So, what Becker really meant to say is
that the cost of murder is the net loss - discounted by the pre-
vailing rate of long-term interest, of course
35
- of the late vic-
tim's lifetime earning potential, minus net lifetime expenditures
(also discounted). This raises a key question in our era of legal-
ized abortion, which may be a preliminary to legalized euthana-
sia (as it has been in the Netherlands): What if the dead victim had
been sick, dying, mentally retarded, or in some other way is a net ab-
sorber of society's scarce economic resources? Must we not conclude
that the murderer has in fact increased the net wealth of soci-
ety? Remember Becker's rule: "society's" estimation of net social
costs or benefits "excludes, among other things, the value
placed by society on life itself." On what economic grounds
could a legislator oppose the concept of selective murder, with
criminal indictments to be handed down in specific cases only
after a retrospective evaluation (by some committee or other) of
net costs and benefits?36 Who is to say? Mter all, as he says,
34. Becker, "Crime and Punishment," p. 9.
35. Richard A. Posner, Economic Analysis ofLaw (Boston: Little, Brown, 1986), pp.
170-81.
36. Becker also fails to mention the value of life to the late victim, which seems
a bit odd, given the fact that Becker also pioneered a subdivision in the economics
profession called human capital: Gary S. Becker, Human Capital (New York: National
Bureau of Economic Research, 1964). Fortunately, Richard Posner has attempted to
rectify this gaping hole in Becker's analysis. He does try to make an objective estima-
tion of the economic value of life to the victim, which he concludes is nearly infinite.
He uses a hypothetical example of rising economic payment that someone would
demand to induce him to get involved in death-producing activities: the more likely
death becomes, the higher the pay demanded. If death is sure, the price demanded
will approach infinity. (Why, then, do men volunteer for suicide missions in war-
time?) This is his surrogate for making a subjective posthumous estimation of life's
monetary value to the late victim: Posner, Economic Analysis of Law, pp. 182-86. He
draws no important conclusions from this analysis, however, and does not include it
in his book's index under "death" or "death," for which there are no entries, or
75 "Weighing Up the Gains and Losses"
"Reasonable men will often differ on the amount of damages or
benefits caused by different activities."37
If all this begins to sound like the work of a madman, this is
only because it is the work of a technically skilled University of
Chicago economist who follows the logic of his position.
38
Bear
in mind that ~ e c k e r ' s essay on crime is regarded by his peers as
a classic in the field, one comparable to (and written with the
same presuppositions as) Coase's essay on social cost. One Euro-
pean economist has called Becker's work truly revolutionary.
Even more: ". . . Gary Becker is classed among the greatest
living American economists.,,39
Pin-Stickers and Their Victims
Becker has returned us to the age-old question of the pin-
sticker and his victim.
40
If a person enjoys sticking pins into
other people, and if other people resent this, what should
society do? Construct a measuring device to record the joy of
the pin-sticker and then compare it to the pain of his victim?
Should society base the decision of whether to identify this act
as a crime in terms of the pin-sticker's pleasure minus his vic-
tim's pain - "net social utility"? And if so, what do we do about
the masochist who enjoys being stuck? (Yes, I know: sticking
under the entries for "murder."
37. Becker, "Crime and Punishment," p. 45.
38. For a brief, intelligent, and methodologically rigorous response to Becker,
see G. Warren Nutter, "On Economism," Journal of Law & Economics, XXII (Oct.
1979), pp. 263-68. It was in response to Becker's methodology that I wrote my
tongue-in-cheek piece, ''A Note on the Opportunity Cost of Marriage," Journal of
Political Economy (April 1968), in which I concluded that male Ph.D-holding scholars
cannot afford t ~ marry women who are not high school drop-outs. Astoundingly,
George Stigler (seemingly straight-faced) replied in a subsequent issue that I had not
dealt with Adam Smith accurately.
39. Henri Lepage, 1bmorrow, Capitalism: The Economics of Economic Freedom (La
Salle, Illinois: Open Court, [1978] 1982), p. 161. The chapter is titled, "The Gary
Becker Revolution."
40. North, Dominion Covenant, pp. 44-45.
him would be a victimless crime, and therefore necessarily
outside conventional economic policy analysis.)
The biblical view of man rests on the presupposition that
there are two kinds of people: covenant-breakers and covenant-
keepers. There is also such a thing as common grace.
41
When
God removes it, people become more consistent with their own
ethical presuppositions. Increasing numbers of covenant-break-
ers turn to crime as an expression of their ethical rebellion
against God. The economics of crime and punishment no doubt
can be discussed in part in terms of criminals' expected costs
and benefits, but equally important, if not more important, is
the psychological link between crime and certain forms of ad-
diction, especially the addiction to illicit thrills and danger.
People'S tastes are not stable, contrary to Chicago School econo-
mists; people can and do develop an addiction to criminal
behavior. They need ever-increasing doses of crime to satisfy
their habit. Thus, to analyze all economic actors in terms of the
pure logic of expected profit and loss is a fundamental error of
modern economic analysis.
Becker disagrees. He wants to consider only people's per-
ceived costs and benefits, risks and rewards, net. The logic of
Becker's position seems to infer the right of a criminal to inflict
damage as heavy as murder so long as he can demonstrate in
court through cost-benefit analysis that the particular murder
produced net social utility. Coase, writing eight years earlier,
was more judicious in his conclusions. He wanted only to assert
the right at some price of an individual to inflict on other people
less permanent forms of damage than murder.
The "Right to Inflict Damage"
Coase considers an example taken from Pigou's Economics of
Welfare. Suppose that it would pay a railroad firm to run a train
41. Gary North, Dominion and Common Grace: The Biblical Basis of Progress (Tyler,
Texas: Institute for Christian Economics, 1987).
faster than normal, thereby throwing off more sparks. (The
example applies to railroads before the era of diesel engines,
but it is still valid as an example.) Suppose also that the sparks
set a fire that burns a farmer's crop. Pigou said that the rail-
road company should reimburse the farmer for the loss of his
crops by paying him the crop's market value. This, it should be
pointed out, is also what Exodus 22:6 says. Coase denies Pigou's
conclusion. "The conclusion that it is desirable that the railway
should be made liable for the damage it causes is wrong."42
Why? Because the economic gains to the total economy, as revealed
by the value of the crops lost vs. the cost of installing spark-
arresters on the engine, or the losses to the railroad company
if the train was not run at all, might be greater by allowing the train
to emit sparks. (Might be, might be, might be: How can anyone
know, given the intellectual tools of modern, subjectivist eco-
nomics?) The judge should consider the monetary value of the
burned crops in relation to the cost of installing a spark-arrest-
er or the monetary losses to the company of running the train
more slowly, and then make a decision as to what each party
owes the other. In other words, he must consider the value of
total production. "This question can be resolved by considering
what would happen to the value of total production if it were
decided to exempt the railway from liability from fire-dam-
age...."43 Coase argues that it might be better for society in
general if the farmer's property rights are ignored, leaving him
free to pay the railroad company sufficient money to install the
spark-arrester. After all, the value of the crop may be greater
than the cost of the spark-arrester.
44
43. Ibid., p. 33.
44. Clearly, the damage inflicted on the crops planted close to the tracks by
numerous farmers could be high. The costs would be high to organize the farmers
together in order to contribute money to finance the installation of the spark arrest-
er. Each farmer would tend to wait for the others to put up the money. Each would
prefer to become a "free rider" in the transaction: paying nothing, but benefitting
from the spark arrester. The payment to the railroad firm probably would not be
What if the farmer had worked for years to build up the soil
or build his family's dream home? This labor was unquestion-
ably a manifestation of the dominion covenant. Perhaps he
dimly understood that his labor to build the house was in a
unique way a moral act under God, meaning his personal con-
formity to God's injunction to subdue the earth to God's glory
(Genesis 1:26-28). The farmer's home is thus not simply a man-
ifestation of his technical competence as a builder; it may also
be a manifestation of his self-conscious fulfillment of God's
dominion covenant. In other words, his house may be in a very
real sense a holy thing - a thing set apart for God by the very act
of constructing it. This is why people are sometimes "irration-
ally" committed to a piece of ground. A spark-emitting train is
threatening his home's existence, meaning the work of his
hands, meaning his dream or vision. Is he entitled to no com-
pensation? Isn't the railway always liable for damages? Further-
more, if the court decides that the railway is liable - and Coase
denies that the court should automatically decide that it is - is
the man's shattered dream worth only monetary compensation
for the market value of his crops? Maybe he resents the fact
that the railway is reducing to mere dollars his right to safety
from fire, and market-determined dollars at that. Shouldn't the
engines be fitted with a spark retarder, by law? Mter all, this is
not an accidental, occasional incident; this is a daily threat of
fire that is a statistically probable event because of the technolo-
gy involved in running the trains. In short, what about the
psychic costs to the victim? Coase's analysis completely ignores
this fundamental issue.
45
made apart from intervention by the civil government to compel all farmers who are
benefitted by the spark arrester to pay their proportional share. The civil govern-
ment eventually must decide who pays whom: the railroad firm paying damages to
the farmers, or the farmers paying "protection money" to the railroad company.
45. This is Walter Block's main criticism: "Coase and Demsetz on Private Proper-
ty Rights," Journal of Libertarian Studies, I, No.2 (1977).
"Coase, Get lVur Cattle Off My Land!" .
Or what about the farmer who sees the cattleman move in
next door? Or the cattleman who sees the sheepherder move in
next door to him? If the other man's animals come roaming
into his garden or into his pasture, isn't the victim entitled to
compensation? What if the "accident" of wandering animals is
not an accident, but a regular way of doing business? Shouldn't
the offender be required to put a fence around the wandering
beasts? Why should the injured party be required by the court
to share the costs of fencing? Are the victim's property rights of
undisturbed ownership not to receive predictable compensation? What
I am arguing, in short, is that the victimized property owner
has the right to announce: "Coase, get your cattle off my land!"
My land: there is greater value to me in my right to enjoy my
land undisturbed than Coase's reductionist economic analysis
indicates. To count the market value of the crops that the cattle
trampled, and then to compare that value to society with the
meat that someone will put on his table, is to reduce the value of
a man's right of undisturbed ownership to zero. Coase's concept of
social costs ignores one of the most valuable assets offered to
men by a free market social order: the right of the owner to deter-
mine who will and who will not have legal access to his property, and
on what terms. To think that monetary compensation for dam-
aged goods at a market price is all that matters to an owner is
ridiculous. Rothbard is correct, and I cite his statement again:
"There are many problems with this theory. First, income and
wealth are important to the parties involved, although they might
not be to uninvolved economists. It makes a great deal of
difference to both of them who has to pay whom. Second, this
thesis works only if we deliberately ignore psychological factors.
Costs are not only monetary. The farmer might well have an
attachment to the orchard far beyond monetary damage..
But then the supposed indifference totally breaks down.,,46
46. Murray N. Rothbard, "Law, Property Rights, and Air Pollution," Galo Journal,
Even more important, there must also be compensation for
the loss of security that is necessarily involved in every willful
violation of another man's property rights. Exodus 22:5 re-
quires that restitution be paid with "the best" of the violator's
field, "and of the best of his own vineyard." To argue, as Coase
does, that as far as society is concerned, it is economically irrele-
vant to the total economic value accruing to society whether the
farmer (victim) builds the fence at his expense or the cattleman
(violator) does so at his expense is to place zero price on the
rights of ownership. When free market economists place zero econom-
ic value on the rights of oumership, they have given away the case for
the free market. This is precisely what Coase and the many aca-
demic "economics of law" specialists have done. They have
preferred the illusion of value-free economics to the ideal of
private property - our legal right to exclude others from using
our property.
Theft as a Factor of Production
Coase explicitly argues that the ability to cause economic injury
is a factor ofproduction. Therefore, the State's decision to deny a
person the right to exercise this ability involves a social cost: the
loss of a factor of production. "If factors of production are
thought of as rights, it becomes easier to understand 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 produc-
tion. 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 exercis-
ing 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
II (Spring 1982), p. 58.
HWeighing up the Gains and Losses" 81
house, to enjoy a view, to have peace and quiet or to breathe
clean air."47 Coase simply ignores the crucial free market con-
cept that the legal right to exclude others from invading your
property is a far more crucial factor of production - the factor of
personal confidence in the honesty and reliability of the civil
government. Without this confidence, the free market will be
steadily reduced to little more than black market operations.
Coase wants us to "have regard for the total effect" of such
uses 'of our so-called capital, namely, the right to pollute the
environment.
48
But "total costs" are precisely what he has de-
liberately chosen to ignore: the right to determine whether or not an-
other person can invade my privacy, wake me up at 2:00 A.M., set fire
to my crops, send his cattle to eat in my fields, or, ultimately, sell tickets
to people to peek through my window at 3:00 A.M. The economic
value of my right to say "Keep your cattle off my land!" - and
my right to demand restitution for the violation of this right -
is simply ignored by Coase and all those economists who take
seriously his economic analysis of social costs. He offers economic
analysis of the right to inflict damage, but he ignores any economic
analysis of the right to deny the damage-producer his so-called right.
More than this: Coase explicitly denies the right ofproperty owners to
have their property defended by predictable law, for he says that any
consideration of the right to demand compensation depends on "circum-
stances. , ~ 9 If the right of collecting compensation is not predic-
table, the right of private property loses its status as a right.
By elevating the "right to inflict damage" to the same level as
the right to demand compensation for a violation of a property
right, Coase has effectively compromised the latter right by
making a potential right out of the ability to inflict damage. The
application of Coase's argument would destroy property rights by at-
tempting to extend the status of property right to a man's ability to
48. Idem.
49. Ibid., p. 21.
damage his neighbor's property. He does not discuss anywhere in
the essay the economic costs to society of compromising the injured
party's right to demand and receive by law economic restitution from the
offending party.
Coase does not even seem to understand the implications of
his own argument. Most astounding of all, his arguments have
been taken seriously by economists who see themselves as de-
fenders of the free market order. Economic reductionism is a
very real threat. The more rigorous the logic, the more the
threat to real-world policy-making, if this rigor is purchased by
the surrender of private property rights, let alone justice.
Transaction Costs at the O.K. Corral
Coase's academic colleague at the University of Chicago,
Nobel Prize-winning economist George Stigler, has extended
the Coase theorem. Coase argues that in the absence of transac-
tion costs, different initial assignments of property rights will
lead to the same economic output. In his authoritative text-
book, The Theory of Price, Stigler takes this thesis one step far-
ther. He concludes that if there is perfect competition, meaning
perfect foreknowledge, market transactions between the pollut-
er and his victim will lead to the production of exactly the same
economic output as would have been produced if one firm had
owned both the source of pollution and its sink.
50
In other
words, the rights of private ownership - the legal right to ex-
clude - and the sense of outrage at an invasion of one's prop-
erty are economically irrelevant. In a world of perfect competi-
tion, amazing things happen. The economic significance of the
theft involved in polluting a neighbor's environment is zero.
51
50. George Stigler, The Theory of Price (3rd ed.; New York: Macmillan, 1966), p.
113.
51. In complete agreement is Warren G. Nutter, "The Coase Theorem on Social
Cost: A Footnote," Journal of Law & Economics, XI (Oct. 1968).
UWeighing up the Gains and Losses" 83
All we need is to reduce transaction costs. That should not
be too difficult. The polluter can pick up a gun, walk over to
his neighbor, put the gun to his head, and force him to deed
over his property. Presto: the "internalization" of pollution
costs! It will not alter economic output one little bit, Stigler's
theory assures us. This surely is a cost-effective way to reduce
transaction costs - unless, of course, one's neighbor also has a
gun. That, of course, is the whole point.
What possible objection can a self-proclaimed ethically neu-
tral economist offer to this sort of wealth-transfer? This is the
question Leff asks in a perceptive critique of the "economics
and law" approach to social theory:
Let us say I am naturally superior to a rich man in taking things,
either by my own strength or by organizing aggregations of
others (call them governments) to do my will. I am not much of
a trader, but I'm one hell of a grabber. That's just the way things
are. Is there any way to criticize my activities except from the
standpoint of taste (or some other normative proposition)? It
would be inefficient to allow violent acquisitions. How can one
know that? All of Posner's arguments about the efficiency-induc-
ing effects of private property assume only that"someone has the
right to use and exclude, not that it be any particular person. If
force, organized or not, were admissible as a method of acquisi-
tion there is no reason to assume that eventual equilibrium
would not be reached, albeit in different hands than it presently
rests. After all, as Posner would be the first to tell you, "force" is
just an expenditure. If a man is "willing" to pay that price, and
the other party is "unwilling" to pay the price of successful coun-
terforce, we have an "efficient" solution. 52
One Nobel Prize-winning economist who does not ignore the
transaction costs of an economic approach to law that elevates
efficiency over all other considerations is James Buchanan. In
52. Arthur Allen Leff, "Economic Analysis ofLaw: Some Realism About Nominal-
ism," Virginia Law Review, LX (1974), p. 454.
a perceptive law review article, he warned the practitioners of
both economics and law that the great benefit which the free
market offers society is not its efficiency or its maximizing of
economic value. What the free market offers is its support for
"institutional alternatives which generate less social tension, less
evasion of postulated standards of conduct, more general ad-
herence to legal norms.,,53 Yet economists and legal theorists
argue that free market economic processes that exist only in an
imaginary zero-cost world can and do offer us a cost-effective
real-world model: just substitute voluntary market exchanges
for enforcement by the State of legal titles. Those who argue
this way are not only utopians, they are intellectual arsonists.
54
This is the mid-1960's social philosophy of "Burn, baby, burn!"
applied not only to the adjacent field but to society itself.
The Social Costs of the Coase Theorem
There may be a journal essay by a free market economist
that has inflicted more damage on the case for economic free-
dom than Coase's "Problem of Social Cost." There may also be
a scholarly essay that has polluted academia's moral environ-
ment favoring market choice more than Coase's has. I cannot
imagine what that essay might be. (Becker's 1968 essay on
"Crime and Punishment: an Economic Approach" comes close,
but it is really only an application of Coase's economic ap-
proach to law.)
Coase can always argue that his right to inflict such moral
damage is merely a factor of academic production. No doubt
this essay advanced his academic reputation after 1960. That is
what the Nobel Committee believed, in any case. But for every
53. Buchanan, "Good Economics - Bad Law," ibid., p. 486.
54. Dahlman is overstating the case against traditional welfare economics when
he says that transction costs "are at the heart of the matter of what prevents Pareto
optimal bliss from ruling sublime. For if we could only eliminate transaction costs,
externalities would be of no consequence...." Carl J. Dahlman, "The Problem of
Externality," Journal of Law & Economics, XXII (April 1979), p. 161.
benefit there is a cost: that essay surely has inflicted and will
continue to inflict damage on human freedom, for it assails the
moral case for private property as no article "within the camp"
ever has. It has created an intellectually and morally bogus
concept of the supposed social economic efficiency of produc-
tion costs that somehow remain the same, irrespective of the
initial distribution of ownership. With that seemingly scientific
and academically irresistible conclusion, Coase in 1960 seduced
some of the brightest economists and legal theorists of the next
generation.
Conclusion
From the day that Lionel Robbins refuted Pigou's defense of
the graduated income tax, economists have been confronted
with a dilemma: the impossibility of rendering economic judg-
ments scientifically in a world in which it is scientifically impos-
sible to make interpersonal comparisons of subjective utility.
The subdiscipline of law and economics is surely a field in
which the rendering ofjudgments is inescapable. The problem
raised by Robbins cannot legitimately be avoided, yet it is avoid-
ed, and avoided religiously, by the specialists in law and eco-
nomICS.
This subdiscipline can be traced back to Coase's theorem and
Becker's essay on crime and punishment. Both of these scholars
attempted to strip the subject of normative content. Both of
them devised sophisticated arguments in terms of cost-benefit
analysis, meaning social costs and benefits. But in doing so, they
removed ethics from the rendering of judgment. In Coase's
case, he even attempted to prove that a civil judge is not neces-
sary to the rendering of cost-effective judgment. The market
can do it all by itself.
These two free market economists have done their best to
strip ethics out of both economics and law. But without a moral
case for private property, private property will not survive the
attacks, political and intellectual, of its ever-present, ever-envi-
ous enemies. The weakening of the moral case for the free
market is the primary danger posed by "morally neutral" de-
fenses of the free market offered by private property's erstwhile
friends. The Coase theorem's threat to the moral integrity of
the case for the free society is the reason why the problem of
social cost remains a major intellectual problem. The problem
of social cost is a lot more difficult than Coase and his disciples
have imagined. So is its solution.
6
THE CRISIS: LIVING WITH
DIALECTICAL SCHIZOPHRENIA
Let us then assume that crises are a necessary precondition for the
emergence of novel theories and ask next how scientists respond to their
e ~ t e n c e . Part of the answer, as obvious as it is important, can be dis-
covered by noting first what scientists never do when confronted by even
severe and prolonged anomalies. Though they may begin to lose faith and
then to consider alternatives, they do not renounce the paradigm that has
led them into crisis. They do not, that is, treat anomalies as counter-in-
stances, though in the vocabulary of philosophy of science that is what
they are.
Thomas Kuhn
1
Today, most economists appeal "scientificallf' to mechanistic
explanations of human action. A few go so far as to avoid the
use of the word choice, since the concept of choice implies a
personal decision that is not the result of prior causes. They
substitute such phrases as "demonstrated preference." There
are a few notable exceptions to this demonstrated preference
for mechanistic explanations, but these economists are humanis-
tic John the Baptists, crying in the epistemological wilderness.
2
Typical of the mechanists is Stephen Cheung, a rigorously
empirical economist, and rigorously naive technician, who has
titled his book, The Myth of Social Cost. The book is almost as
mythical epistemologically as Coase's original essay. He argues
that there is no theoretical barrier against making scientifically
valid economic settlements where pollution is involved. He does
admit that abstracting from transaction costs does lead to prob-
lems. "The important conclusion is that the solution becomes
mechanical once the nature and magnitude oftransaction costs, together
with other constraints, are sufficiently specified."3 He italicized his
words, so he must have regarded them as significant.
What we can and must say, contrary to Professor Cheung, is
that no solution in economics is ever mechanical because all solutions
involve comparisons of subjective value - interpersonal in the
same period of time or across time, or intrapersonal across
time.
4
Admit this, and Galbraith's conclusion is inescapable: "In
the name of good scientific method he [the economist] is pre-
vented from saying anything."s Thus, the modern, "rational"
economist is living in an epistemological dream world, a world
2. For example, Prof. Kenneth Boulding. See his presidential address to the
American Economic Association, "Economics As A Moral Science," American Economic
Review, LIX (March 1969).
3. Steven N. S. Cheung, TM Myth of Social Cost (San Francisco: Cato Institute,
[1978] 1980), p. 31.
4. On this point - which utterly devastates all humanistic economics, including
Austrian subjectivism - see G. L. S. Shackle, Time in Economics (Amsterdam: North
Holland Pub. Co., 1958), lecture 1; d. "The Complex Nature of Time as a Concept
in Economics," Economica Intemazionak, VIII, No.4. Shackle has pushed the logic of
pure subjectivism, pure solipsism, and pure autonomy to a preposterous but consis-
tent conclusion: every point in time is unique, incomparable, and autonomous. He
calls it the "moment-in-being." For an attempted refutation which fails, see Ludwig
Lachmann, Capital, Expectations, and the Market Process (Kansas City, Kansas: Sheed
Andrews and McMeel, 1977), pp. 81-86. Lachmann falls back on the epistemolog-
ically hopeless concept of "common experience" to escape Shackle's logic: p. 86.
5. John Kenneth Galbraith, TM Affluent Society (Boston: Houghton Mifflin, 1958),
p.150.
The Crisis: Living With Dialectical Schizophrenia 89
of hypothetical scientific neutrality, complex formulas, mathe-
matics, and (usually) taxpayer-financed tenure.
The assumption of ethical neutrality is the essence of what
we might call "economic formalism." Pro-free market econo-
mists continually appeal to efficiency apart from equity. In this
respect, Coase is representative of the entire profession. How
can we maximize value, they ask, questions of equity apart? This is
the perhaps the major problem that pro-free market defenders
have: overcoming the objections of socialists and other critics of
the free market, who point to questions of equity and fairness
as the crucial ones, rather than questions of efficiency.
The collapse of the Communist economies has, at least for
the present, silenced the socialists. Questions regarding eco-
nomic efficiency could not be avoided forever; the social costs
of socialist economic planning kept rising, even though social
costs cannot be measured scientifically according to the epistem-
ology of methodological individualism. But this increase in
economic awareness regarding the irrationality of socialism is
not the same as a scientific refutation of socialist economic
theory. The retreat of the socialists after 1988 was a paradigm
shift based overwhelmingly on the public admission by Soviet
leaders that the Communist system was not working according
to plan, especially five-year plans. It was not the logic of Mises
in his 1920 essay on the irrationality of socialist economic calcu-
lation that persuaded the socialists;6 it was Gorbachev's new
Party line in 1988. He needed Western credits, and he was
willing to admit the economic failure of Communism in order
to get them.
Until 1989, the free market's academic defenders generally
failed to convince the socialists and ethicists that the benefits of
economic efficiency are greater than the social and personal
6. Mises. "Economic Calculation in the Socialist Commonwealth" (1920). in F. A.
Hayek. (00.). Collectivist Economic Planning (London: Routledge & Kegan Paul, [1935]
1963), ch. 3.
costs of competition's "heartlessness," and "economic oppres-
sion." Inescapably, the decision as to which is more important
- efficiency or morality - is a question of value (subjective and
objective), a moral question. But free market economists have
so downplayed moral questions in their "scientific" discussions
that they are not skilled competitors in any intellectual market-
place of moral ideas. Unfortunately for them, this is the only
marketplace of ideas there is. Because they have emphasized effi-
ciency and have excluded or doumplayed questions of morality and
value, value-free economists have not been efficient competitors in the
intellectual marketplace. The religion of economic efficiency turns
out to be woefully inefficient rhetorically.
Weber's Critique: Dialecticism
Max Weber, the great German social scientist (d. 1920),
recognized the tension - a permanent tension, he argued - in
all humanistic economic systems between what he called "formal
rationality" and "substantive rationality." It is the heart of the
debate between capitalism and socialism. It is the question of
efficiency vs. ethics.
7
With respect to economic efficiency (for-
7. Weber wrote: "A system of economic activity will be called 'formally' rational
according to the degree in which the provision for needs, which is essential to every
rational economy, is capable of being expressed in numerical, calculable terms, and
is so expressed.... The concept is thus unambiguous, at least in the sense that
expression in money terms yields the highest degree of formal calculability.... The
concept of 'substantive rationality,' on the other hand, is full of ambiguities. It
conveys only one element common to all 'substantive' analyses: namely, that they do
not restrict themselves to note the purely formal and (relatively) unambiguous fact
that action is based on 'goal-oriented' rational calculation with the technically most
adequate available methods, but apply certain criteria of ultimate ends, whether they
be ethical, political, utilitarian, hedonistic, feudal (stiindisch), egalitarian, or whatever,
and measure the results of the economic action, however formally 'rational' in the
sense of correct calculation they may be, against these scales of 'value rationality' or
'substantive goal rationality.' There is an infinite number of possible value scales for
this type of rationality, of which the socialist and communist standards constitute only
one group. The latter, although by no means unambiguous in themselves, always
involve elements ofsocial justice and equality." Weber, Economy and Society: An Outline
of Interpretive Sociology, edited by Guenther Roth and Claus Wittich (New
The Crisis: living With Dialectical Schizophrenia 91
mal rationality), Weber argued, capitalism's socialist critics very
often take offense: "All of these [substantively rational, ethical-
G.N.] approaches may consider the 'purely formal' rationality
of calculation in monetary terms as of quite secondary impor-
tance or even as fundamentally inimical to their respective
ultimate ends, even before anything has been said about the
consequences of the specifically modern calculating attitude."s
In short, Weber concluded, "Formal and substantive rationality,
no matter by what standard the latter is measured, are always
in principle separate things, no matter that in many (and under
certain very artificial assumptions even in all) cases they may
coincide empirically."g This assertion of permanent dialectical
tension in economic thought was basic to Weber's sociological
analysis. 10
Professional Blindness to Moral Issues
Economists who defend the free market seldom acknowledge
the nature of this fundamental debate between the free mar-
ket's intellectual defenders and the free market's critics. Their
"value-free" methodology and their methodological individual-
ism blind them to the realities of the debate - a debate over
morality, values, and the effects of voluntary economic transac-
tions on social aggregates. Free market economists cannot seem
to understand those scholars and critics who raise the question
of individual morality, let alone social consequences and social
values, and who then ignore questions of economic efficiency
York: Bedminster Press, 1968), pp. 85-86. This is a translation of Weber's posthu-
mous Wirtschaft und Gesellschaft, 4th German edition, 1956.
8. Ibid., p. 86. See a slightly different translation of this passage and the one in
the preceding footnote in Weber, The Theory of Social and Economic Organization,
edited by Talcott Parsons (New York: The Free Press, [1947] 1964), pp. 185-86.
9. Ibid., p. 108. [Theory, p. 212.]
10. Gary North, "Max Weber: Rationalism, Irrationalism, and the Bureaucratic
Cage," in North (ed.), Foundations of Christian Scholarship: Essays in the Van Til Perspec-
tive (Vallecito, California: Ross House, 1976), pp. 141-46.
for the attainment of the economic goals of individuals. The
economists dismiss such criticisms as amateurish and irrational;
the fact that most people accept the perspective of the critics
does not faze the economists, most of whom see this battle as a
technical academic debate rather than a life-and-death war for
Western civilization. They see all conflicts as in principle resolv-
able "at the margin, at some price." They prefer not to discuss
the Gulag.
Professional Blindness to Efficiency
Anti-capitalist critics, of course, really do tend to ignore
questions of efficiency, a concept which does have to be consid-
ered carefully in any relevant discussion of men's economic
ability to pursue moral goals, both personal and social. Weber
recognized this: "Where a planned economy is radically carried
out, it must further accept the inevitable reduction in formal,
calculatory rationality which would result from the elimination
of money and capital accounting. Substantive and formal (in the
sense of exact calculation) rationality are, it should be stated
again, after all largely distinct problems. This fundamental and,
in the last analysis, unavoidable element of irrationality in eco-
nomic systems is one of the important sources of all 'social'
problems, and above all, of the problems of socialism."ll Thus,
Weber pointed to a dialectical tension in all humanistic discus-
sions of social systems. Free market economists and capitalism's
critics cannot come to grips with each other's arguments.
The free market economist does have one thing working for
him: socialism really is inefficient. People around the globe
want the fruits of free market capitalism, which are only too
visible on television and in imported media, and steadily na-
tional leaders are drastically modifying socialist ownership in
order to provide access to these fruits. There is a humorous
11. Weber, E&S, p. 111. [Theory, pp. 214-15.]
The Crisis: living With Dialectical Schizophrenia 93
definition in the late 1980's that describes the situation in Eu-
rope: "Socialist, noun: a capitalist who, for political reasons,
cannot admit it publicly." Nevertheless, economic pragmatism
is not sufficient to serve as the foundation for an entire civiliza-
tion. Envy still has a large political constituency.12 There is a
desperate need today for a moral and ultimately religious de-
fense of capitalism.
13
It will not suffice to defend the formal
efficiency of the free market by means of an appeal to the for-
mal political techniques of democracy. An appeal to formal
rationalism from the market to the election booth and back
again is little more than the proverbial pair of drunks who lean
on each other in order to stay on their feet. Eventually, they
tumble together.
Weber's dualism between substantive rationalism and formal
rationalism is as applicable to democratic theory as to market
theory. The spirit of democratic capitalism needs moral content
derived from outside market theory and democratic theory.14
The naked public square needs more than the fig leaf of politi-
cal and religious pluralism to protect it from the socially de-
structive elements of r evolutionary violence and moral ero-
sion.
1s
The same can be said for economic theory.
An Alternative to Dualism
The Christian economist who acknowledges the validity of
Van Til's epistemology (and who also understands its applica-
tion) sees no hope in the quest either for a rational ethics - an
12. Gonzalo Fernandez de la Mora, Egalitarian Envy: The Political Foundations of
Social Justice, translated by Antonio 1: de Nicholas (New York: Paragon House,
1987), Part B.
13. PaulJohnson, "The moral dilemma confronting capitalism," Washington Times
(Feb. 21, 1989).
14. Michael Novak, The Spirit of Democratic Capitalism (New York: Touchstone,
1982).
15. Richard John Neuhaus, The Naked Public Square: Religion and Democracy in
America (Grand Rapids, Michigan: Eerdmans, 1984). Cf. Gary North, Political Polythe-
ism: The Myth of Pluralism (Tyler, Texas: Institute for Christian Economics, 1989).
ethics supposedly derived from value-free presuppositions
(which are mythical anyway) - or the quest for a reliable hypo-
thetical mental construct which in any way relies on the idea of
"man, the omniscient." A wholly rational methodological con-
struct along the lines of Parmenides' unchanging logic - with or
without mathematics - is apostate man's attempt to find coher-
ence in a changing world apart from God. On the other hand,
it is equally fruitless to adopt as one's standard of reference the
ideal of "society, the random." Heraclitus' flux is not going to
serve as a valid guide to social theory, a kind of Kantian limit-
ing concept against which meaningful reality is measured in a
world in which it is impossible to measure interpersonal utility.
General equilibrium theory also cannot serve as a reliable
"limiting concept" that judges the performance of a real-world
economy of change, responsible decision-making, and uncer-
tainty. The decisions of responsible men cannot be shown to
move toward a realm of mankind's omniscience, a world that is
peopled (i.e., "unpeopled") with predictable automatons - the
underlying assumption of general equilibrium theory. But it is
understandable that men who deny God and His providence
wish to believe in the potency of such an intellectual construct.
It comforts economists. As Ludwig Lachmann wrote in 1943:
"Economists, not unnaturally, prefer to do their fieldwork in a
pleasant green valley where the population register is exhaus-
tive and everybody is known to live on either the right or the
left side of an equation. Only on rare occasions - and scarcely
ever of their own free will- do they embark on excursions into
the rough uplands of the World of Change to chart the country
and to record the folkways of its savage inhabitants; whence
they return with grim tales of horror and frustration.,,16
16. L. M. Lachmann, "The Role of Expectations in Economics as a Social Sci-
ence," Economica, New Series, Vol. X (February 1943), p. 16. Lachmann is the
"Austrian School" economist who has been insistent on the danger of relying heavily
on general equilibrium models. "Such smooth transition from one equilibrium (long-
run or short-run) to another virtually bars not only discussion of the process in which
The Crisis: Living With Dialectical Schizophrenia 95
Conclusion
The problem for all social theorists is to explain social
change in terms of social theory. If we are to make sense of
historical change, we need a theory of history. If we are to
make sense out of ceaseless economic change, most notably
changing prices, we need a theory of economic behavior. This
theory must be beyond history yet applicable to history.
The ideal of science has been basic to economic theory from
the late seventeenth century. The problem is, the ideal of sci-
ence (Kant's phenomenal realm) is in dialectical tension with
the ideal of freedom and personality (Kant's noumenal
realm).l7 So, when the defenders of the free market appeal to
economic science as a means of defending the free market, they
invoke an ideal that is hostile to freedom. This is a fundamental
antinomy of all modern thought, but it is especially glaring in
the case of free market economics.
Economics needs the ideal of responsibility as surely as all
other social sciences do. Yet this ideal is challenged by the ideal
of mechanism. Ethics and efficiency are in dialectical tension in
modern thought, including economic thought. What is needed
is a reconstruction of economic thought that escapes the dual-
we are interested here, but of all true economic processes.... And all too soon we
shall also allow ourselves to forget that what is of real economic interest are not the
equilibria, even ifthey exist, which is in any case doubtful, but what happens between
them." Lachmann, "The Market Economy and the Distribution of Wealth," in Mary
Sennholz (00.), On Freedom and Free Enterprise, p. 186. Lachmann's expressed hope in
1956 has not come true - in fact, the reverse has taken place: "It is very much to be
hoped that economists in the future will show themselves less inclined than they have
been in the past to look for ready-made, but spurious, coherence, and that they will
take a greater interest in the variety of ways in which the human mind in action
produces coherence out of an initially incoherent situation" (p. 187). Nevertheless,
his Kantian individualism, with the human mind serving as the entrepreneurial
provider of coherence to an incoherent world, is as impotent to deal epistemologic-
ally with the realities of God's creation as are the defenders of general equilibrium
theory.
17. Richard Kroner, Kant's Weltanschauung (Chicago: University of Chicago Press,
[1914] 1956).
ism between the Kantian ideal of science and the Kantian ideal
of personality. The dialecticism of modern humanist thought is
so deeply rooted that very few scholars, and fewer economists,
have dealt forthrightly with the implications of this dialecticism.
The endless tension between law and flux, theory and fact,
predictability and freedom, and above all, cost and choice has
undermined economic thought for over two centuries. Most
economists have done their best to ignore this dialectical ten-
sion, but inevitably, the problems produced by this tension
continue to surface.
Eventually, in a culture-wide crisis, economists will be faced
with the reality of their calling. It rests, as does modern
thought in general, on a broken epistemological foundation.
CONCLUSION
What is the process by which a new candidate for paradigm replaces
its predecessor? Any new interpretation of nature, whether a discovery or
a theory, emerges first in the mind of one or a few 'individuals. It is they
who first learn to see science and the world differently, and their ability
to make the transition is facilitated by two circumstances that are not
common to most other members of their profession. Invariably their atten-
tion has been intensely concentrated upon the crisis-provoking problems;
usually, in addition, they are men so young or so new to the crisis-ridden
field that practice has committed them less deeply than most of their
contemporaries to the world view and rules detennined by the old para-
digm. How are they able, what must they do, to convert the entire profes-
sion or the relevant professional subgroup to their way of seeing science
and the world? What causes the group to abandon one tradition of
normal research in favor of another?
Thomas Kuhn
1
It may seem odd that I have devoted so much space to the
obvious. Unfortunately, economists quite frequently spin com-
plex theories and arguments that are internally consistent - to
the extent that arguments are capable of internal consistency2
2. I have in mind the layman's understanding of Godel's theorem on the impos-
sibility of arguing both completely and consistently.
- but to perform these mental gymnastics, they must ignore, or
define away, the obvious. Coase's essay is regarded by many
economists as a classic. It is a classic all right - a classic exercise
in rarified and misleading sophistry. Yet it is taken very serious-
ly by some of those Chicago School economists who have devel-
oped the subdiscipline, "the economics of property rights."
What I argue is that the Bible declares exactly who must pay
damages: the initiator ofthe damo,ge. If one man sets a fire, and it
spreads to his neighbor's field, he must compensate the neigh-
bor for the accident. If he is an outright arsonist, he is a crimi-
nal, and he must pay double restitution - double the market
value of the lost crop and equipment. It is not a matter of
indifference to the legal system as to who initiated the "nui-
sance." The Bible does not teach that "from an economic point
of view, a situation in which there is 'uncompensated damage
done to surrounding woods by sparks from railway engines' is
not necessarily undesirable. Whether it is desirable or not de-
pends on the particular circumstances."3 What the Bible teach-
es is that the victims of accidental fires must be compensated
for their loss. It also teaches that a deliberate violation of anoth-
er man's property rights is a crime. This is where we must
begin any discussion of social costs.
Social costs and social benefits cannot be calculated precisely
by means of scientific economics. The economist cannot make
interpersonal comparisons of subjective utility, nor can he add
up individual utilities or manipulate them by means of some
variant of Jeremy Bentham's felicific calculus. We need the
Bible to tell us what is right and what is wrong, who pays
whom, and whose property should be protected. Society is
required by God to adhere to this general principle of justice.
The economist has nothing to offer in its place except epis-
temologically blind intuition.
4
Neither, for that matter, does
4. Gary North, "Economics: From Reason to Intuition," in North (00.), Founda-
Conclusion 99
the modern legal theorist. Intuition is undefined and undefin-
able. As the old political slogan says, "you can't beat something
with nothing." Men cannot legitimately fight the Bible's defini-
tion of property rights with an appeal to circumstances, or to
the intuitive ability of men to assess total social costs and total
social benefits - especially a total cost package that ignores the
right, meaning legal predictability, ofcompensation to the victims.
In the case of the problem of social costs, Pigou's analysis of
pollution and restitution was generally in accord with the
Bible's discussion of the problem of social cost. The railroad has
the legal responsibility to compensate the farmer for any fire it
sets. There will undoubtedly be problems for a jury or arbitra-
tor in assessing exactly what the losses were. If the fires contin-
ue, then the railroad's officers can be sued for criminal miscon-
duct. Like the man whose ox gains a reputation for goring, but
is not penned up by its owner, so are the railroad officers who
do not take care to protect people from an identified physi-
cal hazard. The formerly docile ox that gores someone to death
must be killed (Exodus 21 :28). (The engine would at that point
be fitted with a spark-arrester or prohibited from the tracks.)
But the ox with a bad reputation that kills a man must die, and
so must its owner, unless he makes restitution to the heirs of
the victim (Exodus 21 :29-30). (The directors of the railroad
could be held responsible in a court of law for criminal actions
for not taking care to install safety equipment after the fire
threat had been pointed out to them by the authorities.) Bibli-
cal case laws are to govern the courts, not the speculative con-
clusions of economists that are opposed to the Bible's explicit
statements. Sometimes very bright economists can come up with
outrageous hypotheses. The public adopts these "logical discov-
eries" at its peril. Coase's essay is regarded by academic econo-
mists - at least non-Keynesian and non-mathematical econo-
tions of Christian Scholarship (Vallecito, California: Ross House, 1976).
mists - as a landmark essay. What it is, on the contrary, is clev-
er sophistry: a land mine essay.
The Myth of Value-Free Social Science
In a brilliant yet almost despairing essay, Arthur Allen Leff
has described the development of modern legal theory: a war
. between legal formalism (the "logic of the law") and legal em-
piricism or positivism ("man announces the law"). The fact is,
this debate goes back at least to the Socratic revolution in Greek
political thought: the debate over physis (nature) and nomos
(convention).5 Writes Leff: "While all this was -going on, most
likely conditioning it in fact, the knowledge of good and evil, as
an intellectual subject, was being systematically and effectively
destroyed." What he calls the swamp of historical legal studies
was replaced by the desert of legal positivism: the "normative
thought crawled out of the swamp and died in the desert." He
continues:
There arose a great number of schools of ethics - axiological,
materialistic, evolutionary, intuitionist, situational, existentialist,
and so on - but they all suffered the same fate: either they were
seen to be ultimately premised on some intuition (buttressed or
not by nosecounts of those seemingly having the same intuitions)
or they were even more arbitrary than that, based solely on some
"for the sake of argument" premises. I will put the current situa-
tion as sharply and nastily as possible: there is today no way of
"proving" that napalming babies is bad except by asserting it (in
a louder and louder voice) or by defining it as so, early in one's
game, and then later slipping it through, in a whisper, as a conclusion.
6
5. On the rival conceptions oflaw, see Sheldon Wolin, Politics and Vision: Continu-
ity and Innovation in Western Political Thought (Boston: Little, Brown, 1960), pp. 29-34.
On physis, see Robert A. Nisbet, Social Change and History: Aspects of the Western Theory
of Develapment (New York: Oxford University Press, 1969), pp. 21-29.
6. Arthur Allen Leff, "Economic Analysis of Law: Some Realism About Nomin-
alism," Virginia Law Review, LX (1974), p. 454.
Conclusion 101
There is no way for either law or economics to be conducted
without an appeal to good and evil, yet it is this appeal, above
all, which is prohibited by the methodological standards of
modern academic scholarship. The appeal to efficiency by the
legal theorists is simply another example of seeking meaningful
content for the ethically empty box of legal formalism. When
the search for meaning turns to the criteria of economic effi-
ciency, the searchers are being lured down one more dead-end
trail. As Leff says, "while you are now working with is-terms
only (you have escaped the dreaded ought), they are, as a mat-
ter of fact, very different matters of fact: what indeed is of
'value' must be known before one rates the 'efficiency' of get-
ting there. Thus it is possible that all you have ended up doing
is substituting for the arbitrariness of ethics the impossibilities of
epistemology.u7
This is the heart of the problem. Without ethics, there can be no
epistemology. This assertion - which is also a dreaded but ines-
capable conclusion of modern economics - was the theme that
Van Til worked with throughout his career. Economics is a
blind science. So is its subdivision, law and economics. Again,
Leff zeroes in on the problem faced by the law schools:
It is a most common experience in law schools to have someone
say, of some action or state of events, "how awful," with the clear
implication that reversing it will de-awfulize the world to the full
extent of the initial awfulness. But the true situation, of course,
is that eliminating the "bad" state of affairs will not lead to the
opposite of that bad state, but to a third state, neither the bad
nor its opposite. That is, before agreeing with any "how awful"
critic, one must always ask him the really nasty question, "com-
pared to what?" Moreover, it should be, but often is not, appar-
ent to everyone that the process of moving the world from one
state to another is itself costly. If one were not doing that with
those resources (money, energy, attention), one could be doing
7. Ibid., p. 456.
something else, perhaps righting a few different wrongs, a sepa-
rate pile of "how ghastly's."8
Coase himself has admitted as much, though he confines this
admission to the narrow confines of the question of transaction
costs. "Since property rights can be changed in such a way as to
raise as well as lower the costs of transactions, how can one say
that a move from regulation to a private property rights system,
the use of the market, will necessarily represent an improve-
ment? If the question is put in such a general form, one cannot
say that it will."g But no one cites Coase's admission.
Christian economists must therefore enter the debate regard-
ing costs, whether social or personal. There is no intellectually
consistent way that the humanist economist can legitimately
keep Christian economics out of the arena. He has adopted a
position of intuitional and arbitrary ethics in the name of value-
free methodology. It is all a sham. The more loudly the econo-
mist insists that ethics should be left outside the temple of eco-
nomics, almost as one leaves one's shoes outside a Moslem
mosque, the more irrelevant his findings and concealed his own
system's ethics. It is better to be open about one's ethics and the
source of one's ethics. The reduction of deception, including
self-deception, is a legitimate intellectual end. The problem is,
neither the embarrassed Christian economist nor the self-de-
ceived humanist economist has been willing to pay the method-
ological price. But we should have expected this; it is an ancient
problem: "Beware lest any man spoil you through philosophy
and vain deceit, after the tradition of men, after the rudiments
of the world, and not after Christ" (Colossians 2:7).
Economists prefer to avoid thinking about philosophy in
general and epistemology in particular. This is what has kept
8. Ibid., p. 460.
9. Coase, "The Choice of the Institutional Framework: A Comment," Journal of
Law & Economics, XVII (October 1974), p. 493.
Conclusion 103
the crisis at bay. But the epistemological crisis cannot be de-
ferred forever. As Kuhn says, "normal science ultimately leads
only to the recognition of anomalies and to crises."lo But you
can't beat something with nothing. "To reject one paradigm
without simultaneously substituting another is to reject science
itself."ll
Is there an alternative? I am working on it: biblical econom-
ics. It is in the early stages of development. This fact is not
necessarily proof of the futility of the project. As Kuhn says,
"Often a new paradigm emerges, at least in embryo, before a
crisis has developed far or been explicitly recognized."12 When
the looming crisis hits society in general, even academic econo-
mists will be under pressure to rethink the epistemological
foundations of their calling. Probably not before this culture-
wide event, however, for at least three reasons: (1) old habits
die hard; (2) tenure is a very conservative force; and (3) the
myth of neutrality is today the legal justification for the exis-
tence of State-funded universities, which is where most of the
world's economists are presently employed.
10. Kuhn, Structure, p. 121.
11. Ibid., p. 79.
12. Ibid., p. 86.
APPENDIX
THERE'S NO (AUTONOMOUS)
ACCOUNTING FOR TASTE
For which of you intending to build a tower, sitteth not down first,
and counteth the cost, whether he have sufficient to build it. Lest happly
[it happen], after he hath laid the foundation, and is not able to finish it,
all that behold it begin to mock him, Saying, This man began to build,
and was not able to finish (Luke 14:28-30)?
Having devoted considerable space to what R. H. Coase and
modern economists have done wrong, it is time for me to sug-
gest a biblical solution. But before I do this, I need to return to
the basic theme of this monograph: the dialecticism of objective
and subjective value theory. The dualism between objective and
subjective knowledge has always been central to the crisis of
non-Christian epistemology, and economic epistemology has
not escaped this fundamental antinomy.
Dialecticism arises in modern economics with the issue of
imputation. Acting man imputes value to a scarce economic
resource, be it a stream of income or a course or action. In
other words, he makes a judgment. It is this act of imputation
that lies at the heart of modern, subjectivist economic theory.
Christian economics also begins with the judgment of an
acting agent: God. The Christian religion is theocentric. The
There's No (Autonomous) Accounting for Taste 105
Christian analyst is therefore supposed to begin with what God
has said and done, as revealed in the Bible. Then he moves to
what man says and does. If the issue we are studying is an
individual's rendering of judgment, the obvious place to begin
is with God's rendering of final judgment.
Final Judgment
The New Testament discusses in much greater detail the
final judgment than the Old Testament does. Only one clear-
cut reference to the resurrection of the dead appears in the Old
Testament, Daniel 12: 1-4. This passage speaks of a book sealed
for now but which will be opened at the end of time (v. 4). In
contrast, the New Testament speaks of God's judgment in terms
that can be compared with an account book. We are told that
everything we think, say, or do will be publicly reviewed at the
final judgment (Matthew 12:35-37). There is a one-to-one rela-
tionship between our performance in history and our reward in
eternity. The parable of the talents speaks of this relationship in
terms of earthly business contracts, but the parable points to
final judgment (Matthew 25: 15-30). This same performance
and reward relationship is spoken of by Paul (I Corinthians
3:12-15).
By placing His own discussion of earthly actions and God's
final judgment within the framework of business dealings,]esus
drove home His points in terms of concepts familiar to his
listeners. His parables were often either "pocketbook" parables
or agricultural parables. ] esus made His point through analo-
gies that would be familiar to people. Those analogies on the
surface were economic.
This raises a significant issue: judgments in history. Why are
men told to "count the cost" of their planned actions? First,
because of the threat of economic waste (especially time). Paul
warned his readers of the moral necessity of "redeeming the
time, because the days are evil" (Ephesians 5:16). Again: "Walk
in wisdom toward them that are without, redeeming the time"
(Colossians 4:5). To redeem or buy back the time is basic to the
Christian walk before God. The second reason for counting the
cost of our decisions is because of the embarrassment suffered
by those who fail publicly (Luke 14:29). The Christian walk is a
public walk. Skeptics are watching the performance of Christians.
They will praise or mock Christians in terms of visible perfor-
mance. Life in the Spirit is therefore life lived in history. We
are told in Deuteronomy 4 that the eyes of the world were on
Israel. We are told in Matthew 5 (the famous "Sermon on the
Mount") that the eyes of the world are on the church; there-
fore, Christians are not to hide their lights under a basket (v.
5). There is an objective relationship between the inner life and
outward performance. This is what makes accounting possible.
God is the Supreme Judge. He settles all accounts perfectly
at the end of time. His standard of judgment is His own law.
l
Man is made in God's image. He, too, has the power to make
judgments. He acts as God's representative agent in history,
subduing the earth (Genesis 1:26-28). He is not omniscient, as
God is, but he has been given the power and therefore the
judicial responsibility to think God's thoughts after Him as a
creature. God's judgments are cosmically objective because they are
cosmically subjective. Man's judgments, like God's, are both objec-
tive and subjective. They are measured (evaluated) subjectively
by God in terms of God's objective law. The point is, judgments
are always personal; this does not deny their objectivity. It is
because man must give an account to God for everything he
thinks, says, and does that his imputations are objective.
Judgments and Accounting
The standard textbooks in European economic history say
that the development of double entry bookkeeping was a turn-
ing point in the history of capitalism, and therefore in Western
1. Greg L. Bahnsen, By This Standard: The Authority of God's Law 1bday (Tyler,
Texas: Institute for Christian Economics, 1985).
civilization. The technique of recording each financial transac-
tion as both a debit and credit allows the accountant to main-
tain tight control over all records, and also enables the business-
man to identify fiscal hemorrhaging in his business operations.
Double entry bookkeeping is an aspect of "man, the judge of
history." He is God's agent on earth. He makes evaluations.
Scholars debate endlessly about the dating of this remarkable
invention. Standard accounts place it in the year 1340 in Gen-
oa. Scraps of evidence - literally - have turned up indicating
that it could have been half a century earlier.
2
The techniques
were popularized in 1494 by Luca Pacioli of Venice, as a sec-
tion of a book on mathematics. Double entry bookkeeping
spread throughout Europe, changing every society it touched.
Pacioli also added words of wisdom concerning proper busi-
ness attitudes and techniques. Clough and Cole quote him:
Where there is no order there is confusion.
Every action is determined by the end in view.
Work should not seem to you strange, for Mars never granted a
victory to those who spent their time resting.
A sage said to the lazy man to take the ant as an example.
If you are in business and do not know all about it, your money
will go like flies, that is, you will lose it.
The authors regard this as evidence of a new spirit of capitalism
and rational management in the West.
3
Ludwig von Mises is
even more laudatory: "Our civilization is inseparably linked
with our methods of economic calculation. It would perish if we
were to abandon this most precious intellectual tool of acting.
2. Raymond de Roover, "The Development of Accounting prior to Luca Pacioli
according to the Account Books of Medieval Merchants," in de Roover, Business,
Banking, and Economic Thought in Late Medieval and Early Modem Europe, edited by
Julius Kirshner (Chicago: University of Chicago Press, 1974).
3. Cited in Shepard Bancroft Clough and Charles Woolsey Cole, Economic History
of Europe (3rd ed.; Boston: D.C. Heath & Co., 1952), p. 81.
Goethe was right in calling bookkeeping by double entry 'one
of the finest inventions of the human mind.' ,,4
The Dialecticism of Humanist Thought
Cornelius Van Til emphasized throughout his long career
that modern thought is plagued by an epistemological dualism
that can be traced back to Immanuel Kant. Kant divided hu-
man life into two radically separate realms, the phenomenal
and the noumenal. The phenomenal realm is the realm of
scientific calculation, of measurable cause and effect. Effects
have specific causes. In this sense, effects are determined by their
causes. It is this determinism of the phenomenal realm that is
the basis of all scientific investigations (except in the subatomic
world of quantum mechanics, where there are crucially impor-
tant effects which have no known or knowable causes - in fact,
which are believed by scientists to have no physical causes).5
Problem: in a world ofpredictable and therefore inescapable physi-
cal cause and effect, human freedom disappears. So does the reality
of ethical behavior, given the worldview of humanism, for such
behavior is based on the independent (autonomous) existence
of freely determined human choice. Responsible men are re-
garded as more than mere biological counting machines. Calcu-
lating machines are neither moral nor immoral. They do not
choose; they simply respond to inputs according to their hu-
manly designed programs. Kant attempted to salvage both
freedom and ethics by positing the existence of an independent
(autonomous) noumenal realm of the human personality, or
human spirit, which he argued is also the realm of ethical
choice. This realm is not under the strict physical determinism
4. Ludwig von Mises, Human Action: A Treatise on Economics (3rd ed.; Chicago:
Regnery, 1966), p. 230. Yale University Press edition (1949), p. 231.
5. Nick Herbert, Quantum Reality: Beyond the New Physics (Garden City, New York:
Anchor Press/Doubleday, 1985).
that governs the phenomenal realm. The noumenal realm is
marked by human freedom and responsibility.
6
The crucial intellectual problem for the humanist is this:
neither Kant nor any philosopher, neither the psychologist nor
the social theorist, has been able to describe or explain the
epistemologically necessary link between these two realms. To
the extent that the noumenal can be classified, defined, and
described rationally in terms of the phenomenal realm's logic,
it loses its character as a realm of indeterminism. Yet it is this
very indeterminism which Kant said must be present in order
for the noumenal to be a realm of choice, of human action as
distinguished from determined human response. For all post-
Kantian thought, man without the noumenal becomes an automaton.
Problem: without the ability to think coherently about cause
and effect, including ethical cause and effect, man is left adrift
in a sea of irrationalism. How can personal responsibility exist
in a world of irrationalism? Madmen who break the law or
ignore conventions are generally treated as outside the law, and
are incarcerated. Thus, the total freedom of the noumenalleads
directly to the literal straightjacket of phenomenal judgment
and the loss of freedom. The key unanswered problem is this:
How is a man's spirit - his "self" - related to his actions? Humanist
thought has no solution to this crucial moral question.
This problem is not merely a speculative exercise of philoso-
phers. It has inescapable consequences in every area of life,
including the science of economics. A crisis in general episte-
mology produces crises in specific epistemologies. Ultimately,
this is a crisis in ethics, for ethics in the Kantian worldview is
governed (yet somehow not determined) by the noumenal.
Mises and other economists point to rational accounting
techniques as the central factor in the development of modern
capitalism. Without rational economic calculation, the modern
6. Richard Kroner, Kant's Weltanschauung (Chicago: University of Chicago Press,
[1914] 1956).
division of labor would become impossible. Civilization would
collapse. Mises made himself famous with his 1920 essay on the
impossibility of rational economic calculation under socialist
ownership. Without a competitive free market in goods, espe-
cially producer goods, socialist planners cannot make rational
decisions about what to produce or what production actually
costs.
7
Recent studies indicate that no one has yet refuted
Mises on this point.
8
(Socialist economist Robert Heilbroner
came to this conclusion in 1990 at the end of his career.)9
Economists are fully aware of the crucial importance of
scientific accounting methods as the indispensable means of
planning, managing, and evaluating economic performance.
But modern economists cannot escape the inherent dualism of
all post-Kantian thought. They cannot solve this crucial prob-
lem: how to relate the inner life of man's self-awareness to the
historical realm of cause and effect. Economists have no way to
explain how a page full of numbers (phenomenal realm) is
related economically and motivationally to the decision-making
processes (noumenal realm) of rational human beings.
Index Numbers (Continuity)
Take for example the problem of accounting under inflation.
Considerable study has been devoted to this topic, especially by
free market economists.
10
It is well understood that unexpect-
ed inflation leads to capital consumption because businessmen
7. Mises, "Economic Calculation in the Socialist Commonwealth" (1920), reprint-
ed in F. A Hayek (00.), CoUectivist Economic Planning (London: Routledge & Kegan
Paul, [1935] 19(3), ch. 3.
8. Don Lavoie, National Economic Planning: What Is Left1 (Cambridge, Massachu-
setts: Ballinger, 1985).
9. Robert Heilbroner, "Reflections: Mter Communism," New lfJrker (Sept. 10,
1990), p. 92. It is worth noting that there is not a single reference to Mises in Heil-
broner's best-selling textbook in the history of economic thought, The Worldly Philoso-
phers. This is an example of how well an academic blackout can work: 1920-1990.
10. This interest increased in the 1970's, when Federal Reserve monetary policy
pushed price inflation above 10 percent by the end of the decade.
There's No (Autonomous) Accounting for Taste III
misinterpret their account books and conclude that capital
consumption is in fact profit. Only when it comes time to re-
place worn-out equipment do they discover that they have
made a mistake.
Pierre Goodrich, the multi-millionaire whose money estab-
lished the Liberty Fund in Indianapolis, made a fortune for his
Independent Telephone Company of Indiana by being on the
right side of many long-term coal contracts prior to the infla-
tion of the late 1960's and the 1970's. He had been advised by
University of Michigan accounting theorist and free market
economist William Paton to set up two sets of books, one of
which was tied to the government's GNP price deflator. 11
Paton told him to make his decisions on the basis of this "shad-
ow" set of books, not the conventional accounts recommended
by his CPA firm (and required by the Federal government).
Goodrich for years actually published both sets of books in his
company's annual report, the first U.S. corporation to do so. In
the early 1970's, companies from across the U.S. ordered a
copy of the report to see how it was done.
12
But there is a major theoretical problem with accounting, a
problem more readily understood when we discuss inflation
accounting: Who is to say what the "right" commodities are for
inclusion into the government's price index? There is more
than one available index: wholesale prices, consumer prices,
GNP price deflator. The statisticians must assign weighted
numerical values to each commodity and service in an attempt
to reflect its overall importance to the economy. Question:
Whose economy? Yours or mine? How can every participant in
the economy agree on the proper weights assigned to the se-
lected commodities and services? (Personal evaluations by econ-
omists of the economic importance for "the economy at large"
11. Paton died in 1990 at age 101.
12. An early Liberty Press publication was Economic Calculation Under Inflation
(1976), with essays by Solomon Fabricant, William Paton, Paul Grady, George Ter-
borgh, and others.
of a limited number of goods and services are called "weights,"
which gives you some idea of the problem: a physical term for
a psychological phenomenon, meaning a phenomenal term for
a noumenal "noumenon.") How can the statisticians be sure
which commodities and services should be in the selected list?
How important are they, relatively speaking, in the minds of
most participants? How do we find out how important an eco-
nomic good is in the minds of most economic actors?
In constructing their statistical index numbers, the statisti-
cians have to "feel" their way along. They must intuit the appro-
priate weights. But when we use the words "feel" and "intuit,"
we have returned to Kant's practical reason (the noumenal
realm) where numbers determine nothing, and pure reason
(the phenomenal realm) is necessarily silent.
How does a decision-maker know for sure that what the
account books seem to be telling him is exactly what he wants
to know? He cannot be sure, according to subjectivist economic
theory. If he is a consistent believer in subjective value theory,
he must conclude that all objective price indexes are inherently
corrupt and theoretically unjustifiable. He must conclude that
any change in the purchasing power of the monetary "unit"
cannot in fact be measured in a meaningful subjective manner,
for to discuss "purchasing power" you must discuss index num-
bers of compiled prices, and all index numbers, being aggre-
gates of individual preferences ("weighted averages") are theo-
retically invalid. Why? Because ever since the classic study by
Lionel Robbins, The Nature and Significance of Economic Science
(1932), economists have known that it is illegitimate to make
interpersonal comparisons of subjective utilities. This rules out
all index numbers. It also rules out all applied economics, and
all economic advice to decision-makers. If taken seriously, this
crucial application of subjectivism destroys economics.
Yet these same defenders of subjective economics want to be
able to discuss certain relationships. For example, a defender of
the "Austrian" monetary theory argues that rising prices are not
inflation, but in fact are a result of inflation. Inflation is an
increase in the money supply. But what does he mean, "rising
prices"? Which prices? Gerald :P. O'Driscoll, who is presently
employed by the Federal Reserve Bank of Dallas, and Sudha R.
Shenoy, both of whom are ardent defenders of subjectivist
economics, felt compelled to discuss such statistical relation-
ships. They wrote in 1976: "However, after 1945, the problem
turned around completely and became that of gently (and later,
more rapidly) rising prices. In eleven major developed coun-
tries, prices declined hardly at all, and when they did, it was
only for a couple of years during the early fifties."13
The question arises: How can they know what "prices" -
prices in general - did? Because they have statistical evidence.
But how did these statistical data come into their possession?
Because other economists constructed national index numbers
of prices in terms of various implicitly objective theories of eco-
nomics. We are back to the problem of intuition, the unstated
but crucial basis of modern economics. Kant's dualism remains.
Changing Tastes (Discontinuity)
We also have another problem: personal tastes that change over
time. What an economic actor thought was a great idea when he
began planning may have changed. He may be like the man
who stripped naked and leaped onto a cactus plant. When
asked later on why he did it, he replied: "It seemed like a good
idea at the time." The economic actor originally wanted to
achieve one set of goals, but now he has changed his mind. His
tastes have changed, and there is no accounting for changing
tastes. I mean literally no accounting. In fact, most modern econ-
omists, but especially "Chicago School" economists, ignore the
relevance of changing tastes precisely because changing tastes
13. Gerald P. O'Driscoll, Jr. and Sudha R. Shenoy, "Inflation, Recession, and
Stagflation," in Edwin G. Dolan (00.), The Foundations of Modem Austrian Economics
(Kansas City, Kansas: Sheed Be Ward, 1976), p. 186.
cannot be accounted for in their models of economic behavior.
Occasionally, some intellectually honest economist will even
admit that this is the intellectual game they all play. "Tastes are
assumed to be constant because we have absolutely no theory of
changes in tastes...."14
Thus, the "blank ink" in an account book may no longer tell
an individual whether he has been successful or his firm has
been successful. It is impossible scientifically to make the con-
nection between the objective 'numbers - entered way back then,
when a person's goals were different, his tastes were different,
and the purchasing power of money was different - and a
person's present subjective circumstances. Standards change. For
example, the individual who experiences a religious or moral
conversion may look at the positive balance sheet (record of the
past) in his corruptly operated firm and conclude that the good
news on paper is bad news for him (future day of judgment).
He interprets the objective numbers from a new point of view.
The problem of the meaning of numerical symbols cannot be
deferred at zero cost. But the economics profession defers it.
Systematic Autonomy: Shackling Economic Science
Two economists who have dealt with this problem is consid-
erable detail are G. L. S. Shackle and Ludwig Lachmann. The
problem is, when Shackle is finished with his revision of mod-
ern economic theory in terms of the logic of pure subjectivism,
it is difficult to see what remains of economic science. Shackle
begins with the autonomous actor making an autonomous
decision, and he ends with the autonomous moment. Lachmann
summarizes Shackle's position, and then attempts to put the
broken pieces together. But Humpty-Dumpty is shattered.
Shackle comes to this extraordinary conclusion: each subjective
moment is selfcontained and autonomous. He calls this the "mo-
14. Paul H. Rubin, "The Economics of Crime," in Ralph Andreano and John J.
Siegfried (005.), The Economics of Crime (New York: Wiley, 1980), p. 15.
ment-in-being." The entrepreneur looks forward when he
makes his plans, and he looks backward when he evaluates the
success or failure of his plans, but neither of these actions is
scientifically relevant to the "moments-in-being." These autono-
mous moments-in-being cannot be compared with each other.
"Expectation and memory do not provide a means of compar-
ing the actuality of the moment-in-being at one of its stations
with that at another, they do not enable two moments, distinct
in location on the calendar-axis, to be in being together, for the
nature of 'the present,' the essence of the moment-in-being, is
an impregnable self-contained isolation."l!> Given the logic of
pure subjectivism, Shackle's conclusion is correct.
Lachmann immediately raises the key epistmological ques-
tion: Can economics survive Shackle's radical discontinuity?
In other words, in describing the phenomena of human
action [no, Shackle was actually describing the noumena of human
action - G.N.], time cannot be used as a co-ordinate because we
lack an identifiable object which "passes through time." Man with
his "feelings," preferences, and the content of his consciousness
changes in unpredictable fashion. Our author holds that this
implies the impossibility of any intertemporal or interpersonal
dynamics. His dynamics "seeks to show the internal structure of
a single moment," it is "private and subjective." It is valid for an
individual at a point in time.
Lachmann then asks: "Is he right in thus confining the scope
of dynamic theory?" On the next page, he attempts to salvage
something of the science of economics from what little remains
of it in Shackle's system of radical temporal discontinuity. He
sees where Shackle's exposition leads: to a radical existentialism
that borders on nihilism - indeed, has crossed that border.
15. Shackle, Time in Economics (Amsterdam: North Holland Pub. Co., 1958), p.
16; cited by Lachmann, Capital, Expectations, and the Market Process: Essays on the Theory
of the Market Economy (Kansas City, Kansas: Sheed Andrews and McMeel, 1977), p.
83.
But if we were to take Professor Shackle's thesis literally,
there could be no testing of the success of plans, no plan revi-
sion, no comparison between ex ante and ex post. In fact planned
action would make no sense whatever. Nor could there be a
market in which the "private and subjective dynamics" of the
individuals trading become socially objectified in the form of
market prices and quantities of goods exchanged. Common
experience tells us that these phenomena do exist. What, then,
has gone wrong with our author's thesis?16
Better put, what has gone wrong with humanism's epistemology?
Shackle is being faithful to the dualism of all post-Kantian
thought. He is admitting that the noumena of "private and sub-
jective dynamics" of acting individuals cannot logically or theo-
retically become "socially objectified," as Lachmann puts it; that
is, they cannot become phenomena. Shackle is honest: modern
epistemology cannot relate the discontinuous noumena of each
subjective decision to a continuous phenomenal (objective cause
and effect) system of expectation and memory.
Lachmann suggests that "common experience" tells us that
Shackle is incorrect. Indeed it does, but what is "common expe-
rience," and how does it relate to scientific economic theory?
Lachmann then seeks to find continuity in the system in the
human mind. He says that Shackle "comes perilously close" to
denying "the continuity of mind." But, I hasten to add, so did
Kant, who had to assert the existence of universal categories of
human thought in order to preserve coherence for mankind.
To escape from Shackle's discontinuity, Lachmann asserts (but
does not prove) that man's unchanging mind (continuity) tran-
scends man's changing preferences (discontinuity). "The cre-
ative acts of the mind need not be reflected in changing prefer-
ences, but they cannot but be reflected in acts grasping experi-
ence and constituting objects of knowledge and plans of action.
16. Lachmann, ibid., p. 84.
All such acts bear the stamp of the individuality of the ac-
tor.,,17 Got that? Neither do I. What is he trying to do? He is
struggling to reach a conclusion that is required to save eco-
nomics from radical discontinuity: "Intertemporal comparisons
are thus possible except in cases where fundamental changes
take place in an individual's system of preferences."18
This is like saying that intertemporal comparisons are possi-
ble except when they aren't. Who knows for sure whether his
own tastes, concepts, or ideas have changed "fundamentally"?
Maybe they have changed near-fundamentally. Or maybe he
has forgotten what he really believed before. The point is, there
is no resting place (continuity) for the autonomous mind if it is
to retain its freedom to change (discontinuity) apart from being
determined by outside forces. But if human freedom is based on
indeterminism - and in all post-Kantian thought, it is - then
this freedom of decision-making destroys science, for continuity
was seen by Kant as an element of determinism (phenomenal
cause and effect). If I freely (!) change my mind, am I the same
person who established goals before and then began entering
accounting data in order to evaluate my success?
"I'm a new man!" says the entrepreneur. Replies his accoun-
tant: "Then are these old entries still of any value to you?"
The Kantian realms of the phenomenal (account books) and
the noumenal (their meaning to men) are forever separated, yet
they must be together if men are to make rational economic
calculations. This is the epistemological crisis of economics.
A Christian Answer
We need to defend discontinuity and continuity, subjectivism
and objectivism. We need to do this, not out of intellectual
necessity alone, but in order to affirm the moral and judicial
responsibility of every man and every collective group before
17. Ibid., p. 85.
18. Idem.
God. As a by-product of a biblical defense of each man's res-
ponsibility, we can and must provide the basis of a reconstruc-
tion in economic theory. Instead of sneaking objective value
theory (continuity) into subjective economic theory through the
back door of statistics and index numbers, we must lay as the
foundation of economic science both biblical objectivism (God's
law) and biblical subjectivism (man's responsibility). Economics
must be gounded on an explicitly biblical epistemology. To
develop a consistent economic science, we must avoid the dia-
lecticism of both pre-modern and modern epistemology.19
We must begin with a covenantal view of God and man.
God's covenant has five assertions: the sovereignty of God, the
hierarchy of God's authority, the permanence of God's ethical
standards, the judgment of God (temporally and eternally), and
the continuity through time and eternity of this covenant.
20
First, we know that God is all-knowing. He can make inter-
personal comparisons of all our individual subjective utilities
(Luke 21:2-4). Second, we know that we are responsible to God
through time. He exercises authority over us. Third, His law is
our permanent standard of ethical performance. Fourth, we
know that He is the subjective evaluator of all the minds and
spirits of every creature in history. We know that he properly
"weighs" the importance of every act, service, and commodity.
He has objective knowledge of all subjective realities. Fifth, we
know that He has a perfect plan for the ages that will be per-
fectly fulfilled. His people will inherit the earth (Psalm 37:9).
Applying all this to economic theory, we conclude that
Shackle's "moments-in-being" are linked through time in terms
of God's sovereignty, authority, law, judgments, and plan. Man
is made in God's image, so he can make sense of his world. He
is personally, covenantally responsible before God, who judges
19. Cornelius Van Til, A Christian Theory of Knowledge (Nutley, New Jersey:
Presbyterian & Reformed, 1969).
20. Ray R. Sutton, That lVu May Prosper: Dominion By Covenant (Tyler, Texas:
Institute for Christian Economics, 1987), chaps. 1-5.
our lifetime performance objectively, moment by moment, and
also at the day of final judgment. There is objective continuity
over time and across interpersonal barriers .because man is
made in God's image, and God is objectively sovereign.
The God of the Bible is the basis of a theoretical resolution
of the subjective-objective dualism of all humanist thought. He
is therefore the fundamental presupposition of all valid eco-
nomics. Without God's comprehensive planning and God's
comprehensive judgments (evaluations) through history and in
eternity, there is no way theoretically for the economist to
"bridge the gap" between subjective value theory and the objec-
tive reality of the objective numbers in the capitalist's account
books. God is the subjective Author of objective accounting,
including index numbers, and man, who is made in God's
image, can use accounting techniques to the glory of God and
the benefit of society.
Conclusion
The modern economist does not want to deal forthrightly
with the fundamental dualism of accounting theory because this
problem is a manifestation of the epistemological crisis - the
crisis of dialecticism - in humanism's various economic theories.
The economist shrugs off such philosophical criticism as periph-
eral to his task. These epistmological problems have no solu-
tions that are consistent with the economist's presuppositions
concerning God, man, law, and time. Therefore, the modern
economist concludes that they are irrelevant. He chooses to
deal only with problems that may have solutions, and price-
competitive solutions at that. So, when his ideological colleagues
reach conclusions that sound irrational, immoral, or irrelevant
- especially irrelevant - he pays no attention. Irrelevance is par
for the academic course. In fact, it is a way of life in the profes-
sional journals. Yet economics was announced by its developers
to be the most relevant of all academic inquiries: inquiries into
the wealth of nations. God is not mocked at zero price.
BIBLIOGRAPHY
Christian Economics
Beisner, E. Calvin. Prospects for Growth: A Biblical View of Popula-
tion, Resources, and the Future. Westchester, Illinois: Crossway
Books, 1990.
______. Prosperity and Poverty: The Compassionate Use of
Resources in a Free Society. Westchester, Illinois: Crossway
Books, 1988.
Chilton, David. Productive Christians in an Age of Guilt-Manipula
tors. Third edition. Tyler, Texas: Institute for Christian Eco-
nomics, (1985) 1991.
Griffiths, Brian. The Creation of Wealth. London: Hodder &
Stoughton, 1984.
______. Morality and the Market Place. London: Hodder
& Stoughton, 1982.
Hodge, Ian. Baptized Inflation: A Critique of "Christian" Keynesian-
ism. Tyler, Texas: Institute for Christian Economics, 1986.
North, Gary. The Dominion Covenant: Genesis. Second edition.
Tyler, Texas: Institute for Christian Economics, 1987.
Bibliography 121
. "Economics: From Reason to Intuition," Foun-
------
dations of Christian Scholarship: Essays in the Van Til Perspective,
edited by Gary North. Vallecito, California: Ross House
Books, 1976.
______. "Free Market Capitalism," Wealth and Poverty:
Four Christian Views, edited by Robert G. Clouse. Downers
Grove, Illinois: .InterVarsity Press, 1984.
______. Honest Money: The Biblical Blueprint for Money
and Banking. Ft. Worth, Texas: Dominion Press, 1986.
______. Inherit the Earth: Biblical Blueprints for Econom-
ics. Ft. Worth, Texas: Dominion Press, 1987.
_______. An Introduction to Christian Economics. Nutley,
New Jersey: Craig P r ~ s s , 1973.
_______. Is the World Running Down? Tyler, Texas:
Institute for Christian Economics, 1988.
_______. Moses aiul Pharaoh: Dominion Religion vs. Power
Religion. Tyler, Texas: Institute for Christian Economics,
1985.
_______. The Sinai Strategy: Economics and the Ten Com-
mandments. Tyler, Texas: Institute for Christian Economics,
1986.
______. Tools of Dominion: The Case Laws of Exodus.
Tyler, Texas: Institute for Christian Economics, 1990.
Rose, Tom. Economics: ~ h e American Economy from a Christian
Perspective. Mercer, Pennsylvania: American Enterprise Publi-
cations, 1985.
122
THE COASE THEOREM
______. Economics: Principles and Policy from a Christian
Perspective. Milford, Michigan: Mott Media, 1977.
Christian Epistemology
North, Gary, editor. Foundations of Christian Scholarship: Essays in
the Van Til Perspective. Vallecito, California: Ross House
Books, 1976.
Rushdoony, Rousas John. By What Standard? An Analysis of the
Philosophy of Cornelius Van Til. Tyler, Texas: Thoburn Press,
(1959) 1983.
Van Til, Cornelius. A Christian Theory of Knowledge. Phillips-
burgh, New Jersey: Presbyterian & Reformed, 1969.
______. The Defense of the Faith. Revised edition. Phillips-
burgh, New Jersey: Presbyterian & Reformed, 1963.
_____. A Survey of Christian Epistemology. Den Dulk
Foundation, (1932) 1969. Distributed by Presbyterian & Re-
formed, Phillipsburg, New Jersey.
INDEX
abortion, 31
accounting, 6-7, 17,
106-7
addiction, 76
anarcho-capitalists, 34
Austrian School, 28, 53, 56
automatons, 64, 108
Baird, Charles, 1, 68
beauty,
Becker, Gary
"criminals," 72
"crime," 69n
optional crime, 66
fines, 68-69
"harm," 69n
murder, 73-74, 76
pin-sticker, 75-76
prisons, 69
restitution, 69
Bentham, Jeremy, 73
Block, Walter, 25n
bookkeeping, 10, 10607 (see
also accounting)
books, vii
Boulding, Kenneth, 88n
Buchanan, James
costs (pre- and post-), 5
costs and decisions, 6, 11,
54,70
efficiency, 84
epistemology, 19
equilibrium, 53n
omniscient observer, 70
price &, 10-11
social costs, 20-21
transactional costs, 83-84
uncertainty, 54
vs. Posner, 29n
welfare economics, 19
Cain, xvi
Calabresi, Guido, 24, 40-45
capital, 10
cause & effect, 108-10, 116
chaos, 16, 70
Chicago School, xv, 26, 27,
39,43,45,47,70,75,98,
113
Cheung, Stephen, 88
choice, 9, 11, 87, 108
Coase, Ronald H.
cattle vs. crops, 79
cattleman vs. farmer, 37
crops vs. meat, 32
damage, 98
fire & crops, 77-78
free goods, 37
gymnastics, 34
information costs, 37n
intellectual pollution, 27
intellectual pollution, 84
marriage, 47
maximization, 39
"my land," 79
neutrality myth, xvi
Nobel Prize, xiv
Pigou &, 25-26, 76-77
policy-making, 22
pollution, 25
property rights, xv, 39-
40, 63, 77, 79, 81-82,
102
publications, 23
reciprocal harm, 30-32
solutions, 39
sophistry, 98
sparks, 77-78, 98
transaction costs, 38-39
Typhoid Mary, 27
weighing gains, 63
Coats, A. W., vii-viii
Coleman, Jules, 38n
common grace, 76
costs
Buchanan on, 5-6
comparisons, 1
decisions &, 70
immesurable, 5-8
information, 37
objective, 6, 8, 21, 53-54
opportunity, 4-5, 9, 11
psychological, 37
Rothbard on, 49-50
social (see social cost)
solutions, 39
subjective, 1
sunk, 8
transaction, xv, 26-27, 28-
29, 38, 39, 64
covenant, 117
crime, 21, 71-72
criminals, 72-73
crops, 32
cynics, 1-2
Darwinism, 15
demand,2-3
dialectics, 45
dialecticism, 90-94
Diogenes,2
distribution, 30
dominion, 78
dualism, 107-9, 115-16, 118
(see also dialecticism)
economics
calculation, 109-10
circular reasoning, 2-3
dilemma, 21
equations, 41
ethics &, xii-xiii, 56, 91-
92, 102-3, 109
formalism, 89, 91
fraud,3
imputation, 104-5
judgment, 104-5
intuition, 98-99
law &, xv, 24, 68, 85
mathematics, 67
mechanism, 87
morality &, 40
neutrality myth, xvi
optimality, 68-69
policy-making, 18-19, 22,
30
predictions, 13
reason, 13-14
relativity, 16
science ?, viii
solutions, 88
tasks, 76
technical, 42
utopianism &, 41-42
value-free ?, 30, 31
welfare, 17, 19, 44
wicked, 31
efficiency
Buchanan on, 84
equilibrium, 65
equity &, 45, 89
myth of, 50-51
Rothbard on, 50-51
social, 33, 50-51
Egger, John, 1
envy,93
epistemology
ethics &, 101
lack of interest, 19
only youl, 4
resentment toward, viii-ix
Robbins vs. Harrod, x-
xiv, 17-19
self-interest, ix-x
equations, 41
equilibrium, 53, 57-58, 64,
65, 67, 94
equity (see justice)
ethics
appeal to, xii-xiii
Index 125
economics &, 102-103,
109
epistemoloty &, 101
externalities, xiv, 25-26
(see also pollution)
fines, 68-69
fire, 98-99
flux, 52, 95
free market, 93
freedom, 107, 116
Friedman, Milton, 13n
Galbraith, J. K., 88n
games, 29-30
genocide, 31, 55
Georgescu-Roegen, Nicholas,
16
God, 7-8, 31, 47, 58, 65, 76,
98,117-18
Goodrich, Pierre, 110
grace, 76
gunnery sergeant, 43
Halevy, Elie, xi
hall of mirrors, 44-45
Hardin, Garrett, 46
harm, 30-32, 69n
Harper, F. A., 57n
Harrod, Roy, x-xiv, 17-19,
51-52
Heibroner, Robert, xiv, 109
Heraclitus, 16, 59, 94
Humanist Manifesto, 15n
ideal type, 57
imputation, 8, 104-5
indeterminism, 108, 116
index number, 110-13
inflation, 110-12
institution, 45
intuition, 67, 98-99, III
Jewish law, 26
journals, vii
judge, 85
judges, 21, 27, 28" 33, 38,
42-43
judgment, 104-7
justice
cost of, 31
economics &, 56
efficiency &, 45
ignored, 39-40
sense of, 37
violating, 65
Kant, Immanuel, 95-96, 107-
8, 115
Keynes, J. N., 18n
kidnapping, 31
Kuhn, Thomas
anomalies, 87, 103
anomaly, 36
books, vii
common sense, vi
loss of faith, 87
malfunction, 13
neutrality, 23
new paradigm, 48
normal science, vi
paradigm, 38
paradigm game, 63
paradigm shift, 97
professionalization, vi
Lachmann, Ludwig, 88n, 94,
114-16
land,79
law
battle, 100-102
biblical, 68
economics, 68
economics &, xv, 24, 85
Leff, Arthur, 29n, 83, 100-
102
Lehn, Kenneth, xiv-xv
Letwin, William, 71
Levine, Aaron, 26, 46-47
Lewin, Peter, 33-34, 65
Liberty Fund, 110
Machlup, Fritz, ix
man, 15
market order, 10
marriage, 5, 29-30, 36, 47
mathematics, vii, 6, 67
measurement, 1, 5-8, 11, 14-
16, 21, 40
methodology, viii, 57-59
Mises, Ludwig von
accounting, 107-8
action, 58
evenly rotating economy,
58-59
methodology, 59-60
socialism, xiv, 57n, 89,
110
utilitarian, 57n
variables, 15n
Mitchell, lohn, 30
money, 29
murder, 73-74, 76
neutrality, xvi, 40
numbers, 6-7, 110-12
O'Driscoll, Gerald, 112
omniscience, 41, 60n, 70,
82, 94
ownership, 30
ox, 99
Pacioli, Luca, 107, 119
Pareto, v., 42n
Parmenides, 16, 59, 94
Paton, William, 110
Pigou, A.C., 17, 20, 25-26,
76-77,99
pin-sticker, 75-76
policy-making, 52, 54 (see
also Robbins)
political science, xiii
pollution
appropriate level, 21
Coase's essay, 25
externalities, 25-26
solution, 88
Pigou's view, 20
Stigler & Coase, 82
subjective value theory,
12
Posner, Richard, 1, 24, 28-
29, 74n, 83
possibility, 10-11
price, 2-4, 10
prisons, 69
property rights
bundle of rights, 37
Coase on, xv, 39- 40, 63,
77,79,81-82, 102
enforceable, 38
Index 127
exclusion, 36
value of, 39-40, 63, 82
Protagoras, 15
punishment, 21
railroad, 99
reason, 13-14
Regan, Donald, 38
relativity, 15-16
responsibility, 98, 106, 117
restitution, 69, 80, 98
Rizzo, Mario, 53
Robbins, Lionel, x-xiv, 17-19,
85, 112
Rothbard, Murray N.
damages, 79
efficiency, 50-51
ethics, 56
farmer & railroad, 49-50
policy-making, 52
social cost, 48
utilitarianism, 54-55
Rubin, Paul, 72n
scarcity, 43
science
economics, viii
psientific, 68
sacred law, vii
Shackle, G. L. S., 88n, 114-
16
Shenoy, Sudha, 112
Siegfried, John, vii
Smith, Adam, 14
social change, 95
social cost
Becker on, 71-72
denial of, 33, 48-49
efficiency, 33
ethical problem, 30
God's hustice, 98
Lewin on, 33
market failure, 20
Pigou,20
pollution, 20
social order, 47
social theory, 95
social value, 18
social wealth, 29
socialism, 89-91, 92, 110
society, 3, 16
sociology, xiii-xvi
sparks (train), 77-78
speed of light, 15
75n, 82
stock market, 10
subjectivism, xi-xiv, 17-19,
chap. 4
suicide, 16-17
sunk costs, 8
supply, 2-3
tastes, 76, 113
taxation, 17, 19, 85
Thirlby, G. F., 9-10, 70
transaction costs, xv, 26-27,
28-29, 38-39, 64
Typhoid Mary, 27
uncertainty, 50-51, 54
utilitarianism, 25, 54-55
utilities, 1
utility, x-xiv, 17-18, 21, 28,
30,32,34,40,85
utopianism, 41-42
value
changing, 51, 104
imputed, 8, 14
neurality &, 40
objective vs. subjective,
104
scale, 21
subjective, 5-8, 14, 17-19,
chap. 4
Van Til, Cornelius, 52-53,
59, 93-94, 101, 107
water-diamond paradox, 14
wealth, 29
Weber, Max
dialecticism, 90-94
ideal type, 57n
rationality, 90-92
welfare economics, 17, 19, 44

The Coase Theorem - Economic Epistemology

Uploaded by

Copyright:

Available Formats

The Coase Theorem - Economic Epistemology

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

The Coase Theorem - Economic Epistemology

Uploaded by

Copyright:

Available Formats

A STUDY IN ECONOMIC EPISTEMOLOGY

You might also like