Briefly, in Economics, a situation where someone receives a benefit or a cost, other than through the operation of the market, is called an externality and when this happens we know the market fails to produce the best possible outcome.
Landsburg argument is that when I hire x instead of y, then y loses out. Similarly, if I urinate copiously on y, then y loses out. Why is it that I will be fined or jailed for urinating on y whereas I get off scot-free for not hiring him?
The answer is that hiring x rather than y is a market decision. Y's loss or gain is mediated by the market. There is no externality. Urinating on a guy, or committing some other nuisance, is not mediated through the market, unless he paid me to do it, or I compensated him for it.
Landsburg says 'the social value created by Gruen ( an author he likes) is determined by the value that you get from reading Gruen as opposed to reading someone else.'
This is mad. Suppose I chose to hire you to work for ten hours cleaning my house. I could have hired someone else to work for nine and a half hours. Is the social value of your ten hours of labor actually just half an hour of labor because that is the difference between my benefit from hiring you and my benefit from hiring someone else? If so, why stop there? The social value of everything is zero because the alternative to that thing is 99.9999999 recurring percentage of that same thing. Landsburg just destroyed the economy.
But Steve's just getting warmed up.
His post continues 'That social value is, most of the time, far less than your willingness to pay. But the reason markets work so well is that — most of the time — willingness to pay is an accurate gauge of social value. In this case it’s not, so there’s no reason to trust the market.'
So, according to Landsburg, when people buy a book by Gruen for ten dollars, the social value created by Gruen is less than ten dollars because people could have read Faulkner for free on their Kindle. Suppose Gruen is a believer in Landsburg's nutty Economics. She increases the social value of her product, at least for Landsburg, by offering him the following contract- either buy my book or I cause ten million dollars worth of damage to your body. Now Landsburg's social value from buying her book is just ten bucks short of ten million. Wow! Landsburg hasn't just destroyed the economy, he's resurrected it as an evil zombie.
But why stop with the Economy when one can also destroy Civilization? That's Landsburg's next step.
Question: How do you justify taxing carbon emissions without also taxing novelists?
Let me head off the obvious (but I think faulty) rejoinder that the carbon emitter is intruding on his neighbors’ property rights while Sara Gruen is not. Here’s why I don’t buy that: When we talk about setting policy, we’re implicitly talking about how property rights should be allocated in the first place. When we tax the polluter, we’re declaring that his neighbors have a property right to carbon-free air. If we tax Sara Gruen, we’re declaring that the Faulkner estate has a property right to the attention of potential readers. Neither of those property rights exists ab initio. Instead, they’re created by policies. So a claim that there’s a relevant property right in one case (but not the other) is not an answer to the question; it’s only a rephrasing of the question, viz: “Why is there so much clamor to create and enforce one property right but not the other?”
Suppose no rights exist ab initio. In that case, talk about setting policy can't implicitly be about rights at all. Either such talk explicitly creates rights or it does not. Nothing that goes on during the process of talking can have an implicit reference to rights because we have already stipulated for their non-existence.
What happens if some rights exist ab initio? Then implicit reference can be made to those rights and, while talking about setting policy, the scope of those rights may indeed be broadened such that new property rights become vested.
Landsburg asks- It is possible, perhaps, to understand why self-interested parties have found it worth their while to fight for carbon taxes but not for authorial taxes. My question is whether there’s a principled reason to tax polluters but not novelists. Anyone?
The answer, of course, is- the principles of Economics give a reason to tax externalities such that Social Costs and Benefits come into line with Private Incentives and penalties. If authors compete in the market, no externality requiring a tax arises though there are winners and losers. Carbon taxes, however, are one proposed solution to the Externalities associated with the use of fossil fuel.
You've got Landsburg wrong. He's talking about electronic books which have zero marginal cost.
ReplyDeleteSee his blog-
Dave B:
I must be missing something. In the example of the authors you say Sara Gruen causes a lot of damage to the authors she displaces. Isn’t this just competition. We don’t tax Samsung for displacing Apple products.
Yes, you’re definitely missing something. Samsung and Apple do not produce products that can be replicated at zero marginal cost. If you don’t see that this is critical to the argument, then you’ve not understood the argument.
Zero marginal cost itself gives rise to market failure. Monopoly itself gives rise to market failure. Both obtain in this situation. But Landsburg didn't phrase his argument like that.
DeleteLandsburg clarifies this- 'Suppose that I'm willing to pay $9 to read Faulkner or $10 to read Gruen. The Faulkner is already written, and available for $8.
ReplyDeleteThen if I read Faulkner, there’s a $9 social gain, of which I receive $1 in consumer surplus and the Faulkner estate collects the remaining $8.
On the other hand, if Gruen devotes $8.50 worth of effort to writing a book she can sell me for $8.99, then the social gain is the value to me of the book ($10) minus the cost to her of writing it ($8.50), or $1.50. Of this, I receive $1.01 in consumer surplus and she receives $.49 in producer surplus.
(Of course, she won’t write a book just for me, but she might devote $8500 worth of effort into writing a book for 1000 people just like me, in which case the numbers all scale up.)
So quite independent of the cost of my time, Gruen’s entry into the marketplace reduces social gain.'
The Marginal Social Gain from x is the Utility received by the consumption of the last x less any external cost. If I smoke a cigarette I gain utility, however if my smoking causes you dis-utility by worsening air quality in the room then the Marginal Social Gain is less than my utility from smoking. Indeed, it may be negative.
DeleteIf I smoke a Benson cigarette, instead of a Camel, there is not external cost to Camel, nor is there any external cost to the producer of any of the producers of the billions of goods I could have bought instead. This is because they are already related to me through the market. Essentially they made me an offer which I turned down. It was up to them to make me a different offer. All the relevant information has already been taken into account by the market- that's why the market solution is efficient. If however, there is information that the market does not take into account- e.g. an external cost or benefit- then a market failure arises.
Landsburg says- 'I can either read Faulkner or Gruen. If I read Faulkner there is a Social gain of 9 because that's my Utility for reading it. If I read Gruen, Social Gain is 1.50.'
Landsburg is wrong. Social Gain is 10. Her cost of writing it is irrelevant because it happened before I bought her book. It's a sunk cost. The book already exists just as Faulkner's book already exists. If I read it there's a marginal social gain. If I don't, there isn't.
Gruen's entry into the market does not reduce social gain. If no one reads her book there is no increment in Social Gain but it does not fall either
Suppose Gruen spends 8500 writing a book no one reads. She incurs a loss. However, this can only happen if Gruen did not have perfect information- i.e. her loss arises from information asymmetry which is a separate reason for market failure and has nothing to do with externality.
Landsburg is simply talking nonsense. What he does not understand is that Gruen's 8.50 of cost generates 8.50 of income for others- e.g. the coffee she drank and food she ate while writing the book. Suppose some of that 8.50 was not spent by her but represents 'psychic pain' or a 'self-produced' good- in that case some of the money she receives by selling her book is a compensation for that psychic pain or self-produced good, so it is still 'factor income'.
I think you've got hold of the wrong end of the stick. Landsburg is saying 'why are so many crap novels being published? people should read the classics instead'. This is literary criticism, not Economics- except of a tongue in cheek sort.
ReplyDeleteIf it's literary criticism, it is bad literary criticism because it does not understand that books written today. even if word for word identical to a work written long ago, nevertheless can have an enhanced aesthetic value- e.g. Borge's Pierre Menard's Don Quixote.
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