Saturday, May 12, 2007

Coase's Theorem

I just read an elegant presentation of Coase's theorem. It's well-worth reading for what it says at face value but it's even more interesting for the implications it left dangling.

One of those implications is that economists don't distinguish between fundamentally different situations like who pays for pollution controls. So long as pollution controls are paid (or not paid) if it is "efficient" for them to be paid for, the question of who pays for them is considered irrelevant. This is not consistent with people's daily experience.

Indeed, the question of who pays for pollution controls goes back to the initial allocation of property rights. Imagine considering the initial allocation of an apple tree found in the wild to be "irrelevant". Doesn't quite work, does it? Far from disproving the importance of the definition of property rights, Coase's theorem only underscores its importance in pre-choosing winners and losers.

Of course, if one set of investments is going to be winners and another set is going to be losers, if the former are going to be vastly more profitable at the expense of the latter, then it's going to affect the outcome of future investments. The profitable business is going to have more money to reinvest with than the less profitable business. We know from the oil industry that in the real world, companies don't invest far out of their sector. A steel mill isn't going to buy up resorts. And why should it anyways when it is doing a most profitable business?

So the definition of property rights matters. But it's actually worse than this because it's impossible to predict all the ways in which technology and society will evolve in the future. Consequently, it's impossible to predict all of the property distinctions human beings will consider meaningful and important. Who could have known two centuries ago that privacy would be a luxury? Or that airspace would ever become important?

Since we can't define property rights a priori, and Coase's results demonstrate there is no algorithm to decide who is the victim in a situation, it follows that property rights are an AI-complete problem. Only an intelligent agent can determine who can more easily afford to bear the burden of resolving a conflict given the available technology. The neo-liberal agenda dies stillborn.

As if that weren't enough, there is the moral dimension to consider. Certain exchanges simply shouldn't be forced for entirely moral reasons. Organ exchange is a good case in point. Organs may be donated but selling them degrades the value of human beings, degrades the value of living in a society that permits such things. Economists would no doubt like to call this an externality, and in a sense it is, but it's one whose value is entirely unquantifiable.

So Coase's results are extremely interesting but if you want to get a neo-liberal argument out of them, don't even bother.

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