2 Jun 2008

The Wisdom of Wantrup

I will be a Ciriacy-Wantrup postdoctoral fellow at UC Berkeley in the fall. Professor Wantrup was an institutional economist who deserves a wider recognition for his thinking. Take this* example:
My main criticism is that the book** presents a conceptually insufficient model of economic growth because the role of institutions is left out.

Sometimes the author himself seems vaguely aware of this insufficiency. He is "puzzled" by economic decisions under a feudal land-tenure system and "baffled" by the economic behavior of plantation owners under a system of slavery. Still, none of the economic institutions that are significant for resource use -- such as the systems for owning and using property, the systems of water rights, taxation, collective and cooperative organizations, and quasi-governmental agencies like public districts -- is mentioned, much less systematically treated.
This excerpt is a little scary, since it seems to touch on so many topics central to my dissertation, e.g., a water cooperative in a public district with problems managing rights. (I only read this paper after I was done.)

Even more interesting is Wantrup's comment on water institutions:
My concern is that the doctrine discussed in the previous sections will lead to complacency regarding the institutional difficulties that lie ahead in realizing the full benefits of the green revolution and avoiding serious setbacks. According to this doctrine, there are no such difficulties because farmers themselves will accomplish those changes in water institutions that become necessary.
This comment is in the tradition of those who critique the Coase Theorem's assumption of zero transaction costs.*** Since institutional transactions costs can be significant, ignoring them can lead to policies that produce perverse, surprising and/or harmful results. Unfortunately, these concerns are still relevant today.

Bottom Line: Read this paper.

* Ciriacy-Wantrup, S-V (1969). "Natural Resources in Economic Growth: The Role of Institutions and Policies." American Journal of Agricultural Economics 51(5). pp. 1314-1324. In the tradition of this, I have posted the paper here.

** Schultz, Theodore (1964) Transforming Traditional Agriculture. Yale University Press. Schultz won the Nobel prize in 1979.

*** Coase did not name the theorem after himself and explicitly acknowledged the strong assumption of zero transaction costs. (To the contrary, he is one of the founders of institutional and transactions costs economics.) He should not be blamed if others cite him in claiming that all externalities can be solved by the simple assignment of property rights.


The-ghost-of-Pigou said...

Regarding Coase - Are you kidding me? Have you even read his seminal article??

Here is the motivation (the whole article is essentially a Pigou slamming):

"The economic analysis of such a situation has usually proceeded in terms of a divergence between the private and social product of the factory, in which economists have largely followed the treatment of Pigou in The Economics of Welfare. The conclusions to which this kind of analysis seems to have led most economists is that it would be desirable to make the owner of the factory liable for the damage caused to those injured by the smoke, or alternatively, to place a tax on the factory owner varying with the amount of smoke produced and equivalent in money terms to the damage it would cause, or finally, to exclude the factory from residential districts (and presumably from other areas in which the emission of smoke would have harmful effects on others). It is my contention that the suggested courses of action are inappropriate, in that they lead to results which are not necessarily, or even usually, desirable."

Moreover, in his qualifying statement of transaction costs, he comes to this anti-government intervention conclusion:

"There is, of course, a further alternative, which is to do nothing about the problem at all. And given that the costs involved in solving the problem by regulations issued by the governmental administrative machine will often be heavy (particularly if the costs are interpreted to include all the consequences which follow from the government engaging in this kind of activity), it will no doubt be commonly the case that the gain which would come from regulating the actions which give rise to the harmful effects will be less than the costs involved in government regulation."

To suggest that Coase does not rightfully deserve significant share of the blame for the misguided views of so-called “free market environmentalists" (and political libertarians), is to give an incorrect historical interpretation of Coase's influence.

David Zetland said...

Well GoP, I have read his article and agree on your interpretation of his statements (and of his responsibility for both movements). I was pointing out that he did not claim that transactions costs would be zero.

My POV is generally in alignment with him, Hayek, et al., i.e., that government can hardly know how or where to set the Pigouvian tax. That said -- and given the problem of setting property rights for clean air, global temperatures, etc -- I am in favor of a carbon tax (over cap and trade) because it is the most transparent means of addressing GW problems.

You might call this a Coasian way to implement a Pigouvian solution :)

gormk said...

David - Your two statements "... government can hardly know how or where to set the Pigouvian tax" (implying you want government to stay out) and "..I am in favor of a carbon tax (over cap and trade) because it is the most transparent means of addressing GW problems"
seems contradictory. The GW problem seems to be to toughest setting for knowing "wehere to set the Pigouvian tax" (or equivalently, by Weitzman's prices versus quantities result, tradeable quotas), so why favor intervention in this instance?

As far as pigouvian taxes go, the government doesn't need to know exactly the right level to set it at. This is a repeated game. Set t1 = X and see if you (society, people, government) like the outcome, if not, iterate. In the meantime, you tax revenues are raised that can be used to provide public goods (education, parks, water supply infrastructure, etc) to correct another type of market failure (underprovision of public goods in a Hayekian world). Hence, you get double dividend!

David Zetland said...

Gorm -- As you will note, I hedged with "that said" before I sided with the carbon tax -- for the reasons you made clear. :)

As far as revenues are concerned, I'd favor a 50/50 split between a straight rebate (per capita) and provision of public goods. (I'm wary that "public goods" like ICBMs might get more funding.)

gormk said...

Yes,well, so you gave an indication that the next statement might be contradictory. So how DO you reconcile the two statements? How can you, at once, be generally sceptical to government intervention (even with economic instruments) AND favor intervention in the most difficult instance, in terms of knowing what's socially optimal (leaving the issue of whether global climate change can even be attributed in any way to human activities)?

David Zetland said...

If there is going to be intervention, that's the one I'd recommend. (I am not quite as skeptical as Brian Caplan, who supported the gas tax holiday because it would be a cheap political move relative to other, more-costly, moves...)

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