Coase on Koppelman on Somin on Koppelman on Somin on Koppelman

A Post-Script to the Balkinization symposium on Andrew Koppelman's Burning Down the House.

In his final comment responding to critiques of his book Burning Down the House, Professor Andrew Koppelman responds to this VC post by Ilya Somin noting:

Somin does not dispute my claim that sometimes, large regulatory programs are justified.  But, he says, the characteristic failures of democratic governance "amount to a systematic relative advantage of the private sector that should create a presumption against state control. The problem isn't limited to one or a few specific areas of government policy."  This is not, however, the sort of question that is appropriately addressed with presumptions.  As I say in the book, "whether this is so in any particular case cannot be resolved without attention to the local evidence."  (69)  Presumptions are not a substitute for such evidence.  Sometimes libertarians can supply it: we are well rid of the Civil Aeronautics Board and the pre-1980 Interstate Commerce Commission restrictions on trucking.  But sometimes the evidence points the other way. . . .

The modern regulatory state is a mighty complex enterprise, and it's hard to make reliable generalizations across the whole.  The most powerful case for intervention is presented by problems of externalities, positive or negative, in which if government doesn't do something it just won't get done.  Libertarian presumptions, as lately deployed in the Supreme Court, have crippled the capacity of the federal government to address climate change and Covid. This is not a gain for liberty.

This comment made me think of Ronald Coase, whose work on "externalities" and transaction costs is routinely quoted, but often mischaracterized or misunderstood. Indeed, while Coase's work is often cited for the proposition that the presence of externalities (and transaction costs) justifies governmental intervention, that was not how Coase understood his own work.

As Coase wrote in the introductory essay to The Firm, the Market and the Law:

the existence of "externalities" does not imply that there is a prima facie case for government intervention, if by this statement is meant that, when we find "externalities," there is a presumption that governmental intervention (taxation or regulation) is called for rather than the other courses of action which could be taken (including inaction, the abandonment of earlier governmental action, or the facilitating of market transactions). . . .

The fact that governmental intervention also has its costs makes it very likely that most "externalities" should be allowed to continue if the value of production is to be maximized. . . . The ubiquitous nature of "externalities" suggests to me that there is a prima facie case against intervention.

And here's a little tidbit: The word "externality" never appears in Coase's eminal essay, "The Problem of Social Cost," and that was deliberate on his part, as he did not believe the term (or the concept) added much of use to the analysis.

My own comment on Koppelman's book is here.