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• Foreword
• Preface
• Acknowlegments
• Cost and Choice
• 1.: Cost In Economic Theory
• Classical Economics
• Marginal-utility Economics
• The Marshallian Synthesis
• Frank Knight and American Neoclassical Paradigms
• 2.: The Origins and Development of a London Tradition
• Wicksteed and the Calculus of Choice
• H. J. Davenport
• Knight On Cost As Valuation
• Robbins, 1934
• Mises, Robbins, and Hayek On Calculation In a Socialist Economy
• Hayek, Mises, and Subjectivist Economics
• The Practical Relevance of Opportunity Cost: Coase, 1938
• G. F. Thirlby and “the Ruler”
• Mises’ Human Action
• The Death of a Tradition?
• Appendix to Chapter 2: Shackle On Decision
• 3.: Cost and Choice
• The Predictive Science of Economics
• Cost In the Predictive Theory
• Cost In a Theory of Choice
• Choice-influencing and Choice-influenced Cost
• Opportunity Cost and Real Cost
• The Subjectivity of Sunk Costs
• Cost and Equilibrium
• 4.: The Cost of Public Goods
• The Theory of Tax Incidence
• Costs and Fiscal Decision-making: the Democratic Model
• Costs and Decision-making: the Authoritarian Model
• Costs and Decision-making: Mixed Models
• The Choice Among Projects
• The Costs of Debt-financed Public Goods
• Ricardo’s Equivalence Theorem
• Tax Capitalization
• 5.: Private and Social Cost
• Summary Analysis
• A Closer Look
• Internal Costs, Equilibrium, and Quasi-rents
• An Illustrative Example
• Pigovian Economics and Christian Ethics
• Narrow Self-interest and Alternative-opportunity Quasi-rents
• Conclusion
• 6.: Cost Without Markets
• Prices, Costs, and Market Equilibrium
• Resource-service Prices As Final-product Costs
• Market Equilibrium, Costs, and Quasi-rents
• The Cost of Military Manpower: an Example
• The Cost of Crime: Another Example
• Artificial Choice-making
• Socialist Calculation and Socialist Choice
• Costs In Bureaucratic Choice

Pigovian Economics and Christian Ethics

The example above suggests that a defense of the Pigovian policy norm’s applicability may lie in the behavioral assumption that each person acts strictly in accordance with his own narrowly defined, materialistic “private” interest. His own behavior may be assumed to be wholly uninfluenced by the effects it exerts on other persons. Under such conditions, it might be argued, the demonstrated conflict between the corrective policy and the achievement of allocative efficiency would not arise. As the following section will show, even this restrictive assumption will not rescue the Pigovian analytics. At this point, however, the legitimacy of the assumption itself must be more carefully examined.

Initially, the behavioral assumption seems nothing more than an extension of the “economic man” who roams throughout predictive economic theory. Closer examination reveals, however, that the requirement here is much more restrictive than this. In the traditional neoclassical theory of markets, the implicit behavioral assumption is that of “nontuism,” first clarified by Wicksteed. This is merely the assumption that, by and large and on the average, individuals or firms engaged in market-like behavior leave out of account the direct interests of those who are on the opposing side of the trading contract. The “economic man” of Wicksteed can adhere to a Christian ethic without neurosis, since he can, if he so chooses, incorporate in his behavior pattern some recognition of the interests of all his fellows except those with whom he is directly trading. He may continue to “love his neighbor,” as long as his neighbor is not trading with him. In the externality relationship, by definition, trade does not take place. It seems reasonable to think that it is precisely in this kind of relationship that genuinely benevolent behavior patterns might be witnessed. Indeed, it might plausibly be argued that in almost all of our nonmarket behavior, there is potential externality and that the ordinary functioning of civil society depends critically on a certain mutuality of respect. When property rights are not well defined and, hence, market-like arrangements are difficult to establish, the very forms of behavior seem to pay at least lip service to something other than narrowly defined self-interest. “May I smoke?” provides a classic illustration.

The departures from behavior patterns based on narrowly materialistic utility functions seem to be almost universal only when personal externality relationships exist. That is to say, the argument against the narrow self-interest assumption applies fully only when the potential externality relationship is limited to a critically small number of persons. In large-number groups, by comparison, there may be little or no incorporation of the interests of “others” in the utility calculus of individuals. Here the individual really has no “neighbors,” or may have none in any effective behavioral sense, despite the presence of “neighborhood effects.” Under the latter conditions, the Pigovian logic and its policy implications are at least partially restored. The person who litters the nonresidential street in the large city probably does not worry much about the effects of his action on others. This suggests that, for such cases, the corrective devices implied by the Pigovian analysis should not generate conflicts with standard allocative norms provided, of course, that all of the other conditions required for their applicability are met.5

[5. ]It is perhaps worth noting here the interesting difference in emphasis between political scientists and economists, both of whom discuss essentially the same behavioral interactions. In politics, primary emphasis has traditionally been placed on political obligation, on the duty of the individual to act in the “public interest.” This represents an attempt to improve results through modifying the individual’s utility function in the direction of causing him to place a higher valuation on the utilities of others. Relatively little attention has been given until quite recently to the prospects of making institutional changes that will channel private choice in the direction of producing more desirable social results.

In economics, by contrast, institutional or policy changes have been the center of attention, and relatively little discussion has been devoted to norms for individual behavior. As our analysis shows, economists have implicitly assumed that individuals act in accordance with quite narrowly defined self-interest, and they have developed policy norms which may prove inapplicable if this underlying behavioral postulate is not descriptive of reality.

For an earlier discussion of this difference between the two disciplines, see my “Marginal Notes on Reading Political Philosophy” included as Appendix I in James M. Buchanan and Gordon Tullock, The Calculus of Consent (Ann Arbor: University of Michigan Press, 1962; Paperback Edition, 1965).