By way of followup to yesterday’s post on locavores, I present this letter to the editor of Science, written in 1976 by Harvard economist Robert Dorfman. You can think of Earl Cook, to whom Dorfman is responding, as the Steven Budiansky of his time.
The article by Earl Cook, “Limits to exploitation of nonrenewable resources”, is extremely informative. In fact, I should like to assign it to my class except that it is marred by an egregious fallacy. Since this fallacy has been turning up repeatedly in writings about environmental and natural resource problems, I wish to call it to the attention of Science readers.
The mistake has to do with the nature of social cost. Cook, for example, writes “To society … the profit from mining (including oil and gas extraction) can be defined either as an energy surplus, as from the exploitation of fossil and nuclear fuel deposits, or as a work saving, as in the lessened expenditure of human energy and time when steel is used in place of wood … “. A number of other authors also equate social cost with the expenditure of energy.
For better or worse, neither kilocalories nor man-hours nor any other directly observable, unidimensional, physical input is an adequate measure of social cost. A moment’s thought should make this compelling. Consider a very simple self-contained economy where coal is extracted by surface mining and the coal seams lie under the only land suitable for growing hops. The greater the amount of coal that is surface-mined, the less the amount of beer that can be brewed. In these circumstances surface mining may be a loser, socially speaking, even though it requires the expenditure of far less than 12,000 BTUs per pound of coal; and subsurface mining may be advisable even though it requires more energy per pound extracted than surface mining, particularly if there is a beer shortage. The social cost of surface-mined coal includes the reduction in the availability of beer along with the expenditure of man-hours, capital investment, and other things too numerous to mention.
Clearly, then, social costs cannot be measured in simple physical units. The only adequate measure is what economists call “social opportunity costs”, meaning the social value of the alternative commodities that have to be forgone in order to obtain the commodity being produced. Under certain idealized conditions, this opportunity cost is measured by the dollars-and-cents cost of producing the commodity. Under realistic conditions the dollars-and-cents production cost is a fair approximation to the social cost. Under almost any conceivable conditions, the dollars-and-cents cost is a much better approximation to social cost than the amounts of energy expended or any other simple physical measure.
…
Energy is indeed a scarce and valuable resource, but it is only one of many, and there is a good deal more to life than British thermal units.
Robert Dorfman
It is, however, the case that at every previous time in human history, the prices of goods did not reflect the true social cost of making them, because they did not include the immoralities of things like slave labor or grossly inhumane treatment of animals.
Wouldn’t it be an amazing coincidence if we happened to be born at the first moment of human history when prices really did reflect all of these costs?
I think it’s more likely that there are still some immoralities that are not reflected in the costs of goods, and we have at least some social responsibility to figure out what those immoralities are (and adjust shopping accordingly).
In particular: (a) polluters probably aren’t really paying the full social costs of polluting, especially in countries with little regulation; (b) animals are often still mistreated in food production; and (c) even when children “voluntarily” enter into labor arrangements, the main reason that they do this is because they’re not allowed to engage in the most economically productive alternative: borrowing money to finance their own education and to live on, and then once they’ve got an education, paying back the loans out of their future earnings, and keeping what’s left over. Labor is still to some degree coerced labor if you’ve given them no other choice by outlawing their alternatives.
I think the moral is that for the kinds of costs that ARE reflected in the price (like energy costs and opportunity costs), you don’t have to feel guilty about ignoring those. You may still have some social responsibility to ask whether some costs are not reflected in the price.
Lets see if I have got this. People buy food based on all sorts of subjective assesments, so lets assume that we are talking about identical products – say 2 tomatos of equal quality. If we want to asses the overall social cost of getting that tomato to my local shop, then the price is the best way of doing this. I will do most social good by buying the cheapest tomato. This will leave me more money to do other good with, such as supporting my local restaurant and enjoying a good meal. It is impossible to asses the plethora of interactions that went into getting those tomatos there, so I cannot (even in principle) work out whether energy costs caused greater social harm than extra land use, fewer pesticides, unemployed farm labourers, employed machine workers and all the others.
Of course, products are rarely identical, so if I particularly like the flavor of my local tomato, then I am quite at liberty to pay more for it because it is, to my mind, better. The extra social cost which resulted in higher price has produced a social gain (better flavor).
Presumably this also applies in cases where I know that the production has caused harm – say cheap battery chickens. If I disaprove of keeping chickens in this (to my mind) cruel manner, I will be doing more social harm by avoiding battery chicken or eggs, because the resources saved will have produced a more than compensating good elsewhere. (again assuming the “quality” is the same.) Or am I logically OK to avoid battery poultry because the chicken pays the cost, which is not included in the price?
I’m having difficulty thinking about what a term like “social cost” actually means. There is no cost accrued to a group of people that is not first accrued to an individual. In that case, why not simply label this as “cost” and be done with it?
On the other hand, if “social cost” is the “sum of all cost accrued to all individuals within a society as a result of a particular action,” then we are faced with the impossible task of quantifying what everyone’s cost is. In other words, at a certain point it becomes a value judgement on the part of the person calculating the sum. This is neither a true reflection of the “sum cost across society” nor a number with any connection to the actual experiences of real human beings. It is made up.
Especially in environmental issues, we are constantly barraged with numbers that purport to tell us what our social costs actually are – but how many of us really identify with those numbers?
The only meaningful comparison is a question such as, “Would you rather have more coal or more beer?” Even this question is entirely contingent on how much coal and beer a particular individual has, and how much of each they would be willing to give up to get more of the other, or how much of a third commodity they would give up for both coal and beer.
The point is that you can never “sum” these numbers because they’re not real numbers (i.e. part of the set of Real Numbers). They are value judgements. They are preferences. It’s possible for an individual to quantify them, but impossible for anyone to quantify them on behalf of “society.”
The whole problem is misrepresented.
I’m having difficulty thinking about what a term like “social cost” actually means. There is no cost accrued to a group of people that is not first accrued to an individual. In that case, why not simply label this as “cost” and be done with it?
On the other hand, if “social cost” is the “sum of all cost accrued to all individuals within a society as a result of a particular action,” then we are faced with the impossible task of quantifying what everyone’s cost is. In other words, at a certain point it becomes a value judgement on the part of the person calculating the sum. This is neither a true reflection of the “sum cost across society” nor a number with any connection to the actual experiences of real human beings. It is made up.
Especially in environmental issues, we are constantly barraged with numbers that purport to tell us what our social costs actually are – but how many of us really identify with those numbers?
The only meaningful comparison is a question such as, “Would you rather have more coal or more beer?” Even this question is entirely contingent on how much coal and beer a particular individual has, and how much of each they would be willing to give up to get more of the other, or how much of a third commodity they would give up for both coal and beer.
The point is that you can never “sum” these numbers because they’re not real numbers (i.e. part of the set of Real Numbers). They are value judgements. They are preferences. It’s possible for an individual to quantify them, but impossible for anyone to quantify them on behalf of “society.”
The whole problem is misrepresented.
Bennett Haselton –
“Wouldn’t it be an amazing coincidence if we happened to be born at the first moment of human history when prices really did reflect all of these costs?”
You mistake the argument. It’s not that prices really reflect all of these costs, it’s that we have reason to doubt that we can do better, in terms of our own private shopping.
Let’s take your case of polluters aren’t really paying the full social cost of polluting. But how can we do better about calculating the full cost of pollution? Different crops have different requirements in terms of land area, irrigation, fertilisers, labour needed (should kids be taken out of school for the harvest). Let’s say that corn can be grown in either site A or site B. In site A, there’s ample rainfall, in site B, irrigation systems must be built (with all the attendent social costs of building those). In both sites, the land used for growing crops could be used for housing, in site A existing nearby house prices are about $100,000 for a 3-bedroom house, in site B they’re about $400,000 per house. In site B also the land could be used for a company making some advanced medical equipment (with all its attendent social costs), in site A the alternative use is a panel-beating company (with all its attendent social costs). At site A, pesticides used are likely to run off into the nearby river, unless capital equipment is installed (with all its attendent social costs), at site B, pesticides are likely to wind up soaking into the soil.
And I could keep going like this. How do you decide which of these costs are better or worse?
You mention the low-regulation countries. What if they’re like that because they face other, higher costs? If people’s lives are at risk, people are willing to run more risks. For example I’m from NZ, which is heavily anti-nuclear because of radiation fears. But no one proposes banning hospitals from using radiotherapy in cancer treatments, because the potential gains to the otherwise-terminally-ill cancer patient are so obvious. In poor countries, the trade-offs are even harsher. Typically the necessity defence, even in rich countries, is an accepted reason for breaking laws, eg the lost hiker at risk of starving can break into a isolated hut, or eat a rare wild species, to avoid starving. In poor countries, a lot more people are close to starving, so the social costs of environmental regulations are higher. It’s entirely possible that we know less about what other countries need than the people living there. (I’ve read some shock-horror environmental stories about NZ companies’ use of 1080 poison, and how terrible that is. What they miss is that the government department, the “Department of Conservation” also uses 1080 poison, it’s a great poison for NZ’s needs, as it really affects mammals and NZ split from Gondwanaland before mamals evolved, so the only native mammals are two species of bats, and the 1080 bait can be flavoured so they don’t like to eat it. Animals like possums are a major threat to NZ forests and rats and mice to NZ native birds. Using 1080 poison is right in NZ, though it wouldn’t be most places in the world).
You may still have some social responsibility to ask whether some costs are not reflected in the price.
This is a good point, and perhaps Steve Landsburg should have included it. Where the locavores fall down is that they think that the costs that already are reflected in the price can then be blithely ignored.
I have thought about the battery chickens a bit more. The cost of suffering to the chicken is just one other externality, like the “subsidy” for not taxing the energy use for environmental damage. I cannot start to include this for the same reason I cannot logically start to worry about food miles. That means I am effectively being immoral by not buying battery produce, unless it is genuinely because I prefer the alternative (say in a blind test). I should put all thoughts of chicken welfare out of my head when buying chicken.
I think this is why people like Budianski challenge the narrower claims of movements like Locovores. It may be missing the main point, but it is easier to get the idea over.
Ohmygosh what a blast from the past… In my previous life as an academic I did use this letter by Robert Dorfman in my freshman course Econ 101 to illustrate the concept of opporunity cost. The letter is great, but what I particularly found funny is Earl Cook’s (who was some kind of science dean at Texas A&M, I think) response to the letter — completely dismissive of Dorfman’s comments (if I recall correctly); an attitude that even 30+ years later you find in people, completely dismssing the concept of “opportunity cost”.
By the way, if the current bloggers are interested, for further reading I recommend that you read Ronald Coase’s “The Problem of the Social Cost” article, which elaborates a bit further (including externalities, that some people mention above). Economics at its superb best.
I’m not sure I follow the two statements in the quoted exerpt, “The social cost of surface-mined coal includes the reduction in the availability of beer along with the expenditure of man-hours, capital investment, and other things too numerous to mention.
“Clearly, then, social costs cannot be measured in simple physical units.”
Why can’t they? Reducing the acreage available to hops will increase the price of hops, and also of beer. This will in turn increase the amount that hops-growers are willing to pay for land, and at some point hops-growing and coal mining will achieve equilibrium.
Bennett Haselton-
“(c) even when children “voluntarily” enter into labor arrangements, the main reason that they do this is because they’re not allowed to engage in the most economically productive alternative: borrowing money to finance their own education and to live on, and then once they’ve got an education, paying back the loans out of their future earnings, and keeping what’s left over. Labor is still to some degree coerced labor if you’ve given them no other choice by outlawing their alternatives.”
I believe I have discovered the reason that I so often disagree with you- we have fundamentally different ideas about the default state of the world.
As I view it, there were poor children in poor societies, who could either farm, hunt, or starve. Someone later came along and introduced a third option- work in a tire factory.
As you view it, there were poor children in poor societies, who could either farm, hunt, borrow thousands of dollars to get a quality education, or starve. Someone later came along and introduced a fourth option- work in a tire factory. However, they then outlawed the “borrow thousands of dollars to get a quality education” option, thus forcing the poor children to work in the tire factory.
I have two problems with your theory. 1) It does not describe the standard “model” that is the real world as we know it, since it is not the case that poor children in poor societies had access to student loans. 2) It is inconsistent. Students are no more forced to work in a tire factory in your theory than they are in mine, or in the state of the world before the tire factory even existed.
I simply can’t subscribe to a theory that is both inconsistent and only applicable to non-standard models.
In response to your theory, I could just as easily opine that since someone has “outlawed” the alternative of a free world-class education, 2 yachts, a McMansion, and a purple llama, the poor children in poor societies are “coerced” into a predatory lending scheme whereby they must take on debt in order to get an education, making them financial slaves for decades.
Assumptions about the default state of the world matter. Personally, I find it more believable that the world is a place where prices are reasonably accurate measures of social costs and no one has access to student loans or education unless someone else chooses to provide that access. You assume that the world is a place where prices do not reflect social costs and everyone has access to student loans and an education unless someone “outlaws” that access by providing another alternative.
Who knows, maybe we would actually agree on policy proposals if only we were both describing the same model. Until then, I have no idea what reality you are living in, but I have certainly never encountered it.
Further thoughts. I presumed I was justified to buy the more expensive product if I think it is better quality, as my enhanced enjoyment is equivalent to the increased social cost. My distaste at the battery farming methods reduces my enjoyment of the product, and is thus equivalent to lower quality. I am therefore justified in spending more to avoid battery hens in the same way as I am justified in paying more for better quality. But my earlier thoughts led me to believe that the greater price indicated greater social cost, so my increased enjoyment at avoiding battery hens must be paid for by greater social cost than would have occured by buying battery hens. This reduces my enjoyment. I seem to be back to having to ignore any welfare considerations.
The only way I can do so justifiably seems to be if I somehow know that the externalities “tip the balance”. Steve has argued that this is not possible, as we cannot possibly know all of them. However, if I knew that, say, the low price was achieved by a 90% subsidy from the procedes of crime, I could justifiably say that the externalities not indicated in the price were higher than the social costs of producing a slightly higher priced tomato (I think). So if the externalities are great enough, they can overwhelm the price indication. I don’t know if this can happen in real life, but it can happen in principle.
@Harold: to be clear about externalities, if 1. you buy a chicken, then you have internalized all angst about chicken raising in your decision to buy the chicken, and thus there is no externality from your purchase, unless you are causing harm to another person. 2. Externalities occur when _other_ people buy and sell a product that somehow harms you, which is the point of an externality, since someone else has made a market transaction that harms (or benefits) you. The model (in the economics sense of model) does not include the direct “harm” to the chicken, only the cost that 3rd party people suffer from their perceived notion of harm to the chicken.
@ Harold:
The price of chicken would surely include the aggregate ‘feelings’ of society towards the treatment of the chooks. It could be the case that very few, even those in the know of how food gets to our plate, are bothered enough to not purchase these badly treated chooks.
AIV: you answered your question in it yourself. The price of hops is not a simple physical unit, unlike a calorie (I’ve taken enough physics courses to know that “simple” isn’t applicable to anything involving energy, but hey, I’ll continue with the existing wording). The price of hops reflects social values, like how much people like beer. The number of calories is independent.
thedifferentpupil &sam, Thanks for clarifications, but I am not sure they help. The externality is the suffering of the chooks. My angst is internalised, but the suffering is not. You say unless I cause harm to another person – but cannot we include harm to other creatures? The economic model may not include this, but then the economic model may be incomplete.
Similarly, the price reflects the aggregate feelings of society towards mis-treating chickens. Say I value chook welfare much greater than aggregate society. Fine, I may say, then don’t buy battery chicken. But from the initial argument, I am causing more social harm by not buying the cheapest product. I am not “allowed” to consider anything about the welfare of non-economic players in my personal descisions.
In a hypothetical case, say the cheap chickens were produced by slaves. The feelings of the slaves have no place in the economic model, they are not an externality as they have no money. The economic way of thinking prevents me considering their welfare. Does this not lead to the conclusion that if slavery produces cheaper goods, then slavery should be supported? Even if you did consider the feelings of the slaves an externality, we are not “allowed” to consider them, in the same way as we should not consider the energy subsidies.
Hi Harold,
Good reply.
We have an interesting parallel occurring at the moment in Australia with pork. One of the big two national supermarket chains will soon refuse to buy pork from farms that use sow stalls. The main point of contention, and rightly so, is that, while it forces local pork farmers to make their farming practices more humane, Coles (the supermarket in question) won’t expect the same standards to be applied to international pork farmers.
It’s likely that (some) Australian farmers won’t be able to match price of imported pork due to the efficiencies sow stalls allow, and the subsidies paid to international pork farmers in Denmark and the USA.
The reaction of the farmers is one of hostility.
It will be interesting to see how this plays out.
I think your point is a good one.
Harold,
I think you’re pretty safe buying cage free chickens. So long as the cage free chicken market is competitive, you can be pretty sure that the extra cost of a cage free chicken goes toward the most efficient method of raising them cage free. You need not worry about that extra social cost because to buy your cage free chicken, you had to spend a few extra dollars that you presumably earned by contributing something of equal value to society…
You say “I don’t want my dinner to suffer too much before it reaches my plate” and you go and buy cage free chickens. A locovore says “I want to decrease my environmental impact” and chooses to buy local. While it’s pretty clear that you are achieving your goal of saving chickens from suffering, it is not clear that the locovore is achieving their’s of decreasing their environmental impact. There is no reason to believe that the extra money they spend to buy local is the cost of producing food in an environmentally friendly manner – it’s really the cost of producing food locally (which may or may not be environmentally friendly, but obviously there are so many factors involved that it’s practically impossible to tell).
Thomas Purzycki: My gut agrees with you, but I think the logic does not. Your argument is similar to Budiansky’s. He says locavores are wrong because the stated aim is not achieved; buying local does not reduce energy costs. Steve’s point is that this is the wrong question, and we cannot possibly hope to know all the social costs and trade-offs; the best estimate is the price. If this is the case, then I must assume that cage chickens have lower overall social costs since they are cheaper. If I avoid them, I am adding to the overall social costs. If the chickens suffering is an externality, then I would be assuming that this is greater than all the other other social benefits, and there is no way I can know this.
Fortunately, non-cage birds taste better (to my mind), and I have sufficient funds to indulge my tastes in this small regard. However, perhaps I will have to forego that little extra glow of smugness that came from thinking I was helping the world to be a better place at the same time.
Haha, yeah my argument does sound like Budiansky’s. I guess this is the point where I have to throw up my hands and admit I must have somehow missed the point of Landsburg’s post.
Still, I don’t think locovores or environmentalists or animal rights activists (or anyone really) care about social costs other than in the sense that they want to get a good price. I think they care about specific costs that they believe are not accounted for properly in the price. If we believe that everyone should try to minimize social cost, forget about deciding between cage free chicken and standard chicken – there are less socially costly ways of sustaining yourself than chicken (or any meat for that matter). Such logic would lead everyone to buy only the minimum (and cheapest) goods necessary to sustain themselves while working their asses off to contribute to the good of society. In other words, such logic would suggest everyone should become misers. While I know that Landburg loves misers, I don’t really think that he meant to suggest that everyone should be miserly. So I guess I’m back to throwing up my hands and admitting I must have missed the point somewhere >.<
I think the point is that if you want to pay more for a good because you prefer it, or is better quality, then that is OK. Quality costs more (generally), and if you enjoy the better quality, then it is worth paying for (for you). Meat is more expensive than vegetables, but if you want to eat meat, then you think it is worth the extra money, so the total social good is optimised. Your extra enjoyment is worth the extra money.
However, if you try to make choices based on some factor not inherent in the product (such as energy cost or animal welfare), then you are actually most likely making the wrong choice. You can compare the cost of two different chickens. Steve’s point (I think) is that it is fools errand to try to work out which is the most socially useful chicken based on a small amount of knowledge of say animal welfare (or food miles), because you do not have the whole picture. However, the price has already done that for you.
This (I think) is the logic. I still think there must come a point where the incomplete knowledge you have is enough to override the price signal, where your knowledge of some of the externalities is enough. I can see no way to identify where that point is.
One other thought. The price represents a snapshot. It is the equilibrium point at the moment. Is it not possible that there could be “better” equilibrium, but it won’t get there by itself? It needs a push to get it over the hump before it can settle down to a new, better level.
We saw such a situation with child protection laws a while back – there is a mechanism whereby introducing such laws could result in a more favourable position when run over time (several generations in that case). Maybe it is possible to get to place where everyone is just as happy, but animal welfare is also better.
Harold,
I’m not sure how animal welfare wouldn’t be considered a factor in quality. As you said, you do experience a certain amount of warm fuzziness (or smug superiority) when you purchase cage free chickens because you know that you are are saving one animal at a time from abominable conditions. It doesn’t seem clear why that benefit shouldn’t be considered to flow into your utility function any differently than something like enjoyment of superior taste. Anyway, here is an example:
Suppose you can purchase a caged chicken for $5 or a cage free chicken for $7. If we assume that chicken production is competitive, and that price is a good indicator of social opportunity costs, it seems pretty clear that because price is such a good indicator, the extra $2 you spend for cage free chicken goes directly toward the opportunity costs associated with raising chickens cage free (rather than caged). Furthermore, since price is such a good indicator and money doesn’t grow on trees, that opportunity cost is really a cost to you – you either have to earn an extra two dollars by producing something or forgo a $2 purchase elsewhere. If you choose to spend an extra $2 because it makes you feel warm and fuzzy, you have made the decision that the chicken’s comfort was worth at least the extra $2 of opportunity costs (assuming you aren’t deluding yourself about the connection between cage free living and chicken welfare). If you still aren’t convinced, imagine that some charitable animal rights association solicits donations and then pays chicken producers $2 per chicken to raise them cage free. Why should you be less entitled to smug superiority when you buy a $7 cage free chicken than when you buy a $5 cage free chicken (from a company working with the charity) and then donate $2 to that charity?
Actually Landsburg has made the argument elsewhere that if you want to be charitable you should pour all of you giving into the one cause you feel is most important. By that logic, perhaps you are better off buying the caged chickens and putting the extra $2 into something you care about more (unless you feel that chicken welfare IS the most important cause in the world). Haha so in the end maybe I do reach Landsburg’s conclusion albeit through a different argument.
I think that last point is the crux of this. If the price is the best estimate of the social cost, then my warm fuzziness disapears when I realise that the $2 spent on the cage free chicken was being put to better use by my buying a $5 chicken and spending the $2 elsewhere. At least, that is the argument. Somehow, I find my enjoyment of the poor old chook is still diminished if I know it was treated badly, and the vague benefits that accrue in opportunity savings elesewhere do not have the same emotional impact.