Welfare Economics and Externalities in an Open Ended Universe: A Modern Austrian Perspective.

• Author: Ford, George S.

The author's stated goal is to develop, within the bounds of Austrian theory, a welfare criterion that can be used to judge and possibly improve economic efficiency when market failure, i.e., externality, exists. The basic tenets of Austrian theory are that a) competition is a dynamic, disequilibrium process, b) utility and costs are subjective and unmeasureable and c) information is always imperfect. Within this framework there can be no useful definition of social costs; there are only individual costs that are purely subjective in nature. Also, any notions of orthodox price-cost deviations are senseless as both value and cost are subjective and interpersonal utility comparisons are not acceptable. One can easily see how the standard Pigouvian and Coasian approaches to externality and welfare are senseless within this framework.

The book begins with an unequivocal denial of orthodox theories of externality and welfare. The first two chapters are devoted to summary and critique of orthodox and earlier Austrian positions on the topic. Cordato adopts theories of economic efficiency (individual) from those of Rothbard and Kirzner. Rather than viewing man as a utility maximizer, the Austrian approach sees man as a goal seeker; efficiency then is judged on the market's ability to disseminate information and allow individuals to better allocate resources to attain their goals. Voluntary exchange, in that it provides information, is viewed as efficient allowing market participants to better pursue their goals. On a grander scale, the welfare criterion, catallactic efficiency, is judged by the extent to which market activity encourages economic efficiency, i.e. the dissemination of information. Rather than searching for a set of optimal conditions there is no end-state to be reached; the process is "open-ended." The author defines an ideal institutional setting (IIS), the cornerstone of which is private property, which best facilitates the discovery of information. Within this IIS framework, individuals are best able to employ resources as they pursue goals. In summary, welfare is enhanced when individuals are allowed to use private property to pursue their goals via voluntary market exchange. The IIS is the ideal state in which this activity can occur. Therefore, policy that moves society toward the IIS is efficient and welfare enhancing. So, deviations from efficient conditions are measured at the institutional level rather than by non-optimal...