1 ESHET Conference 7-9 June 2018-05-08 Complutense University of Madrid John Stuart Mill and the Concept of Externality: What Co

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1 ESHET Conference 7-9 June 2018-05-08 Complutense University of Madrid John Stuart Mill and the Concept of Externality: What Co ESHET Conference 7-9 June 2018-05-08 Complutense University of Madrid John Stuart Mill and the concept of externality: what counts as a harm Elodie BERTRAND1 Draft version The history of the concept of externalities is necessarily also a history of the ethics of externalities. In this perspective, the philosophy of John Stuart Mill is inescapable. His principle limiting private liberty to what does not harm others is regularly referred to in the analyses of externalities (e.g., Chauvier 2013). Even more, this principle is sometimes interpreted as pointing at externalities (e.g., Medema 2009). The present paper aims at assessing the role of Mill’s harm principle in the definition of the concept of externality. It will interpret On Liberty (Mill 1859) and The Principles of Political Economy (1871, V.11) with the lens of the modern definition of externalities. Mill’s principle does not aim at involuntary harm, hence does not aim at externalities. However, it is true that On Liberty is crucial to the economists’ modern definition of externalities, but for another reason, insufficiently explored. Other types of externalities can be found in Mill: indirect harms that, in his view, do not justify public interference, and that correspond to external effects that are excluded from the standard definition of externalities. These are “moral” externalities, these effects of our actions that harm others by injuring their morality. I conclude that Mill does not refer to externalities as market failures, but that he gave welfare economists the philosophical background that justifies them in excluding moral externalities while their view of welfare as preferences satisfaction should lead to this concept. What counts as an externality rests on the liberal harm principle. The economists’ concept of externalities is grounded in Mill, but not in the sense Mill would write about externalities, rather because economists exclude from externalities the same moral effects that Mill excludes from the harm principle. 1 CNRS, Institut des Sciences Juridique et Philosophique de la Sorbonne, UMR 8103 (CNRS & University Paris 1 Panthéon-Sorbonne), [email protected] I thank Sophie Jallais, Nathalie Sigot and Regis Servant for their comments and suggestions. 1 1. Introduction Externalities pose specific problems to ethics. Moral philosophers agree that there is a duty not to harm, a principle that John Stuart Mill developed particularly in On Liberty (1859). Externalities, however, cause a peculiar harm, which is involuntary and indirect: it arises from the conjunction between an otherwise legitimate action and a specific state of the world that makes this action cause this harm to others. Does this harm become legitimate from the moment it is involuntary? Or does the harm to others taint the action that causes it with its illegitimacy? In his Ethique sans visage (Ethics without Face, 2013), the philosopher Stéphane Chauvier poses the problem in these terms, which bring to light two elements. First, the history of the concept of externalities is necessarily also a history of the ethics of externalities: thinking about externalities necessarily leads to think about its legitimacy or about the legitimacy of forbidding the action that causes it. Second, when reflecting about externalities, and therefore about their ethics, the philosophy of John Stuart Mill is inescapable. It so happens that his principle limiting private liberty to what does not harm others is regularly referred to in the analyses of externalities. Chauvier (2013) applies some parts of On Liberty to build his ethics of externalities. The jurist Michael Trebilcock parallels the delineation of Mill’s harm to others and the delineation of externalities: “What should count as an externality in welfare terms, or what should count as a harm to others in liberal terms?” (1993, 58-59). As for economics, Kenneth Arrow (1969) and Ezra Mishan (1971a; 1974), two important authors for the definition of the concept of externalities, made passing references to Mill. Regarding now the historical and philosophical analyses of the concept, the link between Mill and the concept of externalities is rarely developed. Donald Herzog (2000), professor in political theory and public law, suggested in a book review the important intuition that the borders of the externalities that economists take into account – technological but not moral – were grounded in Mill’s liberalism. Moreover, the sociologist James Coleman interprets Mill’s principle as applying to externalities (1990, 343). In his Hesitant Hand (2009), Steven Medema asserts that Mill’s harm principle directly aims at externalities: they would be included into the “harm to others” that public interference is legitimate in interfering with. Medema adds that Mill would also discuss a list of positive and negative externalities in the chapter of his Principles that delineates a legitimate sphere of economic intervention for the State.2 The present paper therefore aims at assessing the role of Mill’s harm principle (as expanded in On Liberty, 1859) in the definition of the concept of externality. This will lead to challenge a part of Medema’s interpretation and develop Herzog’s intuition. Analysing this role also contributes to the history of the concept (both in philosophy and in economics), and to the analysis of some philosophical presuppositions of the economic concept. In On Liberty (I, 9), Mill states from the start that the object of his book is to establish what will be later known as the “harm principle” (or “liberal principle”), which allows limiting liberty in case of harm to others (and only in this case): 2 In what follows, that public intervention is legitimate does not necessarily implies that it is necessary or that it is the only solution. Mill’s harm principle is not a sufficient principle; and when Mill opens a domain for public intervention in the Principles, he also adds that in each case, one has to prove that it is more efficient (see references below and Medema 2009, chapter 2). 2 The object of this Essay is to assert one very simple principle, as entitled to govern absolutely the dealings of society with the individual in the way of compulsion and control, whether the means used be physical force in the form of legal penalties, or the moral coercion of public opinion. That principle is, that the sole end for which mankind are warranted, individually or collectively, in interfering with the liberty of action of any of their number, is self-protection. That the only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others. In accordance with the modern and standard definition of technological externalities, the New Palgrave defines them as “the indirect effect of a consumption activity or a production activity on the consumption set of a consumer, the utility function of a consumer or the production function of a producer. By indirect, we mean that the effect concerns an agent other than the one exerting this economic activity and that this effect does not work through the price system” (Laffont 1987, 263). The modern definition excludes pecuniary externalities and other utility interdependences (like envy). To proceed, this paper interprets Mill’s On Liberty (1859, OL herein) and book V (precisely ch. 11) of The Principles of Political Economy (1871 for the 7th edition, PPE herein) with the lens of the modern definition of externalities. On the one hand, Mill’s harm principle does not aim at involuntary harm, hence does not aim at externalities. Examining other passages from his works that are sometimes interpreted as referring to externalities, I will argue that once put in their contexts, it must be recognized that they do not aim at externalities. On the other hand, however, it is true that On Liberty is crucial to the economists’ modern definition of externalities, but for another reason, insufficiently explored. Other types of externalities can be found in Mill: indirect harms that, in his view, do not justify public interference, and that correspond to external effects that are excluded from the standard definition of externalities. These are “moral” externalities, these effects of our actions that harm others by injuring their morality. They were excluded while welfare economists restrained the concept of externalities to technological externalities. But if economists were consistent in their view of welfare as satisfaction of preferences, they should take into account these moral externalities (which diminish utility). The implicit (and sometimes explicit) reason for excluding moral externalities from the analysis was, precisely, that, in chapter IV of On Liberty, Mill eliminates them from the domain of legitimate intervention. Consequently, there is no evidence that On Liberty concerns phenomena denoted today by “technological externalities”. But the economists’ exclusion of moral externalities from the domain of externalities relevant to welfare originates from their liberalism, anchored in Mill’s discussion of the harm principle. What counts as an externality rests on the liberal harm principle. Mill is important for the construction of the concept, but not (or not only) for the reasons invoked by Medema; it is rather for what he excludes from harms to others legitimating liberty limitations than by what he includes in these harms. 3 2. Externalities are not included in Mill’s harm to others The domain of externalities relevant to welfare economics The discussion on externalities took off in the 1950s and focused on the disparity between general equilibrium and Pareto-optimum that they cause, with Meade 1952, Scitovsky 1954, and Bator 1958 (see Mishan 1971b, Medema 2017, Berta 2017). Economists first considered this concept theoretically, as a source of suboptimality, then they realized that the concept had a real counterpart, namely pollution. The history of the concept of externality from the 1950s to the 1970s is thus a story of its restriction, under a double constraint.
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