by Mario Rizzo
A little Learning is a dang’rous Thing;
Drink deep, or taste not the Pierian Spring:
There shallow Draughts intoxicate the Brain,
And drinking largely sobers us again.
Sometimes in the course of scientific development an idea gets introduced with various qualifications and limitations that are “forgotten” in an effort to simplify or make ideas textbook-ready. In other cases the innovators may look to how their ideas are being used and, after some time, seek to caution practitioners.
I recently came across an article by Arthur Cecil Pigou in a 1954 issue of the journal Diogenes that seems to illustrate the second phenomenon mentioned above. (It was also reprinted in the third edition of the fantastic collection, Great Political Thinkers: Plato to the Present edited by William Ebenstein.)
I have often taught in my classes that Pigovian taxes for negative externalities and subsidies for positive externalities work fine in textbooks where the relevant information is simply given. However, the mechanism is actually rarely (never?) used. One reason is that we often do not know what the correct tax or subsidy should be. Furthermore, in practice such correction of market prices is fraught with the public choice problems that distort “corrections” in the direction of the partial, rather than general, interests.
With that in mind, this is what Pigou said in 1954:
It must be confessed, however, that we seldom know enough to decide what fields and to what extent the State, on account of them, could usefully interfere with individual freedom of choice. Moreover, even though economists were able to provide a perfect blueprint for beneficial State action, politicians are not philosopher kings and a blueprint might quickly yield place on their desks to the propaganda of competing pressure groups. ‘Fancy’ finance, like a fancy franchise, whatever its theoretical attractions, has, at all events in a democracy, dim practical prospects.
I call this to the attention of the members of the Pigou Club.
In the next part I will discuss a new application of the Pigovian tax idea.