The policy argument on the American political right these days between postliberals with (some) populists, on the one hand, and Reaganite and market-oriented fusionist conservatives, on the other hand, is, in essence, an argument over externalities. More particularly, the argument is over what’s included in our set of policy-relevant costs and benefits when we consider policy problems and solutions. The controversy circles around postliberals proposing the inclusion of a set of non-pecuniary costs when identifying policy problems and when considering policy change. Recognizing this means there is enough common ground for constructive debate over policy rather than each side arguing past the other.

To be sure, the philosophical divide between postliberals and market-oriented conservatives (and classical liberals) goes deeper than the policy divide. But Americans, and conservatives in particular, have long had experience with modus vivendi-type policy coalitions constructed out of groups with incompatible philosophical commitments.

“Externalities” are costs or benefits imposed on (or received by) people not party to a market exchange or action. The action or exchange of one set of people imposes costs (or confers benefits) on others who are “external” to a transaction. A canonical example of a negative externality is an increased probability of lung disease as a result of breathing auto emissions from other people’s cars. An example of a positive externality is those spared from contracting an infectious disease because other people got vaccinated and, as a result, did not transmit the infection.

The above are textbook examples of externalities. While rightwing postliberals (and left-wing anti-neoliberals) generally eschew conventional economic jargon, many of their criticisms of markets or market outcomes really only argue for the recognition, and remediation, of un- or underrecognized negative externalities. Postliberal arguments can be accommodated by existing market theory, albeit by that part of market theory that considers market failure.

For example, while the market’s “creative destruction” can expand the economic pie, the process can also impose real costs on people in the form of disrupting lives and communities formed in reliance on settled, if imperfect, expectations of the future. (This is Karl Polanyi’s basic argument in The Great Transformation.) Another example is that increased globalization can attenuate supply chains. This can increase the fragility of domestic markets, thus making economic disruption more likely in response to otherwise remote events across the globe.

While these may seem like novel arguments, careful market theorists have long recognized that the idea of “cost” is broader than often conceived. For example, Harold Demsetz observed in his seminal 1967 article in the American Economic Review, “Toward a Theory of Property Rights,” that externalities can be both “pecuniary as well as nonpecuniary. No harmful or beneficial effect is external to the world.”

Similarly, F. A. Hayek rejected blanket ideological “appeals to the principle of non-interference” in the market economy. He endorsed empirical rather than rationalistic (or a priori) approaches to policy, arguing that government measures to address policy issues like negative externalities “must be examined in each instance” to judge in each case whether “costs will outweigh the advantages.”

That postliberal criticisms of the market can fit within a well-known category of “market failure” does not of course resolve the policy debate.

This does not mean giving a free pass to the mere assertion that the benefits of remediating a negative externality exceed the cost, but it does mean that evidence rather than ideology should be the guide on both sides of the policy argument.

This is not new. Adam Smith proleptically exemplified Hayek’s admonition when discussing a rationale that would justify national restrictions on free trade.

Adam Smith on National Defense and Free Trade

While generally favoring free trade in The Wealth of Nations, Adam Smith nonetheless famously argued that national defense can justify restricting trade with other nations in order to encourage domestic production or conservation of strategic materials needed for defense. Often styled as an argument Smith provided in favor of tariffs, Smith’s argument discussed the possibility that government subsidies (“bounties”) be provided for domestic production of goods critical to defense (rather than tariffs).

While Smith argued in application to a specific policy domain, the form of Smith’s argument is simply a specific example in which the benefit of the trade restriction is greater than the cost; he applies a simple cost/benefit calculus.

Smith provides an argument from an externality. That is, he argues that government intervention would provide a benefit beyond, or external to, the benefits to the parties immediately engaged in international trade of a particular good critically needed for national defense. The loss of the gains of trade to the nation, which occurs with certainty, would be compensated by a probabilistic increase in security.

The value of “increased security” would result from a lower probability of conflict breaking out in the first instance as a result of maintaining domestic production of the critical good, or from an increased probability of winning a conflict or minimizing the magnitude of loss should war actually break out.

The aura of mathematical calculation should not divert attention from the highly subjective elements involved in reasoning through the tradeoffs; the identification or calculation of the underlying parameters—the comparative probabilities that a conflict breaks out with and without the policy intervention, and the cost of a conflict if one does break out—is fraught with subjective judgment calls.

Yet while subjective, the necessity of making the judgment calls is inescapable. As a result, there would likely be policy debate over the magnitude of the foreign threat, the fragility of the international supply of the critical defense good, and over the actual dependence of the nation’s defense on the particular good in dispute. The accuracy of these judgment calls would be known, if ever, only in retrospect. As a result, the policy debate would be entirely appropriate and, again, inescapable.

While Smith limits his argument to national defense (although other externalities make an appearance later in The Wealth of Nations), the form of Smith’s argument is not similarly limited. The policy question is what external benefit or loss we seek to obtain or avoid with a policy intervention relative to the cost of that intervention. (And, to be sure, not all externalities require government intervention to solve. Nonetheless, externalities involving numerous actors unable to easily coordinate their behavior will typically require government intervention. That said, calibrating the appropriate type or level of government intervention in response to an externality can be fraught with practical difficulties.)

While goods like avoiding economic and social disruption of communities, or promoting national solidarity or national greatness, or increasing the availability of meaningful industrial jobs all require the making of highly subjective judgment calls on the nature of the benefit, they’re not really different animals than Smith’s argument justifying policy intervention in international trade to improve a nation’s defense capacity.

Importantly, that does not mean that the assertion of an amorphous, subjective “good” always wins the policy debate, but it does mean that the existence of an amorphous and subjective good does not rule out the need for authentic policy debate. Indeed, careful modern property rights analysis recognizes that identifying what externalities “count” for intervention changes with changing circumstances.

Externalities Change Over Time

Much of the debate today between postliberals and traditional market-oriented Reagan conservatives is, implicitly, an argument over what counts as an externality; that is, what interests we recognize as belonging to people and therefore what counts as a harm when taken away.

Postliberals and (some) populists, for example, advance interests of social solidarity and the dignity of manufacturing work as elements lost with the globalization of US trade. While these may be novel assertions in the context of the sorts of values policymakers (and academics) have typically considered in recent generations, their novelty does not really present a problem for bringing those values within the traditional theoretical structure of policy debates regarding externalities.

Phenomena like social solidarity and dignity doesn’t mean giving postliberals a pass on evidence and proof.

As noted earlier, in his 1967 AER article, Harold Demsetz pointed out that externalities can be “pecuniary as well as nonpecuniary.” While there are issues of identification and measurement, that interests such as solidarity and dignity are “nonpecuniary” does not rule out recognition of their loss as externalities.

Even more piquantly in Demsetz’s discussion is his observation that our concepts of what constitutes an “externality” naturally change over time with the advent of new economic and social circumstances. Demsetz’s argument in his 1967 AER article is dense but important:

Every cost and benefit associated with social interdependencies is a potential externality. …

Changes in knowledge result in changes in production functions, market values, and aspirations. New techniques, new ways of doing the same things, and doing new things-all invoke harmful and beneficial effects to which society has not been accustomed. … The emergence of new property rights takes place in response to the desires of the interacting persons for adjustment to new benefit-cost possibilities.

While interests such as social solidarity and the dignity of manufacturing work aren’t property interests in a narrow sense, the argument nonetheless is that in some identifiable way, these aspects of life and work “belong” to Americans and, as a result, their loss represents a real loss to many Americans. This loss, postliberals and populists argue, deserves to be taken into consideration when weighing policy costs and benefits.

Discussion of social reliance interests related to policy change is a matter of course in other areas. For example, US courts consider the significance of “reliance interests” in current law as one factor judges take into consideration when contemplating changing or overturning legal precedent. While the terminology is borrowed from contract law, no one suggests that overturning a judicial precedent constitutes an actionable breach of promise or an actionable deprivation of a property interest. Nonetheless, as a matter of legal policy, judges consider social reliance on previous decisions, and the cost of confounding settled reliance interests, as a relevant factor when considering whether to overturn precedent.

Identifying and Measuring External Costs

That postliberal criticisms of the market can fit within a well-known category of “market failure” does not, of course, resolve the policy debate. The question, as in all policy debates, is what’s the evidence that a problem exists and what’s the evidence that a proposed policy solution would actually address the problem?

On the one hand, simply asserting that “the pervasive logic of the market system has caused a decrease in social solidarity in the US” isn’t enough to warrant policies with real economic costs. (Nor is de rigueur citation of Karl Polanyi’s 1944 book The Great Transformation.) After all, even in a planned economy in which the means of production are wholly socially owned, changes in the technology of production or in consumer preferences would require planning boards to deploy labor and capital in new and different ways. These changes are no less socially disruptive simply because a planning board instigated them rather than the market. Further, social policies in market economies can cushion the impact of these changes without jettisoning the market in toto. Recall, after all, that Polanyi does not criticize economic change in itself, and he underscores that the system he advocates would make ample use of markets. Rather, Polanyi criticizes market “systems” (let the reader understand!) in which abstract market forces dictate an unduly rapid pace of economic change.

At the same time, the difficulty of empirically accounting for phenomena like social solidarity and dignity does not mean that the phenomena do not exist. In this, as in other policy debates, we must avoid repeating the error of Sir Arthur Eddington’s ichthyologist, who uses a net with a two-inch mesh to catch the fish he studies. When then asked about the study of fish that are less than two inches long, the ichthyologist nods, dismissively waves his hand and responds, “That’s no problem, ‘cuz what my net can’t catch ain’t fish.”

But this also doesn’t mean giving postliberals a pass on evidence and proof. For example, in their book The Politics of Virtue, John Milbank and Adrian Pabst criticize the materialism of modern market economies while also repeatedly (and implausibly) claiming that many of the policies they advocate won’t have any significant negative impact on current living standards. Yet if, in fact, renewed social solidarity and dignity (and other values postliberals identify) are valued by people, then they would be willing to trade away at least some material gain to obtain these greater goods. “Man does not live by bread alone,” after all.

The point, however, is that postliberals and traditional conservatives can have a policy debate on grounds that are recognizable in market theory. Postliberals press the outer boundaries of what we normally consider to be negative externalities. But that’s to be expected, if not actually predicted, as Demsetz observes, given the dramatically changing “social interdependencies” that result from globalization and from the extent that the market penetrates modern life.

To be sure, the possibility of shared areas of policy agreement neither entails nor necessitates philosophical convergence between postliberals and market-oriented conservatives (and classical liberals). Nonetheless, recognizing the possibility of a modus vivendi in some areas of policy would allow these philosophically divergent groups to move ahead together in substantive policy areas.