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LimitedGovernment:
AN INCOHERENT
CONCEPT
Steven Kelman
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Moreover, Coase would agree that these determinations by government affect the distribution of wealth. In Coase'sworld of voluntary exchange, one party is seen as receiving payment from another
in order to give up an entitlement. If the potential victims of pollution must pay the polluter to stop, the victims are poorer and the
polluters richer. To be sure, Coase trumpets his conclusion that
government's initial determinations will have no influence on
behavior, while whispering the observation that different initial
entitlements will affect the wealth of the parties. But, of course, the
acknowledgment that initial determinations by government will
have an effect on wealth is no modest cadenza. It is an affirmation of
the notion that even the very limited government in Coase's model,
whose determinations do not influence behavior, nonetheless influence wealth distribution.
Coase does not discuss whether, in his world of voluntary
exchanges, initial determinations also affect the individual preferences. But the question has been explored by others, with the conclusion that preferences are indeed affected.2 The link is created by
what has come to be called the "offer-asking problem," that is, the
fact that people who are asked to give something up demand a
higher price than what they would pay for securing that same thing
in the first instance. For example, a number of experiments have
been conducted in which respondents have been shown two pictures of a beautiful vista, one clear and one in which visibility was
clouded by pollution. Some of the respondents were asked to imagine that they were living in the clouded environment and to state
how much they would pay to clean it up. The others were asked to
imagine that they were living in the clean environment and to state
how much they would demand in payment in order to allow it to be
polluted. There were significant differences between the two
amounts; respondents demanded more to give up the clean environment than they were willing to pay in order to clean it up.13
These results are devastating for the Coase theorem, since they
suggest that even in the absence of transaction costs, final behavior
may well differ depending on initial determinations, because the
offer-asking difference creates a tendency for people to be unwilling to trade away entitlements. Thus, there is likely to be less
pollution if victims of pollution have an initial entitlement to freedom from pollution. But there is another implication of the
offer-asking phenomenon that is especially relevant here. From the
example it seems clear that the initial entitlement embodied in the
government's specification of property rights affects the strength of
people's preferences, a fact reflected in the difference between offer
prices and asking prices. If government is inescapably involved in
the business of determining such initial entitlements, as Coase
concedes, and if such determinations inevitably influence people's
preferences, then government inevitably influences preferences.
It is sometimes argued that the wealth effects of initial entitlements are limited to the period when the entitlement was first
granted, exercising only a one-time effect on the distribution of
wealth.14 Say that it is decided that airlines are entitled to fly noisy
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tack has been different: to argue that the premises of the case for
limited government do not stand up. In order for government to
undertake the tasks that advocates of limited government assign it,
government must be able to distinguish between coerced and voluntary exchange, and between unacceptable and permissible harm.
To define these distinctions, government cannot avoid making a
myriad of determinations about how people are entitled to behave.
And the determinations will inevitably influence wealth distribution and preferences. The program for limiting government so that
it does not influence individual preferences or the distribution of
wealth simply collapses as incoherent. It violates its own principles.
The interesting debates about public policy are not over whether
government should intervene in our lives, but how.
STEVEN KELMAN is an Associate Professor at the John F. Kennedy
School of Government, Harvard University.
NOTES 1. I ignore here the general issue of free will.
2. Nichols, Albert, and Zeckhauser, Richard, "Government Comes to the
Workplace:An Assessment of OSHA,"ThePublic Interest(Fall 1977):46.
3. See Nozick, Robert, "Coercion," in Philosophy, Science and Method,
Morgenbesse, Sidney, et al., Eds. (New York: St. Martin's Press, 1969).
4. See Wertheimer, Alan, "The Prosecutor and the Gunman," Ethics, 89
(April 1979).
5. One need not believe that the only function of ethical statements is to
motivate behavior in order to see a connection between ethical statements and motivation; one may have this view even if one believes that
ethical statements are statements about truths. For a discussion, see
Frankena, William K., "Obligation and Motivation in Recent Moral
Philosophy," in Readings in Ethical Theory, Sellars, Wilfred, and
Hospers, John, Eds. (Englewood Cliffs,NJ: Prentice-Hall, 1970), 2nd ed.
6. For a discussion of the point with particular reference to environmental
policy, see Kelman, Steven, WhatPrice Incentives?:Economists and the
Environment(Boston: Auburn House, 1981), especially pp. 44-53.
7. This argument is made by Kennedy, Duncan, and Michaelman, Frank,
"Are Property and Contract Efficient?"Hofstra Law Review, 8 (Spring
1980): 720.
8. Lieberman, Jethro, "The Relativity of Injury," Philosophy and Public
Affairs, 7 (Fall 1977): 71.
9. Foran introduction to the discipline of "law and economics," see Posner,
Richard, Economic Analysis of Law (Boston: Little Brown, 1977), 2nd
ed.; see also Demsetz, Harold, "Toward a Theory of Property Rights,"
AmericanEconomic Review,57 (May 1967).
10. For the earlier approach, see Pigou, A.C.,TheEconomics of Welfare(New
York:AMSPress, 1978).I use the phrase "entitlements determinations"
rather than "specification of property rights" partly because the phrase
"property rights" for most people has a more narrow meaning, and
partly because use of the word "rights," as I will note later, has implications for the grounds on which determinations should be made.
11. Coase, Ronald, "The Problem of Social Cost,"Journal of Law and Economics, 3 (October 1960).
12. This argument is based on Kelman, Mark, "Production Theory, Consumption Theory, and Ideology in The Coase Theorem,"Southern California Law Review, 52 (March 1979).
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13. See, for instance, Rowe, Robert, et al., "An Experiment on the Economic
Value of Visibility," Journal of Environmental Economics and Management, 7 (March 1980); see also Thaler, Richard, "Toward a Positive
Theory of Consumer Choice,"Journal ofEconomic Behavior and Organization, 1 (1980).
14. For instance, Demsetz, Harold, "Wealth Distribution and the Ownership of Rights," Journal ofLegal Studies, 1 (1972).
15. See above, p. 1302.
16. Duncan Kennedy makes this point in "Cost-Benefit Analysis of Entitlement Problems: A Critique," Stanford Law Review, 33 (February 1981):
422-429.
17. Sen, Amartya, and Williams, Bernard, "Introduction," in Utilitarianism
and Beyond (Cambridge: Cambridge University Press, 1982), p. 4.
18. For further discussions of utilitarian and nonutilitarian systems of normative ethics, see, e.g., the articles in ibid., Smart, J.J.C., and Williams,
Bernard, Utilitarianism: For and Against (Cambridge: Cambridge University Press, 1973); and Brandt, Richard B.,EthicalTheory (Englewood
Cliffs, NJ: Prentice-Hall, 1959), Chaps. 15-17.