Glen Whitman’s got a nice post discussing utilitarianism, Coase, Layard, and the implications of Will Wilkinson’s recent evisceration of Layard’s utilitarian interventionist arguments about status and well being. When I first read Will’s post, my initial reaction was “yikes, I hope I never get on Will’s wrong side!” Will cleverly applies Coasian analysis to conclude that if you want to retain a utilitarian, consequentialist approach to status inequality, the least-cost avoider principle from Coase’s “Nature of Social Cost” implies that in some cases the least-cost alternative may be for you to change your preferences. In other words, if you are envious, get over it. Glen writes:
This reasoning opens a mighty interesting can of worms (and I mean that in a good way). In the traditional Coasean approach, preferences of agents are taken as given, and the only question is whose actions can reduce harm at lowest cost (keeping in mind that all harm is relative to the parties’ preferences). But if actions can change preferences, it follows that changing preferences may in some instances be the least-cost means of reducing harm. This is true even for less exotic forms of externality than Layard’s status-externality. Take the airport noise externality. Maybe the least costly solution is for people to start enjoying the sight and sound of airplanes. Or consider the visual externality created by a factory that obscures the view of a nearby mountain. Perhaps the least costly solution is for people to stop caring so much about natural scenery and learn, Rand-like, to appreciate the man-made beauty of mortar, block, and glass decorated with thousands of electric lights.
This is an intriguing line of thought, and one that is going to be a challenge for mainstream economic theory to address. Our models routinely assume preferences are fixed and given, not malleable. It’s a simplifying assumption to enable the math to go through (you need the stationarity, coupled with some other mathematical assumptions, to prove existence of equilibria). But if you relax that assumption, how does it change your results? Clearly you can’t do the same mathematical analysis, so it’s hard to compare results. It’s even hard to show that changing your preferences is the least-cost alternative in a given situation, except as an ex post revealed preference inference.
So while I think Will is right, and Glen is too, I struggle to see how we can make this idea analytically useful.