Against Economic Casuistry

In any science, there is a tendency to lay down rules for conduct following some theory or discovery. Economics is no different. However, I will argue here that, in economics, this tendency is not only wrongheaded, but doomed to failure. As economists, we should resist economic casuistry.

Casuistry is “endeavour[ing] to lay down exact and precise rules for the direction of every circumstance of our behavior,” (Adam Smith, Theory of Moral Sentiments, Pg. 329). Smith is writing in the context of moral philosophy and natural jurisprudence, referring to the moralists who attempt to have a rule for every aspect of human interaction, but his definition and description work for our purposes here.

Economic textbooks, especially at the principles level, has a tendency towards casuistry. Principles books tend to lay down certain rules for economics, especially in the realm of policy. Rules like “always do cost-benefit analysis,” or “if the market has failed in a certain way, government can intervene by doing X,” or “public goods should be provided by government,” etc. Policy conversation in the real world revolve around such rules: “we’ve identified problem X, and so recommend policy Y.” For example, Trump is using national security to justify tariffs. Dani Rodrik identifies all sorts of problems and recommends policy changes in his book Straight Talk on Trade.

But the issue Smith highlights in his discussion of moralistic casuistry, namely that identifying and knowing every rule for every situation is damn near impossible, applies to economics as well. Take, for example, the rule that if a market failure occurs, there is some action the government can take to address the failure. As I have written elsewhere, properly identifying market failures is extremely difficult. A “market failure” requires a comparison to a perfectly competitive market, a comparison which may not be valid with the existence of transaction costs. Furthermore, since benefits (and thus also costs) are subjective, identifying transaction costs themselves is a difficult, if not impossible, task.

John Nye also writes on the difficulties when trying to set polices for dealing with market failures. He discusses that there are already many small Coasian bargains going on around externalities and that policy prescriptions tend to fail to take these into account.

What all this adds up to is one simple fact: identifying market failures is not as straightforward as textbook models represent. As Ronald Coase says, paraphrasing Frank Knight, these discussions ultimately come down to a discussion of morals and aesthetics.

We can do this for all supposed market failures. Identifying public goods, for example, is extremely difficult as the definition relies heavily on the scope of the problem you are looking at. National defense, the quintessential public good, is a public good at a small scale (the Army protecting Washington DC from attack also protects Maryland), but at a large scale, it becomes a private good (the Army can choose whether or not to defend Mexico). So, is national defense a public or private good? Hard to tell. Thus, hard to set rules.

Classifying economic situations and outcomes is not as simple as classifying an animal in biology. A lot of it will depend not only on the actors involved, but the judgement of the spectator, the analyst. As such, it is very loose and vague. Precise rules, like those laid forth in economics textbooks, will tend to fail.

None of this is to say one should just through up their hands and do nothing. There can, indeed need, to be rules. But they should also be loose, more negative than positive. Rules such as private property, where people can do as they wish so long as they do not harm each other. Courts that can interpret issues when conflicts inevitably arise. In short, “thou shalt not” rules rather than “thou shalt.” As economists, we must resist the natural urge to lay down 10,000 commandments, rather going for rules more like the 10 Commandments.