Externalities, Rights, and the Problem of Knowledge

Very short summary: This essay explains how the knowledge problem applies to the definition of jurisdictional rights. Jurisdictional rights define spheres of individual sovereignty. Rights are appropriately defined if they internalize all potential externalities. However, individuals may disagree about what counts as an externality. This disagreement stems from individuals’ preferences, which are typically dispersed and local. I discuss various solutions to this problem, including the use of polycentricity. Finally, I show the relevance of this issue for the debate about the proper formalization of rights in social choice theory.

I don’t generally advertise my academic work here, but I’ll make an exception today by mentioning the recent online publication in the political philosophy journal Res Publica of my article “Living in Disagreement: Public Reason and Jurisdictional Rights.” I mention it because it’s related to a few essays I published on this newsletter (here, here, and here) and because it touches upon an insight about the definition and justification of rights that I’m only beginning to grasp. Recent readings made me realize that this insight was somehow already absorbed by the public choice tradition – at least in the Ostroms’ Bloomington School.[1] However, it’s interesting that no explicit connection is made with a related debate about the conceptualization of rights in social choice theory (I addressed this debate several years ago here). What follows is an attempt to connect the dots.

The Knowledge Problem

Many readers will be familiar with the so-called “knowledge problem.” The knowledge problem was first identified in the economic calculation debate that opposed neoclassical economists like Oskar Lange to Austrian economists Ludwig von Mises and Friedrich Hayek. To summarize quickly, in the 1920s, von Mises asserted the economic impossibility of socialism on the ground that the lack of market prices would undermine entrepreneurial activity and the rational allocation of resources.[2] Socialist neoclassical economists responded that, based on general equilibrium theory, it is in principle possible for the socialist planner to simulate the market process and infer market prices analogically to the Walrassian auctioneer. Hayek decisively refuted this argument by pointing out that market prices can be found in the Walrassian model only because general equilibrium theory assumes that we can write a system of equations summarizing all the information about consumers’ preferences and producers’ production costs. But that’s precisely the ...