The Genealogy of the Austrian Position

Abstract

In casually surveying the analysis of externality questions among modern Austrian economists one is struck with the fact that most discussions center around externality problems involving conflicts in the use of property, such as pollution. On the other hand, very little is written about the consequences of other external effects such as free-rider or public goods problems. This narrow focus does not arise from any oversight on the part of Austrian writers. It results from a distinctly Austrian perspective on the question of externalities, which, in turn arises from a refusal to view welfare economics in terms of perfectly competitive market outcomes. Typically it has been argued that only those externalities involving a conflict in the use of property will have negative effects on the workings of a market economy. Consequently, the only policy relevant externalities are those that arise because of property rights that are not clearly defined or strictly enforced. In direct contrast, Pigouvian analysis concludes that all non-pecuniary externalities are evidence of market failure, i.e., have negative effects on social welfare, and that all externality problems are at least potentially policy relevant.