Day: June 17, 2025

The policy argument on the American political right these days between postliberals with (some) populists, on the one hand, and Reaganite and market-oriented fusionist conservatives, on the other hand, is, in essence, an argument over externalities. More particularly, the argument is over what’s included in our set of policy-relevant costs and benefits when we consider policy problems and solutions. The controversy circles around postliberals proposing the inclusion of a set of non-pecuniary costs when identifying policy problems and when considering policy change. Recognizing this means there is enough common ground for constructive debate over policy rather than each side arguing past the other.

To be sure, the philosophical divide between postliberals and market-oriented conservatives (and classical liberals) goes deeper than the policy divide. But Americans, and conservatives in particular, have long had experience with modus vivendi-type policy coalitions constructed out of groups with incompatible philosophical commitments.

“Externalities” are costs or benefits imposed on (or received by) people not party to a market exchange or action. The action or exchange of one set of people imposes costs (or confers benefits) on others who are “external” to a transaction. A canonical example of a negative externality is an increased probability of lung disease as a result of breathing auto emissions from other people’s cars. An example of a positive externality is those spared from contracting an infectious disease because other people got vaccinated and, as a result, did not transmit the infection.

The above are textbook examples of externalities. While rightwing postliberals (and left-wing anti-neoliberals) generally eschew conventional economic jargon, many of their criticisms of markets or market outcomes really only argue for the recognition, and remediation, of un- or underrecognized negative externalities. Postliberal arguments can be accommodated by existing market theory, albeit by that part of market theory that considers market failure.

For example, while the market’s “creative destruction” can expand the economic pie, the process can also impose real costs on people in the form of disrupting lives and communities formed in reliance on settled, if imperfect, expectations of the future. (This is Karl Polanyi’s basic argument in The Great Transformation.) Another example is that increased globalization can attenuate supply chains. This can increase the fragility of domestic markets, thus making economic disruption more likely in response to otherwise remote events across the globe.

While these may seem like novel arguments, careful market theorists have long recognized that the idea of “cost” is broader than often conceived. For example, Harold Demsetz observed in his seminal 1967 article in the American Economic Review, “Toward a Theory of Property Rights,” that externalities can be both “pecuniary as well as nonpecuniary. No harmful or beneficial effect is external to the world.”

Similarly, F. A. Hayek rejected blanket ideological “appeals to the principle of non-interference” in the market economy. He endorsed empirical rather than rationalistic (or a priori) approaches to policy, arguing that government measures to address policy issues like negative externalities “must be examined in each instance” to judge in each case whether “costs will outweigh the advantages.”

This does not mean giving a free pass to the mere assertion that the benefits of remediating a negative externality exceed the cost, but it does mean that evidence rather than ideology should be the guide on both sides of the policy argument.

This is not new. Adam Smith proleptically exemplified Hayek’s admonition when discussing a rationale that would justify national restrictions on free trade.

Adam Smith on National Defense and Free Trade

While generally favoring free trade in The Wealth of Nations, Adam Smith nonetheless famously argued that national defense can justify restricting trade with other nations in order to encourage domestic production or conservation of strategic materials needed for defense. Often styled as an argument Smith provided in favor of tariffs, Smith’s argument discussed the possibility that government subsidies (“bounties”) be provided for domestic production of goods critical to defense (rather than tariffs).

While Smith argued in application to a specific policy domain, the form of Smith’s argument is simply a specific example in which the benefit of the trade restriction is greater than the cost; he applies a simple cost/benefit calculus.

Smith provides an argument from an externality. That is, he argues that government intervention would provide a benefit beyond, or external to, the benefits to the parties immediately engaged in international trade of a particular good critically needed for national defense. The loss of the gains of trade to the nation, which occurs with certainty, would be compensated by a probabilistic increase in security.

The value of “increased security” would result from a lower probability of conflict breaking out in the first instance as a result of maintaining domestic production of the critical good, or from an increased probability of winning a conflict or minimizing the magnitude of loss should war actually break out.

The aura of mathematical calculation should not divert attention from the highly subjective elements involved in reasoning through the tradeoffs; the identification or calculation of the underlying parameters—the comparative probabilities that a conflict breaks out with and without the policy intervention, and the cost of a conflict if one does break out—is fraught with subjective judgment calls.

Yet while subjective, the necessity of making the judgment calls is inescapable. As a result, there would likely be policy debate over the magnitude of the foreign threat, the fragility of the international supply of the critical defense good, and over the actual dependence of the nation’s defense on the particular good in dispute. The accuracy of these judgment calls would be known, if ever, only in retrospect. As a result, the policy debate would be entirely appropriate and, again, inescapable.

While Smith limits his argument to national defense (although other externalities make an appearance later in The Wealth of Nations), the form of Smith’s argument is not similarly limited. The policy question is what external benefit or loss we seek to obtain or avoid with a policy intervention relative to the cost of that intervention. (And, to be sure, not all externalities require government intervention to solve. Nonetheless, externalities involving numerous actors unable to easily coordinate their behavior will typically require government intervention. That said, calibrating the appropriate type or level of government intervention in response to an externality can be fraught with practical difficulties.)

While goods like avoiding economic and social disruption of communities, or promoting national solidarity or national greatness, or increasing the availability of meaningful industrial jobs all require the making of highly subjective judgment calls on the nature of the benefit, they’re not really different animals than Smith’s argument justifying policy intervention in international trade to improve a nation’s defense capacity.

Importantly, that does not mean that the assertion of an amorphous, subjective “good” always wins the policy debate, but it does mean that the existence of an amorphous and subjective good does not rule out the need for authentic policy debate. Indeed, careful modern property rights analysis recognizes that identifying what externalities “count” for intervention changes with changing circumstances.

Externalities Change Over Time

Much of the debate today between postliberals and traditional market-oriented Reagan conservatives is, implicitly, an argument over what counts as an externality; that is, what interests we recognize as belonging to people and therefore what counts as a harm when taken away.

Postliberals and (some) populists, for example, advance interests of social solidarity and the dignity of manufacturing work as elements lost with the globalization of US trade. While these may be novel assertions in the context of the sorts of values policymakers (and academics) have typically considered in recent generations, their novelty does not really present a problem for bringing those values within the traditional theoretical structure of policy debates regarding externalities.

As noted earlier, in his 1967 AER article, Harold Demsetz pointed out that externalities can be “pecuniary as well as nonpecuniary.” While there are issues of identification and measurement, that interests such as solidarity and dignity are “nonpecuniary” does not rule out recognition of their loss as externalities.

Even more piquantly in Demsetz’s discussion is his observation that our concepts of what constitutes an “externality” naturally change over time with the advent of new economic and social circumstances. Demsetz’s argument in his 1967 AER article is dense but important:

Every cost and benefit associated with social interdependencies is a potential externality. …

Changes in knowledge result in changes in production functions, market values, and aspirations. New techniques, new ways of doing the same things, and doing new things-all invoke harmful and beneficial effects to which society has not been accustomed. … The emergence of new property rights takes place in response to the desires of the interacting persons for adjustment to new benefit-cost possibilities.

While interests such as social solidarity and the dignity of manufacturing work aren’t property interests in a narrow sense, the argument nonetheless is that in some identifiable way, these aspects of life and work “belong” to Americans and, as a result, their loss represents a real loss to many Americans. This loss, postliberals and populists argue, deserves to be taken into consideration when weighing policy costs and benefits.

Discussion of social reliance interests related to policy change is a matter of course in other areas. For example, US courts consider the significance of “reliance interests” in current law as one factor judges take into consideration when contemplating changing or overturning legal precedent. While the terminology is borrowed from contract law, no one suggests that overturning a judicial precedent constitutes an actionable breach of promise or an actionable deprivation of a property interest. Nonetheless, as a matter of legal policy, judges consider social reliance on previous decisions, and the cost of confounding settled reliance interests, as a relevant factor when considering whether to overturn precedent.

Identifying and Measuring External Costs

That postliberal criticisms of the market can fit within a well-known category of “market failure” does not, of course, resolve the policy debate. The question, as in all policy debates, is what’s the evidence that a problem exists and what’s the evidence that a proposed policy solution would actually address the problem?

On the one hand, simply asserting that “the pervasive logic of the market system has caused a decrease in social solidarity in the US” isn’t enough to warrant policies with real economic costs. (Nor is de rigueur citation of Karl Polanyi’s 1944 book The Great Transformation.) After all, even in a planned economy in which the means of production are wholly socially owned, changes in the technology of production or in consumer preferences would require planning boards to deploy labor and capital in new and different ways. These changes are no less socially disruptive simply because a planning board instigated them rather than the market. Further, social policies in market economies can cushion the impact of these changes without jettisoning the market in toto. Recall, after all, that Polanyi does not criticize economic change in itself, and he underscores that the system he advocates would make ample use of markets. Rather, Polanyi criticizes market “systems” (let the reader understand!) in which abstract market forces dictate an unduly rapid pace of economic change.

At the same time, the difficulty of empirically accounting for phenomena like social solidarity and dignity does not mean that the phenomena do not exist. In this, as in other policy debates, we must avoid repeating the error of Sir Arthur Eddington’s ichthyologist, who uses a net with a two-inch mesh to catch the fish he studies. When then asked about the study of fish that are less than two inches long, the ichthyologist nods, dismissively waves his hand and responds, “That’s no problem, ‘cuz what my net can’t catch ain’t fish.”

But this also doesn’t mean giving postliberals a pass on evidence and proof. For example, in their book The Politics of Virtue, John Milbank and Adrian Pabst criticize the materialism of modern market economies while also repeatedly (and implausibly) claiming that many of the policies they advocate won’t have any significant negative impact on current living standards. Yet if, in fact, renewed social solidarity and dignity (and other values postliberals identify) are valued by people, then they would be willing to trade away at least some material gain to obtain these greater goods. “Man does not live by bread alone,” after all.

The point, however, is that postliberals and traditional conservatives can have a policy debate on grounds that are recognizable in market theory. Postliberals press the outer boundaries of what we normally consider to be negative externalities. But that’s to be expected, if not actually predicted, as Demsetz observes, given the dramatically changing “social interdependencies” that result from globalization and from the extent that the market penetrates modern life.

To be sure, the possibility of shared areas of policy agreement neither entails nor necessitates philosophical convergence between postliberals and market-oriented conservatives (and classical liberals). Nonetheless, recognizing the possibility of a modus vivendi in some areas of policy would allow these philosophically divergent groups to move ahead together in substantive policy areas.

State supreme court justices often must resolve difficult issues in hard cases. No one expects them to get every hard case right. But judges who faithfully adhere to their oaths of office are unlikely to make obvious errors in easy cases whose issues are governed by clear rules and settled precedents. So, what is going on in Wisconsin?

Last week, in Catholic Charities Bureau, Inc. v. Wisconsin Labor & Industry Review Commission, the Supreme Court of the United States reversed a ruling of the Supreme Court of Wisconsin. A unanimous US Supreme Court ruled that Wisconsin’s high court had rationalized religious discrimination by Wisconsin officials in violation of the First Amendment. Writing for the Court, Justice Sotomayor observed that this was not a hard case.

A charitable explanation for the Wisconsin ruling is that a majority of Wisconsin’s justices suffer deep jurisprudential confusion. The court committed three major errors. All three errors are conceptual as well as legal and constitutional. And all three errors matter because they are incompatible with constitutional rule and ordered liberty.

The case arose under a Wisconsin law that requires employers to pay taxes into a scheme of unemployment insurance and exempts religious, nonprofit employers. The Catholic Charities Bureau claimed this tax exemption. But the Supreme Court of Wisconsin decided that Catholic Charities’ charitable ventures are not “operated primarily for religious purposes,” as state law requires. The court acknowledged that Catholic Charities and its subsidiaries are motivated by an explicit Christian mission and are governed by the bishop of a Roman Catholic diocese. But the court asserted that these religious institutions “offer services that would be the same regardless of the motivation of the provider.” The court concluded that Catholic Charities’ “activities are primarily charitable and secular.”

The Wisconsin court held that it did not violate the First Amendment to withhold the exemption from Catholic Charities. A dissenting justice charged that the court’s reasoning “excessively entangles the government in spiritual affairs, requiring courts to determine what religious practices are sufficiently religious under the majority’s unconstitutional test.” But the majority disagreed. “The review we endorse in this case is a neutral and secular inquiry based on objective criteria, examining the activities and motivations of a religious organization.”

The Wisconsin court also insisted that its holding would not infringe Catholic Charities’ free exercise rights. Catholic Charities can afford the tax. To require Catholic Charities to participate in the state’s unemployment compensation scheme, therefore, did not place a “constitutionally significant burden” upon its religious exercise, the court concluded.

In reversing, the justices of the Supreme Court of the United States unanimously held that the Wisconsin ruling was not neutral between different religions, as long-established First Amendment doctrine requires. The Establishment Clause, as the US Supreme Court has interpreted it over several decades, prohibits governments from favoring any religion over any other. This rule of “denominational neutrality,” as the Court calls it, requires strict scrutiny of any law or application of a law that distinguishes between religions, treating one more favorably than another.

Wisconsin violated the neutrality rule. To affirm that violation was the Wisconsin court’s first error. “There may be hard calls to make in policing that rule,” Justice Sotomayor acknowledged, “but this is not one.” Wisconsin officials engaged in a “paradigmatic form of denomina­tional discrimination.”

Wisconsin drew a line between religious charities based on “theo­logical differences in their provision of services.” Wisconsin deemed Catholic Charities and its affiliates ineligible for the tax exemption “be­cause they do not ‘attempt to imbue program participants with the Catholic faith,’ ‘supply any religious materials to program participants or employees,’ or limit their charita­ble services to members of the Catholic Church.” On that reasoning, Catholic Charities “could qual­ify for the exemption while providing their current charita­ble services if they engaged in proselytization or limited their services to fellow Catholics.” But Catholic Charities and its affiliates argued that Catholic doctrine forbids them to use “works of charity for purposes of prose­lytism” and requires them to serve everyone. The burden on religious exercise is obvious.

The implications of this first error for ordered liberty are profound. The problem is not mere favoritism. A state supreme court that arrogates the power to draw the boundary between religious and non-religious activities by religious associations has seized the power in principle to nullify the religious freedom of those associations by defining their free exercise of religion out of legal and constitutional existence.

Writing a separate concurrence, Justice Thomas identified a second error of the Wisconsin court. Catholic Charities Bureau operates through a separate corporation from the Diocese that oversees it. For the Wisconsin majority, this meant that Catholic Charities is a separate “organization” from the Church, and the Church’s religious motivations, therefore, were irrelevant in ascertaining Catholic Charities’ primary purpose.

As Justice Thomas observed, that “hold­ing contravened the church autonomy doctrine,” another well-established constitutional rule. It requires Wisconsin’s courts “to defer to the Bishop of Superior’s religious view that Catholic Charities and its subentities are an arm of the Diocese.” Religious institutions have a First Amendment right to structure their legal affairs in the manner best suited to their own ecclesial governments, theological doctrines, and practical, legal needs. The Supreme Court of Wisconsin has no power to decide which corporate structure is sufficiently religious for a church’s ministries.

The Wisconsin court’s legal error, Thomas explained, was to identify the association of charitable Roman Catholic believers with the legal structures that the association uses to carry on its business. The Roman Catholic Church “is a single worldwide religious insti­tution,” not a legal sub-entity incorporated in the state of Wisconsin. Though the Wisconsin justices acknowledged that the Bishop of the local Diocese directs Catholic Charities and controls its affairs, they nevertheless “viewed Catholic Charities and its subentities as distinct, nonreligious or­ganizations merely because they are separately incorpo­rated.”

The Wisconsin court’s conceptual error was, in Justice Thomas’s words, to think of “religious institutions as nothing more than the cor­porate entities they have formed.” Churches and other religious communities have an existence of their own, which is not reducible to their formal, legal structures and not contingent upon the laws of a state or judgments of secular officials. Whether its rights and obligations are secured by a corporation, a trust, or some other legal fiction, a religious group exists in reality, independent of its recognition in positive laws and legal and equitable judgments.

Justice Thomas pointed out the implications of this conceptual error for civil liberties and the rule of law. Quoting an 1835 decision of the Vermont Supreme Court, Justice Thomas explained, “To conclude that a religious institution has no existence outside its corporate form ‘would be in effect to decide that our religious liberties [are] dependent on the will of the legislature, and not guar­anteed by the constitution.’” Religious liberties are not contingent on sovereign will, Justice Thomas insisted, because “religious institu­tions are a parallel authority to the State, not a creature of state law.”

The majority of justices of the Supreme Court of Wisconsin are not equal to the powers that they arrogated. Secular courts have no legal or constitutional competence to adjudicate questions of canon law, religious or theological doctrine, or ecclesiology. And as the Wisconsin majority opinion illustrates, elite lawyers often lack professional competence to address such questions, as well. Most of the top law schools no longer require law students to learn jurisprudence and legal history, much less canon law. And increasing numbers of lawyers have no meaningful experience of religion.

Thus, it is not surprising that most of the Wisconsin justices misunderstood religion. Not all religious people proselytize. Though the Christian religion involves evangelization, winning converts is neither the totality of the Christian religion nor its essence. The Christian life consists of acts of obedience. “If you love me, keep my commandments,” Jesus of Nazareth instructed his followers. Among those commandments are several injunctions to perform acts of charity. God will reward those who give food to the hungry, drink to the thirsty, and clothes to the naked. If anyone demands your shirt, give him your coat as well. Above all, love your neighbor as you love yourself.

The Wisconsin justices committed a third conceptual error, which the justices of the US Supreme Court did not correct—indeed, Justice Jackson compounded this error in a separate concurrence. They misunderstood charity. In the minds of the Wisconsin justices, the “religious motivation” for Catholic Charities’ charitable work was “not enough to receive the exemption” because non-religious organizations can provide the same services. The charitable services, therefore, “are secular in nature.”

In this line of reasoning, the justices identified charity according to its outward action and effect, without regard to its motivation. They identified the relevant “activities” as “job training, placement, and coaching, as well as services related to activities of daily living.” Whether these valuable ends are pursued for “religious or secular motivations,” the justices speculated, “the services provided would not differ in any sense.” Therefore, they concluded, the services are activities of a “wholly secular endeavor.”

That conception of charitable action, identifying charity with its effects and consequences, mistakes the character of charity. A charitable intention is what makes an act charitable. To be charitable is to intend to give what one has a right to retain, and to yield up one’s rights with no claim or expectation of reciprocity, for the sole reason that the recipient will benefit. Paying taxes and making payrolls of social services agencies are not acts of charity. Donating time and money that one has no duty to give, so that another may learn or eat, is charity.

Because it is the intention that makes an act charitable, the primary values of charity are moral and spiritual, not pragmatic. As Thomas Aquinas taught centuries ago, acts of charity, such as almsgiving, have an internal effect on the soul of the almsgiver, bearing the “spiritual fruit” of loving another person more than riches. And such acts can also generate gratitude and benevolence in the recipient.

Charity’s moral value is its central aspect. Charitable acts certainly can produce what Aquinas called “a corporal effect, inasmuch as they supply our neighbor’s corporal needs.” But what makes charitable action so valuable, and a chief reason why we extend to charitable actors so many special, legal privileges and immunities, is that charitable actions make charitable persons. And a society comprised of charitable persons is immeasurably better off than a society whose members only do what they are obligated to do.

Is charity religious? In theory, charity can be secular. Every human being has the capacity for charity. But in practice, charity is a religious phenomenon. Viewing the full sweep of human history reveals that charity is a distinctly religious virtue and almost exclusively a religious activity. While many societies throughout history have practiced hospitality and altruism, the Jewish and Christian religions invented charity. And it was Christian societies that placed charity in the mainstream of civic life and gave it a unique place in our fundamental law.

By redefining charitable action according to its material effects, rather than its intention and spiritual value, the Wisconsin majority attempted to make charity commensurable to non-charitable forms of poor relief. This false equivalence opens the door to threats to ordered liberty. If government welfare programs, social engineering projects, or other secular, non-charitable endeavors can produce equal or better results, and if it is the results that matter, then those in power may decide that we can do without charity. If we don’t need to preserve rights to perform charity, then officials may decide they don’t need to respect the autonomy of charitable associations. And we may end up with more rulings like that of the Supreme Court of Wisconsin.