The Moment of Truth — December 12, 2009

My Transaction Spilleth Over

I haven’t been getting out much lately. I’ve been building a new office. An office where I will write with my writing partner. And I have to say that the work, from which I will benefit as the sometime inhabitant of the result of the work, has got me thinking about what economists call “externalities” or “spillovers.”

Now and then certain persons or groups of persons have accused me of being intelligent. I have to confess to enjoying it when they do. But I am not above pleading ignorance when it suits me, and no one has ever accused me of lying when I have done so. This is to say, you can trust me when I tell you I had never heard of “externalities” until the past couple of weeks while listening to some podcasts on economics.

Though I didn’t have command of the term itself, I was familiar with the concept of externalities. When arguing with libertarians I found myself saying, “No, I don’t want my neighbor so-and-so to be able to do absolutely anything he wants to with his land. What if he wants to bury nuclear waste on his land? That affects me as his neighbor. What if he wants to burn his house down? You see, in a society, his ownership of the house cannot guarantee him the right to do that. We would be in big trouble if that were a main guiding principle of our society.” And yet that is exactly what libertarians suggest we adopt. They suggest our society would be better off if ownership were an inviolable right, the sole relationship to dictate usage of a given commodity. And the worst thing is, they’ve been listened to, for various unsavory reasons.

An externality or spillover is a consequence of an economic transaction that affects a party in addition to the parties to the transaction, and is thus not reflected in the market value of the goods or services being exchanged. The classic example of an externality is pollution: Adolf buys coal from Benito for a lower price than he can buy clean-burning magic-dust. But the cost in health deterioration to those who have to breathe the dirty air resulting from the bargain is not reflected in its being a bargain—there is an external or spillover cost.

About 11 years ago, when I first started writing this segment, the Moment of Truth, I repeated quite often that capitalism was great at producing wealth and encouraging innovation, but had trouble with anything that was not a commodity which could be bought, processed, packaged or sold. Those things which cannot be bought processed packaged or sold constitute a set of very basic externalities. Love, health, beauty, truth, liberty, peace, dignity, mentorship, respect—these tend to be externalities in the US economy, despite the attempts to commodify them.

Or are they? To call them externalities is to consider them only as benefits spilling over from market transactions. So, now that I have learned the term, I find it to be for the most part worthless. I don’t view love, health, beauty, etc. as extras or collateral phenomena in addition to the wealth and innovation created by market transactions. I view those things as the core make-up of human life, especially civilized life. And to me the market is of equal or lesser importance in relation to them. In fact, the market cannot exist without them. The market is one of many products of our quest for survival, happiness and meaning. For the market to arrogate to itself the primary position and these other qualities accidental byproducts is exactly the kind of foolish bass-ackawardness that renders libertarianism such an insipid superstition.

“Externality,” to someone oriented to appreciate qualities outside the market, can only have meaning in its negative sense. To a person I might call “sensibly oriented,” the concept of externality is only useful when the market overreaches to the detriment of those outside the transaction, because good qualities, so-called accidental or collateral benefits of a transaction, are no such thing, they are in the nature of things. Flowers are beautiful even outside the market transaction, and if you plant them the beauty enjoyed by passersby is certainly not figured into their price, and yet it wasn’t created by the transaction, though its location might be the result of the transaction, rather the beauty itself of a flower is a product of an altogether separate transaction, that between the flower and he or she who beholds it. Beauty itself is a non-economic relationship.

But to pollute a river is to create costs that weren’t part of the river in the first place. The term “pollute” means to add negatively to a pre-existing thing.

Or maybe I should say that a positive externality is generally something the market hasn’t figured in because the market didn’t create, whereas a negative externality is something the market hasn’t figured in because it doesn’t want to accept responsibility for it.

To be fair, harm is often created by things outside the market, like tornadoes or malaria or entropy or man-eating tigers. And usually there isn’t a clear distinction between what phenomena are effects of a market transaction and what are not.

But for those of us who struggle for happiness and dignity and wisdom, the market is often a barrier to our achieving those things, and when it is not it is only because it has accidently neglected to become such a barrier.

Adam Smith knew about externalities. Marx did. Milton Friedman did. But for some reason, during the past three decades, as our most influential and therefore most annoying and destructive economists have been advising the world to privatize resources and rely on the wisdom of the market, externalities have been dropped from the discussion.

One reason is that, while every economic theory besides libertarianism assumes that government is the corrective for negative externalities, libertarianism, or lip service to it, has been in fashion. Milton Friedman thought the government should mainly restrict its involvement to the imposition of fees in order to discourage bad corporate behavior. Thus he revealed the shrimpiness of his intellect. Nevertheless, he at least had the acuity to recognize that markets can’t be the sole motivators of behavior in a society that wants to have a decent quality of life.

Unfortunately, libertarianism has been in style for two main reasons: one, it is utopian and simplistic, and two, corporations which would love to remove any and all government interference in their money-making activities exert a dangerous level of influence over public policy. To a corporation, a libertarian society would be utopia.

It’s important to remember, though, that corporations aren’t people, but organizations for making profit regardless of the spillover cost to humanity. They are our guests here on Earth, but we have allowed them to take control of us.

Corporations aren’t human. And the humans who serve only the needs of corporations, either as libertarians or just corporate stooges, are traitors, not just to their own species, but to the very qualities and manifestations that make human life a thing worth living. Right now, thanks to our democratic tradition, we have a system of checks and balances. Government is a check on bad capitalistic behavior, and capitalism unleashes the motivating force of self-interest to create things the government, through its uninspiring dictates of legislation, cannot.

But isn’t there some third way possible? Is there not some organizational structure that doesn’t rely solely on the selfish motive or solely on the motivation to control?

And if capitalism has become the enemy of government control, hasn’t it taken over the position once held by human revolutionaries, lovers, artists, hermits, satirists, criminals and renunciates? Are corporations today’s discontents of civilization?

This to me is a frightening idea. Because if corporations have taken over the jobs of the human discontents, and government represents the collective will to moderate behavior, where do we humans find ourselves on such a map? Is the landscape of our lives now divided only between government and corporation? Is there no unclaimed territory, such as nature, whatever nature is? Has a human animal no world of its own, unclaimed by one of the two sovereign forces?

If such is the case, maybe externalities are the most we can hope for. Maybe our desires for love or freedom or what-have-you are no more dignified than the hope of an impoverished person under a poker table that someone will accidentally drop some money or a hot wing.

There’s got to be something more. I’ll see what I can find during the week, and report back to you ASAP.

This has been the Moment of Truth. Good day!