Forgotten Externalities

 by on November 21, 2013
Nov 212013

Matt Bruenig offers an important thought experiment he calls Pick the Externality!. He describes three scenarios of property ownership and use and then asks which involve externalities. It is as much an experiment in politics, history and philosophy as it is in economics. And it raises questions that go to the root of contemporary economic theory and the hidden forces behind its practice that affect, in deep and enduring ways, our daily lives.

I would hope that the major takeaway for most people is this: our economic ideologies and their leaders have been largely successful at convincing us that externalities do not exist and, when they do, that their costs should be passed on to the lowest, most vulnerable actors in the economic relation rather than paid upfront. This single realization helps to explain everything from the persistence of gender and racial inequality in economic opportunities to our continued non-action faced with the growing threat of climate and environmental disaster.

All human actions have varying degrees of social and environmental costs. The idea of the solitary human living in a benign personal freedom where his actions only affect himself has long been contested and refuted in fields such as the sciences, politics and philosophy. But somehow in the sole sphere of economics–particularly the “soft” economics of politicians, policy-makers, and financial markets–the belief persists against all evidence to the contrary. The denial of the externalities involved in any economic relation, the costs that affect other humans and environments beyond the temporal and physical immediacy of the brute economic exchange, is an unquestioned, unthought assumption of an economic system that serves, first and foremost, its leaders. Though they are denied, the costs consistently show up again down the economic line, to be paid for by the consumers, countries, and environments that did the least to produce them.

For this reason, any attempt to bring about a more just or equitable economic system will overemphasize these externalities. We see this in environmental and social justice movements where everyday citizens take on the role of representing the other, external costs of doing business. The problem, of course, is that political and economic leaders take advantage of the common myth of the non-existence of externalities to dismiss such movements as extreme, impractical, and not economically feasible. Yet an almost obsessive refocusing of economics toward forgotten externalities is the most rational of all approaches. If we are to promote a more evidence-based, rational society where great problems such as climate change, healthcare, and economic mobility can be confronted, the most important–and for that reason, the most difficult–task will be to convince ourselves that these forgotten costs do in fact exist and must be taken seriously in all levels of policy.

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