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EXTERNALITIES AND COMMON PROPERTIES (PART II)

June 28, 2017

EXTERNALITIES AND COMMON PROPERTIES (PART II)

Adam Smith published his book The Wealth of Nations in 1776. He was an English economist whose government in colonial America was getting another message that same year from Thomas Jefferson on or about July 4, the Declaration of Independence. It was a turbulent time for both economics and politics of the day, but Smith was a brilliant economist of his time and with a gentle demeanor poles apart from the arrogance of King George, the royal dictator in that day and age.

Smith’s era preceded the Industrial Revolution by a few years and his economic theories must be tested by that important understanding, an externality Smith could not have considered. The Industrial Revolution started in Britain with steam power to run their looms and with bountiful coal for energy to make such power, and we all know the economic history after that, the Luddites, the transplanted Marx and his revolutionary ideas, and in this country the Gilded Age, the Great Depression, Bush’s Great Recession, the current chaos in leadership.

As noted by Hahnel, the conservative economist Friedman of the Chicago School of Economics argued that markets allocate productive resources efficiently and free enterprise guarantees that capitalists will diligently search for ever more efficient technologies and implement them quickly in order to maximize profit. This follows the ideas of Adam Smith, who in his Wealth of Nations postulated an “invisible hand” at work in capitalism. Smith reasoned that sellers would keep supplying more goods so long as the price they received covered the additional costs of producing them and would produce less goods when the price they received did not cover such additional costs of production, all of which would result with a perfect match of supply and demand in the most efficient allocation of scarce resources available as if guided by some “invisible hand.”

Smith and others of his day, of course, did not distinguish between private costs to sellers and costs to society as a whole. It was an unconsidered externality in his time, in part because there were little costs to society as a factor in a yet to be industrialized economy. There were no steamboats or locomotives or cars and trucks around to spread their gunk across the land and, relatively speaking, not that many people to spread it. Compare that to today with coal-burning utilities, millions if not billions of trucks and cars and other oil-burning equipment to foul the land, air and water, billions of people etc. We have lots more gunk to spread but the same air, land and water by area and volume within which to spread it.

I am sure that Smith if living today would consider the costs of buyer-seller transactions and their impact on the larger society, as does Hahnel. It was easier for Smith to come up with a Norman Rockwell view of an “invisible hand” in a world where there was theoretical perfection in matching supply with demand than now as there were few external costs involved in such transactions then, and the validity of his theories assumed that external costs were insignificant as, relatively speaking, they were. Some economists argue that such external costs are still insignificant and have added “let the markets decide” to Smith’s “invisible hand.” I disagree; things have changed. There are costs to the greater society that you and I are paying that are not considered in buyer-seller transactions.

Thus in a market where final costs of a transaction are not borne altogether by the contracting parties but in part by the rest of us since someone has to pay for them, we become partners to such transactions, perhaps unknowingly and unwillingly. Thus for instance, when the buyer and seller of an automobile make a deal, then the size of the benefit they have to divide between them is greatly expanded by externalizing the costs unto others in the form of acid rain, urban smog, noise pollution, traffic congestion, and greenhouse gas emissions. We are “the others.” These are social costs, costs we pay, thereby enlarging the profits of the car seller and benefits to the car-consumers who avail themselves of this cost-shifting opportunity to externalize such costs, costs which we pay in some form and that are socially unproductive, all under the guise of a system of market economics. We are not technically parties to such transactions between buyers and sellers, but we are partners in paying the final costs though disfranchised as parties in decision-making in such transactions. A problem in assaying just what the social costs are in an individual seller-buyer transaction, since it may not amount to all that much in terms of externalized costs we have to pay for ecological damage, is solved when you multiply a single transaction by the millions. Witness our rapidly deteriorating environment due to burning of fossil fuels, vehicular emissions etc.

Both Smith and Friedman write of the efficiencies of the market system in allocating risk and resources in the most productive ways and, among other such claims, point to the fact that those in the market will always seek out the most efficient technologies in order to be competitive and profitable, but there are many reasons that competition for profits can drive capitalist firms to make technological choices that do not fit this Pollyanna description. Corporations frequently make technological choices that are contrary to the social interest of lower prices because corporations are in the game to make money.

Thus there is no incentive to embrace new technologies in a monopoly market. Why go to the risk and expense when there is no significant competition and none new to the market who can challenge the monopolists (think Wall Street banks and the “defense” industry and their entrenched political supporters)? Even in truly competitive situations, why embrace new technology when the present allocation of the market is stable and the actors profitable? Such embraces may lead to socially desirable outcomes such as lower prices and less damage to our environment, but after all, corporations are less interested in such socially desirable outcomes than they are in fattening their bottom lines. As one CEO in a fit of candor once declared: “We are not here to babysit the American economy; we are here to make money.” The truth outs. . . .

In addition to the above, Hahnel tells us that there exists a substantial literature in which mainstream economists have documented cases where large companies have conspired to suppress technological innovations because they would have depreciated their fixed capital or reduced opportunities for repeated sales. This is hardly shocking to learn, but where are the anti-trust and SEC authorities – as if we did not already know? When was the last time you heard of Big Oil going to bat for solar panel subsidies? I’m waiting. . . . .

So here we are. You and I are paying for decisions made by others, paying higher prices for goods and services due to decisions made by others, and are suffering our environment to be headed south while victims of externalized costs of commercial transactions – and all under the guise of “freedom” and a market economics system posing as a “free market” promised to deliver economic democracy to us per the entreaties of Friedman and other conservative economists.

I have a question: Freedom and economic democracy for whom?     GERALD     E

 

 

 

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