Tag Archives: externalities

The Virus Is An Externality

Well, I see the “President” has restarted his pandemic “briefings,” and–wonder of wonders–said everyone should wear a mask. Whether that will convince any of the dangerous idiots who are refusing to do so (because “freedom”) remains to be seen.

My two favorite economists, Joseph Stiglitz and Paul Krugman, are both Nobel prizewinners. I find both to be logical and persuasive–and I’m sure that a great deal of their persuasive power is their ability to explain things clearly to non-economists, of whom I am definitely one. Krugman stepped up to the plate again in a recent column for the New York Times, in which he explained what is at stake in the mask controversy with an analogy to the economic concept of externalities.

Krugman notes that there are a number of possible reasons for rejecting the wearing of a mask.

Some of this is about insecure masculinity — people refusing to take the simplest, cheapest of precautions because they think it will make them look silly. Some of it is about culture wars: liberals wear masks, so I won’t. But a lot of it is about fetishization of individual choice.

Many things should be left up to the individual. I may not share your taste in music or want to do the same things you do with consenting adults, but such matters aren’t legitimately my business.

Other things, however, aren’t just about you. The question of whether or not to dump raw sewage into a public lake isn’t something that should be left up to individual choice. And going to a gym or refusing to wear a mask during a pandemic is exactly like dumping sewage into a lake: it’s behavior that may be convenient for the people who engage in it, but it puts others at risk.

The reference to “going to a gym” was prompted by the stubborn idiocy of Florida Governor Ron DeSantis. Krugman had opened his column with a discussion of Florida’s soaring Covid-19 case count, and the Governor’s culpability for that rise.

Florida has, of course, become a Covid-19 epicenter, with soaring case totals and a daily death toll now consistently exceeding that of the whole European Union, which has 20 times its population. But DeSantis won’t contemplate any rollback of the state’s obviously premature reopening; he even refuses to close venues that are perfect coronavirus incubators.

In particular, he insists on letting gyms — closed spaces full of people huffing and puffing — stay open. Why? Because “if you are in good shape you have a very low likelihood of ending up in a significant condition.”

As Krugman points out, this isn’t true–but the fact that healthy people can and do contract the virus is almost beside the point: gyms should be closed because the people we are trying to protect aren’t the people working out, but the people with whom they will come into contact. As he says, even gym rats have families, friends, and co-workers.

And that brings us back to externalities.

Unregulated free markets simply cannot solve the problem of externalities. Externalities are defined as costs imposed on non-consenting others, on people who have no say in the matter. Pollution is the classic example–the factory that dumps its waste in the local river in order to save the cost of proper disposal requires a government cleanup paid for with our tax dollars. Spreading a virus raises precisely the same set of issues yet, as Krugman notes, many conservatives seem unable or unwilling to grasp this simple point.

And they seem equally unwilling to grasp a related point — that there are some things that must be supplied through public policy rather than individual initiative. And the most important of these “public goods” is probably scientific knowledge.

The people who refuse to wear masks are clones of the lawbreakers willing to dump industrial waste into our rivers, and spew harmful chemicals into the air we all breathe.

The pandemic has simply allowed them to advertise what and who they are: self-centered and illogical ignoramuses polluting the environment we all must share.


Fair Trade

Lest the title of this post confuse you, I’m not talking about the fair trade goods that stock the shelves of shops run by well-meaning nonprofits. That movement—to insure that craftspeople abroad are paid fairly for the goods they make—is well intentioned and important, but it isn’t the subject at hand.

The operation of a market economy—capitalism—rests upon a definition of what constitutes a fair trade. It is usually framed as the amount that a willing buyer and a willing seller, both of whom are in possession of all relevant information, agree is a fair price for the goods or services in question.

There are, rather obviously, economic areas where markets don’t work. Health care (no matter what GOP congressmen insist) is one of those, because the buyer and seller do not both possess all relevant information. Economists call this “information asymmetry.” As a practical matter, when one party to a transaction has important information that the other party doesn’t have, the party with the information has an unfair advantage.

There are other situations where markets can be manipulated. One of the most common involves externalities.

Economists use the term “externalities” to refer to the costs of an economic activity that aren’t paid by either party to the primary exchange, but are instead “offloaded” to someone else—typically, taxpayers. The most common example is pollution: a local factory produces a toxic chemical in the process of manufacturing its widgets, but rather than properly and safely disposing of that chemical and including the cost of disposal in the price of the widget, the factory owner dumps it in a nearby river.

The seller makes a bigger profit, and the buyer gets a better deal on his widget purchase. Meanwhile, we taxpayers pay to clean up the river.

Most of us have no problem identifying this as unfair all around. Such practices distort the marketplace, allowing people who break the rules to profit at the expense of the rest of us.

In today’s economy where the lines between public and private are being increasingly blurred, where private-sector companies ask for—and receive—government subsidies and favorable regulations, where the corporations that can afford well-connected lobbyists enjoy privileges that are unavailable to the mom and pop store on the corner, externalities are harder to detect.

America is in real danger of losing real capitalism. Increasingly, what we have is corporatism, and that’s a very different animal.

Corporatism has been defined as the socio-political organization of a society by corporate interest groups. And all signs are that we aren’t stopping there; the words “oligarchy” and “plutocracy” are more frequently heard in American political discourse these days.

Today’s plutocrats and oligarchs are the rich and superrich who effectively dictate economic policy. And they make the widget factory guy look like a piker.

When markets work as they should, where they should, they really do operate as Adam Smith described; the “hidden hand” improves life for all of us. When the system has been corrupted—when, in transaction after transaction, we socialize the risks and costs and privatize the profits—the only people who prosper are the “haves.” And the greedy.

And that’s not fair trade, by any definition.