Sunday, August 3, 2014

Externalities are the norm, not the exception

I thought I'd continue on the theme from last time dealing with the problems inherent in imagining a utopia of pristine "free" markets" free from all outside interference. One area where this really falls short is the environment. First, because the environment was not "made" by anyone, yet we assign it individual owners. But more importantly, everything is connected to everything else, and there is no "away." We are all embedded in this world, and what we do effects everything else.

This blog post from George Monbiot, based on one by Matt Breunig, gives a great summary of this. It was written a couple of years ago, but for some reason started circulating again about  a month ago:
[Matt] Bruenig explains what is now the core argument used by conservatives and libertarians: the procedural justice account of property rights. In brief, this means that if the process by which property was acquired was just, those who have acquired it should be free to use it as they wish, without social restraints or obligations to other people.

Their property rights are absolute and cannot be intruded upon by the state or by anyone else. Any interference with, or damage to, the value of their property without their consent – even by taxation – is an unwarranted infringement. This, with local variations, is the basic philosophy of the Republican candidates, the Tea Party movement, the lobby groups that call themselves "free market thinktanks" and much of the new right in the UK.

It is a pitiless, one-sided, mechanical view of the world, which elevates the rights of property over everything else, meaning that those who possess the most property end up with great power over others. Dressed up as freedom, it is a formula for oppression and bondage. It does nothing to address inequality, hardship or social exclusion. A transparently self-serving vision, it seeks to justify the greedy and selfish behaviour of those with wealth and power.

But, for the sake of argument, Bruenig says, let us accept it. Let us accept the idea that damage to the value of property without the owner's consent is an unwarranted intrusion upon the owner's freedoms. What this means is that as soon as libertarians encounter environmental issues, they're stuffed.

Climate change, industrial pollution, ozone depletion, damage to the physical beauty of the area surrounding people's homes (and therefore their value) – all these, if libertarians did not possess a shocking set of double standards, would be denounced by them as infringements on other people's property.

The owners of coal-burning power stations in the UK have not obtained the consent of everyone who owns a lake or a forest in Sweden to deposit acid rain there. So their emissions, in the libertarian worldview, should be regarded as a form of trespass on the property of Swedish landowners. Nor have they received the consent of the people of this country to allow mercury and other heavy metals to enter our bloodstreams, which means that they are intruding upon our property in the form of our bodies.

Nor have they – or airports, oil companies or car manufacturers – obtained the consent of all those it will affect to release carbon dioxide into the atmosphere, altering global temperatures and – through rising sea levels, droughts, storms and other impacts – damaging the property of many people. As Bruenig says:

    "Almost all uses of land will entail some infringement on some other piece of land that is owned by someone else. So how can that ever be permitted? No story about freedom and property rights can ever justify the pollution of the air or the burning of fuels, because those things affect the freedom and property rights of others. Those actions ultimately cause damage to surrounding property and people without getting any consent from those affected. They are the ethical equivalent – for honest libertarians – of punching someone in the face or breaking someone else's window."

So here we have a simple and coherent explanation of why libertarianism is so often associated with climate change denial, and the playing down or dismissal of other environmental issues. It would be impossible for the owner of a power station, steel plant, quarry, farm or any large enterprise to obtain consent for all the trespasses he commits against other people's property – including their bodies.
Why libertarians must deny climate change, in one short take (The Guardian)

In economics, these are often waved away as "externalities" and treated as exceptions, but in this interview with Peter Victor from the Extraenvironmentalist Podcast, Victor makes what appears to be a simple point but in reality has enormous ramifications:
"Well, there’s’ this concept in very conventional economics [that] many of your listeners may well have run into—externalities. The idea of an externality was that the market system works very well if the full consequences of any action are borne either by the person who imposes the action or the person who the action is imposed on."

"Let me put that in simple terms. If I run a factory and I produce something and I sell it to somebody else, than I incur some costs. If they think what I produce is valuable enough, they’ll pay a price that more than covers my costs so I can earn some profit."

"But in a process like that, the assumption is that there’s nobody else [who] gets interfered with through those activities. Now if my factory also puts out smoke into the atmosphere so that all sorts of people are suffering from exposure to the smoke, we call that an externality. To be clear, it means external to the market transaction. So people who experience those bad effects of my factory have no means through the market, short of packing up and moving somewhere else, to deal with the problem."

"Well, when I was taught about externalities, the thing that struck me was that externalities weren’t unusual, externalities were the norm. They’re all over the place, in the simplest things. I’m talking now from Toronto, I’m in my office looking across the road to my neighbor’s house. Well they chose the color of their house, but I’m the one who gets to look at it.  I have no say in that. It’s an example, not a very serious one, but it’s still an example, of an externality.'

"So I began to think that environmental externalities in particular, were all-pervasive. And that to treat them as unusual and to assume them away, which is very common in a lot of economic literature of the highest caliber—you’ll often find the writer saying, ‘assuming away externalities’—and I thought that was completely wrong."
This is an essential point. Classical economics has it that when two parties are conducting a transaction, this is hermetically-sealed and cut off from the wider society. Take that concept away away, and conventional economics breaks down. Even libertarian economists have to grudgingly acknowledge this, but they contend that these are just a few isolated cases, like smokestacks from coal-fired power plants. They argue, against all reason and common-sense, that most economic transactions are just between two consenting parties, and that the wider society is usually not affected in nay significant way.

But in fact, a transaction between two parties not affecting anyone else is the extreme rarity! It should be on economists to prove where externalities do not occur rather than cases where they do. Having no externalities is the exception, especially in large industrial economies. Small-scale local economies have smaller externalies which are mostly centered in local communities, but that's not the world most of us live in. In the world of globalized, corporatized, monopoly capitalism, externalities become all-pervasive. That's why classical, and especially Neoliberal economics, requires that we don't think about them.

Can you even think of an economic transaction that does not effect anyone else, truly? For example, shopping at Wal-mart effects everything from the slaves in Thailand getting your shrimp, to the Bangledeshi sweat shop workers sewing your three-wolf-moon T-shirt, to the workers in cinderblock dormitories at FoxConn, to the cashier who is on public assistance. That car you buy affects everything from the maintenance of the roads, to the urban settlement pattern, to the air quality, to the stationing of armies in oil-rich portions of the globe. Every building has a host of knock-on effects which is why they are so tightly regulated with planning committees, public hearings, zoning laws, etc. As Joel Salatin has pointed out, "cheap food" has costs all over the place, from obesity, to pollution runoff, to loss of biodiversity, to superweeds, to strip-minng topsoil and overpumping aquifers, to dependance on fossil fuels. Cheap food only works if these are not taken into account. The same thing goes for cheap clothes, cheap plastics, cheap electronics, cheap water and cheap energy. Attempting to get "permission" for everything in the economy is impossible. How do you get "permission" to put pharmaceuticals in the water, growth hormone in the milk and dioxin in breast milk? Do we all need to sign a waiver?

If you take seriously the notion that externalities are the norm for everything and that even "private" transactions are embedded in a wider society, you undermine the whole philosophy underpinning discipline of "classical" economics. That's why we must never talk about it, or, as with climate change, deceive inveigle and obfuscate.

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