Reading 2: Externalities and the Ubiquity of Market FailureRod Hill & Tony Myatt1. On page 154, the authors Rod Hill and Tony Myatt write: ‘[Externalities] threaten to make the planet uninhabitable

The economiCS anti-textbook A critical thinker’s guide to microecOflOmiCs Rod Hill and Tony Myatt cO/2 FernwoOd Publishing HALIFAX WINNIPEG Zed Books LONDON NEW YORK 7 IExternalities and the ubiquity of market failure ‘The growth fetish, while on balance quite useful in aworld with empty land, shoals of undisturbed fish, vast forests, and arobust ozone shield, helped create amore crowded and stressed one.

...Economic thought did not adjust to the changed con ditions it helped to create; thereby it continued to legitimate, and indeed indirectly to cause, massive and rapid ecological change.’ J.

R.

McNeil (2000:

536) ‘In what industry, in what line of business, are the true social costs of the activity registered in its accounts?’ Joan Robinson (1972:

102) The answer to Joan Robinson’s inconvenient question in the quote above is ‘none’.

Yet the default model of the textbooks assumes that producers of goods and services do pay the full social cost of production.

There are no free inputs. Similarly, when someone buys the good or service, she pays the full cost as well. No one else experiences any costs (or benefits). Ifproducers or consumers impose such costs (or benefits) on others and don’t take those into account in their decisions, the result would be an inefficient use of resources.

The invisible hand drops the ball, yet again. ITHE STANDARD TEXT Externalitfes Suppose that you’re making adecision about how much to drive your car inaweek.

You weigh the benefits to you of doing various things (going to work, shopping and so on) against the costs you have to pay:

fuel, and wear and tear on your car, for example. The result of this rational choice isillustrated in Figure 7.1.

You will drive until the marginal benefit to you of an additional kilometre driven just equals the marginal cost to you of driving that kilometre.

Beyond that, the extra costs outweigh the extra benefits.

lithe costs or benefits change, you would respond accordingly.

For example, iipublic transport became cheaper or quicker, the benefits of driving would fall and you would drive less. Your choices won’t lead to the best social outcome, however, because your driving decisions have effects on others which you haven’t taken into account. $Ikibmetre Ignoring exte $0.33 230 FIGURE 7.1 d In his original analysis led to wear and tear o repairing the road or I are other costs too:

t the atmosphere, incre other drivers and ncr increases their insura density regions these California adds betw€ costs, costs borne by The person driving and are borne by oth private cost to the dr others.

Thus, the mar the marginal private In an analogous around your house, c choice model presun ignoring others’ exte on the neighbours if tulip ‘arms race’ cou and expensive!

This issue, as we saw in C Inthe case of the so the marginal soci driver.

Suppose the the dashed line sho 150 FIGURE 7.7 Markets are inefficient inthe presence of externalities In his original analysis of such situations, Arthur Pigou pointed out that driving led to wear and tear on the road, acost that others would have to bear either by repairing the road or by having to drive over apoorer surface (7932:

793).

There are other costs too:

the emission of toxic pollutants, of greenhouse gases into the atmosphere, increased congestion of the roads, which slows the progress of other drivers and increases their chances of having an accident, which, inturn, increases their insurance costs.

Arecent study has shown that in high-traffic- density regions these added insurance costs are significant.

An extra driver in California adds between $2,000 and $3,000 ayear to total statewide insurance costs, costs borne by other drivers (Edlin and Karaca-Mandic 2006:

936). The person driving the car doesn’t bear these costs —they are ‘external’ to her and are borne by others inthe society.

The marginal social cost isthe marginal private cost to the driver herself plus the marginal external costs she imposes on others.

Thus, the marginal social cost of driving another kilometre isgreater than the marginal private cost. in an analogous way, an activity could benefit others.

ifyou plant tulips around your house, others can enjoy the flowers inthe spring, but the rational- choice model presumes that you plant the tulips only for your own pleasure, ignoring others’ external benefits.

(The tulips might even impose external costs on the neighbours ifthey compare their own properties with yours.

Awasteful tulip ‘arms race’ could take place inwhich gardens become ever more elaborate and expensive!

This may sound fanciful, but consumption externalities are areal issue, as we saw in Chapter 4.

We’ll consider this further inthis chapter.) in the case of the driving example, suppose there are no external benefits, so the marginal social benefit isthe same as the marginal private benefit to the driver.

Suppose the external cost of driving is7cents akilometre.

in Figure 7.7, the dashed line shows the marginal social costs of driving akilometre as 7cents tuity of market $/kilometre Ignoring externalities $Ikilometre V Including externalities Marginal private and social benefit ofdriving Marginal private cost ofdriving ite useful in aworld fish, vast forests, and more crowded and stressed to the changed con continued to legitimate, eand rapid ecological $0.33 mxI.,m $0.40 $0.33 Marginal external cost Marginal social cost ofdriving N ‘ess, are the true social accounts?’ Joan Robinson 230 Kilometresdriven per week 170 230 Kilometresdriven per week [uestion in the quote above is surnes that producers of goods tion.

There are no free inputs. e,she pays tile full cost as well. or benefits) on others and don’t result would be an inefficient )all, yet again. nabout how much to drive )fdoing various things (going have to pay:

fuel, and wear IFigure 7.1.

You will drive ilometre driven just equals Beyond that, the extra costs schange, you would respond iecheaper or quicker, the ess. me, however, because your haven’t taken into account. 151 greater than the marginal private cost.

The socially optimal amount of driving iswhere the marginal social cost equals the marginal social benefit of driving. Clearly, individual decisions result in ‘too much’ driving from asocial point of view, a‘market failure’ because resources are not being efficiently used. There are two textbook solutions to this externality problem.

Ifpersons or producers aren’t bearing the full costs of their activities, their costs can be raised through appropriate taxes, called Pigouvian taxes, named after Pigou.

In Figure 7.1, atax 017 cents per kilometre driven would increase the driver’s marginal costs by the amount of the externality.

This ‘internalizes’ the externality; the driver now considers the marginal social cost of driving when deciding how much to drive, reducing kilometres driven to the socially optimal amount. There isasecond, less obvious, solution.

Externalities arise because there are no markets for some things and hence no price ispaid for them. In this case, suppose that the government requires producers of fossil fuels to buy permits in an auction market for each kilogram of carbon that the fuel will emit.

The number of permits isset to limit total emissions of carbon dioxide. Instead of emissions of CO2 being afree good, property rights have been estab lished and itnow has aprice.

Iftotal emissions are set appropriately, the driver pays aprice for fuel that reflects the social cost of its use, including the costs of climate change inthis case, thus internalizing the externality. Property rights Problems arise inthe absence of any property rights.

Typically, no one person or group has property rights over common-access resources, such as the air, the water or the fish inthe ocean.

Ifopen access prevails, so that anyone may use these resources, the potential for inefficient overuse arises.

Using the resource does not involve compensating its owner, because there isno owner.

One way to address the problem isto require licences for use of the common resource. Note that an absence of property rights isdifferent from asituation inwhich individuals share property rights.

The classic case isafield on which everyone in avillage has the right to graze their animals.

The field iscommon property and offers the potential for overgrazing.

Ifafarmer grazes his cows on the commonly owned field, he may not take into account that he isleaving less grass for other people’s cows, Ifhe grazes his cows on his own field, he alone faces the costs of overgrazing.

Such common grazing land has existed for millennia, however, and social institutions generally arise to deal with the potential problem. Public goods The idea of a‘public good’ (also called a‘collective good’), intro duced in Chapter 5(pages 712—13), isreally just aspecial case of an externality.

As inthe example we used there, someone inagroup that has acommon interest (like the producers of agood) was considering contributing to further the group’s goals.

Anyone who produces or contributes towards apublic good isproviding positive external benefits to others.

The benefits any one person gets from the public good do not reduce the b people are not rivals inconsumi any beneficiaries be excluded fr paid for them (a situation of no’ In general, goods fall into on goods have the non-rival charac good, it’s possible to exclude th used to write this book are ago are artificially scarce; otherwis€ computer programs are freely a TABLE 7.1 Classification oftypes Excludable Rival Private goods, e.g. fish inafish farm Non-rival Artificially scarce g e.g.

using acompul Ifyou drive anoisy motorc to a‘public bad’, imposing ext and non-excludable.

Carbon di everyone to some extent, rega Self-interested behaviour a voluntary contributions to put public bads, such as smoggy a with the inefficient allocation property rights problems. 2 THE ANTI-TEXT The late Joan Robinson of C economics.

She commented tion that Pigou made betwe him as an exception to the b shows that the exception is Unfortunately, current t externalities by the rhetoric existence of externalities an Mainstream textbook tre topic isalways mentioned b 152 lyoptimal amount of driving inal social benefit of driving. riving from asocial point of being efficiently used. iality problem.

Ifpersons or ivities, their costs can be raised named after Pigou.

In Figure :rease the driver’s marginal ializes’ the externality; the riving when deciding how much ioptimal amount. ialities arise because there are paid for them. ires producers of fossil fuels ram of carbon that the fuel alemissions of carbon dioxide. perty rights have been estab set appropriately, the driver its use, including the costs of externality. yproperty rights.

Typically, no ion-access resources, such as :cess prevails, so that anyone itoveruse arises.

Using the because there isno owner.

One ruse of the common resource. tent from asituation inwhich isafield on which everyone in eld iscommon property and zes his cows on the commonly isleaving less grass for other d, he alone faces the costs of Ufor millennia, however, and )otential problem. Ja‘collective good’), intro ecial case of an externality.

As that has acommon interest tributing to further the group’s Isapublic good isproviding iy one person gets from the public good do not reduce the benefits others can get from it(in the jargon, people are not rivals in consuming it, so itis‘non-rival’ inconsumption).

Nor can any beneficiaries be excluded from enjoying the benefits, even ifthey have not paid for them (a situation of non-excludability). In general, goods fall into one of four categories, as depicted inTable 7.7.

Some goods have the non-rival characteristic of apublic good, but, unlike the public good, it’s possible to exclude those who don’t pay for it.

The computer programs used to write this book are agood example.

Excludability means that these goods are artificially scarce; otherwise they would be freely available to anyone.

Some computer programs are freely available to everyone and are pure public goods. mx I, CD CDU, TABLE 7.7 Classification oftypes ofgoods Excludable Non-excludable Rival Private goods, e.g.

an apple, Common access resources, fish inafish farm e.g.

air, water, fish inthe ocean Non-rival Artificially scarce goods Pure public goods, e.g.

listening to a e.g.

using acomputer program radio programme; open source software Ifyou drive anoisy motorcycle down the street, you are instead contributing to a‘public bad’, imposing external costs on others.

Public bads are also non-rival and non-excludable.

Carbon dioxide that contributes to climate change affects everyone to some extent, regardless of whether they contributed to it. Self-interested behaviour and ‘free riding’ by individuals results intoo few voluntary contributions to public goods, while resulting in over-contribution to public bads, such as smoggy air.

Collective action issometimes needed to deal with the inefficient allocation of resources resulting from these public goods and property rights problems. 2 THE ANTI-TEXT The late Joan Robinson of Cambridge University was asharp critic of textbook economics.

She commented on ‘the notorious problem of pollution’:

‘The distinc tion that Pigou made between private costs and social costs was presented by him as an exception to the benevolent rule of laissez-faire.

Amoment’s thought shows that the exception isthe rule and the rule isthe exception’ (1972:

102). Unfortunately, current textbook economics downplays the importance of externalities by the rhetorical device of ‘note and forget’ —the texts note the existence of externalities and then largely forget about them. Mainstream textbook treatment of externalities is remarkably uniform.

The topic isalways mentioned briefly in an early chapter and isthen set aside while 153 the bulk of the book adopts ‘no externalities’ as its default assumption.

Serious consideration of externalities reappears only in achapter towards the end.’ Ifstudents get this far, they have spent the bulk of the course admiring the works of the invisible hand.

Itwould be easy to get the impression that external ities are of peripheral, not central, importance.

This would be the case ifexternal effects were not significant or ifgovernments address them adequately. In reality, externalities are pervasive and of great practical importance.

Every year, they cost millions of people their lives.

They threaten to malce the planet uninhabitable for many species, perhaps eventually including our own.

They are involved in everyone’s consumption decisions every day.

They even contribute to the instability of the financial system.

The no-externalities default model of the textbooks invites us to forget these simple facts. Many of the biggest externalities are also remarkably hard to deal with through collective action.

Itwould be easy to get the impression from the textboolcs that well-informed economists determine what government policy should be to coun teract externalities, and that benevolent politicians then implement it.

Is this what happens in practice?

The textboolcs don’t say because, for the most part, they don’t deal adequately with how government policy isactually determined. Colander et al.

(2006:

130) isarare exception, remarking ‘that government often has difficulty dealing with externalities’ because ‘government isan institution that reflects, and is often guided by, politics and vested interests’. As we’ve argued in Chapter 5, business power combined with the rational ignorance of the public often plays acentral role in shaping public policy, and that sensitive topic is off limits.

As aresult, the textbooks give the misleading impression that externalities are minor blots on the landscape that could be (and perhaps are being) dealt with by asmattering of Pigouvian taxes and subsidies and, where needed, the creation of property rights. 2.1 Externalities in reality Let’s briefly consider some actual externalities to support our contention that they deserve acentral place in the analysis of the modern economy.

At the same time, we consider whether these externalities can ‘easily be put right’ in light of the realities of power and information in the societies involved. Greenhouse gas emissions ‘No snowflake inan avalanche ever feels responsible.’ StanislawJerzy Lec (1968:

9) The production of virtually every good or service uses, directly or indirectly, the energy from fossil fuels and results in greenhouse gas (GHG) emissions.

These ‘emissions are externalities and represent the biggest market failure the world has seen’, writes Nicholas Stern (2008:

i), author of The Economics of Climate Change:

The Stern Review (2007).

He explains that 154 people around the world are rent emissions will have poten scientific evidence on the pote in the recent Intergovernment ment Report.

(2008:

1—2) The potential consequences of What isat stake isthe habitab change that, perhaps radically. Asource of increasing con in climate have happened in t increasing concentrations of GI centrations spiral upwards, cre 68—73).

This could happen if, currently trapped in permafro climate changes are particular expected by 2050 seems likel (Thomas et al.

2004). Improved understanding c melt has led to growing conc levels.

Climatologist David Ar usual’ could result in an event 2009:

141). Despite this, even by the m to prominence, many textboc did tucked itaway at the bad adequately dealt with?

Hardi: the 1992 United Nations Fr into effect in 2005.

It has a reductions in expected emiss The climate change exter make itparticularly difficult making procrastination tern ordinated action.

Individual actions.

finally, internalizing emissions with the aim of g Naturally, corporations with action to protect their share] Aside from the crude me as-usual lobby also rents ‘cli tanlcs’ to give the policy of ir create an impression of cont people around the world are already suffering from past emissions, and cur rent emissions will have potentially catastrophic impacts in the future ...The scientific evidence on the potential risks isnow overwhelming, as demonstrated in the recent Intergovernmental Panel on Climate Change (IPCC) Fourth Assess ment Report.

(2008:

1—2) The potential consequences of climate change are wide ranging and complex. What isat stake isthe habitability of the planet.

We have learned that we can change that, perhaps radically.2 A source of increasing concern is the understanding that abrupt changes in climate have happened in the past and could happen again, particularly if increasing concentrations of GHGs set up apositive feedback loop in which con centrations spiral upwards, creating a‘runaway greenhouse effect’ (Strom 2007: 68—73).

This could happen if, for example, substantial amounts of methane, currently trapped in permafrost or in the oceans, were to be released.

Rapid climate changes are particularly difficult to adapt to, Even the climate change expected by 2050 seems likely to result in significant extinctions of species (Thomas et al.

2004). Improved tinderstanding of the rapidity with which large ice sheets can melt has led to growing concern about the potential for arapid rise in sea levels.

Climatologist David Archer thinks that acontinuation of ‘business-as- usual’ could result in an eventual rise in sea levels of about fifty metres (Archer 2009:

141). Despite this, even by the mid-2000s, almost twenty years after the issue rose to prominence, many textbooks barely mentioned the subject and those that did tucked itaway at the back of the book.3 Is this because the issue has been adequately dealt with?

Hardly.

The Kyoto Protocol, negotiated in 1997 under the 1992 United Nations Framework Convention on Climate Change, came into effect in 2005.

It has achieved neither global emissions reductions nor reductions in expected emissions growth (Tickell 2008:

2). The climate change externality has acombination of characteristics that make itparticularly difficult to address.

Its effects come with along time lag, making procrastination tempting.

It’s also aglobal problem, requiring co ordinated action.

Individual countries will be tempted to free-ride on others’ actions.

Finally, internalizing the externality will require somehow pricing GHG emissions with the aim of greatly reducing the long-term use of fossil fuels. Naturally, corporations with avested interest in business-as-usual have taken action to protect their shareholders’ interests. Aside from the crude measure of simply renting politicians, the business- as-usual lobby also tents ‘climate change sceptics’ and ftinds so-called ‘think tanks’ to give the policy of inaction some intellectual cover.

Their strategy isto create an impression of controversy over the science, the same strategy that was m>CD D) CD ts default assumption.

Serious achapter towards the end.’ ilk of the course admiring the tthe impression that external is would be the case ifexternal idress them adequately. at practical importance.

Every ythreaten to make the planet Ily including our own.

They are very day.

They even contribute -externalities default model of acts. •kably hard to deal with through ession from the textbooks that ment policy should be to coun ans then implement it.

Is this ay because, for the most part, policy isactually determined. iarking ‘that government often ‘government is an institution Ivested interests’. r combined with the rational in shaping public policy, and textbooks give the misleading elandscape that could be (and Pigouvian taxes and subsidies -its. to support our contention that modern economy.

At the same in ‘easily be put right’ in light societies involved. )le.’ StanislawJerzy Lee (1968:

9) uses, directly or indirectly, the ;egas (GHG) emissions.

These ggest market failure the world rof The Economics of Climate 155 used successfully for so long by the tobacco industry and its public relations advisers, as we saw in Chapter 5•4 As aconsultant to the US Republican Party wrote in 2002, ‘Should the public come to believe that the scientific issues are settled, their views about global warming will change accordingly.

Therefore you need to continue to make the lack of scientific certainty aprimary issue’ (Gelbspan 2004:

41). ‘There will always be uncertainty in understanding asystem as complex as the world’s climate,’ ajoint statement by eleven national academies of science explained, adding that ‘the scientific understanding of climate change isnow sufficiently clear to justify nations taking prompt action’ (Joint Science Academies 2005).

But the national academies and the thousands of scientists engaged in research on these questions are perpetrating a‘hoax’ and peddling ‘junk science’, according to the propagandists who find the more subtle strategy of emphasizing uncertainty too tame for their taste.6 The campaign can claim some success both with politicians and the public. For example, in Australia, a‘senior figure’ in the former government of John Howard said that there was ‘an understanding in cabinet that all the science is crap’ (McKnight 200$). Public opinion polls can produce awide variety of results, depending on the question asked and the context, but as of April 200$ apoll in the United States found that less than half the population believed that there was ‘solid evidence’ of global warming caused by human activity.

One in five did not believe there was solid evidence of global warming at all.

The issue ranked at the bottom of the public’s policy priorities (Pew Research Center 200$). In Britain, a200$ 1)011 found ‘the majority of the British public is still not convinced that climate change iscaused by humans’ (Jowit 200$), although the previous year 62 per cent agreed that ‘man-made global warming isthreatening the planet’, while 25 per cent disagreed (Angus Reid Global Monitor 2008). Industry’s efforts to distort public perceptions iive been exposed and are slowly becoming an embarrassment.

The Royal Society accused Exxon-Mobil of giving nearly $3 million to thirty-nine climate-denial groups in 2005.

In 200$, in the wake of ashareholder revolt(!), Exxon-Mobil ‘announced that itwould cease funding nine groups that had fuelled aglobal campaign to deny climate change’ (McKnight 2008). Economists’ debate about what action to take on climate change has centred on the comparison of the costs of taking action against the long-term benefits. Largely unnoticed is that the costs in well-being of any ensuing reduction in real consumption are exaggerated by the textbook insistence that well-being depends solely on absolute consumption levels.

We saw in Chapter 4the idea of rapid adaption to new circumstances and of the importance of relative con sumption in determining well-being.

Canadian economist Pierre Fortin makes atelling point: 156 Itmust be recogviizecl that ti matter, but in anegative sense: and global environment, demr in the long run.

The view that the quality of the environment economic systems) deteriorate tions for growth policy.

(2005: restion for your profes failure the world has se deserve more than apass: textbook? Positional externalities in COflS ‘Ihave Traxtar and you don’t.’ As Fortin notes, people’s asse in part on what other people h ample, then you won’t feel the one and you don’t.

The same t houses, cars, clothing, jewelle What others in society havc terms it(1997).

That frame c affected by itand the effect that ithas on others.

Each p of reference in small, subtle 1D For example, suppose that y astore window.

Carried away, will now judge their own cons reference.

Iftheir shoes sudde devalued them.

Your extrava their consumption levels relal Frank calls these ‘position in the same way that million up in terms of air pollution. in futile ‘expenditure arms i relative consumption positiol is that too few resources an sumption isn’t easily observe consume individually (going friends) or consume collectivc tdustry and its public relations ant to the US Republican Party ye that the scientific issues are change accordingly.

Therefore tiflc certainty aprimary issue’ standing asystem as complex eleven national academies of tderstanding of climate change prompt action’ (Joint Science md the thousands of scientists etrating a‘hoax’ and peddling ofind the more subtle strategy aste 6 vith politicians and the public. ie former government of John in cabinet that all the science tyof results, depending on the wo$ apoll in the United States Ithat there was ‘solid evidence’ tie in five did not believe there issue ranked at the bottom of ter 2008). fthe British public is still not ans’ (Jowit 2008), although the global warming isthreatening Reid Global Monitor 2008). 1s hive been exposed and are ociety accused Exxon-Mobil of enial groups in 2005.

In 2008, obil ‘announced that itwould )bal campaign to deny climate on climate change has centred igainst the long-term benefits. of any ensuing reduction in )ok insistence that well-being We saw in Chapter the idea he importance of relative con conomist Pierre Fortin makes itmust be recognized that the absolute level of production continues to matter, but inanegative sense:

by making more and more demands on the local and global environment, demands which have the potential to reduce well-being in the long run.

The view that well-being islinked torelative income, whereas the quality of the environment (and hence the long-term sustainability of economic systems) deteriorates with absolute income growth, has stark implica tions for growth policy.

(2005:

4) m m Question for your professor:

Doesn’ tthe ‘biggest market failure the world has seen’ (as Professor Stern puts it) deserve more than apassing mention towards the end of the textbook? Positional externalities in consumption ‘Ihave Traxtar and you don’t.’ from aReebok advertisement7 As Fortin notes, people’s assessment of their own material situation depends in part on what other people have.

Iffew people have their own vehicle, for ex ample, then you won’t feel the lack of one nearly as much as ifeveryone else has one and you don’t.

The same thing holds for other visible consumption goods: houses, cars, clothing, jewellery, furnishings and appliances, and so on. What others in society have sets your ‘frame of reference’, as Robert Frank terms it(1997).

That frame of reference is itself apublic good:

everyone is affected by itand the effect on one person does not detract from the effect that ithas on others.

Each person’s consumption decisions affect the frame of reference in small, subtle but real ways. For example, suppose that you notice abeautiful pair of $300 Italian shoes in astore window.

Carried away, you buy them.

Everyone who notices your shoes will now jtidge their own consumption standards by aslightly altered frame of reference.

Iftheir shoes suddenly look second rate beside yours, your purchase devalued them.

Your extravagance created anegative externality by lowering their consumption levels relative to yours. Frank calls these ‘positional externalities’; their cumulative effect adds up in the same way that millions of people driving afew more kilometres adds up in terms of air pollution.

This results in people systematically engaging in futile ‘expenditure arms races’ on those goods that most enhance their relative consumption position (Schor 1992, 1998).

The other side of the coin is that too few resources are devoted to ‘non-positional’ goods whose con sumption isn’t easily observed by others.

These include things we produce and consume individually (going for awalk, taking more holidays, socializing with friends) or consume collectively (public libraries, roads, parks).

Thus positional 157 I on $14,000 Hermes Kelly alligal spending by lower-income famil people to enguge in untaxed cot time with friends and family, gc these activities have been reduc Frank asks ‘If this tax is suet (ibid.:

225).

He attributes this to higher tax rates on the rich will such apolicy actually being a have to be explained in ten-sec Other forms of collective act externalities.

If spending to k excessively long hours, increas Business owners, however, ha’ and-spend.

As the American a ‘Power concedes nothing with the European Union, where s and unions organize alarge p minimum of four weeks of paid five or six weeks (European Uni unions are weak and the very’ entitled to no weeks of paid I no paid holidays of any kind Air pollution Questions for your prof exist?

If so, why doesn ‘Unfortunately, the will of oi difference ofcorporate polli our people through air poflu The burning of fossil fuels cr oxides, hydrocarbons and fin lutants and other pollutants the interior of the lungs and illnesses and lung cancers (D cities gets alot of attention, e through public pressure) in substantial numbers of peopi for many more.

About two n ©Andy Singer externalities distort the entire pattern of consumption, lowering everyone’s well-being. This unhappy result is ruled out by the standard textbook assumption that individual well-being depends only on absolute, not relative, consumption.8 The problem with this default model isthat (as Franic puts it) it‘is inconsistent with our best theoretical understanding of the origins and functions of human motivations; and itis flatly at odds with extensive direct and indirect empirical evidence regarding the nature of utility’ (2005a:

141). Conspicuous consumption can be reined in only by collective action.

Frank (1999:

2;1—26) has argued that progressive taxes on annual consumption spend ing are the most effective toot to correct this externality.

Under such ascheme, people would be able to deduct from taxable income all savings placed in regis tered accounts.9 Because income equals consumption plus saving, the tax base is annual consumption spending.

The extra tax paid per dollar of spending would rise with an individual’s total annual consumption spending; Frank suggests top marginal tax rates of 70 per cent or so.

This would make the tax ‘progressive’ in the sense that total tax paid as ashare of aperson’s income would be higher for higher-income persons.’° He writes: Ifaprogressive consumption tax isto curb the waste that springs from excessive spending on conspicuous consumption, its rates atthe highest levels must be sufficiently steep to provide meaningful incentives for people atop the consump tion pyramid.

for unless their spending changes, the spending of those just below them isunlikely to change either, and so on all the way down.

(Ibid.:

216) Because the tax would collect more from higher-income households and less from lower-income households than the current US tax system, itwould reduce total spending on conspicuous consumption goods.

Some spending 158 on $14,000 Hermes Kelly alligator handbags would be replaced by increased spending by lower-income families on real necessities.

Itwould also encourage people to engage in untaxed consumption:

working less to spend more leisure time with friends and family, going for awalk or reading alibrary book.

All of these activities have been reduced by the wasteful consumption arms race. Frank asks ‘If this tax issuch agreat idea, why don’t we already have one?’ (ibid.:

225).

He attributes this to the widespread, and false, belief that imposing higher tax rates on the rich will cripple the economy.

He’s not optimistic about such apolicy actually being adopted when political programmes apparently have to be explained in ten-second sound bites. Other forms of collective action can also help to address these consumption externalities.

If spending to keep up with the Joneses leads people to work excessively long hours, increases in legislated minimum holidays could help. Business owners, however, have an interest in promoting the cycle of work- and-spend.

As the American abolitionist Frederick Douglass famously put it: ‘Power concedes nothing without demand.

It never did and itnever will.’ In the European Union, where social democratic parties have long been strong and unions organize alarge part of the labour force, people are entitled to a minimum of four weeks of paid leave per year, although some countries legislate ave or six weeks (European Union 1993).

In the United States, in contrast, where unions are weak and the very wealthy have disproportionate power, people are entitled to no weeks of paid leave, and about aquarter of the workforce has no paid holidays of any kind (Ray and Schmitt 2007). Questions for your professor:

Do consumption externalities exist?

If so, why doesn’ tthe textbook mention them? Air polltttion ‘Unfortunately, the will ofour elected officials to curb air pollution and the in difference of corporate polluters to the silent cumulative violence they inflict on our people through air pollution persists.’ Ralph Nader (2004b:

168) The burning of fossil fuels creates carbon monoxide, sulphur dioxide, nitrogen oxides, hydrocarbons and fine particulate matter.

Breathing these invisible pol lutants and other pollutants that form from them (such as ozone) damages the interior of the lungs and directly influences respiratory and cardiovascular illnesses and lung cancers (Davis 2002:

70).

While the thick smog in big Chinese cities gets alot of attention, even the much lower levels of particulates (achieved through public pressure) in the world’s wealthiest countries are still killing substantial numbers of people and causing breathing problems, such as asthma, for many more.

About two million people die prematurely every year from the ‘1,x z m‘I, Sumption, lowering everyone’s dard textbook assumption that te, not relative, consumption.8 Frank puts it) it‘is inconsistent )rigins and functions of human ye direct and indirect empirical 141). only by collective action.

Frank on annual consumption spend ternality.

Under such ascheme, tome all savings placed in regis ption plus saving, the tax base is Id per dollar of spending would nspending; Frank suggests top id make the tax ‘progressive’ in son’s income would be higher vaste that springs from excessive satthe highest levels must be ies for people atop the consump ;,the spending of those just on all the way down.

(Ibid.:

216) igher-income households and Lirrent US tax system, itwottld nption goods.

Some spending 159 effects of air pollution, according to the World Health Organization (2oo$b). About 650,000 of these deaths occur in China, more than 500,000 in India and more than 40,000 in the United States (Platt 2007).

Recently, the Canadian Medical Association (2008) published areport claiming that 21,000 Canadians will die in 2008 as aresult of air pollution.11 Major emitters, particularly utilities with coal-fired power plants, adopted the usual strategy of arguing that the links between emissions and death rates are unclear, but the evidence is now conclusive (Pianin 2002).

Since the birth of the modern environmental movement in the ig6os, significant progress has been made in reducing these (and other) air pollutants (notably lead), but at the same time, new ones have emerged. To give just one example, polybrominated diphenyl ethers (PBDEs) are a class of chemicals used as flame retardants in such things as furniture, mat tresses, electronics and textiles, and were introduced, ironically, in response to flammability regulations intended to protect consumers.

They are structurally similar to the widely banned polychlorinated biphenyls (PCBs) and, like PCBs, are persistent pollutants that accumulate in the body.

In rats, PBDE5 affect the regulation of calcium in neurons, disrupt thyroid hormonal secretions, and fetal exposure leads to hyperactivity after birth (Coburn et al.

2008). PBDEs are found in household dust and, in Canadian tests, in everyday foods such as dairy products, beef, pork and fish (Picard 2005).

American and Canadian women’s breast milk contains concentrations more than forty times higher than those in Sweden, and the levels are rising rapidly, doubling every few years, according to one estimate (Betts 2001).

With babies among the most vulnerable, the long-term consequences of this cannot be good. These are only one group among many industrial chemicals in our bodies which interact in largely unknown ways.

There are $,ooo chemicals registered for use in the United States, of which fewer than 2per cent have been tested for carcinogenicity (Davis and Webster 2002:

25).

Aside from the problem of dealing with the complexities of different levels, duration and timing of exposure to amix of potentially harmful substances, researchers have no ‘control group’ with whom to compare the affected population because virtually everyone is exposed (Davis 2007). Workplace health and safety The world’s working-age population, currently about 2,700 million, experiences about 1.9—2.3 million deaths per year related to occupation, according to estimates of the International Labour Organization.

Of these at least ;.6 million are work-related diseases, including 6oo,ooo cancers, which may take years or decades to develop (Takala 2003:

2). Textbook economics rules out by assumption any externalities from worker illness and death due to hazardous workplaces.

With the assumption of perfect information, itfollows that workers demand and get higher wages in exchange 160 for exposure to added risk.’2 9 wages raise firms’ costs so tha on their workers, internalizing If this proves too costly, firms the risks more cheaply.’3 In real workplaces, the reali the hazards they face.

Employe Friedrich Engels, writing in 184 termed such behaviour ‘social r under such conditions in whic and so hurries them to the gra Ignorance of risk and the ash the lead, chemical and plastics of this type of ‘social murde; breathing asbestos fibres wer lodged in the lung, they remair thickening within the lung), Ia lioma.

The cancers emerge th At risk are not just asbesto their families, users of asbesi building materials and asbes ing countries, where protecti existent, the asbestos cancer been in the developed count There are currently about according to the World Health will have caused between 5a the near future, which seem developing countries (Brophy While the industry knew 0 from workers and the public f lated not only governments b the World Health Organizatic for aworldwide asbestos bar With the bankruptcy of rn demand and illness-related national and international Canadian government.

Cana tant producers and exporten the industry is small (LaDm for exposure to added risk.12 These so-called ‘compensating differentials’ in wages raise firms’ costs so that on average firms pay for the costs they inflict on their workers, internalizing these costs and thus ruling out any externality. If this proves too costly, firms may find workers in other countries to accept the risks more cheaply.13 In real workplaces, the reality isimperfect information; workers don’t know the hazards they face.

Employers, however, often know just what they’re doing. Friedrich Engels, writing in 1845 on The Condition ofthe Working Class inEngland, termed such behaviour ‘social murder’.

He wrote that society ‘placed the workers under such conditions in which they can neither retain health nor live long and so hurries them to the grave before their time’ tEngels 1987 [1845]:

128). Ignorance of risk and the asbestos holocaust There are many examples from the lead, chemical and plastics industries, but probably the largest single cause of this type of ‘social murder’ is exposure to asbestos.

The fatal dangers of breathing asbestos fibres were observed in the late nineteenth century.

Once lodged in the lung, they remain there permanently, causing asbestosis (a fibrous thickening within the lung), larynx cancer and lung cancer, including mesothe lioma.

The cancers emerge decades after initial exposure (Michaels 2008:

13). At risk are not just asbestos workers, but their families, users of asbestos products, and the public as itisexposed to building materials and asbestos in heating and ventilating systems.

In develop ing countries, where protection ofworkers and communities isscant to non existent, the asbestos cancer epidemic may be even more devastating than ithas been in the developed countries.

(LaDou 2004:

285) There are currently about 100,000 cases of asbestos-related cancer ayear, according to the World Health Organization.

According to one estimate, asbestos will have caused between 5and 10 million deaths, ifexposures to itcease in the near future, which seems unlikely because its use is increasing in some developing countries (Brophy et al.

2007:

237). While the industry knew of the dangers, itsuccessfully kept the information from workers and the public for decades.

The industry also successfully manipu lated not only governments but also the International Labour Organization and the World Health Organization, both of which are now, however, finally calling for aworldwide asbestos ban (LaDou 2004; Greenberg 2008). With the bankruptcy of multinational asbestos companies, due to declining demand and illness-related lawsuits, the single ‘most powerful opponent of national and international efforts to ban asbestos around the world’ is the Canadian government.

Canada has long been one of the world’s most impor tant producers and exporters of asbestos, although with about 1,500 workers, the industry is small (LaDou 2004:

289).

Chapter 5sketched oitt the logic of mxCD-I CDVI Health Organization (2008b). more than 500,000 in India 2007).

Recently, the Canadian aiming that 21,000 Canadians l-firecl power plants, adopted en emissions and death rates (Pianin 2002).

Since the birth 196os, significant progress has )llutants (notably lead), but at liphenyl ethers (PBDEs) are a such things as furniture, mat need, ironically, in response to nsumers.

They are structurally henyls (PCBs) and, like PCBs, body.

In rats, PBDEs affect the hormonal secretions, and fetal Lrn et al.

2008). aCanadian tests, in everyday h(Picard 2005).

American and trations more than forty times rising rapidly, doubling every ).With babies among the most cannot be good. .strial chemicals in our bodies tre 85,ooo chemicals registered rn 2per cent have been tested 5).

Aside from the problem of luration and timing of exposure archers have no ‘control gloup’ because virtually everyone is cing-age population, currently illion deaths per year related to ttional Labour Organization.

Of ;es, including 600,ooo cancers, kala 2003:

2). iany externalities from worker With the assumption of perfect iget higher wages in exchange 161 how narrow interests can dominate public policy and this provides aclassic example.

The Canadian government has ‘used its full influence in international organizations to protect its export market for asbestos, and Canada has aggres sively promoted the use of asbestos in developing countries’ (ibid.:

289).

When France banned the importation of asbestos and asbestos products, the Canadian government challenged itin the World Trade Organization (without success). When the European Union, which has banned asbestos and asbestos products, tried to have chrysotile asbestos added to the UN’s Rotterdam Convention (which requires countries importing toxic substances listed under the Convention to give their prior and informed consent), the Canadian government successfully blocked it(Greenberg 2008). At home, despite the efforts of organizations like Ban Asbestos Canada, the Canadian government remains ‘essentially alone among industrialized countries in failing to acknowledge and act upon’ the increasing incidence of asbestos- related cancers.

Itfunds an industry lobby group, the Chrysotile Institute (Brophy et al.

2007:

237).

Itadvocates ‘controlled use’ of chrysotile asbestos while ignor ing the fact that almost all Canadian asbestos isexported to developing countries with weak to non-existent regulations.

Canada currently exports about 250,000 metric tons of asbestos annually (Greenberg 2008).

With about three cancer deaths associated with every 170 tons of asbestos (Tossavainen 2004), these exports should eventually result in about 4,400 deaths ayear. Choosing false beliefs Even ifworkers know there may be risks to their work, will they evaluate them properly?

The textbook model assumes that they will and that appropriate compensation for the extra risk will result. This won’t happen ifworkers experience what psychologists call ‘cognitive dissonance’.

People can choose their beliefs about the world, using information selectively to reinforce abelief they would prefer to have (Akerlof and Dickens 1982).

In this case, workers have to reconcile their view of themselves as smart people who make the right choices with the actual job they choose.

As aresult, they can believe their work issafer than itactually is.

In this situation, there is no reason to think that wages will, in reality, adequately compensate workers for the risks they face, and thus internalize these costs in the firms’ decision-making (Purse 2003).

Another idea, leading to the same result, isthat workers have dif fering and incomplete information about job risks.

Those who underestimate the risks take the most dangerous jobs. Question for your professor:

Do health and safety risks to workers in the workplace constitute an external cost of pro duct ion? The cancer epidemic American i ing acancer during their lifeti and Pastides 2008:

4).

Rates in Britain and Australia are broad TABLE 7.2 Percentage changes in Australia Ca (1973—2002) (197 Alt cancers Men 38.4 Women 34.0 Alt cancers except lung Men 55.4 Women 31.2 Lung Men -26.7 Women 96.6 Liver Men 290.9 Women 250.0 Prostate Men 176.1 Breast Women 56.2 Non-Hodgkiizs lymphonia Men 91.8 Women 78.2 Note:

Data for ‘all cancers’ exciuc Source:

Authors’ calculations fro (2005). Cancer rates for both men throughout the industrialized in Figures 7.2 and 7.3.

Some creasing rates for the incidenc hence reduced lung cancer ra is one of the few bright spot lung cancer rates significantl rational-choice approach of o tion’, an act apparently carric 162 The cancer epidemic American men have about aone-in-two chance of develop ing acancer during their lifetime, and women aone-in-three chance (Nasca and Pastides 200$:

4).

Rates in other industrialized countries such as Canada, Britain and Australia are broadly similar. Australia Canada Scotland Sweden US, Whites (1973—2002) (1978—2002) (1975—2002) (1958—2002) (1972—2002) At!

cancers Men 38.4 12.2 17.8 48.9 26.1 Women 34.0 11.0 27.6 49.8 15.5 Alt cancers except lung Men 55.4 22.1 42.2 28.0 37.1 Women 31.2 5.5 23.2 22.5 9.7 Lttng Men -26.7 -24.1 -32.2 39.3 -16.7 Women 96.6 79.5 66.2 291.9 90.8 Liver Men 290.9 90.9 116.7 30.7 119.0 Women 250.0 27.3 112.5 7.7 70.0 Prostate Men 176.1 109.7 121.4 208.8 142.2 Breast Women 56.2 20.3 31.9 74.6 29.5 Non-Hodgkins tymphoma Men 91.8 44.0 74.6 142.5 79.3 Women 78.2 35.1 91.1 126.7 61.4 Note:

Data for ‘all cancers’ exclude ‘other skin’ cancers. Source:

Authors’ calculations from International Agency for Research on Cancer (2005). Cancer rates for both men and women have been rising steadily for decades throughout the industrialized countries, as can be seen in the sample shown in Figures 7.2 and 7.3.

Some data are summarized in Table 7.2 and show in creasing rates for the incidence of cancer in general.

Adecline in smoking and hence reduced lung cancer rates among men in most industrialized countries is one of the few bright spots.

More smoking among women is raising their lung cancer rates significantly.

Incidentally, as we noted in Chapter 1, in the rational-choice approach of orthodox economics, smoking isa‘rational addic tion’, an act apparently carried out in full knowledge of the risks.

Ifthat were 163 TABLE 7.2 Percentage changes inage-standardized cancer incidence rates ‘IixCD CDI’, flicy and this provides aclassic tsfull influence in international sbestos, and Canada has aggres ng countries’ (ibid.:

289).

When asbestos products, the Canadian Organization (without success). asbestos and asbestos products, ‘sRotterdam Convention (which listed under the Convention to iadian government successfully 3like Ban Asbestos Canada, the among industrialized countries creasing incidence of asbestos- the Chiysotile Institute (Brophy chrysotile asbestos while ignor exported to developing countries currently exports about 250,000 too8).

With about three cancer stos (Tossavainen 2004), these deaths ayear. Lere may be risks to their work, model assumes that they will ra risk will result. iat psychologists call ‘cognitive ut the world, using information r to have (Akerlof and Dickens eir view of themselves as smart ual job they choose.

As aresutt, thy is.

In this situation, there is cuately compensate workers for tsin the firms’ decision-making result, isthat workers have dif sks.

Those who underestimate fetyrjsksto FIGURE 7.3 Cancer incidenc The collapse ofthe world’s fishei an open-access problem.

Each f any fish left behind might be cai. disaster, but even in the late ni fisheries ‘inexhaustible’ and re Advances in fishing technoic ments completely wrong.

The d perhaps for ever, in 1992) was biologists explains, ‘[gjlobally catches dropping below 10% C over time, with 29% of curren They observe an ‘on-going erc on aglobal scale’.

This loss of only of fishing, but of pollutic trend is of serious concern b [taxonomic units] currently fi continues.

In turn, this implit water quality, and ecosystem (Worm et al.

2006:

788, 790). Governments and internat ing problem.

As one observ politicians alike assume that have to satisfy, and not the t 400- 350- Sweden ———- Australia USA, whites —-—- Canada — Scotland 300- 250 -—;-___ --;:-_ — - - - 300 200- 150 - Sweden 1 ———-Australia USA, whites Canada — ScotlanJ 100- 200- 50- 150 0- 1958—62 1963—67 1968—72 197 0— I I I I 1958—62 1963—67 1968—72 1973—77 1978—82 1983—87 1988—92 1993—97 1998—2002 FIGURE 7.2 Cancer incidence per ioo,ooo mates, age-standardized rates true, none of the 500 million smokers alive today who will die of smoking- related cancers and other disease (Dauvergne 2005:

ii) should feel any regret at having smoked. Excluding lung cancer, male cancer rates are still rising.

These increases are not due to the increasing average age of the population.

We use cancer statis tics where the rates are adjusted to those of afixed age distribution, allowing comparability across time and across countries. Such things as increased screening and better diagnosis can account for some of the increase, particularly for breast cancer in women and especially for prostate cancer in men.

This can’t fully account for breast cancer increases, however, nor does itexplain the increasing incidence of cancers such as non- Hodgkin’s lymphoma.

Other underlying risk factors appear to be atwork:

work place and occupational exposures as well as the more familiar culprits, diet and exercise.

‘Precautionary policies would urge that exposures to suspected environmental hazards be minimized and that healthful behaviors should be promoted throughout the population with the active involvement of the public and private sectors’ (Dinse et al.

1999). Unfortunately, substantial and influential parts of the private sector have interests in promoting unhealthy products and lifestyles and in covering up workplace and environmental hazards.

In the ‘cancer industry’ itself, attention isnaturally directed to the areas where private profit is the greatest (detection and treatment, particularly with expensive drugs) rather than towards preven tion (Epstein 199$). 164 300- --,--- - - —---=- ---- - -- Sweden ———-Australia ------ USA, whites —-—.

Canada — — Scotland iday who will die of smoking- 005:

ii) should feel any regret still rising.

These increases are uEation.

We use cancer statis ixed age distribution, allowing ter diagnosis can account for fleer in women and especially tnt for breast cancer increases, dence of cancers such as non ors appear to be at work:

work .e more familiar culprits, diet ethat exposures to suspected healthful behaviors should be tive involvement of the public rts of the private sector have lifestyles and in covering up neer industry’ itself, attention rofit isthe greatest (detection )rather than towards preven The collapse ofthe world’s fisheries An unregulated fishery isaclassic example of an open-access problem.

Each fisherman has an incentive to maximize his catch; any fish left behind might be caught by someone else.

This sounds like arecipe for disaster, but even in the late nineteenth century, biologists declared the world’s fisheries ‘inexhaustible’ and regulation awaste of time (Gordon 1954:

126). Advances in fishing technology, however, have proved these optimistic assess ments cornpletelywrong.

The destruction ofthe Newfoundland cod fishery (closed, perhaps for ever, in 1992) was not an isolated event.

As one group of Canadian biologists explains, ‘[g]lobally, the rate of fisheries collapses, defined here as catches dropping below 10% of the recorded maximum, has been accelerating over time, with 29% of currently fished species considered collapsed in 2003’. They observe an ‘on-going erosion of diversity that appears to be accelerating on aglobal scale’.

This loss of genetic and species biodiversity isthe result not only of fishing, but of pollution, habitat destruction and climate change.

‘This trend is of serious concern because itprojects the global collapse of all taxa [taxonomic units] currently fished by the mid-2lst century’ ifbusiness-as-usual continues.

In turn, this implies ‘serious threats to global food security, coastal water quality, and ecosystem stability, affecting current and future generations’ (Worm et al.

2006:

78$, 790). Governments and international organizations have presided over this grow ing problem.

As one observer comments, ‘The wortd over, bureaucrats and politicians alike assume that commercial fishermen are the constituency they have to satisfy, and not the true owners of the sea, the citizens’ (Clover 2006: 250- 200- 150- mxCD-I CDU, 100- 50- ‘I’ —87 1988—92 1993—97 1998—2002 es, age-standardized rates I I 1958—62 1963—67 1968—72 1973—77 1978—82 1983—87 1988—92 FIGURE 7.3 Cancer incidence per ioo,ooo females, age-standardized rates - 1 1993—97 1998—2002 165 Externalities in the financial industry Given the experience of recent years, no one reading this will need convincing that poorly regulated financial markets don’t work well.

An important element in their malfunction involves an external ity which public regulation and institutions should address. When abank makes aloan to abusiness, itfaces some risk of the firm not meeting its obligutions.

This not only makes the lending bank riskier, itmakes other banks with which itis linked in the payments system alittle riskier too. This isan externality (Kaufman and Scott 2003).

When the bank makes the loan, itthinks only of the additional risk itis assuming, not of the additional risk it imposes on other banks.

This has consequences for the stability of the entire financial system ifan event (such as afall in housing prices or arecession) increases the number of defaulting loans faced by all banks. Public regulation of financial institutions can require individual financial institutions ‘to expend the resources necessary to manage risk, to maintain adequate capital, and pay for risk insurance’ to internalize these external costs, as John Eatwell and Lance Taylor explain in astudy of the Asian financial crisis of 1997.

They note that while effective management of these externalities is good for society as awhole, the financial institutions ‘tend to resent the costs involved, and argue that, in their case at least, these costs are unnecessary’ (1998:

22—3). The result isan ongoing tension between the regulators and the regulated.

In the United States, the last several decades have seen in ‘housing and consumer finance ...the consequences of market power, of asymmetric information, and of regulatory capture, leading to rampant predation against both apublic system and the public itself, and on acolossal scale’, as James K.

Galbraith recently put it(2008:

140).

We pursue these themes further in the postscript to this book. 2.2 Externalities and the profit motive ‘We have always known that heedless self-interest was bad morals; we know now that itisbad economics.’ Franklin Delano Roosevelt, second inaugural address, 1937 [Marx’s] perception that the pr remains, Ithink, agreat insigh isdone atthe expense of hum money has led chemical comp manufacturers to create monsi how they will be used or againi Ifwe take the ubiquity of im nize the realities of power and them, we can see how the profi externality problem in the bad asymmetric information, corp often tend to give disproportio Zinn identifies. Many critics, including Zinn of society can overcome the cc lective action to deal with the generates.

In the near term, tha engagement in civic affairs (N tization would have to include non-democratically as amatter organizations would ultimatel in the sense of maximizing Pr others, would be discarded. 2.3 Summing up:

externalit The ideal of aperfectly coi resources efficiently isalso one the conclusion that such aficti admittedly, not equitable) isn At best, it’s an intellectual to the actual economy is from tl The modern market econrn of living for many people in th as ‘efficiency’.

As we’ve tried t problems of pollution (of whi resources, and even with lon 316).

And what do the fishermen want?

They make two demands, according to George Monbiot (2008):

‘they must be allowed to destroy their own livelihoods, and the rest of us should ay for it’. Many critics of the current ec itas destructive.

From the view] guides resources to their most itappears that these critics are the American historian Howard Question for your professor:

If externalities are really per vasive and important, why doesn’ tthe textbook integrate them throughout the book, rather than leaving them to achapter towards the end? 166 Many critics of the current economic system deplore the profit motive, seeing itas destructive.

from the viewpoint of the textbooks, where the profit motive guides resources to their most valued uses and produces material abundance, itappears that these critics are economic illiterates.

Consider this comment by the American historian Howard Zinn: [Marx’s] perception that the profit motive was ruinous for the human race remains, Ithink, agreat insight.

We see that the drive of corporations for profit isclone atthe expense of human beings all over the world ...the pursuit of money has led chemical companies to pollute the air and water, has led arms manufacturers to create monstrous weapons of destruction without regard to how they will be used or against whom they will be used.

(2002:

97—8) Ifwe take the ubiquity of important externalities seriously, and ifwe recog nize the realities of power and information that hinder effective responses to them, we can see how the profit motive can work in practice.

The texts put the externality problem in the background, while assuming away the problems of asymmetric information, corporate power and citizen disorganization that so often tend to give disproportionate power to the kind of narrow interests that Zinn identifies. Many critics, including Zinn, would argue that only adeep democratization of society can overcome the concentrations of power that inhibit effective col lective action to deal with the external costs that the existing economic system generates.

In the near term, that could take the form of sufficiently active citizen engagement in civic affairs (Nader 2004a:

i).

In the long term, that democra tization would have to include the capitalist corporation itself, which operates non-democratically as amatter of principle.

In ademocratic economy, producing organizations would ultimately have to cover their costs, but the profit motive, in the sense of maximizing profit regardless of the external costs imposed on others, would be discarded. 2.3 Summing up:

externalities and the market economy The ideal of aperfectly competitive market economy that allocates scarce resources efficiently isalso one that presumes that there are no externalities.

But the concitision that such afictitious ‘free market’ economy isefficient (although, admittedly, not equitable) isno justification for apresumption of laissez-faire. At best, it’s an intellectual toy that could be used to stress just how different the actual economy is from this imaginary world. The modern market economy has indeed produced ahigh material standard of living for many people in the developed world.

But this isnot the same thing as ‘efficiency’.

As we’ve tried to show, it’s perfectly compatible with very serious problems of pollution (of which we have given only afew examples), misuse of resources, and even with long-term catastrophe. 167 ike two demands, according to destroy their own livelihoods, ‘Iix m experience of recent years, no ly regulated financial markets alfunction involves an external uld address. Eaces some risk of the firm not lending bantc riskier, itmakes ents system alittle riskier too. iVhen the bank makes the loan, ‘g, not of the additional risk it sfor the stability of the entire Irnusing prices or arecession) by all banks. in require individual financial Ito manage risk, to maintain nternalize these external costs, idy of the Asian financial crisis ment of these externalities is itions ‘tend to resent the costs these costs are unnecessary’ regulators and the regulated.

In een in ‘housing and consumer fasymmetric information, and on against both apublic system James K.

Galbraith recently put in the postscript to this book. 1ities are really per extbook integrate them ig them to achapter ;twas bad morals; we know now evelt, second inaugural address, In fact, this does not contradict what is in the texts themselves, ifthey are read carefully and completely by those willing to draw their own conclusions. But the texts put externalities in the background (and at the back of the book), foregrounding instead the story of markets that work efficiently.

Aconcept that could be woven throughout the book as arepeated theme isinstead treated as a secondary matter that could be fixed by appropriate government policy.

They fail to provide real information about the actual importance of negative externalities and an analysis of how governments actually respond to them. Suggestions for further reading Robert Frank’s 1999 book, Luxury Fever:

Why money fails to satisfy in an era of excess, isathought-provoking exploration of the effects of consumption ex ternalities.

He advocates aconsumption tax to address the problem. Two first-rate accounts of the ruthless behaviour of industrial polluters and the makers of dangerous products are Gerald Markowitz and David Rosner’s 2002 study, Deceit and Denial:

The deadly politics ofindustrial pollution, and David Michaels’s Doubt is Their Product:

How industiy’s assault on science threatens your health (2008). The economics of climate change is an issue of first-rate importance, and Frank Ackerman’s brief and accessible 2009 book, Can We Afford the Future?

The economics of awarming world, isan excellent introduction to the issues. The disaster facing the world’s fisheries isset out by reporter Charles Clover in The End of the Line:

How oveifishing is changing the world and what we eat (2006).

It has subsequently been the inspiration for adocumentary film, The End of the Line, directed by Rupert Murray.

See endoftheline.com. Engels’s theme of ‘social murder’ istaken up by Robert Chernomas and Ian Hudson in their Social Murder and Other Shortcomings ofConservative Economics (2007), acritique of corporate power and its absence from mainstream economic theory. For more advanced undergraduate students, Arild Vatn provides an introctuc tion to institutional economics as applied to environmental economic policy in his 2005 book, Institutions and the Environment. ‘Are we so committed to t and its implicit claim legitimated by market fc of power, monopoly and I discuss the way incomes (1998:

37) ‘In theory there is no di practice there is.’ Yogi We’ve emphasized in previous of the main economic goals — emphasis shows up again in ti don of income.

They are invari time constraints, the typical in’ The implicit message is that t The textbooks teach the n come is determined primarily lip-service is given to convent tic spending, bargaining pow framework, or arbitrary histor In its pure form, the neocIa ing perfect information) and the value of what they contribti prepared to admit that almos’ is almost never perfect infori are prevalent enough, and infi as an approximation. ITHE STANDARD TEX’ LI Introduction What are the factors of prod fication.

The factors of product and entrepreneurship.

Baumol 8 fThe marginal pr distribution or y 168 dition tothe third edition is ia footnote on p.678. tctays itisseriously challenged ral economics.

One indication )ural economics has become Iisthe 9December 2002 stin Fox inFortune entitled ‘Is rational?

No, say the experts. are you —so don’t go thinking Smart it’. Imount itpays out asdividends al.

Either the firm disperses dividends oritploughs them vits assets —either way, the benefits. text several paragraphs draw ‘tullainathan and Thaler ed-end funds are like typical mutual funds except that to the fund, investors must sell on the open market.

This closed-end funds have market re determined by supply and ther than set equal tothe value ts by the fund managers as in cifund. recent studies found under her than overreaction over iods of time.

Over periods of toone year, stocks display i— the stocks that go up the he first six months ofthe keep going up.

So, markets overreact and sometimes (Mullainathan and Thaler stories vary, but always seem atthe time.

In the dot-corn story was all about the new breaking the mould.

Every :oing to be different.

In real us the story iscisually about a nt ofland confronting agrow :ion and agrowing economy vays (and will always) propel er.

It’s amyth, but people uring the boom. for example, Shiller (1981), tnd Shiller (1987) and Jung and 7Externalities 1We surveyed nine widely used texts, eight ofwhich had this structure:

Baumol and Blinder (2006), Colander etal.

(2006), Frank etal.

(2005), McConnell etal.

(2007), Krugman and Wells (2005), Parkin and Bade (2006), Ragan and Lipsey (2008) and Schiller (2006).

The only exception was Mankiw etal.

(2006), where externalities get achapter inthe middle ofthe book. 2Archer (2009) isagood introduction tothe physical science.

See also the most recent report ofthe Intergovernmental Panel on Climate Change (2007). 3Of the sample ofnine texts inend- note 1,only three —Baumol and Blinder (2006), McConnell etal.

(2007) and Schiller (2006) —offer any factual evidence about climate change. 4For details see Monbiot (2006:

ch.

2) and Gelbspan (2004:

ch.

3). 5The academies were those ofBrazil, Canada, China, France, Germany, India, Italy, Japan, Russia, the United Kingdom and the United States.

See also American Association for the Advancement ofSci ence (2006). 6See www.junkscience.com for a sample.

The site www.sourcewatch.org is avaluable guide tothe background and sources offunding ofindustry-funded organizations and ‘experts’. 7Cited inSchor (2004:

48). 8Of the texts listed inendnote 1, only Frank etal.

(2005:

298, 427) mention consumption externalities.

Itplays no role inthe central chapter on consumption, however. 9Some countries, such asCanada and the United States, already have such schemes, but they limit the amounts that can be put inthese accounts each year. 10 This contrasts with existing ‘regres sive’ sales taxes and value-added taxes where higher-income persons tend topay alower percentage oftheir income intax than lower-income persons. ii This claim seems inconsistent with the figures for the United States inthe previous sentence. 12 From the texts inendnote 1,only Colander etal.

(2006:

463) explicitly acknowledge the importance oflaws governing workplace health and safety.

No other texts mention the issue. 13 The 2004 documentary film Ship- breakers provides acase stttdy ofthe dirty and dangerous work ofbreaking up ships carried out inAlang, India.

For details, see the National Film Board ofCanada, www3. nfb.ca/collectiofl/films/ficheflid=5;361. 8Marginal productivity theory 1It’s the same as asimple mortgage calculation.

You can find many mortgage calculators online.

Set the amortization period totwenty-five years, and choose the interest rate and principal amount. 2The fact that estimated returns to schooling are much greater than that required from amortgage amortization point ofview suggests that there are bar riers toentering occupations —including differences in inherited ability —which raises the return above levels implied by the principle ofequal net benefits. McConnell etal.

(2007:

305) inform us that:

‘Rates ofreturn are estimated to10 to 13 percent for investments insecondary education and 8to 12 percent for invest ments incollege and university education. One generally accepted estimate isthat each year ofschooling raises aworker’s wage by about 8percent’ (emphasis added). 3For example, McConnell etal.

(2007: 300) say:

‘The purpose oflicensing is supposedly toprotect consumers from incompetent practitioners —surely awor thy goal.

But such licensing also results in above-competitive wages and earnings for those inthe licensed occupation.’ 4Employers are rational —so that even non-prejudiced employers seelc to maximize profits.

Ifthey can employ black workers atadiscount, they’ll seize the op porttinity.

Prasch (2008:

ch.

VII) contains an excellent discussion. 5Perhaps the worst treatment of discrimination iscontained inParkin and Bade (2006), who seem toconfuse shifts indemand with changes inquantity z0 in 269