Externalities everywhere

Every day I become more and more convinced about how central externalities are to modern human society. It should not be surprising, given the modern turn towards the individual, that social welfare would be less well served by modern institutions than individual welfare. This is not even a bad thing - the growth we've experienced since the individualist turn strongly suggests that there's something substantial to the idea of modern individualism that ought to be maintained vigorously! But that still means that modern institutions might not be well equipped to address the welfare of parties external to the interactions of individuals. I think of human progress as the fulfillment of the difference in welfare from what we are to what we could be in the future. Two social technologies - the market and modern science - are the best tools we have to maximize that progress. But each of these targets specific kinds of welfare improvements, so that modernity is something like a net that catches a lot of opportunities for progress but lets certain opportunities systematically slip through. Externalities are not "exceptions to the rule" - they're a natural and pervasive part of life. And one of the reasons why I hammer thinking about property so hard is that it's precisely our natural embrace of status quo property arrangements that makes us ambivalent towards externalities. If you see human progress as a positive (if ambiguous) thing, that strikes me as an odd position to hold.

I have two points on externalities.

First, Russ Roberts' recent podcast with Dani Rodrik has an interesting discussion of externalities that I've never thought of. On his blog, Russ writes of it:

"Along the way, Rodrik argued, to my surprise, that starting a new venture in a poor country has a positive externality that leads to market failure. He gave the example of a call center–suppose a country has a work force that would be good at working in call centers. An entrepreneur who starts a call center will thereby provide information to other entrepreneurs about the quality of the work force."

Pigou meets Kirzner. It would be a productive meeting, but I'm afraid there would be a lot of resistance, at least from modern proponents of Kirzner. Information asymmetries in hiring are very well understood - the step that I haven't heard anybody take that Rodrik takes here is to point out that because information is welfare-enhancing in labor markets with asymmetric information, entrepreneurs who hire in these markets (providing information on the wage and skill distributions of the population) generate positive externalities for other entrepreneurs.

My other point is to note that I've started writing a short article that I want to submit to a journal called Space Policy on the (mis)use of externalities to justify NASA. NASA's heart has been in the right place in their self-justification to the public. For a very long time they've touted their "spin-offs" - NASA technology that is useful in the private sector. They even have a regular publication dedicated exclusively to featuring these spin-offs, which has covered something like 1,600 spin-offs to date (and they note that this is not exhaustive). The effort is well-intended, but this is not really an externality - or if it is an externality ("information goods" like technology are so strange it's hard to think about them in the same way as non-information goods), it only scratches the surface of the externalities that NASA addresses. I plan on going over three more traditional externalities of public space exploration that NASA does not talk about as much as spin-offs, but should to provide what economists would consider a legitimate justification for public provision of space exploration. The articles in this journal are shorter than in others, so hopefully I'll be able to wrap it up in the next couple weeks (depending on other workloads). And sorry Evan - I know you'll be disappointed to learn its an Elsevier journal.

But for this morning - time to write more about the engineering labor market.