Saturday, April 16, 2011

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.


  1. Why do we need our welfare served? Why can't we sometimes be a little unhappier and just get on with it?

    I admit I ask a strange question, but even if each space exploration program adds a certain amount of "utils" to human happiness, what will it mean? At the end of one's life, when one looks back, what will it mean that one greater or one fewer space exploration project happened? What will it mean in making you believe you lived a meaningful life.

    I don't buy it. Do you?

    When you ask, "If you see human progress as a positive (if ambiguous) thing", you use a very big "If" there. Life need not be any more or any less meaningful, whether you lived in a not so progressive society such as Yemen or whether you lived in a very progressive society such as United States. For you could be an American who spends much of his time watching football, or you could be a Yemeni spending much of his time searching ancient relics in the desert and learning about a hidden past.

  2. I think culture is an important part of a person's utility - and there are relevant externalities associated with cultural production in its own right.

    Which I suppose is just to say that stock-piling utils for me doesn't just consist of stock-piling "stuff", and the example you gave seems consistent with what I'm trying to say.

    I was actually thinking of externalities and cultural experiences as well this morning - let me try to post on that tomorrow morning, and perhaps take a crack at some of the issues you raise.

  3. Sure, I look forward to that post.

    I think about the ancient Persians, Greeks, and Romans, and I have to contend uneasily with the fact that they didn't have modern institutions to deal with welfare maximisation, they didn't have space exploration, they didn't have anything to deal with externalities....

    and yet they still lived. And quite well too. Many of them lived lives both contemplative and cheerful.

    I must keep in mind that the next time anybody discusses whether state-run or privatized medicine is better in quality, I will intervene and ask, "Why do you care? Why does it matter?" We are not going to live forever. Alexander didn't live past 33. Humans once lived without modern medicine and with short lifespans, but many of them did a lot in those lives. Some like Julius Caesar did much before the age of 40 that we couldn't even do before 80.

  4. We are not going to live forever, but I'd rather have either completely state run modern medicine or completely private modern medicine than Alexander the Great's medicine (and he received better than most).

    It is easy to romanticize the past and some elements of the best deserve the honor they get - but all in all we don't do so bad.

  5. I thought the Pigovian system for handling externalities was considered a joke among professionals. Am I wrong?

  6. Don't tell Greg Mankiw, Mattheus.

    Coase certainly gave us more tools to think about Pigou, and certain circles will say that Coase finished Pigou off, but those same circles tend to say a lot of things that don't have much currency with the rest of the discipline.

  7. "either completely state run modern medicine or completely private modern medicine"

    By allowing individual states to decide for themselves, we can have both. As you know, Krugman, and others with intimate personal relationships with Truth, want one way or the other for everyone, when the diverse, pro-choice strategy is to add the phrase to your sentence, "...depending on the preferences of the residents of the states". If Vermont wants state-run medicine, great. If Georgia wants private medicine, great.

    I suppose when you're a Democrat, and you know the One Right Way, you don't mind creating a system from which there is no easy escape.

  8. Anonymous -
    I don't know why you feel the need to be so flippant - I was going to agree strenuously with your point that health reform is precisely where we need considerably more state-level latitude. It worked brilliantly for welfare reform and it should have been the centerpiece of health reform. I've said that a lot on here.

    You seem more concerned about bashing Krugman and Democrats, though - that's unfortunate - you had the kernel of a good idea there.

    My comment on state run modern medicine and completely private medicine was simply a response to Prateek's point about the ancient past - that no matter how bad state run health care would be (and it would be bad), it would still be leaps and bounds better than what Alexander the Great got.

  9. Well, it's not a matter of quality of medical care, but whether we needed quality medical care in the first place.

    Why is this issue taken seriously, when men have lived happy content lives without proper medicine for so long?


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