Reading 2: Externalities and the Ubiquity of Market Failure

greater than the marginal private cost. The socially optimal amount of driving
is where the marginal social cost equals the marginal social benefit of driving.
Clearly, individual decisions result in ‘too much’ driving from a social point of
view, a ‘market failure’ because resources are not being efficiently used.

There are two textbook solutions to this externality problem. If persons 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, a tax 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 is a second, less obvious, solution. Externalities arise because there are
no markets for some things and hence no price is paid 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 is set to limit total emissions of carbon dioxide.
Instead of emissions of CO2 being a free good, property rights have been estab
lished and it now has a price. If total emissions are set appropriately, the driver
pays a price for fuel that reflects the social cost of its use, including the costs of
climate change in this case, thus internalizing the externality.

Property rights Problems arise in the 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 in the ocean. If open 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 is no owner. One
way to address the problem is to require licences for use of the common resource.

Note that an absence of property rights is different from a situation in which
individuals share property rights. The classic case is a field on which everyone in
a village has the right to graze their animals. The field is common property and
offers the potential for overgrazing. If a farmer grazes his cows on the commonly
owned field, he may not take into account that he is leaving less grass for other
people’s cows, If he 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), is really just a special case of an externality. As
in the example we used there, someone in a group that has a common interest
(like the producers of a good) was considering contributing to further the group’s
goals. Anyone who produces or contributes towards a public good is providing
positive external benefits to others. The benefits any one person gets from the

public good do not reduce the b

people are not rivals in consumi

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 a go

are artificially scarce; otherwis€

computer programs are freely a

TABLE 7.1 Classification of types

Excludable

Rival Private goods, e.g.
fish in a fish farm

Non-rival Artificially scarce g
e.g. using a compul

If you drive a noisy 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 is always mentioned b

152

ly optimal amount of driving
inal social benefit of driving.
riving from a social point of
being efficiently used.
iality problem. If persons 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
i optimal amount.
ialities arise because there are
paid for them.
ires producers of fossil fuels
ram of carbon that the fuel
al emissions of carbon dioxide.
perty rights have been estab
set appropriately, the driver
its use, including the costs of

externality.

y property rights. Typically, no
ion-access resources, such as
:cess prevails, so that anyone
it overuse arises. Using the
because there is no owner. One
r use of the common resource.

tent from a situation in which
is a field on which everyone in
eld is common property and
zes his cows on the commonly
is leaving less grass for other
d, he alone faces the costs of
U for millennia, however, and
)otential problem.

J a ‘collective good’), intro
ecial case of an externality. As
that has a common interest
tributing to further the group’s
Is a public good is providing
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 it is ‘non-rival’ in consumption). Nor can

any beneficiaries be excluded from enjoying the benefits, even if they have not

paid for them (a situation of non-excludability).

In general, goods fall into one of four categories, as depicted in Table 7.7. Some

goods have the non-rival characteristic of a public 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 a good 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.

m
x

I,

CD

CD
U,

TABLE 7.7 Classification of types of goods

Excludable Non-excludable

Rival Private goods, e.g. an apple, Common access resources,
fish in a fish farm e.g. air, water, fish in the ocean

Non-rival Artificially scarce goods Pure public goods, e.g. listening to a
e.g. using a computer program radio programme; open source software

If you drive a noisy 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 in too few

voluntary contributions to public goods, while resulting in over-contribution to

public bads, such as smoggy air. Collective action is sometimes 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 a sharp 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. A moment’s thought

shows that the exception is the rule and the rule is the 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 is always mentioned briefly in an early chapter and is then set aside while

153

the bulk of the book adopts ‘no externalities’ as its default assumption. Serious
consideration of externalities reappears only in a chapter towards the end.’

If students get this far, they have spent the bulk of the course admiring the
works of the invisible hand. It would be easy to get the impression that external
ities are of peripheral, not central, importance. This would be the case if external
effects were not significant or if governments 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. It would 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 is actually determined.
Colander et al. (2006: 130) is a rare exception, remarking ‘that government often
has difficulty dealing with externalities’ because ‘government is an 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 a central role in shaping public policy, and
that sensitive topic is off limits. As a result, the textbooks give the misleading
impression that externalities are minor blots on the landscape that could be (and
perhaps are being) dealt with by a smattering 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 a central 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 in an 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 is at stake is the habitab

change that, perhaps radically.

A source 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 it away 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 it particularly 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 is now 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 is at stake is the 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 a positive 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 a rapid rise in sea

levels. Climatologist David Archer thinks that a continuation 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 it away 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 a combination of characteristics that

make it particularly difficult to address. Its effects come with a long time lag,

making procrastination tempting. It’s also a global 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 a vested 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 is to

create an impression of controversy over the science, the same strategy that was

m > CD

D)

CD

ts default assumption. Serious a chapter towards the end.’ ilk of the course admiring the t the impression that external is would be the case if external idress them adequately.

at practical importance. Every y threaten 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 is actually determined.

iarking ‘that government often ‘government is an institution

I vested interests’.

r combined with the rational in shaping public policy, and

textbooks give the misleading e landscape 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 ;e gas (GHG) emissions. These ggest market failure the world r of 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 a consultant 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 a primary issue’ (Gelbspan 2004: 41).

‘There will always be uncertainty in understanding a system as complex as the world’s climate,’ a joint statement by eleven national academies of science explained, adding that ‘the scientific understanding of climate change is now 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 a wide variety of results, depending on the question asked and the context, but as of April 200$ a poll 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, a 200$ 1)011 found ‘the majority of the British public is still not convinced that climate change is caused by humans’ (Jowit 200$), although the previous year 62 per cent agreed that ‘man-made global warming is threatening 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 a shareholder revolt(!), Exxon-Mobil ‘announced that it would cease funding nine groups that had fuelled a global 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 4 the idea of rapid adaption to new circumstances and of the importance of relative con sumption in determining well-being. Canadian economist Pierre Fortin makes a telling point:

156

It must be recogviizecl that ti

matter, but in a negative 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 a pass:

textbook?

Positional externalities in COflS

‘I have 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 it and the effect

that it has on others. Each p of reference in small, subtle 1D

For example, suppose that y

a store window. Carried away,

will now judge their own cons

reference. If their 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 a primary issue’

standing a system as complex eleven national academies of tderstanding of climate change

prompt action’ (Joint Science md the thousands of scientists etrating a ‘hoax’ and peddling o find the more subtle strategy

as te 6

vith politicians and the public. ie former government of John in cabinet that all the science

ty of results, depending on the wo$ a poll in the United States I that there was ‘solid evidence’ tie in five did not believe there issue ranked at the bottom of

ter 2008).

f the British public is still not ans’ (Jowit 2008), although the global warming is threatening Reid Global Monitor 2008). 1s hive been exposed and are ociety accused Exxon-Mobil of enial groups in 2005. In 2008, obil ‘announced that it would )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

it must be recognized that the absolute level of production continues to

matter, but in a negative 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 is linked to relative 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’ t the ‘biggest market

failure the world has seen’ (as Professor Stern puts it)

deserve more than a passing mention towards the end of the

textbook?

Positional externalities in consumption

‘I have Traxtar and you don’t.’ from a Reebok advertisement7

As Fortin notes, people’s assessment of their own material situation depends

in part on what other people have. If few people have their own vehicle, for ex

ample, then you won’t feel the lack of one nearly as much as if everyone 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 a public good: everyone is

affected by it and the effect on one person does not detract from the effect

that it has on others. Each person’s consumption decisions affect the frame

of reference in small, subtle but real ways.

For example, suppose that you notice a beautiful pair of $300 Italian shoes in

a store window. Carried away, you buy them. Everyone who notices your shoes

will now jtidge their own consumption standards by a slightly altered frame of

reference. If their shoes suddenly look second rate beside yours, your purchase

devalued them. Your extravagance created a negative 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 a few 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 a walk, 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 a policy 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 a large 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 of corporate 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 a lot 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 is that (as Franic puts it) it ‘is inconsistent

with our best theoretical understanding of the origins and functions of human

motivations; and it is 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 a scheme,

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 a share of a person’s income would be higher for higher-income persons.’° He writes:

If a progressive consumption tax is to curb the waste that springs from excessive spending on conspicuous consumption, its rates at the 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 is unlikely 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, it would 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. It would also encourage

people to engage in untaxed consumption: working less to spend more leisure

time with friends and family, going for a walk or reading a library book. All of

these activities have been reduced by the wasteful consumption arms race.

Frank asks ‘If this tax is such a great 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 a policy 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 it never will.’ In

the European Union, where social democratic parties have long been strong

and unions organize a large 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 a quarter 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’ t the textbook mention them?

Air polltttion

‘Unfortunately, the will of our 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 a lot 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 a scheme, tome all savings placed in regis ption plus saving, the tax base is Id per dollar of spending would n spending; Frank suggests top id make the tax ‘progressive’ in son’s income would be higher

vaste that springs from excessive s at the 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, it wottld 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 a report claiming that 21,000 Canadians will die in 2008 as a result 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 2 per 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 a mix 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, it follows 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 5 a

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 a worldwide 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 is imperfect 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 of the Working Class in England,

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 it is exposed to

building materials and asbestos in heating and ventilating systems. In develop

ing countries, where protection of workers and communities is scant to non

existent, the asbestos cancer epidemic may be even more devastating than it has

been in the developed countries. (LaDou 2004: 285)

There are currently about 100,000 cases of asbestos-related cancer a year,

according to the World Health Organization. According to one estimate, asbestos

will have caused between 5 and 10 million deaths, if exposures to it cease 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, it successfully 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 a worldwide 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 5 sketched oitt the logic of

m x CD -I

CD VI

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).

a Canadian 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 2 per 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).

i any externalities from worker

With the assumption of perfect

i get higher wages in exchange 161

how narrow interests can dominate public policy and this provides a classic

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 it in 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. It funds an industry lobby group, the Chrysotile Institute (Brophy

et al. 2007: 237). It advocates ‘controlled use’ of chrysotile asbestos while ignor

ing the fact that almost all Canadian asbestos is exported 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 a year.

Choosing false beliefs Even if workers 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 if workers experience what psychologists call ‘cognitive

dissonance’. People can choose their beliefs about the world, using information

selectively to reinforce a belief 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 a result,

they can believe their work is safer than it actually 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, is that 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 a cancer 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 a one-in-two chance of develop

ing a cancer during their lifetime, and women a one-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. A decline 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 is a ‘rational addic

tion’, an act apparently carried out in full knowledge of the risks. If that were

163

TABLE 7.2 Percentage changes in age-standardized cancer incidence rates

‘Ii x CD

CD I’,

flicy and this provides a classic ts full influence in international sbestos, and Canada has aggres ng countries’ (ibid.: 289). When asbestos products, the Canadian Organization (without success). asbestos and asbestos products, ‘s Rotterdam Convention (which listed under the Convention to iadian government successfully

3 like 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 a year.

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 a resutt, thy is. In this situation, there is cuately compensate workers for ts in the firms’ decision-making result, is that workers have dif sks. Those who underestimate

fetyrjsksto

FIGURE 7.3 Cancer incidenc

The collapse ofthe world’sfishei

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 a global 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

— Scotland300-

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 a fixed 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 it explain the increasing incidence of cancers such as non-

Hodgkin’s lymphoma. Other underlying risk factors appear to be at work: 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 is naturally 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 e that 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 is the greatest (detection ) rather than towards preven

The collapse ofthe world’sfisheries An unregulated fishery is a classic 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 a recipe for

disaster, but even in the late nineteenth century, biologists declared the world’s

fisheries ‘inexhaustible’ and regulation a waste of time (Gordon 1954: 126).

Advances in fishing technology, however, have proved these optimistic assess

ments cornpletelywrong. The destruction of the 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 a global scale’. This loss of genetic and species biodiversity is the result not

only of fishing, but of pollution, habitat destruction and climate change. ‘This

trend is of serious concern because it projects the global collapse of all taxa

[taxonomic units]

currently fished by the mid-2lst century’ if business-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-

m x CD -I

CD U,

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 a bank makes a loan to a business, it faces some risk of the firm not meeting its obligutions. This not only makes the lending bank riskier, it makes other banks with which it is linked in the payments system a little riskier too. This is an externality (Kaufman and Scott 2003). When the bank makes the loan, it thinks only of the additional risk it is assuming, not of the additional risk it imposes on other banks. This has consequences for the stability of the entire financial system if an event (such as a fall in housing prices or a recession) 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 a study of the Asian financial crisis of 1997. They note that while effective management of these externalities is good for society as a whole, 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 is an 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 a public system and the public itself, and on a colossal 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 it is bad economics.’ Franklin Delano Roosevelt, second inaugural address, 1937

[Marx’s] perception that the pr

remains, I think, a great insigh

is done at the expense of hum

money has led chemical comp

manufacturers to create monsi

how they will be used or againi

If we 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 a matter

organizations would ultimatel

in the sense of maximizing Pr

others, would be discarded.

2.3 Summing up: externalit

The ideal of a perfectly coi

resources efficiently is also one

the conclusion that such a ficti

admittedly, not equitable) is n

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

it as destructive. From the view]

guides resources to their most

it appears that these critics are

the American historian Howard

Question for your professor: If externalities are really per vasive and important, why doesn’ t the textbook integrate them throughout the book, rather than leaving them to a chapter towards the end?

166

Many critics of the current economic system deplore the profit motive, seeing

it as destructive. from the viewpoint of the textbooks, where the profit motive

guides resources to their most valued uses and produces material abundance,

it appears 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, I think, a great insight. We see that the drive of corporations for profit

is clone at the 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)

If we take the ubiquity of important externalities seriously, and if we 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 a deep 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 a matter of principle. In a democratic 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 a perfectly competitive market economy that allocates scarce

resources efficiently is also one that presumes that there are no externalities. But

the concitision that such a fictitious ‘free market’ economy is efficient (although,

admittedly, not equitable) is no justification for a presumption 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 a high material standard

of living for many people in the developed world. But this is not 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 a few examples), misuse of

resources, and even with long-term catastrophe.

167

ike two demands, according to destroy their own livelihoods,

‘Ii x

mexperience of recent years, no ly regulated financial markets alfunction involves an external uld address.

Eaces some risk of the firm not lending bantc riskier, it makes ents system a little riskier too. iVhen the bank makes the loan, ‘g, not of the additional risk it s for the stability of the entire Irnusing prices or a recession) 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 f asymmetric information, and on against both a public system James K. Galbraith recently put in the postscript to this book.

1ities are really per extbook integrate them ig them to a chapter

;t was bad morals; we know now evelt, second inaugural address,

In fact, this does not contradict what is in the texts themselves, if they 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. A concept that could be woven throughout the book as a repeated theme is instead 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, is a thought-provoking exploration of the effects of consumption ex ternalities. He advocates a consumption 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 of industrial 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 a warming world, is an excellent introduction to the issues.

The disaster facing the world’s fisheries is set 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 a documentary film, The End of the Line, directed by Rupert Murray. See endoftheline.com.

Engels’s theme of ‘social murder’ is taken up by Robert Chernomas and Ian Hudson in their Social Murder and Other Shortcomings ofConservative Economics (2007), a critique 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.

I THE STANDARD TEX’

LI Introduction

What are the factors of prod fication. The factors of product and entrepreneurship. Baumol

8 f The marginal pr distribution or y

168

dition to the third edition is ia footnote on p. 678. tctays it is seriously challenged ral economics. One indication )ural economics has become I is the 9 December 2002 stin Fox in Fortune entitled ‘Is rational? No, say the experts. are you — so don’t go thinking Smart it’. Imount it pays out as dividends al. Either the firm disperses

dividends or it ploughs them v its 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 to the value ts by the fund managers as in ci fund. recent studies found under

her than overreaction over iods of time. Over periods of to one year, stocks display i— the stocks that go up the he first six months of the keep going up. So, markets

overreact and sometimes

(Mullainathan and Thaler

stories vary, but always seem at the time. In the dot-corn story was all about the new breaking the mould. Every :oing to be different. In real us the story is cisually about a nt of land confronting a grow :ion and a growing economy vays (and will always) propel er. It’s a myth, but people uring the boom. for example, Shiller (1981), tnd Shiller (1987) and Jung and

7 Externalities

1 We surveyed nine widely used texts,

eight of which had this structure: Baumol

and Blinder (2006), Colander et al. (2006),

Frank et al. (2005), McConnell et al. (2007),

Krugman and Wells (2005), Parkin and

Bade (2006), Ragan and Lipsey (2008) and

Schiller (2006). The only exception was

Mankiw et al. (2006), where externalities

get a chapter in the middle of the book.

2 Archer (2009) is a good introduction

to the physical science. See also the most

recent report of the Intergovernmental

Panel on Climate Change (2007).

3 Of the sample of nine texts in end-

note 1, only three — Baumol and Blinder

(2006), McConnell et al. (2007) and

Schiller (2006) — offer any factual evidence

about climate change.

4 For details see Monbiot (2006: ch. 2)

and Gelbspan (2004: ch. 3).

5 The academies were those of Brazil,

Canada, China, France, Germany, India,

Italy, Japan, Russia, the United Kingdom

and the United States. See also American

Association for the Advancement of Sci

ence (2006).

6 See www.junkscience.com for a

sample. The site www.sourcewatch.org is

a valuable guide to the background and

sources of funding of industry-funded

organizations and ‘experts’.

7 Cited in Schor (2004: 48).

8 Of the texts listed in endnote 1,

only Frank et al. (2005: 298, 427) mention

consumption externalities. It plays no role

in the central chapter on consumption,

however.

9 Some countries, such as Canada

and the United States, already have such

schemes, but they limit the amounts that

can be put in these accounts each year.

10 This contrasts with existing ‘regres

sive’ sales taxes and value-added taxes

where higher-income persons tend to pay

a lower percentage of their income in tax

than lower-income persons.

ii This claim seems inconsistent with

the figures for the United States in the

previous sentence.

12 From the texts in endnote 1, only

Colander et al. (2006: 463) explicitly

acknowledge the importance of laws

governing workplace health and safety. No

other texts mention the issue.

13 The 2004 documentary film Ship-

breakers provides a case stttdy of the dirty

and dangerous work of breaking up ships

carried out in Alang, India. For details, see

the National Film Board of Canada, www3.

nfb.ca/collectiofl/films/ficheflid=5;361.

8 Marginal productivity theory

1 It’s the same as a simple mortgage

calculation. You can find many mortgage

calculators online. Set the amortization

period to twenty-five years, and choose the

interest rate and principal amount.

2 The fact that estimated returns to

schooling are much greater than that

required from a mortgage amortization

point of view suggests that there are bar

riers to entering occupations — including

differences in inherited ability — which

raises the return above levels implied

by the principle of equal net benefits.

McConnell et al. (2007: 305) inform us

that: ‘Rates of return are estimated to 10

to 13 percent for investments in secondary

education and 8 to 12 percent for invest

ments in college and university education.

One generally accepted estimate is that

each year of schooling raises a worker’s

wage by about 8 percent’ (emphasis

added).

3 For example, McConnell et al. (2007:

300) say: ‘The purpose of licensing is

supposedly to protect consumers from

incompetent practitioners — surely a wor

thy goal. But such licensing also results in

above-competitive wages and earnings for

those in the licensed occupation.’

4 Employers are rational — so that

even non-prejudiced employers seelc to

maximize profits. If they can employ black

workers at a discount, they’ll seize the op

porttinity. Prasch (2008: ch. VII) contains

an excellent discussion.

5 Perhaps the worst treatment of

discrimination is contained in Parkin

and Bade (2006), who seem to confuse

shifts in demand with changes in quantity

z 0

in

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