Cherry-Picking Externalities

Editor’s Note: Originally published at The Roots Of Liberty January 2017.

Critics of capitalism and free markets, when challenged on the basis of theory, often trot out certain erudite-sounding sound-bite phrases they picked up from their anticapitalist echo-chambers. One that made its rounds during the recent hullaballoos over minimum wages was monopsony, a term whose brief ubiquity suggested that it was spoon-fed to the chattering classes by some lofty source (usually the NYTimes). Another, one that didn’t quite get the spike in popularity that monopsony did but is forever lurking just under the radar, is the concept of externality.

In brief, and especially in the eyes of anti-capitalists, an externality is a cost not borne by either party of an economic transaction. While there are positive externalities, it’s been my experience that those who bring externalities into a dialogue focus on the negative ones, with a special emphasis on “societal costs.” Pollution is a commonly cited one, the societal burden of drug addicts is another, and the societal carrying cost of those without health insurance is yet another. Increasingly, as well, global warming is presented as a problem of externalities.

Free marketeers and libertarians (but we are one and the same) have generated mountains of scholarly work on how to address the externality problem through property rights and without government coercion. This work, while very interesting and (of course) compelling to those who aren’t ideologically opposed to liberty, is a topic for another day. Of more interest is the reality behind the anti-capitalists’ proffering of the externality argument. Dig just below the surface, and you’ll find it’s curated, cherry-picked, inconsistent and contradictory, and thus disingenuous.

A recent article at Cato discussed proper perspectives regarding global warming, in particular that “lukewarmism” is the most rational position to take. I cite the article for a different reason, however: it brings down-to-earth the vague, hyperventilating forecasts of planetary doom associated with global warming alarmism, and illustrates how the “externality” argument is used selectively.

Human carbon emissions are presented as an example of an externality problem, in that I do not properly pay the “societal cost” generated by my use of energy made from oil, gas or coal. The simple, direct and simplistic solution to this, I am told, is to tax that energy, thus making me pay for the societal cost I generate. A cynic might ask “how is that tax money going to be used,” and would very likely be correct in his suspicion that its use won’t be quite as externality-resolving as he was led to believe. For some, though, the mere fact of the tax is enough, because it puts individual money in the hands of government overseers and nannies, who it is presumed will spend it in society’s favor.

How, then, do we explain the lack of clamor for other “externality” taxes? Consider some other externalities (some cited in the Cato article). When I travel on a plane, I increase the likelihood of transmitting a disease to a different part of the world. When I take antibiotics for my fever, I contribute to the natural selection process that breeds superbugs. If I choose not to vaccinate my child, I increase the risk of infectious diseases being transmitted from one person to another. If my spouse and I do not produce more than 2.1 children, we will be burdening the social welfare systems like Social Security and Medicare, since they are pay-as-you-go systems that need a growing population base to remain viable. If I don’t exercise enough, or I let myself get fat, I am imposing my greater-than-a-healthy-person’s lifetime medical costs on my fellow citizens. Society has chosen to make recreational drugs illegal, thereby not only depriving society the opportunity to apply externality taxes to them, but completely removing the wealth transfers involved in their trade from the productive economy.

No one seems to give two whits about imposing externality taxes on these matters, so why should we grant that their arguments for carbon taxes as born of a focus on sound economic theory? Or, recalling the “monopsony” bit, why should we accept that their call for minimum wage increases as theoretically sound?

Moreso, consider the nature of warnings about global warming. We are told that, unless we act now, the ill effects of our carbon emissions on the planet’s ecosystem will be irreversible. We are told that, unless we act now, our coastal cities will be under water a century from now. We are told that, unless we act now, the Earth’s ability to feed us will decline over the decades. We are told that, unless we act now, there will be massive waves of “climate change refugees” that will overwhelm First World nations. And on and on.

What do all these predictions have in common? They’re equating a distant-future possibility with a current-day cost, and they’re doing so in qualitative rather than quantitative terms. They ignore two realities: the meaning of risk and the time value of money. “Risk” in a quantitive sense is the product of probability and consequences. Even a world-ending occurrence, like the Sun going supernova, is not much of a risk if its probability is negligibly low. Likewise, a highly probable negative occurrence isn’t much of a risk if the consequences are benign. As for time-value-of-money? Everyone knows that a dollar ten years from now is worth less than a dollar today, and everyone knows that capital grows in value over time. There’s an entire branch of mathematics – actuarial science – that’s devoted to this reality.

The problems, at least as far as global warming alarmists go, are that their predictions of future catastrophe don’t hold up well to these two realities. Accurately extrapolating long-term probabilities in something as complex as global warming is incredibly difficult, perhaps impossible, so determining actual risk is equally difficult-to-impossible. So, they overemphasize the worst-case, and ignore the probability part of the equation. And, given the long time frame (and the ever-increasing rate of human technological progress), economic parsing of global warming consequences vs the present-day costs of carbon taxes and caps doesn’t hold up to actuarial analysis.

So, if the math doesn’t work, and the principle of externalities is unevenly applied, what do we make of the insistence that an externality tax be applied to the global warming problem? Many possible conclusions come to mind, including virtue-signaling, first-world-guilt, moralizing, self-enrichment, global-warming-as-religion, usefulness in advancing a socialist or redistributive agenda, simple ignorance, naive reliance on the words of others, and on and on. All these have one commonality – they are not quite rational or dispassionate. Most of them are also disingenuous, whether consciously or unconsciously so.

Next, consider the cherry-picking of externalities within global warming itself. The proposed solution to global warming, i.e. the taxing and coercive rationing of carbon, itself has massive negative externalities. Since it necessarily involves misuse and inefficient use of capital, it will destroy vast sums of wealth. Since it will make energy more expensive, it will slow the rise out of poverty of hundreds of millions, perhaps even billions, of the world’s poorest. The destruction of wealth and the decelerated rise out of poverty will shorten the lives of millions of people, whether by a reduction in access to medical care, proper nutrition, clean water, better shelter, or easier work.

How are those externalities to be paid for? Some will argue that the carbon tax revenue will be used to help offset the impact on the poor, but then that revenue doesn’t actually address the externalities of the carbon emissions themselves. In short, none of this adds up, which tells us that it either hasn’t been thought through or that it is rooted in irrationality or deceit.

“Externality” is a nifty word. Its five syllables carry the suggestion of intellect and scholarliness, and it makes for a quick “gotcha” attack on free markets and liberty. But, when concerns about externalities are raised selectively, and when they are argued with handwaving and appeals to emotion rather than with sound quantitative arguments, we are justified in questioning both the sincerity and the integrity of its arguers.