We’ve all heard talk of the efficiency of the free market. You know, as the idea goes, companies will only do what customer-citizens want them to do, because if they don’t, customers will sanction the companies by not buying from them.
There are all sorts of reasons why this doesn’t work, of course, including the fact that companies lie to customers and hide information from them so that buying decisions don’t actually reflect the truth about the companies.
But then there is the failure of the market to take account of what are called “externalities.” An externality is a cost of a product or service that is not included in its price.
For example, the price of coal from a strip-mine does not include the health-care costs of all those who drink water tainted by the mine or the costs of destroyed natural beauty or the costs of compromised ecological systems or the costs in carbon emissions produced by burning the coal.
If the market was truly “efficient,” and the price did contain those “externalized” costs, coal may not be so cheap and people may not choose to buy it. So this is a market failure. In the case of coal, the market is not “efficient” at all.
But there is another sort of externality, I realized today, a “positive” externality. I was talking to a friend over lunch about how deadeningly unsatisfying it must be to work in a plastic razor factory. Imagine knowing that you were working to make things that your employer has deliberately designed to be thrown away.
You know, like your livelihood did not depend on people valuing and treasuring what you made, but on them thinking that what you spent your life producing was absolute trash. Because the plastic razor industry only survives if people throw away their old razors and buy new ones.
I said to my friend at lunch, what if those same razor factory workers spent their hours producing some sort of gadget that, for example, helped bring fresh drinking water to the billion people on the planet who don’t have access to it. All things being equal–pay, employment conditions, working hours–wouldn’t the factory workers be happier because they would know they were doing something that really helped?
And my friend said, “Yes, but how do you incentivize that? How do you make the market reflect that sort of meaning and purpose in jobs?”
In other words, meaning and purpose and the feeling that your work is worthwhile is another “externality”–a beneficial one–that the market fails to take account of. Economic indicators don’t tell us whether people love their work and feel they’re doing good in the world.
In fact, the main economic indicator, GDP, goes up if more people get cancer because it means doctors and hospitals are getting more money.
So what I’m trying to say here is, how crazy is it that we run our culture based on “economic indicators” at all? How crazy is it that we don’t do what we know to be best–economic indicators be damned?
We know that blowing the top off a mountain to get coal and that burning the coal to cause global warming is not good for anyone. We know that putting people to work helping people in the developing world get fresh drinking water is better than making throwaway razors.
Do we really need “free market signals” to tell us that? Why do we need to include externalities in prices before we do what we should? We can’t we just accept that economics are not the be all and end all and just do what is right?