Supping With The Devil

     “If you sup with the Devil, use a long spoon.” – Origin unknown

     David L. Burkhead has posted a typically thoughtful piece about externalities: the consequences a seemingly ordinary event or transaction can impose upon persons nominally uninvolved in it. Here’s one example, taken from his article:

     Someone upstream of you, let’s call him Ivan, decides to make widgets and sell them to you. These widgets are something valuable to you. The problem is, the process for making the widgets produces waste. Ivan just dumps that waste in the stream and the contaminated water flows through your property. You, of course, are not happy with this. The contamination is a cost to you, reducing the value of that water to you. Depending on how bad it is, it might be tolerable, but it’s still a cost imposed on you.

     There are both positive and negative externalities to be considered in such a discussion. Here’s one I like quite a lot:

     Smith, Jones, and Davis are in the corner tavern one evening. Smith wants some music, so he puts his change into the jukebox and selects a song. Jones is pleased, for he likes the song. Davis is not, for he hates it. As for the bartender, he’s deliberately deaf to it; what matters to him is the cut he gets from the jukebox’s monthly take.

     There’s a case that features both a positive externality and a negative one. Jones is getting some enjoyment at zero cost to him, while Davis must endure an irritation for which he goes uncompensated. In a private-property setting such as a tavern, Davis can exercise his option to depart. (He certainly can’t invoice Smith for his displeasure, much as he might want to.) So there’s no substantive rationale for “doing something” to mitigate the externalities.

     Now let’s change it up a bit:

     Smith, Jones, and Davis are neighbors in adjacent suburban homes. Smith likes flowers, so he plants his lot with a great many of them. Jones is pleased, for he finds the array beautiful. Davis is not: he’s allergic to the flowers Smith has planted.

     We now have a quasi-public situation. Davis can hardly pick up his house and move it away from the irritation to his sinuses Smith has constructed. Perhaps he could sell it, but there are obvious costs of several kinds to that move. Besides, what Smith has done could happen in Davis’s next neighborhood. What’s the man to do?

     Quite a lot of persons would immediately reach for the State. And the State is always happy to get involved.

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     A long time ago, I addressed the subject of externalities, and their use as a rationale for government intervention in otherwise private actions. It’s not an easy subject, for the reasons Burkhead mentions and others. Most prefer to leave it to the attentions of professional analysts and economists. However, there are aspects of it that even a layman unconcerned with political theory or political economy would do well to ponder.

     The first of those aspects comes from the work of Nobel Laureate Ronald Coase. In its simplest form, Coase’s Theorem posits that when transaction costs – i.e., the frictional impediments that increase the effective cost of a transaction to the transactors, rather than the on-the-counter price that passes from one to the other – are sufficiently low, then over time each asset or right will find its way into the hands of him to whom it’s most valuable. While this isn’t “intuitively obvious,” to use a widely detested phrase, it does seem to hold true in a range of cases. It would suggest that in one approach to the “flowers problem” of the previous segment, Davis could propose to pay Smith a modest amount if Smith would agree to forgo planting species that excite Davis’s allergies. Smith would be compensated for the loss of his pleasure at being surrounded by flowers, and Davis would be freed of the irritant they would have created.

     Mind you, that isn’t guaranteed to work. Smith might not agree to any such bargain. Or he might set a price too high for Davis to meet. But if the transaction costs are near to zero, the possibility will be there.

     The second possibility involves the creation of a “bargaining chip” condition: a condition Davis can tolerate (or enjoy) that Smith finds irritating. For example, if Davis were to discover that Smith dislikes avant-garde modern music, Davis might counter-irritate Smith with blasts of Schonberg, Philip Glass, or (God help us) John Cage. That would produce a mutual-deterrence situation in which each might agree to refrain from his own irritating behavior on the condition that the other should henceforth do the same. (No, it’s not nice, but one does what one must.)

     The third possibility is to “reach for the State.” If there is a local authority with regulatory powers over residential plantings, Davis might have a case that Smith should be restrained. If there are no such authorities, it might be possible to get the municipal or county government to erect one. It could prove the least costly of all the possibilities open to Davis for the relief of his aching sinuses.

     At least in the short term.

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     Among the worst of all the admitted defects of economic reasoning is this: no matter how certain some development may be, even with perfect knowledge of the situation, it’s impossible to predict when that development will arrive. People are variable and cranky. They think, if that’s the word, with their desires and opinions at least as often as with their powers of reasoning. And they often fiddle about interminably in their quest for an easier, simpler, or cheaper way.

     Worse, too many of us are prone to ignoring the incentive effects that arise from the ways we “solve our problems.”

     One inevitable consequence of the creation of a body with coercive powers – i.e., a body that can punish those who defy its decrees – is that that body will attempt to expand its scope. For example, a zoning board that starts out with authority only over the sizes of the plots required for buildings of various sizes will sooner or later attempt to gain authority over what those buildings may be used for, how many people may occupy them simultaneously, what may be stored in them, what the grounds around them can be used for and at what hours, and so forth. It may be irregularly successful in such arrogations, but it will make the attempt. There are no known exceptions.

     Another seemingly inevitable consequence of the creation of authorities is their targeting by persons or organizations that could gain important advantages by getting control of them. I think of this as the “dropped sword” dynamic: a weapon that anyone could use against his adversaries will invite a scramble over its acquisition and control. Nobel Laureate George Stigler did valuable work in this area, usually called regulatory capture theory.

     Both these developments result in a steady accretion of costs upon those under the authority’s power. If in the example above, Davis invokes some local authority to solve his allergy problem, we may rest assured that that board:

• Will act if it already has a statutory or charter rationale;
• Will strive to create such a rationale if one does not yet exist;
• Will employ whatever extra powers it may acquire to reach for more.

     That’s the dynamic of power: it seeks to grow. Thus Davis might eventually be confronted by that same board over something he’s been doing that he regards as nobody else’s business: perhaps a decorative pond, or a fence of an unusual height or composition. That the cost takes a while to arrive and assumes an unpredictable form makes it difficult to factor into Davis’s calculations...if, indeed, he bothers to think of the longer term at all.

     People are so given to thinking with their wishes that such effects are more often dismissed than addressed. There’s an “it won’t happen, at least not to me” character to such dismissals, as if we could count on the bullet hitting the next soldier in line. Ostriches’ method of averting trouble works about as well.

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     Life in society involves interactions with others. Some of those interactions will be unpleasant. In the usual case, there will be a choice of methods by which to cope. When one of those methods is an appeal to authority, it’s well to look closely at all the alternatives first.

     It may well be that in some cases there are no palatable alternatives. Problems involving air and water pollution have been proposed as evidence to the effect that sometimes government power is the only solution. Yet there will be costs, and they will be paid, whether by ourselves or by our descendants.

     Because those costs and their time of arrival are so difficult to foresee in exactitude, we often throw up our hands and declaim “Let our inheritors deal with the consequences.” It’s a very human thing to do. After all, we’re all mortal; we know that someday “our troubles will be over,” at least here under the veil of time. That makes it easy to hope that the price for our solutions might not be ours to pay.

     But it doesn’t mean there won’t be a price. It certainly doesn’t mean we can guarantee that the price won’t fall on our shoulders, nor that it will be bearable if it does.

     When government looks like an angel with the solution to our problems in his hands, we all too readily overlook the downside of inviting coercive power into our affairs. But history tells us that governments are far more often of a diabolical character than an angelic one...and if you’ve wondered about the reason for the aphorism at the head of this essay, now you have it.