To continue our series on the pseudoscience of economics, there are a few other assumptions required by the theory, but I’ll end this exercise with one of the most important. In order for transactions to make the world a better place, all of the benefits and costs of the transaction have to be experienced by the parties. If a transaction somehow affects other people, that’s called an “externality,” and it’s the best known example of a so-called market failure. But it is difficult to imagine a transaction that does not have externalities. They aren’t an occasional problem that needs a special fix, they are pervasive and inevitable.
When you drive to the store for your tomatoes, you spew pollutants out of your tailpipe and you clog the road for other drivers. You also risk crashing and killing or injuring yourself or others. (Riding in a motor vehicle is mostly likely the most dangerous thing you will ever do.) The tomatoes were grown on farmland that was created by destroying a beautiful wilderness, sprayed with pesticides that indiscriminately kill beneficial insects as well as pests, fertilized with synthetic nitrogen that runs off into the river and ultimately causes a dead zone in the estuary. When you buy them you put them in a plastic bag that winds up in a landfill or maybe the ocean . . . I could go on.
As Polanyi wrote in The Great Transformation, referring to the origins of laissez faire in the 19th Century:
[T]he idea of a self-adjusting market implied a stark utopia. Such an institution could not exist for any length of time without annihilating the human and natural substance of society; it would have physically destroyed man and transformed his surroundings into a wilderness.
That sounds bad. We have learned a few things since the 19th Century but nowadays many people seem to want to return to it.
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