Monday, October 11, 2010

A New Dawn

I got up to watch the sunrise this morning... and I haven't blogged in a really long time. While these two things do correlate, there is no causal relationship between them. The same thing caused them. The LSAT is on Tuesday.

I got up this early on a holiday (Indigenous People's Day aka Columbus Day) because I want to be in a routine when the test roles around. And, I haven't been blogging because I study every night.

Though I spend most of my free time studying, it doesn't stop me from encountering things I want to blog about. So, I'm going to post about something briefly that I want to cover more thoroughly later (post-LSAT): internalized cost.

Here's an example of the problems we cause when we don't internalize cost. Cheap toys from China are...well... inexpensive when we buy them in a store. But they're only inexpensive because other costs have been externalized. The laborers in China don't have to be paid as much (they have a lower quality of life) and there aren't as many environmental regulations in China (they're really screwing up the planet over there). These are costs in a very real sense. However, we don't have to pay them because they have been externalized. When we buy products from China, many costs (low quality of life for workers and environmental destruction) aren't built in to the price we pay in the store. China is different from the United States because we have things like minimum wage and environmental regulations so the cost of worker's quality of life and preservation of our environment are built into the price of an American made product.

Now, if we don't care about people in China and believe that low quality of life and environmental destruction in China won't hurt us (hopefully these premises aren't true), who cares about this particular example?

But this is only one example. Another example would be the Iraq War. We didn't pay for the war, we debt financed it and added the expenditures to the deficit.

The Iraq War is unique in the way we paid for it. Never before have we financed a war completely on debt. For every other war we have fought, we have instituted a special "war tax" to pay for it. One can speculate on why this war is different (all about acquiring oil or a massive give-a-way to the military industrial complex--probably both), but it is clear that we have externalized the costs of this war. Our children and grandchildren will have to deal with the debt, but it's not our problem. A more fiscally responsible approach would have been to internalize the cost of the war by instituting a war tax or a gas tax.

A war tax would have simply put us more in touch with the sacrifices of war. And a gas tax would have financially tied the war to it's purpose (in my opinion). We pay less for a gallon of gas at the pump because of the war, but actually that gallon costs much more than we have to pay at the pump. The costs are simply hidden in debt and future national security problems. Essentially, by not having those costs factor in the price of a gallon at the pump, we are circumventing the basic tenets of the market economy. Markets will only function correctly (and correct bad behavior) if all costs are paid by the consumer.

One could argue that the consumers will pay for all costs in this example. If costs aren't paid at the pump, they'll be paid later in the form of debt restructuring or terror attacks. This is true, but because consumers are not omniscient, believe we are capable of avoiding the consequences of our behavior, or simply can't comprehend costs that are significantly removed from the initial purchase, in practicality this undermines the market whether we ultimately pay or not. Companies know this, which is why they continually work to externalize costs.

I thought Ariana Huffington made a really coherent point on Fox News the other day.

Huckabee keeps trying to get her to say that government intervention is bad. She responds by acknowledging that the free market is the best economic system in a moral society. But because our society is not moral, the government must intervene on behalf of the powerless.

A responsible and moral company will work to internalize the costs of their products. In the absence of responsible and moral behavior, "we the people" must insist that companies cease to undermine the very foundation of our economic society.

The expert on this topic is Donella Meadows and her essay Leverage Points: Places to Intervene in a System (it's a life-changing essay, go read it) is what first pointed me toward internalized costs. The essay essentially outlines the most important ways to affect change.

With all the shouting about how to incentivize this and incentivize that, what we need is a systemic fix to our economy. While implementation of system-wide internalization of costs will be difficult and complex, the idea itself is simple: actors in a system ought to bear the cost of their behavior. It is an elegant solution to a big problem.

Given the divisiveness of our political system, it is about time for us to reclaim our government, get down to business, and implement constructive public policy solutions like internalizing costs.

1 comment:

  1. (in random order of fluctuating ridiculousness)
    8. Hi Cody
    7. I like the reading list. Props.
    6. I enjoyed a quick read of Donatella's essay. I didn't expect the philosophizing at the end, but I like surprises.
    5. The things they say on Fox...
    4. I hope the LSAT went well. I'm looking at a copy of KAPLAN's GMAT study guide right now. Less than halfheartedly.
    3. As far as your blog goes, it looks like I have some catching up to do.
    2. In the meantime, I may finally go write another blog of my own. Fancy that...Thanks for the shout out earlier. It hasn't gone completely unnoticed. Promise. To borrow half of your words, "While I spend most of my free time [not blogging], it doesn't keep me from encountering things I want to blog about."
    1. Peace in the Middle East. And internalized costs at home. Among other things.
    -1. "Back from the sublime to the ridiculous..." p.19