Where Negative Externalities Begin...

Take a flourishing, vibrant economy, or civilization for that matter...history then shows where problems start. Of course, the abuses of well functioning systems generally tend to start small, and slowly ripple out. A "nip" of regulatory adjustments here (surely no one will notice), a "tuck" of additional requirements there, in order for participants to remain in the economic game.

But over time, little wealth capture subtleties gradually snowball, into larger wealth capture mechanisms. It's a tempting and convenient point of agreement for state and private interests. Each new rule on the books tends to be more reliable employment for some, while others find it more difficult to maintain secure employment. When too many individuals are no longer able to provide support for the equilibrium which exists, systems of production and services may start to break down. However, by the time this occurs, determining a point of origin for the most recent troubles, hardly seems worth the effort. After all, processes of wealth capture began long before the hapless citizens who are left "holding the bag", when social breakdown finally ensues.

Even though wealth capture and lost production rights may not be what one immediately thinks of when it comes to negative externalities, these factors are also important. Fortunately it's not difficult to find references online, even though the edit function in Blogger format still doesn't recognize "externalities" as a valid word. While I am particularly concerned about macro implications, negative externalities tend to be emphasized in a microeconomic context. From Economics Online:

A negative externality is a cost that is suffered by a third party as the result of a transaction. In a transaction, the producer and consumer are the first and second parties, and third parties include an individual, organisation, property owner or resource that is indirectly affected. Externalities are also referred to as spill over effects, and a negative externality is also referred to as an external cost.

To their credit, the above linked post also touched on property rights, in regard to the work of Ronald Coase and Hernando De Soto. However, the battle for a better understanding of property rights in terms of knowledge use has scarcely begun - a problem which has already led to employment difficulties in nations which provide higher educational opportunities for their citizens, but insufficient means for knowledge use in a local marketplace context. In this instance, the defining transactions could be said to occur between state and private industry, with a growing number of citizens as the third party or negative externality.

How to think about a lack of production rights? Wealth capture on the part of (U.S.) non tradable sectors began in the 19th century and continued through the 20th century, when citizens scarcely had cause to notice because of agricultural and manufacturing employment. Indeed, it may have been difficult for anyone to imagine - at least prior the 1970s - that populations would eventually need greater ability to take part in a knowledge based workplace. By that time, many service providers had already solidified the nature of the services roles that were available.

Now, the wage rigidities and entrenched expectations of the services sectors, are taking their toll. Even though the average citizen may not connect one's difficulties to a lack of production rights, the life of the marginalized can become an unconscious reaction to that reality, just the same. Hence in the U.S. there are the "external costs" of excess imprisonment, and increasing pressures on law enforcement as well. Travel a short way down the path of economic and social exclusion, and one finds the "escape economies" of drugs and prostitution. Travel a bit further down that path, and one ultimately finds poverty, famine, war, and broken societies.

While the negative externalities of the marginalized provide plenty of fodder for discussion - alongside an ongoing non profit response to symptoms - the "disease" gets dropped time and again before there is any broader organized response. It is understandable that today's university graduates and professors are the ones expected to deal with these issues, even as local citizens try to find housing for the homeless and wonder what to do next. Just the same: without active public engagement in areas of the economy which matter most, politicians are falling all over themselves attempting to gain votes in ways which only divide populations further.

Consider what happens over time, when human capital becomes less of the economic equation, in relation to other resources. This is where negative externalities begin to grow and gradually spread. When the ripples have not gone too far, it is still possible to turn the process around. But once it goes too far, and trust is lost, societal trust is not easy to regain. At the very least - in the U.S., the breakdown of societal trust has not gone too far. Perhaps with a bit of luck, there is still time to rebuild the trust which has been lost.