Kirk Klasson

The Paltry Cost of Priceless Externalities

For the past few years, anyone who has been paying attention has come face to face with the economic phenomenon known as externalities. Popularized by causes like climate change, it is by no means something all that novel or vogue. Ronald Coase was one of the first to discuss the concept back in 1960 with his “The Problem with Social Cost” (see The Invisible Hand – November 2013). More recently Nordhaus and Romer shared a Nobel prize for their unique perspectives on externalities’ influence on market behavior and costs.

Simply put, an externality is an economic factor, either an input or an output, that bears no explicit cost or price as part of its production or consumption in a larger, more complex value proposition. As such, the the poster child for all things economically “external” is the combustion engine. It breaths air and expels exhaust, neither of which are explicitly accounted for as a cost borne by the producer or consumer of such engines. But nevertheless, the cost of this gratuitous factor is very, very real.

While agriculture likely made up the first phase of human economic externalization, and industrialization the next, digitization may prove the final frontier of externalized factors as the digital tokenization of all things tangible and conceptual are subsumed in the managerial matrix of our soon-to-be resource exhausted future.


…but first a word from our sponsors.

But before we get there, chances are we will first begin to experience the second order effects of existing digital value propositions. It wasn’t too long ago that you might entertain a life apart and off the grid. Anonymity, while impractical, was potentially achievable and intrinsically valuable. That’s no longer the case. But embracing and exploiting digital notoriety, while making a few instagram influencers richer, hasn’t really panned out unless you’re the likes of Facebook, Google and Amazon, the current paradigms of digital externality.

These shops charge nothing for the use of their services but make billions off the digital exhaust their users exhale. This, in part, is one of the reasons that firms that operate in this fashion pose such an anti-trust conundrum ( see A Perfect Storm? – March 2018). Anti-trust was fashioned as a guardian of consumer welfare whose foremost proxy for their protection was the price that they might pay for goods and services consumed. But with these digital business models there is no “price”, the value rests in a captured and monetized externality, so under existing antiquated notions of anti-trust there is no harm. At least none that is currently priced into the equation.

And there’s little evidence that this is going to change anytime soon. Facebook’s recent settlement of its violation of a FTC consent decree is perhaps a worthwhile example. For a measly $5B, Facebook walked away from what otherwise would have been a train wreck of unimaginable proportion that spewed user data like chlorine from a mile long tanker derailment (see Facebook: An Annus Horribilis – November 2018). The only thing is, that over the period of when this user data was collected, Facebook made $167B in profit of which its principal shareholder retained $75B in equity. So basically a $5B penalty for a $242B realized monetization of user data. And the stakes for Google and Amazon, that smart speaker in your kitchen and your car, are admittedly at least as big if not even larger. Never mind that your data ends up in the hands of malign agents who would harm you if they could. Because we really have no idea what that might cost.

So where there is no discernible harm is there really no admissible foul?

The nature of externalities is that they operate beyond the frontier of acknowledged monetizable factors and usually remain undetected until exposed by the realization of a heretofore unrecognized economic circumstance or consequence.

For instance, freedom, the ability to exercise choice without undue restraint, is consider by some a valuable condition. It promotes opportunity, innovation, mobility of people and capital, market pricing of assets and an unsurpassed quality of human life, aka happiness. And proxies of both price and cost abound for this condition in the form of immigration, human trafficking, sovereign armies, etc. But by and large, freedom is an “unpriced” externality. Those who enjoy it, cherish it; those who don’t, bargain with other externalities, usually not of their making. However, the more information that is collected, whether casual or intentional, public or private, human or device generated, the greater the likelihood that choice, for any and all things, will diminish. What choice will there be when all of your relationships, transactions, conversations, desires and dreams are transparent to those who wish to monetize and exploit them? And here’s the obvious next question: What happens to the occupants of this speck of dust we call home, when the need to control these same factors become the very basis of our own survival?


Don’t peak in high school

Recently, there has been renewed interest in study first published in 1972 entitled “The Limits to Growth”. This study, sponsored by the Club of Rome and funded by the Volkswagen Foundation, employed a computer simulation and data developed by Jay Forrester and colleagues at MIT to project specific trends that might develop under differing scenarios predicated by increasing global population and a finite amount of global resources, the fundamental resources that sustain us.

At the time of its publication and for several years after, the study was roundly criticized as too simplistic, inadequate and unsophisticated in data and supposition and unable to incorporate factors such as innovation and mitigation. And most admitted that the critiques of this study were indeed fair and reasonable. It’s hard to predict the future.

But for the past 50 years it has remained one of the few definitive markers on the prospects of humanity’s future. And every five years or so the trends first described by the “standard model” have been revisited to see how close to reality they might have adhered. Turns out that they have not been that far off. But here’s the scary part. If reality keeps to the model’s projected course, and it seems to be going that way, within a generation, maybe sooner, there’s going to be a major inflection.

Take a look.

            Source: The Limits To Growth

The latter half of this century could be shaping up to be a dystopia of unimaginable proportions as the planet’s benign externalities begin to evaporate before our eyes. However, this need not be the case. Many would argue that we can innovate our way to a perpetually brighter future. Limitless energy through fusion. Abundant food through environmental management. Genetic therapy and life extension. The beneficial outcome of harnessing the prowess of IoT and AI.

What it also suggests is that going forward every moment, every circumstance, every eventuality will have to be managed to the nth detail. Nothing will be left to chance because nothing can be left to chance. Every blade of grass will become a neural node in the management matrix of our future survival. Every essential detail will be managed as if human life depended on it because, indeed, it will. You really didn’t believe that all that money spent on exoplanet telescopes was an earnest search for ET, now did you?


The thin edge of your future’s wedge

China’s social credit system, not entirely familiar to the west, may become an inevitable feature of global future reality, as every economic factor, no matter how small or inconsequential, gets sucked into the mandatory, global managerial matrix. Facial recognition being just the tip of what will become a burgeoning iceberg of monetizable externalities.

For instance, a recent study by RAND Corporation found that nocturia, better known as a night time need to pee, cost the US approximately $44B in annual lost productivity. Crude extrapolation would make this nearly a $500B problem world wide.

Now imagine a future where every moment of lost productivity could prove a species ending exigency and every squandered physical resource, including potable water, a font of continued sustainability.

So before you go to bed tonight, don’t forget to catheterize.

We’re gonna need your pee.


Graphic courtesy of NASA all other images, statistics, illustrations and citations, etc. derived and included under fair use/royalty free provisions.

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