It’s The Government’s Job To Prevent Businesses From Passing Their Costs Onto Third Parties

Prices Need To Reflect The Costs The Seller’s Business Imposes On Others

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By David Grace (www.DavidGraceAuthor.com)

An economy is not a set of isolated, independent transactions. It’s a network, a web, where, if unrestrained, the actions of a business will impose costs and damage on other people far beyond the immediate parties to the transaction.

You Can’t Successfully Apply Simple Rules To Complex Systems

One of the ways people make a horrible mess of things is by not understanding that if you try to apply primitive rules to a complicated system you will end up with nothing but a train wreck.

The people who think simple rules can be successfully applied to all situations are like a nine-year-old who’s gotten all his information about disease from a comic book and ends up believing that a shot of penicillin will cure any illness.

Rules That Apply To An Isolated Transaction Don’t Work For A Complex Economy

Simplistic thinkers like to pretend that the world is full of discrete individuals who, one-on-one, make a series of individual, voluntary transactions where each party bargains for payment in return for goods or services and that the parties should be free to ignore the damages that their transactions impose on others.

In the simplistic model of economics we have two people, an 1850s mine owner and a steel maker, bargaining for the purchase and sale of five boxcars of coal. If you only looked at that one crude transaction you might think that

  • (1) the price was always purely dependent on supply and demand, and
  • (2) transactions between two parties only concern them

Both of those simple rules derived from that primitive transaction are totally inapplicable to calculating the real costs for a product in a mature economy.

It’s wildly inaccurate to view economics as a scatter of individual companies which, one-by-one, each interact successively with one other company and have and should have no obligations to anyone beyond themselves.

The fact is that the real world is not composed of discrete individuals making isolated, purely voluntary transactions that impose no costs they should be liable for on anyone other than the persons who are the direct parties to that transaction.

Instead, every advanced economy is a complicated, interconnected network where transactional benefits to some parties are directly derived from and often result in costs to other people who are not parties to that transaction, and those other affected people have the right to be protected from or be reimbursed for the costs someone else’s transaction imposes on them.

If a chemical factory is built in the middle of farm country, the toxics, traffic, and noise it creates take away its neighbors’ clean air and water, disrupt the health of their farm animals, and clog the roads with its trucks, to name only a few of the many detrimental effects its operations create.

In its quest to make more money, Big Chemical inflicts costs on and takes the quality of life from its neighbors and many others, but under libertarian rules it doesn’t have to pay those costs because the libertarian philosophy chooses to ignore the costs and burdens that one organization’s activities impose on other people, even though those costs are very real and very large.

When BigCorp decides to generate its own electricity by burning coal, it’s affecting my air, my crops, my property and my family, and I have a right, through the government, to either stop them or make them pay.

No one is entitled to do whatever they want to me without my consent and without reimbursing me for the costs their business imposes on me.

Society Is A Mesh Of Interactions

The inescapable fact is that real people in the real world are not discrete, disconnected individuals and businesses, but rather, humans and organizations exist in a mesh, a network, where the actions of each person and organization, to a greater or lesser degree, affect many of the other members of that society in the same way that the motions of each of the bodies in the solar system, to a greater or lesser degree, affect the orbits and paths of the other bodies in the solar system.

Each transaction between two parties is like a stone thrown into a pond. The bigger the stone, the greater the waves it generates which waves affect the other occupants of that pond.

The people throwing the rocks are not entitled to simply ignore the damage caused when the waves from their transaction drown other citizens and sink other ships. Those effects are costs that belong to them, which they need to pay and include in the price of their products.

That’s why we have zoning laws, environmental protection laws, building permits, etc. – to prevent people from increasing their profits by ignoring the damage their business operations do to third parties.

You have a right to make another company’s products obsolete, a right to compete.

You do not have a right to poison your neighbor’s air or water, destroy their quiet enjoyment of their property, or shift the costs of housing, feeding and providing medical care for your workers to people who are not a party to your transaction.

If my neighbor decides to turn his house into a nightclub or an auto body shop, he can’t just say, “That’s between me and my customers” because his business will have a huge, negative effect on me and the value of my property, actions he must be prohibited from taking or costs that he must be forced to pay and include in his price calculations.

The Libertarian Paradox

You can’t have a viable philosophy that is built on the fundamental proposition that no one can take your stuff without paying you for it while at the same time proclaiming that you have the right to impose the costs created by your business on others without a corresponding obligation to reimburse them and include those costs in your price calculations.

You don’t have the right to have your dog poop on the sidewalk in front of my house and not clean it up. If you want to have a dog then you have to assume the obligation of cleaning up its mess. That’s a cost of owning the dog.

If you want to run a business, then you have to assume the obligation of paying the costs that its operation imposes on third parties. That’s part of your cost of being in business.

Preventing Businesses From Imposing Their Costs On Others Is One Of The Roles Of Government

Stopping people from imposing the costs of their business on third parties is one of the principle roles the government fulfills via zoning laws, environmental laws, consumer protection regulations, building permits conditioned on the developer making infrastructure improvements, health and safety laws, etc.

Heads I Win, Tails You Lose is not a valid business or social principle.

–David Grace (www.DavidGraceAuthor.com)

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David Grace
Government & Political Theory Columns by David Grace

Graduate of Stanford University & U.C. Berkeley Law School. Author of 16 novels and over 400 Medium columns on Economics, Politics, Law, Humor & Satire.