What’s wise about a Wise Economy? Anticipating and managing unintended consequences.

A wise person doesn’t only think ahead, he or she also anticipates and prepares to deal proactively with the unintended consequences of a decision.  That sounds like an oxymoron – how do you anticipate your unintended consequences?  This is why thinking ahead becomes so important — if we think rigorously and systematically about the things we decide to do, we can often anticipate that there are possible consequences to our decisions that we didn’t intend.

The easiest unintended consequences to figure out are those that will impact me directly – the ones that will come back to bite me in the butt.  If I am thinking about putting an addition on my house that I really can’t afford, and doing so will put me at risk of being unable to pay all my other bills, then the potential unintended consequences of my choice to add onto my house are pretty obvious. Since I will have to deal directly and immediately with those unintended consequences, they are part of my system – that means that these consequences should be relatively easy to see, if I am honest with myself about what all might happen.

The hardest, and potentially most troubling, types of unintended consequences fall into a group that traditional invisible-hand economics call “externalities.”   These are the impacts of a decision that accrue to someone or something else — the impacts are external to the person or organization that made the decision.  Traditional economic theory placed externalities outside of the economy – the externality was experienced by someone other than the economic actors, so it was not part of the economic activity.  Terming something an “externality” was a way to exclude it from the equasion. 

Of course, it’s not that simple.  My father and grandfather ran a small paint company in the 1960s and 1970s.  In those days, there were few rules regulating hazardous materials, and most of the compounds in paint hadn’t been officially recognized as hazardous anyways.  Like most paint factories, they had garbage – batches of paint that didn’t come out right, test pots, empty containers, broken equipment, etc.  The company was located on the edge of a steep gorge that ran through town … and standard operating procedure was to toss the cans, pots and other garbage over the hillside.  This wasn’t uncommon – people used to use that gorge to discard a lot of types of refuse.  The company closed in the early 1980s, and as far as I know all of the officers and major stockholders are dead.  But the old paint cans on the side of the gorge are probably still leaking – my brothers, who still live in the area, have heard friends talk about seeing chemical scum on the creek downstream from the site. 

When the day comes when that site gets cleaned up, it won’t be my dad’s company doing it.  Instead, it will probably be the state EPA.  Which means that, even though I didn’t do the polluting, as a taxpayer, I and all of my neighbors across the state will pick up the tab. 

The problem with externalities, from a strictly local government and local economy point of view, is that those impacts aren’t really external to us at all.  One way or another, they end up affecting us as individuals, and us as a community.  Most of the time it falls to a public agency, like the EPA, to go on the front line of dealing with externalities, whether it’s environmental cleanup or sheltering people who cannot survive in the modern economy on their own.  And if no one deals with the externality, it will create its own set of consequences and impacts to us or to others, who will in turn impact us.  And as we continuously challenge our local governments and state agencies to deal with more and more externalities with less and less abundant resources, our capacity to manage unexpected consequences continues to erode.    

At the end of the day, all of this means that the externality isn’t external to us as a community at all.  There really are no externalities, because none of us live in isolation, entirely separated from the impacts created by others.  There is actually little or nothing that can be excluded from the economic equasion – we live in a complex, interdependent system, not Adam Smith’s series of simple, separate transactions. 

 People who are trying to build a Wise Economy use the best thinking and decision-making tools available to them to systematically avoid or manage externalities.  They work to identify the potential unintended consequences of decisions, they use all of the tools available to prevent or manage externalities, and they keep a close eye out for new unanticipated consequences that need to be addressed.

3 thoughts on “What’s wise about a Wise Economy? Anticipating and managing unintended consequences.”

  1. Great article, Della:

    Unintended consequences are usually a product of complexity. Until communities stop taking simplistic, “magic bullet” approaches to revitalization (stadiums, convention centers, iconic buildings, economic development, “creative class”, etc.) they will constantly suffer greatly from unintended consequences.

    Unintended consequences won’t disappear simply because communities use more “complexity friendly” tools like Revitalization Forum software, but they will diminish. Surprises are, after all, one of the defining features of complex adaptive systems, which as what cities are.

    We’ve tried mightily to engineer-out the surprises of Mother Nature and economies over the past century, and have only ended up severely damaging both as a result.

  2. Della – A very cogent description of why regulation economically benefits the larger community. As environmental consultants, my colleagues and I frequently hear the question, “Why can’t I do what I want to on my own land?” Besides telling them the DEQ doesn’t allow it, our best argument in this coastal community is that unchecked disposal of wastes, sewage, etc. damages our streams, bayous and the Gulf. And will cut into their catch on the boat this weekend! With the Mississippi River flushing millions of gallons more into the Gulf this year, the externalities of agricultural and landscaping processes hundreds of miles away are of even greater concern than in past years as our annual dead zone expands in size. It’s still hard to get people to draw the connections that their actions have reactions – not only next door, but halfway across the country.

  3. Excellent article. Fortunately, there are techniques for “internalizing” some of the externalities that generate inefficiency and inequity in our economy. Roadway pricing (by according to congestion and mileage) and performance-based parking pricing are two examples applied to automobile travel. Car-sharing utilizes the economics of sharing to save money for individuals while also relieving parking and traffic congestion in some neighborhoods.

    Additionally, I would recommend transforming the traditional property tax into a value-capture user fee. This entails reducing or eliminating the property tax applied to building values. Revenues are maintained by adjusting the property tax rate applied to land values. Because building values are privately produced, reducing the tax on buildings makes residential and business locations more affordable. Because land values are produced by collective action, taxing land values internalizes the positive and negative externalities created by public goods and services.

    Jurisdictions that have used these techniques to internalize externalities have achieved significant public benefits without incurring substantial costs. For more information, see http://www.justeconomicsllc.com

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