Moral Externalities and Outdated Morality [Trenchant Edges]

Estimated reading time: 7 minutes, 9 seconds. Contains 1431 words

Welcome back to the Trenchant Edges. I’m Stephen Fisher, Virgil to your Dante when it comes to weird ideas and fringe people.

Today we’re ignoring all that weird stuff so I can ramble about economics and morality. Come on it’ll be fun.

Oh, and you can still book a time to talk with me via zoom.

Debt: The First 5,000 Years

I’m a fan of the late and great David Graeber and his book on debt really put me into my recent, “So what the fuck even is money” crisis over the last two years.

You should definitely just go read it a couple of times but here’s the gist:

The canonical economics story of how money and specialization came about was written basically from Adam Smith’s racist ass imagination. Modern anthropology reveals a much more complicated and interesting story.

Instead of some helpful person passing out IOUs and accidentally inventing money, debt long predates money, rooted not in passing abstracted tokens around but in a developed sense of fairness in relationships and within kinship networks in premodern societies.

Debts typically were never zeroed out, as the point was to continue the relationship rather than to be free of obligation.

Disclaimer: Writing developed independently in the middle east, India, China, and Central America. I’m only really familiar with the middle east at all and my anthropology is weak. Assume everything I’m saying here is a gross oversimplification.

Once Sumerian style city-states developed alongside writing, cities developed a scribe class operating out of the city state’s temple, which kept tax records initially payable in grain.

These debts were arbitrary and often only possible to meet if everything went perfectly, so most people ended up as debt peons over time.

Anyway, go read the book. It’s super good. Maybe someday I’ll understand debt or money again.

Probably not.

I bring it up because one of the things that Graeber points out repeatedly in Debt is how often moral principles were reckoned in financial terms.

For example, Christians metaphorically consider God to be a kind of universal creditor to whom we all owe life and worship to and failures to live up to the standards God has set out for us means we owe him a debt only he can forgive. Christ’s sacrifice was symbolic of clearing all the debts, but humanity continues to sin so a personal religious practice is needed as a booster shot.

But what if moral metaphors don’t keep up with advances in accounting?

Negative Externalities: The Root of All Evil

An externality is a modern economics term that means, roughly, a cost or benefit imposed outside the “voluntary” transactions of the market.

A positive externality is a benefit and a negative externality is a cost in money or in harm.

The standard example of a negative externality is pollution, which is a cost a firm’s activities impose on the people, animals, and environment around where it’s operating.

A more modern example is the housing-backed securities market of the early 00s, where mortgages were separated into pools and turned into derivatives by many financial institutions. The idea was that because the national housing market had never collapsed at once before, you could eliminate risk by buying these geographically diverse derivatives.

But this so-called elimination of risk was an illusion. Instead of reducing the risk exposure of investors, it created a secondary market to trade derivatives and other complex financial instruments.

This secondary market became a mechanism to tie together housing prices all over the country.

In short, instead of eliminating risk these esoteric financial instruments simply distributed the risk over the whole system. As long as everyone was making their payments, the system worked just fine and everyone made money.

But once the economy started to sputter in 2007, little dominos got knocked over and by March 2008 major investment houses like Bear Sterns and Lehman Brothers began to fail. The liquidity (money in motion) began to dry up and banks who owned the underlying assets started calling more debts in.

This meant more defaulting on loans, which drove more foreclosures, which threatened the liquidity of the banks which… you get the idea. You were probably there.

All of this was enabled by a mix of predatory lending, government grants, and corrupt bond rating agencies and was only fixed by the US and China spending truly disgusting amounts of money to keep the system liquid.

So, here we have an interesting concept that succinctly describes a wide range of harms and benefits that hasn’t yet had, as near as I can tell, any moral or ethical philosophy done with it.

I’m at the, “Start emailing random economists, moral philosophers, and ethicists to see if it’s happened in some corner I can’t easily find” stage of research with this.

This is very interesting because trading externalities is a fundamental action of modern corporations.

How do you get your profits maximized? You hand as many costs and risks to someone else to get them off your books.

Made a shitton of bad bets and crash the economy? You need to get yourself a bailout and externalize the costs of your gambling.

Especially once you understand risk arbitrage, you start to see it everywhere. Uber transfers the risks and costs of car ownership and maintenance to drivers. Ditto with AirBnB and all their imitators.

I once worked at a 3D Printing company where our foreign partner demanded that we use our warehouse space to store more than a month of printers while some gnarly supply chain issues were being resolved. Their potential revenue stream was protected while the risk for getting stuck with a bunch of un-shipping merch and days where we couldn’t build because the warehouse was full.

The costs of storage and interruptions to workflow were moved to us, while they never paid any extra cost for those issues.

This crap went on for almost two months before they found a decent supplier to fix everything.

I should probably put together a primer for risk and risk management so it’s clearer what I mean by “Risk arbitrage” but the short version is it’s about keeping as many of the potential benefits of a situation while avoiding any downsides.

Street drug dealers are a good practical example. Street dealers take a ton of risks: Being shot for product or money, getting busted by the cops, having to deal with potentially erratic junkies, etc.

Meanwhile, it’s the bosses who make most of the money and who are much harder to arrest because they operate a system where other people do most of the crimes and so you’ve got to have difficult evidence to really nail someone who might never be around any of the actual crimes.

The same thing happens between bosses and wholesale suppliers/cartels. If the boss wants to keep their source happy, they’ve got to handle any hiccups in the supply and distribution chain.

This same dynamic happens in marginally less criminal enterprises like retail stores. Ever wonder why part-time workers are so often demanded to have full-time availability?

It’s because the risk of less than full capacity is moved from the business to the worker.

All of these balances of power can be changed with organized labor, but it takes a nearly united front to sway the big changes and that’s hard.

Point of all this is that I think that moral action can be coherently described as minimizing your negative externalities and consistently offering positive externalities to those around you.

At some point maybe I’ll get into moral philosophy and ethics enough to make a formal case for it.

But that’s a story for another day.

Wrapping Up

So there you have it, a teaser for a great book and a bit of speculative economic morality.

What does this have to do with our tour of weird ideas? Well, this is one of mine.

I’m not sure it’s really worth developing further as there are so many other more concrete criticisms of capitalism, but it still might have some utility in some fiction story if I ever need to riff on something like Asimov’s The Foundation.

Really developing this will probably take a year or two just to build a foundation in the discipline and be able to make the case solid.

The interesting thing about it is that it builds in one of the blind spots of the golden rule.

“Treat Others the way you’d want to be treated” doesn’t account for others not wanting to be treated the way you would, but “Minimize Negative Externalities” does.

Did I just claim to be better at moral philosophy, a subject I’ve clearly stated my professional incompetence in, than the great wisdom traditions of the world?


I don’t just write about cranks, I am one. :-D

Enbaitment Questions

Anyway, let me know if you think this is a worthwhile train of thought.

Song of the Day; I think one of my goals for the next year is to see Swan Lake live. You know, pandemic willing and all that.