The other hand

Posted: August 4, 2014 in Uncategorized


I am a big fan of capitalism free markets and globalization of these principles sort of…  Ahh, what do I mean sort of? Well any good economists will tell you that Adam Smiths concept for the invisible hand, does not do enough to address the issue of externality.   I will try to put both concepts in short explanation (the concepts are complex and some very smart people have spent the better part of their careers explaining and understanding these concepts).

Lets see the invisible hand is, a force explained by  Adam Smith in his book “Wealth of Nations”. The invisible hand will work to guide and regulate economy and it’s benefit to society.

        As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.

So simply put the invisible hand is why the economy works. This is what makes the economy work. I have to say I agree with this but what is that invisible hand. Is it profit? For some it is. Is it time? Do you work for the weekend? I feel like I do sometimes. THe invisible hand is different for everyone at different times. For most people the invisible hand is a composite. It is profit translated in monetary means that can be used to pay for necessities, like food, water, electricity.People also use the profits to purchase time in fun places with their friends and family. So, the invisible hand is real.

Now one thing about the invisible hand and economy and Adam Smiths philosophy is that, this type of economics does not address externality. SO what is externality? This is the external benefit of something done in the economy. External benefits can be both negative and positive. YOu can see externality in economics everywhere.

positive benefits would be things like

  • Increased education of individuals can lead to broader society benefits in the form of greater economic productivity, a lower unemployment rate, greater household mobility and higher rates of political participation.[14]
  • beekeeper keeps the bees for their honey. A side effect or externality associated with such activity is the pollination of surrounding crops by the bees. The value generated by the pollination may be more important than the value of the harvested honey.
  • An individual who maintains an attractive house may confer benefits to neighbors in the form of increased market values for their properties.
  • An individual buying a product that is interconnected in a network (e.g., a video cellphone) will increase the usefulness of such phones to other people who have a video cellphone. When each new user of a product increases the value of the same product owned by others, the phenomenon is called a network externality or a network effect. Network externalities often have “tipping points” where, suddenly, the product reaches general acceptance and near-universal usage.
  • In an area that does not have a public fire department, homeowners who purchase private fire protection services provide a positive externality to neighboring properties, which are less at risk of the protected neighbor’s fire spreading to their (unprotected) house.
  • An individual receiving a vaccination for a communicable disease not only decreases the likelihood of the individual’s own infection, but also decreases the likelihood of others becoming infected through contact with the individual.
  • A foreign firm demonstrates up-to-date technologies to local firms and improves their productivity.[15]

(and yes I did copy these right out of wikipedia)

negative externalities would be things like

  • Air pollution from burning fossil fuels causes damages to crops, (historic) buildings and public health. The most extensive and integrated effort to quantify and monetise these impacts was in the European ExternE project series.[5][6]
  • Anthropogenic climate change is attributed to greenhouse gas emissions from burning oil, gas, and coal. The Stern Review on the Economics Of Climate Change says “Climate change presents a unique challenge for economics: it is the greatest example of market failure we have ever seen.”[7]
  • Water pollution by industries that adds effluent, which harms plants, animals, and humans.
  • Noise pollution which may be mentally and psychologically disruptive.
  • Systemic risk describes the risks to the overall economy arising from the risks that the banking system takes. A condition of moral hazard can occur in the absence of well-designed banking regulation,[8] or in the presence of badly designed regulation.[9]
  • Industrial farm animal production, on the rise in the 20th century, resulted in farms that were easier to run, with fewer and often less-skilled employees, and a greater output of uniform animal products. However, the externalities with these farms include “contributing to the increase in the pool of antibiotic-resistant bacteria because of the overuse of antibiotics; air quality problems; the contamination of rivers, streams, and coastal waters with concentrated animal waste; animal welfare problems, mainly as a result of the extremely close quarters in which the animals are housed.”[10][11]
  • The harvesting by one fishing company in the ocean depletes the stock of available fish for the other companies and overfishing may be the result. The stock fish is an example of a common property resource, and that, in the absence of appropriate environmental governance, is vulnerable to the Tragedy of the commons.
  • When car owners use roads, they impose congestion costs and higher accident risks on all other users.

(yes more copy and paste)

Keep in mind these are merely a few examples if one looks he or she can see many examples of externality at work in economics.

NOw that you know let me tell you my problem with free market capitalism and globalization. Locally negative benefits have usually been taken care of and most citizens of municipalities have been protected from negative benefits but with the globalization movement local municipalities have not been so vigilant to protect their citizens from the negative benefits. This is where I am lost when it comes to capitalism. When a local municipality does not do its due diligence to protect its citizens it has failed its nation.


Honestly when I think about this concept of externality and negative externality, I feel like, any person or company that creates a situation that causes negative benefits and does not do his or her or their best to fix this they are acting irresponsibly and doing damage to the worlds economy.

So I guess Mom was right when she said to do our best to treat each other right.















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