Tag: Parkinson’s Law

Externalities: Why We Can Never Do “One Thing”

No action exists in a vacuum. There are ripples that have consequences that we can and can’t see. Here are the three types of externalities that can help us guide our actions so they don’t come back to bite us.

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An externality affects someone without them agreeing to it. As with unintended consequences, externalities can be positive or negative. Understanding the types of externalities and the impact they have in our lives can help us improve our decision making, and how we interact with the world.

Externalities provide useful mental models for understanding complex systems. They show us that systems don’t exist in isolation from other systems. Externalities may affect uninvolved third parties which make them a form of market failure —an inefficient allocation of resources.

We both create and are subject to externalities. Most are very minor but compound over time. They can inflict numerous second-order effects. Someone reclines their seat on an airplane. They get the benefit of comfort. The person behind bears the cost of discomfort by having less space. One family member leaves their dirty dishes in the sink. They get the benefit of using the plate. Someone else bears the cost of washing it later. We can’t expect to interact with any system without repercussions. Over time, even minor externalities can cause significant strain in our lives and relationships.

The First Law of Ecology

To understand externalities it is first useful to consider second-order consequences. In Filters Against Folly, Garrett Hardin describes what he considers to be the First Law of Ecology: We can never do one thing. Whenever we interact with a system, we need to ask, “And then what? What will the wider repercussions of our actions be?” There is bound to be at least one externality.

Hardin gives the example of the Prohibition Amendment in the U.S. In 1920, lawmakers banned the production and sale of alcoholic beverages throughout the entire country. This was in response to an extended campaign by those who believed alcohol was evil. It wasn’t enough to restrict its consumption—it needed to go.

The addition of 61 words to the American Constitution changed the social and legal landscape for over a decade. Policymakers presumably thought they could make the change and people would stop drinking. But Prohibition led to numerous externalities. Alcohol is an important part of many people’s lives. Few were willing to suddenly give it up without a fight. The demand was more than strong enough to ensure a black-market supply re-emerged.

Wealthy people stockpiled alcohol in their homes before the ban went into effect. Thousands of speakeasies and gin joints flourished. Walgreens grew from 20 stores to 500, in large part due to its sales of ‘medicinal’ whiskey. Former alcohol producers simply sold the ingredients for people to make their own. Gangsters like Al Capone made their fortune smuggling, and murdered his rivals in the process. Crime gangs undermined official institutions. Tax revenues plummeted. People lost their jobs. Prisons became overcrowded and bribery commonplace. Thousands died from crime and drinking unsafe homemade alcohol.

Policymakers did not fully ask, “And then what?” before legislating. Drinking did decrease during this time, on average by about half.  But this was far from the hope of a total ban. The second-order consequences outweighed any benefits.

As economist Gregory Mankiw explains in Principles of Microeconomics,

In the presence of externalities, society’s interest in a market outcome extends beyond the well-being of buyers and sellers who participate in the market; it also includes the well-being of bystanders who are affected indirectly…. The market equilibrium is not efficient when there are externalities. That is, the equilibrium fails to maximize the total benefit to society as a whole.

Negative Externalities

Negative externalities can occur during the production or consumption of a service or good. Pollution is a useful example. If a factory pollutes nearby water supplies, it causes harm without incurring costs. The costs to society are high and are not reflected in the price of whatever the factory makes. Economists often view environmental damage as another factor in a production process. But even if pollution is taxed, the harmful effects don’t go away.

Transport and manufacturing release toxins into the environment, harming our health and altering our climate. The reality though, is these externalities are hard to see, and it is often difficult to trace them back to their root causes. There’s also the question of whether we are responsible for externalities or not.

Imagine you’re driving down the road. As you go by an apartment, the noise disturbs someone who didn’t agree to it. Your car emits air pollution, which affects everyone living nearby. Each of these small externalities will affect people you don’t see and who didn’t choose them. They won’t receive any compensation from you. Are you really responsible for the externalities you cause? If you’re not being outright careless or malicious, isn’t it just part of life? How much responsibility do we have as individuals, anyway?

Calling something a negative externality can be a convenient way of abdicating responsibility.

Positive Externalities

A positive externality imposes an unexpected benefit on a third party. The producer doesn’t agree to this, nor do they receive compensation for it.

Scientific research often leads to positive externalities. Research findings can have applications beyond their initial scope. The resulting information becomes part of our collective knowledge base. However, the researcher who makes a discovery cannot receive the full benefits. Nor do they necessarily feel entitled to them.

Blaise Pascal and Pierre de Fermat developed probability theory to solve a gambling dispute. Their work went on to inform numerous disciplines (like the field of calculus) and transform our understanding of the world. Probabilities are now a core part of how we think. Pascal and Fermat created a positive externality.

Someone who comes up with an equation cannot expect compensation each time it gets used. As a result, the incentives to invest the time and effort to discover new equations are reduced. Algorithms, patents, and copyright laws change this by allowing creators to protect and profit from their ideas for years before other people can freely use them. We all benefit, and researchers have an incentive to continue their work.

Network effects are an example of a positive externality. Silicon Valley understands this well. Each person who joins a network, like a marketplace app, increases the value to all other users. Those who own the network have an incentive improve it to encourage new users. Everyone benefits from being able to communicate with more people. While we might not join a new network intending to improve it for other people, that is what normally happens. (On the flipside, network effects can also produce negative externalities, as too many members can decrease the value of a network.)

Positive externalities often lead to the “free rider” problem. When we enjoy something that we aren’t paying for, we tend not to value it. Not paying can remove the incentive to look after a resource and leads to a Tragedy of the Commons situation. As Aristotle put it, “For that which is common to the greatest number has the least care bestowed upon it.” A good portion of online content succumbs to the free rider problem. We enjoy it and yet we don’t pay for it. We expect it to be free and yet, if users weren’t willing to support sites like Farnam Street, they would likely fold, start publishing lower quality articles, or sell readers to advertisers who collect their data. The end result, as we see too frequently, is low-quality content funded by page-view advertising. (This is why we have a membership program. Members of our learning community create a positive externality for non-members by helping support the free content.)

Positional Externalities

Positional externalities are a form of second-order effects. They occur when our decisions alter the context of future perception or value.

For example, consider what happens when a person decides to start staying at the office an hour late. Perhaps they want a promotion and think it will endear them to managers. Parkinson’s Law states that tasks expand to fit the time allocated to them. What this person would otherwise get done by 5pm, now takes until 6pm. Staying late becomes their norm. Their co-workers notice and start to also stay late. Before long, staying at the office until 6pm becomes the standard for everyone. Anyone who leaves at 5pm is perceived as lazy. Now that 6pm is the norm, everyone suffers. They are forced to work more without deriving any real benefits. It’s a lose-lose situation for everyone.

Someone we know once made an investment with a nearly unlimited return by gaming the system. He worked for an investment firm that valued employees according to a perception of how hard they worked and not necessarily by their results. Each Monday he brought in a series of sport coats and left them in the office. He paid the cleaning staff $20 a week to change the coat hanging on his chair and to turn on his computer. No matter what happened, it appeared he was always the first one into the office even though he often didn’t show up from a “client meeting” until 10. When it came to bonus time, he’d get an enormous return on that $20 investment.

Purchasing luxury goods can create positional externalities. Veblen goods are items we value because of their scarcity and high cost. Diamonds, Lamborghinis, tailor-made suits — owning them is a status symbol, and they lose their value if they become cheaper or if too many people have them. As Luca Lambertini puts it in The Economics of Vertically Differentiated Markets,

The utility derived from consumption is a function of the quantity purchased relative to the average of the society or the reference group to whom the consumer compares.” In other words, a shiny new car seems more valuable if all your friends are driving battered old wrecks. If they have equally (or more) fancy cars, the value of yours drops. At some point, it seems worthless and it’s time to find a new one. In this way, the purchase of a Veblen good confers a positional externality on other people who own it too.

That utility can also be a matter of comparison. A person earning $40,000 a year while their friends earn $30,000 will be happier than one earning $60,000 when their friends earn $70,000. When someone’s salary increases, it raises the bar, giving others a new point of reference.

We can confer positional externalities on ourselves by changing our attitudes. Let’s say someone enjoys wine but is not a connoisseur. A $10 bottle and a $100 bottle make them equally happy. When they decide to go on a course and learn the subtleties and technicalities of fine wines, they develop an appreciation for the $100 wine and a distaste for the $10. They may no longer be able to enjoy a cheap drink because they raised their standards.

Conclusion

Externalities are everywhere. It’s easy to ignore the impact of our decisions—to recline an airplane seat, to stay late at the office, or drop litter. Eventually though, someone always ends up paying. Like the villagers in Hardin’s Tragedy of the Commons, who end up with no grass for their animals, we run the risk of ruining a good thing if we don’t take care of it. Keeping the three types of externalities in mind is a useful way to make decisions that won’t come back to bite you. Whenever we interact with a system, we should remember to ask Hardin’s question: and then what?

The Original Parkinson’s Law and The Law of Triviality

We’ve all heard of Parkinson’s Law — “work expands so as to fill the time available for its completion.” I bet you’ve lived this. After all, who hasn’t sat in an hour-long meeting that really ended after 30 minutes. The rest of the time is just filler. It’s already booked after all.

I wanted to learn more about this law so I went back to the source and read Cyril Northcote Parkinson‘s (1909-1993) original 1957 version of Parkinson’s Law.

The implications of the law were interesting.

Politicians and taxpayers have assumed (with occasional phases of doubt) that a rising total in the number of civil servants must reflect a growing volume of work to be done. … The fact is that the number of officials and the quantity of the work are not related to each other at all. The rise in the total of those employed is governed by Parkinson’s Law and would be much the same whether the volume of the work were to increase, diminish, or even disappear.

More than that, Parkinson comes up with the brilliantly insightful Law of Triviality.

“The time spent on any item of the agenda will be in inverse proportion to the sum [of money] involved.”

Parkinson puts this law into dramatic form. Imagine a meeting …

Chairman: We come now to item nine. Our treasurer, Mr. McPhail, will report.

Mr. McPhail: The estimate for the atomic reactor is before you, sir, set forth in Appendix H of the subcommittee’s report. You will see that the general design and layout has been approved by Professor McFission. The total cost will amount to $10,000,000. The contractors, Messrs. McNab and McHash, consider that the work should be complete by April, 1959. Mr. McFee, the consulting engineer, warns us that we should not count on completion before October, at the earliest. In this view he is supported by Dr. McCheap, the well-known geophysicist, who refers to the probable need for piling at the lower end of the site. The plan of the main building is before you–see appendix IX–and the blueprint is laid on the table. I shall be glad to give any further information that members of this committee may require.

Chairman: Thank you, Mr. McPhail, for your very lucid explanation of the plan as proposed. I will now invite the members present to give us their views.

It is necessary to pause at this point and consider what views the members are likely to have. Let us suppose that they number eleven, including the chairman but excluding the secretary. Of these eleven members, four — including the chairman — do not know what a reactor is. Of the remainder, three do not know what it is for. Of those who know its purpose, only two have the least idea of what it should cost. One of these is Mr. Isaacson, the other is Mr. Brickworth. Either is in a position to say something. We may suppose that Mr. Isaacson is the first to speak.

Mr. Isaacson: Well, Mr. Chairman. I could wish that I felt more confidence in our contractors and consultant. Had we gone to Professor Levi in the first instance, and had the contract been given to Messrs. David and Goliath, I should have been happier about the whole scheme. Mr. Lyon-Daniels would not have wasted our time with wild guesses about the possible delay in completion, and Dr. Moses bullrush would have told us definitely whether piling would be wanted or not.

Chairman: I am sure we all appreciate Mr. Isaacson’s anxiety to complete this work in the best possible way. I feel, however, that it is rather late in the day to call in new technical advisers. I admit that the main contract has still to be signed, but we have already spent very large sums. If we reject the advice for which we have paid, we shall have to pay as much again.

(other members murmur agreement.)

Mr. Isaacson: I should like my observation to be minuted.

Chairman: Certainly. Perhaps Mr. Brickworth also has something to say on this matter?

Now Mr. Brickworth is almost the only man there who knows what he is talking about. There is a great deal he could say. He distrusts that round figure of $10,000,000. Why should it come out to exactly that? Why need they demolish the old building to make room for the new approach? Why is so large a sum set aside for “contingencies”? and who is McCheap, anyway? Is he the man who was sued last year by the trickle and driedup oil corporation? But Brickworth does not know where to begin. The other members could not read the blueprint if he referred to it. He would have to begin by explaining what a reactor is and no one there would admit that he did not already know. Better to say nothing.

Mr. Brickworth: I have no comment to make.

Chairman: Does any other member wish to speak? Very well. I may take it then that the plans and estimates are approved? Thank you. May I now sign the main contract on your behalf? (murmur of agreement) Thank you. We can now move on to item ten.

Allowing a few seconds for rustling papers and unrolling diagrams, the time spent on item nine will have been just two minutes and a half. The meeting is going well. But some members feel uneasy about item nine. They wonder inwardly whether they have really been pulling their weight. It is too late to query that reactor scheme, but they would like to demonstrate, before the meeting ends, that they are alive to all that is going on.

Chairman: Item ten. Bicycle shed for the use of the clerical staff. An estimate has been received from Messrs. Bodger and Woodworm, who undertake to complete the work for the sum of $2350. Plans and specification are before you, gentlemen.

Mr. Softleigh: Surely, Mr. Chairman, this sum is excessive. I note that the roof is to be of aluminum. Would not asbestos be cheaper?

Mr. Holdfast: I agree with Mr. Softleigh about the cost, but the roof should, in my opinion, be of galvanized iron. I incline to think that the shed could be built for $2000, or even less.

Mr. Daring: I would go further, Mr. Chairman. I question whether this shed is really necessary. We do too much for our staff as it is. They are never satisfied, that is the trouble. They will be wanting garages next.

Mr. Holdfast: No, I can’t support Mr. Daring on this occasion. I think that the shed is needed. It is a question of material and cost …

The debate is fairly launched. A sum of $2350 is well within everybody’s comprehension. Everyone can visualize a bicycle shed. Discussion goes on, therefore, for forty-five minutes, with the possible result of saving some $300. Members at length sit back with a feeling of achievement.

Chairman: Item eleven. Refreshments supplied at meetings of the joint welfare committee. Monthly, $4.75.

Mr. Softleigh: What type of refreshment is supplied on these occasions?

Chairman: Coffee, I understand.

Mr. Holdfast: And this means an annual charge of — let me see — $57?

Chairman: That is so.

Mr. Daring: Well, really, Mr. Chairman. I question whether this is justified. How long do these meetings last.

Hilarious throughout, Parkinson’s book was the original Dilbert.