Just to re-confuse you, jsalvatier would also say that, in the present environment, it would create positive externalities for me to counterfeit money and use it to be junk that I don’t want.
Your comment reduces my confidence that I understand the term “externality”. Until I read it, I tentatively believed that “X has positive externalities” means that X is an action taken voluntarily by a person (or firm) and has positive expected global utility. Most economic discourse assumes that all voluntary actions taken by a person (firm) have positive expected personal (organizational) utility. But in the present environment, counterfeiting money has according to my models negative global expected utility by reducing (by a small amount) the value of every asset denominated in the currency being counterfeited (e.g., cash and loans). (Counterfeiting is a member of the class or set of a diffuse harms, which by the way do not seem to get the attention they deserve here on Less Wrong.)
(Buying junk I do not want has negative global expected utility, too, under my models.)
The textbook definition of “externality” is where some activity has an effect (whether positive or negative) on people who are neither party to that activity, nor in a contractual relationship with those people.
So, creating a meetup group that other people will enjoy has a positive externality, but note if SilasBarta had been hired by those people to create that group there would be no externality (unless it also benefited some people who hadn’t hired him).
As for the reference to counterfeiting, that I believe is (based on previous discussions with SilasBarta) a sly reference to Keynesian economics, and you should probably leave it to one side if you’re still trying to get your head around externalities.
In the present environment, at least the in the US and most of Europe, it is conceivable that counterfeiting money has positive externalities. There is a very high unemployment rate, and low capacity utilization across most sectors of the economy. There is a fairly broad school of economists who believe that this is the result of a shortage of aggregate demand brought on by poor macroeconomic management due to an irrational fear of inflation—that the central bank can and should do more than it is doing to stimulate the economy, and failing that, central goverments not facing high or rising borrowing costs should be willing to run large short-term deficits. If this bunch of economists is correct, then these policies would be good for the global economy. Since counterfeiting money is essentially equivalent to monetary stimulus, it also would have positive externality. It would be much more likely to put some resources back to work and have little or no effect on the value of assets denominated in that currency.
If all economic actors are perfectly rational, and none suffer from money illusion, hyperbolic discounting, or other effects, then you would be right in all times, not just in normal times of close to optimal fed policy and near full labor and capital usage. That would also mean that the economists to which I refer would be wrong about the current state of events.
I agree, though, that buying junk you do not want would destroy most of any utility gained by counterfeiting. It would be far better to buy things you do want, or failing that, to simply give the money away.
The disagreement here isn’t about the term “externality”, it’s about the consequences of counterfeiting.
Right now, the U.S. economy is in such a screwed-up state that injecting more currency into the economy (regardless of whether it’s done legally by the Federal Reserve or illegally by counterfeiters) may indeed have net positive effects instead of net negative effects.
According to my preferred expert, the best macroeconomic model for our current situation is that of a demand shock brought on by the recent financial crisis: people lost a lot of money, which has led to a fall in aggregate demand (people are buying less stuff), which has led to a drop in output (people are making less stuff), which has led to higher unemployment (you don’t need as many employees when you’re making less stuff), which has led to a fall in aggregate demand (newly unemployed people no longer have the money to buy stuff)...
We don’t seem to be in a downward spiral any more (unemployment stabilized at around 10%), but business investment is extremely low; corporations are sitting on cash instead of spending it to expand production because nobody is buying. Right now, the bottleneck to economic growth in the United States isn’t productive capacity, but people’s desire and ability to purchase finished products. We’re at the point where having the government hire people to dig ditches and fill them up again, or even dropping cash from helicopters, would actually improve the economy.
I’ll note that creating a stable Waco LW meetup group would have positive externalities.
Thanks for helping me understand the term “externality” by providing a comprehensible example of its use.
Just to re-confuse you, jsalvatier would also say that, in the present environment, it would create positive externalities for me to counterfeit money and use it to be junk that I don’t want.
Your comment reduces my confidence that I understand the term “externality”. Until I read it, I tentatively believed that “X has positive externalities” means that X is an action taken voluntarily by a person (or firm) and has positive expected global utility. Most economic discourse assumes that all voluntary actions taken by a person (firm) have positive expected personal (organizational) utility. But in the present environment, counterfeiting money has according to my models negative global expected utility by reducing (by a small amount) the value of every asset denominated in the currency being counterfeited (e.g., cash and loans). (Counterfeiting is a member of the class or set of a diffuse harms, which by the way do not seem to get the attention they deserve here on Less Wrong.)
(Buying junk I do not want has negative global expected utility, too, under my models.)
The textbook definition of “externality” is where some activity has an effect (whether positive or negative) on people who are neither party to that activity, nor in a contractual relationship with those people.
So, creating a meetup group that other people will enjoy has a positive externality, but note if SilasBarta had been hired by those people to create that group there would be no externality (unless it also benefited some people who hadn’t hired him).
As for the reference to counterfeiting, that I believe is (based on previous discussions with SilasBarta) a sly reference to Keynesian economics, and you should probably leave it to one side if you’re still trying to get your head around externalities.
Thanks.
Happy to help, I like to contribute my economics knowledge to the group when its germane.
In the present environment, at least the in the US and most of Europe, it is conceivable that counterfeiting money has positive externalities. There is a very high unemployment rate, and low capacity utilization across most sectors of the economy. There is a fairly broad school of economists who believe that this is the result of a shortage of aggregate demand brought on by poor macroeconomic management due to an irrational fear of inflation—that the central bank can and should do more than it is doing to stimulate the economy, and failing that, central goverments not facing high or rising borrowing costs should be willing to run large short-term deficits. If this bunch of economists is correct, then these policies would be good for the global economy. Since counterfeiting money is essentially equivalent to monetary stimulus, it also would have positive externality. It would be much more likely to put some resources back to work and have little or no effect on the value of assets denominated in that currency.
If all economic actors are perfectly rational, and none suffer from money illusion, hyperbolic discounting, or other effects, then you would be right in all times, not just in normal times of close to optimal fed policy and near full labor and capital usage. That would also mean that the economists to which I refer would be wrong about the current state of events.
I agree, though, that buying junk you do not want would destroy most of any utility gained by counterfeiting. It would be far better to buy things you do want, or failing that, to simply give the money away.
The disagreement here isn’t about the term “externality”, it’s about the consequences of counterfeiting.
Right now, the U.S. economy is in such a screwed-up state that injecting more currency into the economy (regardless of whether it’s done legally by the Federal Reserve or illegally by counterfeiters) may indeed have net positive effects instead of net negative effects.
According to my preferred expert, the best macroeconomic model for our current situation is that of a demand shock brought on by the recent financial crisis: people lost a lot of money, which has led to a fall in aggregate demand (people are buying less stuff), which has led to a drop in output (people are making less stuff), which has led to higher unemployment (you don’t need as many employees when you’re making less stuff), which has led to a fall in aggregate demand (newly unemployed people no longer have the money to buy stuff)...
We don’t seem to be in a downward spiral any more (unemployment stabilized at around 10%), but business investment is extremely low; corporations are sitting on cash instead of spending it to expand production because nobody is buying. Right now, the bottleneck to economic growth in the United States isn’t productive capacity, but people’s desire and ability to purchase finished products. We’re at the point where having the government hire people to dig ditches and fill them up again, or even dropping cash from helicopters, would actually improve the economy.
(Note that in spite of the 2009 stimulus bill, government spending in the United States has actually decreased because spending by state and local governments has dropped more than federal spending has increased.)
On the bright side, at least the developing world is indeed continuing to develop, in spite of the mess the developed world has gotten itself into.