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Creative Destruction Is Not An Externality, Part 1

Here’s a long-overdue letter to a new correspondent.

Mr. J__:

Thanks for your e-mail, and please accept my apologies for the tardiness of my reply.

Responding to my several “critiques of common good capitalism,” you write that I “don’t give enough credence to apprehensions that unregulated markets force many changes on us that most of us may not want.” It is such changes, you add, that “Alex Salter probably was thinking about when he warned of political externalities.”

Judging from the context in which Alex used the term “political externalities,” I agree that what he likely means by this term is economic change that results from free-market innovation and competition. But I disagree that such change is an externality. It’s not, for at least two different but related reasons. The first of these reasons operates at the micro level; the second of these reasons is broader and more philosophical. In the interest of time I share here today only the first of these reasons. I’ll share the second in a follow-up letter.

At the ‘micro’ level, new and innovative economic opportunities are almost always offered alongside older and familiar ones. Older and familiar goods, services, and economic arrangements are discarded in favor of new and innovative ones only if and when enough individuals – spending their own money – choose the latter over the former. As the great economic historian Stanley Lebergott observed in 1993,

the array of available goods changes slowly. The high-button shoes of 1900 were still for sale in 1905. Vacuum tubes were stocked in the 1950s, even as transistorized appliances began to replace them. Twentieth-century consumers could therefore usually choose last year’s budget items this year if they desired. Yet real consumer expenditure rose in seventy of the eighty-four years between 1900 and 1984, as consumers continually switched to new goods. Such repetition reveals consumers behavior as if the newer goods did indeed yield more “worthwhile experience.”*

In almost all cases, people can for a time choose to continue to buy an older good or instead to buy a newer alternative. Because the consumer, when choosing to buy the newer good, personally forgoes whatever benefits he or she would have reaped had the older good been purchased instead, there is in such choice settings no externalities.

The same is true of choosing where to shop. Consumers who value the intimate, cozy feel of mom’n’pop retailers are free to continue to shop there when the likes of Walmart and Amazon arrive on the scene. If consumers value this cozy feel more highly than they value the additional goods and services they’d be able to buy were they to take advantage of the lower prices offered by the larger retailers, consumers would continue to patronize moms’n’pops. But consumers who instead shop at the larger retailers thereby reveal that they do not value the cozy feel highly enough to pay for it. There is here – contrary to the explicit claim of Robert Reich, and to the strong suggestion of Alex Salter – no externality.

You’ll likely, and not unreasonably, respond by correctly noting that moms’n’pops will survive only if enough consumers value the cozy feel sufficiently highly to pay for it. If too few consumers value this cozy feel highly, moms’n’pops will give way eventually to the Walmarts and Amazons, imposing – I predict you will say – an “externality” on the small number of consumers who do value the cozy feel highly enough to pay for it.

This point will be addressed in my follow-up letter.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

* Stanley Lebergott, Pursuing Happiness: American Consumers in the Twentieth Century (Princeton: Princeton University Press, 1993), page 15.