In classic microeconomics, both parties benefit from transactions:

  • Buyers receive a "consumer surplus" measured by the maximum amount they would've been willing to pay versus the actual price.
  • Sellers receive a "producer surplus" measured by the minimum amount at which they would've been willing to sell versus the actual price.

Let's assume I make a purchase that I will selfishly enjoy but which won't help anyone else, like a PS5.

On one hand: when I make a purchase that I'm happy with, I capture consumer surplus and provide the other party with producer surplus.  I also put money in someone else's hands which they can use to make further beneficial trades.  If I skipped the trade and set my money on fire instead, both of us would be worse off.

On the other hand: when I make a purchase, I'm consuming labor and resources that could've been used for other things.  I and my trade partner may be better off, but there's a negative externality of using up some of civilization's finite productive capacity.  I'm not sure how best to think of this, but I assume this negative externality shows up as higher labor and resource costs.

On average the first consideration clearly wins out -- otherwise, the world would be better off halting all trade.  But what about on the margins?  Has there been any work on quantifying the size of consumer + producer surplus versus negative externalities of production?  Do we know anything about how this changes as average spending changes?

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The part that is missing from your question is, in a parallel reality where you didn't buy the PS5, how did you spend the extra money? Also, how did you get that money in the first place? Maybe the parallel reality we should look at is the one where you worked less, got less money, and therefore didn't buy the PS5. Or maybe you worked equally hard, but was less successful at negotiating salary, so your boss bought one more PS5 for their kids instead.

I think the standard assumption is that the entire circle of "you do something useful to get money, then spend the money to buy PS5" is generating something positive for both you and the others. -- And the "magic of capitalism" is that this is actually not obvious from the perspective of entire human history, because some traditional alternatives are "you extort money from people at a gunpoint, then spend the money to buy PS5", which do not generate so much positive value for the others.

Now a separate question is whether it would be better for others if instead of buying the PS5, you donated the money to an effective charity. Yes, it would be, obviously. But how many people actually do that? -- Here again, the "magic of capitalism" is that people generate good as a side effect of their selfish actions, which makes it way more reliable. (And this does not prevent anyone from creating even more good by donating.)

tl;dr -- (under some theoretical assumptions which are not necessarily true in the real world) participating in normal trade generates some good as a side effect, and of course donating to charity instead would generate even more good

The part that is missing from your question is, in a parallel reality where you didn't buy the PS5, how did you spend the extra money

Correct, and intentionally so.  This is why I compare to setting the money on fire instead.  Maybe I have the wrong framing, but it seems valuable to me to look at the marginal value of a single spending act in isolation.  I might do many things with the money (like invest, spend, or donate it in various ways), and it would be interesting to know each of their values independently so I could compare them on eve... (read more)

3Viliam3mo
Burning the money would... create a microscopic deflation, I guess. Everyone else's money just got 0.0000000001% more valuable. I suppose that could count as a very inefficient form of charity. Like, if rich people own X% of all the money on Earth, then X% of the money you burned was in effect donated to them.

there's a negative externality of using up some of civilization's finite productive capacity.

That's a very unusual and IMO confusing framing of things.  "negative externality" normally means things that impinge on others' rights - pollution from making the PS5, for instance.  "civilization's finite production capacity" isn't actually anyone's right, so it can't be impinged or considered an externality.

I've got no attachment to the phrase, I meant it in the sense of (From Wikipedia):

In simple terms, a negative externality is anything that causes an indirect cost to individuals.

I think e.g. paying for labor increases the demand for labor, thus increasing the price everyone else pays.  That's an indirect cost to them.  I didn't intend to make any claims about rights.

3Viliam3mo
Yes, but they now have more money, so maybe the effects cancel out, globally. Locally, the person you paid has a bit more money, and everyone else is microscopically more poor (because it would be more difficult for them to pay that one specific person to do something for them).

Insanity Wolf would tell you you're absolutely right.

NEW PS5?
HOW MANY DEAD BABIES DID IT COST?

DOING GOOD ISN'T THE MOST IMPORTANT THING
IT'S THE ONLY THING!

PERFECTION IS COMPULSORY
ALL ELSE IS FORBIDDEN

THERE IS NO END
TO DOING GOOD

RESTING?
REVEALED PREFERENCE!
YOU DON'T CARE ABOUT THE SUFFERING!

YOU MUST DO THE VERY BEST THAT YOU CAN ALL THE TIME, WITHOUT END
IT’S A THEOREM!
YOU CAN'T ARGUE WITH A THEOREM!

And so on.

However, "negative externalities" normally means things like pollution from mines that the mine-owner does not have to pay for, not merely that someone is making game consoles instead of medical equipment. Positive injuries caused by one's positive actions, not merely a failure to devote all one's resources to curing the pains of the world.

It all depends on where you draw the baseline: inaction, or perfection. Is the question, am I making people worse off than they would be if I had done nothing? Or is it, am I leaving people less well-off than I might have made them if I had acted as well as possible? There are those who argue the latter, such as Peter Singer, but I always hear underneath the words the shriek of a rabid wolf, and turn my back.

I strong downvoted this, because it doesn't answer the question and instead seems to me to be making a political point.

Insanity Wolf would tell you you're absolutely right.

About what?  I don't think I believe any of the things you're arguing against.  I'm just wanting to get a quantitative sense, whether it supports or opposes the political point you're trying to make.

2Richard_Kennaway3mo
You wrote this: That is, there is a negative externality of production, consisting of not using those resources in any of the other, better ways that they might. And I pointed out where this leads.
1tryactions3mo
I disagree that believing there's a negative externality of production leads to the position you're arguing against -- for instance, I might think the negative externality is very small compared to the positive gains from trade. But I appreciate you pointing out exactly where you disagree with my framing.

Conspicuous consumption luxury spending is not a good use of resources and is a negative externality. Some spending is very beneficial such as that on basic research or demand for healthy goods which leads to more production of that healthy good. Spending money on something signals that their is demand for that good or service so leads to more production of that good or time spent on that service. Society would be better off with more medical research and less yachts and JPEG NFT's so we want to encourage spending on health instead of some luxury goods.