Some gifts aren’t free; the costs are just hidden

One can only wonder about the kind of unpleasant experiences with gifts suffered through in America that gave rise to the marketing term, “free gift.” Are there so many unfree gifts out there that we need to distinguish free gifts from the other kind?

It turns out that from an economics perspective this question is not as silly as it sounds. There are, in fact, several kinds of gifts that should be classified as the other kind.

The first type of unfree gift is what we might call the “encumbered gift” — one with costs that are visible but can sometimes be onerous over time. Encumbered gifts include such things as stipulations in wills as well as gifts to colleges and universities that contain conditions that attempt to direct the funds to specific purposes — scholarships for ambidextrous croquet players, for example.

The second type of unfree gift arrives in the form of scientific or technological breakthroughs whose invisible costs are revealed only later. The classic version of this type is H.G. Wells’ 1897 book, “The Invisible Man,” in which the central character becomes invisible but goes insane and meets a violent end. The book, and the first film version, released in 1933, established not only the encumbered gift principle but also the mad scientist and knowledge-is-dangerous principles that still influences movie making.

Invisibility plays a major role in economics, too, and it often applies to costs, damages and other effects that are real, but just not seen. In a sense, invisibility is the key element in a third type of unfree gift, where we see only what we expect to see — or what we want to see.

These cost effects are called “externalities” in economics, and many of them are invisible because of the framework we use to look at an economic enterprise. Most often we look at a business, for example, by using an accounting framework where revenue, costs, number of workers, profits, assets and liabilities dominate what we see.

Externalities are invisible, though. They do not show up in that framework because by definition they are costs outside the business that somebody else is paying — unwillingly or unwittingly. The prime examples are, of course, the environmental effects of enterprises, especially those such as agriculture and extractive industries that have a direct impact on natural resources.

It is the invisibility of externalities that makes certain types of businesses more attractive to cities. New York City loves its financial industry, for example, for most of its externalities have been distributed to Main Street and to taxpayers elsewhere in the economy. They are invisible in Manhattan. Much the same has occurred in San Francisco, where most of the externalities have been distributed offshore and are invisible to the city’s residents, office workers and tourists.

An example of this kind of externality showed up in news headlines this past week, when scientists revealed that young blood could rejuvenate an old body — in mice, at least. The potential for expanding our knowledge of inter- and intra-cellular communications is huge, yet one thing is absolutely clear: The news article was not written from the perspective of the younger mouse, who, as it turns out, gets older as the geezer mouse gets younger. As long as we keep our eyes focused on the geezer, though, and his opportunities for eternal youth, the cost in aging to the formerly younger mouse is an invisible externality.

This blood transfer research also makes it clear that scientists need to spend more time watching movies and TV. Vampires have known about the anti-aging value of blood transfers for centuries. We might not appreciate their treatment of externalities but it is pointless to deny that vampires had their own, entertainment-based technological support for eternal youth.

Externalities do not have a built-in, automatic route to visibility. It requires a lot of hard work to get people and politicians to expand the framework of their vision so that they can see the costs that lie outside the financial statement.

The minimum wage policy decision also provides a good example of both externalities and invisibility and how they create an imbalanced argument. The workers who keep their jobs at the higher wage receive a monetary gift; they are obviously better off and visible. The workers who lose their jobs drop out of sight. They, along with the costs that they pay and the costs to the taxpayers, become invisible externalities.

Whether the policy issue involves minimum wage mandates, urban development, agriculture, health care, or any other dimension of our diverse economy, we must make the externalities visible. That is the only way to identify the real costs and who will pay them. Otherwise we’re just another bunch of vampires.

James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Herald Business Journal.