Size, Leverage and the Casino ended on a pattern: gains kept close, costs sent outside. Too big to fail was one case of it, and the buyout that puts the debt on the bought was another. In each, the people who chose the bet kept the gain and someone else carried the loss. But the workers sold with Toys “R” Us were at least inside the firm. They had a job, a wage and, in principle, a door.
This chapter is about people who aren’t inside anything. The family downstream from the paper mill didn’t sign a contract with it. The village under the flight path didn’t agree to the war. The farmer in a country that borrowed for a dam he never asked for didn’t sign the loan. None of them is an input to the arrangement, and none of them is inside anything they could leave. So the leaving test, which has done most of the work in this book, can’t reach them. They can’t exit what they never entered.
The rule underneath the test still covers them. No one is to be treated as anyone’s input or anyone’s subject, and a person whose health, land or future is spent to make someone else’s deal cheaper is being used as both. This chapter follows that cost out of the market, through the law that lets it out, across borders and into war, and then gives the strongest case that it isn’t as simple as it looks.
The river downstream
Arthur Pigou gave economists the classic picture in The Economics of Welfare (1920). A steam locomotive throws sparks, and the sparks set fire to the woods and crops beside the line. The railway counts the coal, the crew and the track in its costs. It doesn’t count the burned field, because nobody sends it a bill. So the fare is lower than the full cost of the trip, and more trains run than would if the railway paid for everything it used up. Economists now call the burned field an externality: a cost, or sometimes a benefit, that falls on people who aren’t party to the deal.
The point of the example is what it does to price. Cost the Limit of Price argued that a fair price should track the cost of what is made. An externality means the price tracks only part of the cost. The rest is still paid, in smoke in someone’s lungs, a dead fishery or a flooded basement, but it is paid by people who never agreed to the price and get nothing from the sale. What Prices Carry praised prices for carrying knowledge no planner could gather. A price with the cost left out carries a lie: it tells buyers the thing is cheaper than it is, and they buy more of it.
This is also a margin taken rather than made, the distinction the last three chapters have leaned on. A firm that dumps its waste in the river saves what treating it would cost. That saving shows up as profit or as a lower price, and either way it looks like efficiency. It isn’t. Nothing was done more cleverly. The cost was moved onto people downstream, who were never asked.
How the law let costs out
The common law once had an answer to the sparks. Nuisance law said you may use your land as you like, so long as you don’t harm your neighbor’s. A mill that flooded the fields upstream or a tannery that fouled a well could be ordered to stop. Morton Horwitz, in The Transformation of American Law, 1780–1860 (1977), traced how American courts softened that rule as industry grew. Judges began to ask not only whether harm was done but whether the harmful use was reasonable and good for the community, and mills, dams and railways usually were, in the judges’ eyes. The neighbor’s right to be left unharmed became one interest to be balanced against progress.
Murray Rothbard, no friend of the left, told the same story in “Law, Property Rights, and Air Pollution” (Cato Journal, 1982). In his account the courts of the nineteenth century decided that industry served the public good, and so let it pollute property it didn’t own. On this point the left libertarian and the right libertarian read the history the same way: the state didn’t fail to stop pollution, it licensed it.
The balancing reached its plainest form in Boomer v. Atlantic Cement (1970). Neighbors of a cement plant near Albany, New York, sued over the dirt, smoke and vibration. The New York Court of Appeals agreed the plant was a nuisance. But the plant represented an investment of over $45 million and employed more than 300 people, while the trial court had put the neighbors’ total permanent damages at $185,000. So instead of ordering the plant to stop, the court let it pay those damages once and carry on. In effect it sold the plant a permanent right to pollute its neighbors’ land, at a price the court set, to a buyer the neighbors never chose.
Limited liability works the same way at a larger scale. Size, Leverage and the Casino noted that a corporation’s owners risk only what they put in. That cap protects them from creditors who chose to lend. It also protects them from people who chose nothing. On the night of December 2–3, 1984, methyl isocyanate gas leaked from Union Carbide’s pesticide plant in Bhopal, India, into the crowded neighborhoods around it. More than half a million people were exposed. Official death tolls run from about 3,800 to over 5,000, and campaigners put the number far higher. In 1989 Union Carbide settled with the Indian government for $470 million, a fraction of the $3 billion the government had first sued for. The settlement closed all claims arising from the disaster. The people of those neighborhoods weren’t the company’s customers, workers or lenders. They were simply nearby. In the military’s phrase, they were collateral damage, and they were left holding the bag.
The pattern doesn’t need a disaster. In 2000 Coca-Cola’s Indian bottling subsidiary opened a plant at Plachimada, a farming village in Kerala, with every permit the state required. Within a few years villagers said their wells had dropped or turned foul, and that sludge from the plant had spoiled their soil. After two years of protest, led largely by Adivasi villagers, the plant closed in 2004. A committee appointed by the Kerala government held the company responsible and put the damage at about ₹216 crore, and in 2011 the state assembly unanimously passed a law setting up a tribunal to collect it. The bill needed the central government’s assent, and never got it; the Home Ministry sent it back after hearing objections that included the company’s own. Coca-Cola has disputed the findings. The village is still waiting. The permits let the water out; the law that would have brought the cost back in was stopped at the top.
The bill sent abroad
A loan is a deal between a lender and a borrower. When the borrower is a government, the people who repay it are neither. They are taxpayers, often not yet born, and in a dictatorship they never chose the government that signed.
John Perkins described the machinery from the inside in Confessions of an Economic Hit Man (2004). In the 1970s he was chief economist at Chas. T. Main, a Boston engineering firm. His job, as he tells it, was to write forecasts of economic growth for poor countries that were high enough to justify huge loans for dams, power grids and ports. The loans came from the World Bank, the US aid agency and private banks. The contracts went to American engineering and construction firms, so much of the money came straight back. The country kept the debt. When it couldn’t pay, the debt became leverage: a vote at the UN, a military base, access to oil, or a program of cuts and sell-offs written by its creditors. A small elite near the government usually did well. The farmers and slum dwellers who were supposed to gain from the dam paid for it in taxes, in cut services, and sometimes in flooded land.
This is the same pattern as the buyout in the last chapter, scaled up to a nation. The party that chose the bet collected the fees first. The debt was loaded onto someone else, and the someone else had no say. It is also why Perkins matters to this book twice over. He is a witness to how a state, the United States in particular, can act abroad in ways it would never defend openly at home. And he shows the economics of it: who signs, who earns, who pays.
The Philippines gives a case on the record. Under Ferdinand Marcos the government contracted Westinghouse to build the Bataan Nuclear Power Plant. The first bid was about $500 million; the finished plant cost about $2.3 billion. It was completed in 1984 and never produced power for the grid. After Marcos fell in 1986, Corazon Aquino’s government mothballed it over safety concerns, but chose to honor the debt. The Philippines finished paying for it in 2007. At its peak in 1988, repaying it took more than 4 percent of all government spending. The government sued Westinghouse in the United States, alleging bribes paid through Marcos’s associate Herminio Disini; a New Jersey jury acquitted the company, though a Philippine court later ordered Disini to return $50 million. Whatever the courts decided about the bribes, the people who paid for twenty years were the people who never got the power, in either sense. They got no electricity from the plant and no say in the deal. The power that counted was the gap between a dictator and the people he ruled, and it was leveraged to line the pockets of capitalists close to the regime, living on the third floor of Braudel’s house.
Guatemala shows the same partnership without the loan. By the 1950s the United Fruit Company was the country’s largest landowner, and it left much of that land uncultivated. In 1952 President Jacobo Árbenz’s land reform took over idle land on large estates, United Fruit’s included, and offered compensation at the value the company itself had declared for taxes. The company called that theft and lobbied Washington, where Secretary of State John Foster Dulles and his brother Allen, director of the CIA, both had ties to the company through their old law firm. In 1954 a CIA-organized coup overthrew Árbenz. Decades of military rule and a civil war followed, in which some 200,000 people died. The company’s loss of idle land was reversed; the cost of reversing it fell on Guatemalans for forty years.
Coca-Cola’s bottlers in the same two countries show a quieter version, where the cost is pushed down a chain of contracts. Coca-Cola doesn’t own most of the plants that bottle its drinks; it licenses local franchises. In Guatemala City in the late 1970s, the franchise’s American owner set out to break the union, and several of its leaders were murdered, among them Pedro Quevedo, shot in 1978 while making deliveries in his Coca-Cola truck. An international union boycott followed, and in the early 1980s Coca-Cola ended the franchise. In Colombia, on December 5, 1996, paramilitaries shot the union leader Isidro Gil inside the Carepa bottling plant while he was negotiating for its workers; that night the union’s office was burned, and soon the local union was gone. His union and family sued Coca-Cola and its bottlers in the United States, alleging the plant’s managers had brought in the killers. The courts dismissed the case, and no serious account claims that anyone in Atlanta ordered a murder. That is the point. The franchise works like limited liability: the brand collects the margin, the bottler carries the blame, and the people who paid with their lives were never party to either contract.
There is an old legal name for debt like this. In 1927 the jurist Alexander Sack set out the doctrine of “odious debt”: a loan taken by a regime without the people’s consent, not spent for their benefit, with the lender aware of both, is the regime’s debt, not the nation’s. Governments have almost never applied it, because creditors are powerful and new governments need credit. But it states this book’s rule in the language of finance. A debt is owed by whoever agreed to it, and people cannot be made to pay for a deal they had no part in. And even where they had a part, a vote or a seat at the table, they may not have had the power to resist terms set by the stronger side, which is the leaving test again: consent means little to someone who can’t say no.
The anthropologist David Graeber put this in a longer frame, in an interview with Philip Pilkington for Naked Capitalism in 2011 (copy here). For most of recorded history, he argued, rulers feared a population sunk in debt as the surest road to social breakdown, and kept answers ready: Mesopotamian clean slates, the Biblical Jubilee, laws against usury. The modern answer runs the other way. Institutions like the IMF and the ratings agencies exist to protect creditors and treat default as unthinkable, which is how the Third World debt crisis was handled. On that rule, the Philippines paid for Bataan to the last peso.
The bombed village
War is the purest case of a cost pushed outside. The decision is made in a capital; the price is paid in a village that had no vote there. Between 1964 and 1973 the United States flew some 580,000 bombing missions over Laos and dropped more than two million tons of ordnance, in a war run largely by ordinance of the CIA and kept secret from the American public for years. About 270 million cluster bomblets fell, and an estimated 30 percent failed to explode. Since the war ended, unexploded bombs have killed or injured some 20,000 people in Laos, many of them children, and farmers still find them in their fields. None of those people was party to the decision. Most of the Americans whose taxes paid for it didn’t know it was happening.
Frédéric Bastiat’s essay “What Is Seen and What Is Not Seen” (1850) is usually read as a lesson about broken windows: the glazier’s new work is seen, while the shoes the shopkeeper would have bought with the same money are not. War spending is the broken window at full size. The factories, the jobs and the contracts are seen, and politicians point to them. The schools not built, the savings spent, and above all the people on the other end are not seen, because they live somewhere the voters never go. Power Has to Be Watchable took up the first half of that problem, the secrecy. This chapter adds the second half: even a war fought in full view sends most of its cost to people who have no say in it.
The village is outside every test this book has offered except the deepest one. Its people aren’t workers who could quit, customers who could shop elsewhere, or citizens who could vote. The only rule that reaches them is the one under all the others: no one is anyone’s input, and no one is anyone’s subject. A bomb dropped to settle someone else’s argument treats the people beneath it as both.
The strongest objections
The sharpest reply to everything above is Ronald Coase’s “The Problem of Social Cost” (Journal of Law and Economics, 1960), by the standard count the most cited law review article of all time. Coase made two points. First, harm is reciprocal. If the railway must stop throwing sparks, the farmer gains and the railway loses; if it may go on, the reverse. To stop the railway harming the farmer is to let the farmer harm the railway. The real question is which harm is worse, and sometimes the answer is to move the crops back from the line. Second, if the parties could bargain cheaply, it wouldn’t matter much who had the right at the start. Whoever valued it more would buy it from the other, and the efficient outcome would follow either way. Pigou’s tax, on this view, is often the wrong tool, because it assumes we already know who caused the harm and how much it is worth.
There is a lot here to keep. Coase is right that costs are a matter of arrangement, not nature, and right that a clear right which can be traded beats a regulator guessing at the damage. His argument is also a case against the state’s usual cure, since a tax set by a legislature answers to lobbying as much as to harm. But look again at his condition: if the parties could bargain cheaply. The family downstream can’t bargain with a firm whose lawyers outnumber the town. Half a million people in Bhopal couldn’t bargain at all, before or after. The Laotian farmer and the generation that will repay a loan have no seat at any table. Coase himself said that in the real world bargaining is rarely cheap, and that his famous result was meant to show why the rules matter, not to prove they don’t. The cases in this chapter are exactly the ones where bargaining fails, and they fail for the reason this book keeps finding: one side is outside the arrangement and can’t get in. Money talks, the saying goes, and bullshit walks. At a table like that it’s closer to say that money is bullshit, talking. And the harm is reciprocal only in the abstract. When the farm was there first and the railway arrived throwing sparks, someone threw the first punch, and it wasn’t the farmer. The law has a name for the reverse case, a newcomer who moves next to an old factory and then sues: “coming to the nuisance.” Most of the cases in this chapter run the other way. The nuisance came to them, bought by money they never saw.
The second objection comes from Rothbard’s side. Return to strict property rights, he argued: treat pollution as trespass, make the polluter pay in full, and let the courts, not the legislature, enforce it. That is close to where this book stands, and it beats both Boomer and the regulator. But Rothbard also set a high bar of proof. The victim must show beyond reasonable doubt that this polluter caused this harm. That works for a cement plant and its neighbors. It fails for harms spread thin across millions of sources and millions of victims, where no single smokestack can be proven to have caused any single illness. A rule that can only see harms one plaintiff can trace to one defendant will miss the largest ones. Here Elinor Ostrom’s commons, met in Markets Versus Capitalism, do better than either the court or the state: people who share a river or an airshed set the limits together and watch each other, as the Valencia farmers have watched the water for centuries.
The third objection is about the debt. Borrowed money built real things. South Korea borrowed heavily in the 1960s and 1970s and became rich. Roads and power lines financed by the World Bank do carry goods and bring light to homes. Critics of Perkins add that his own story is hard to check. Sebastian Mallaby of the Washington Post called him a conspiracy theorist, and the State Department, in a 2006 statement, called his account of being recruited through the National Security Agency a fabrication. Neither critic is a bystander. The State Department speaks for the government Perkins accuses, and Mallaby had just written a sympathetic history of the World Bank under James Wolfensohn. Former colleagues at Main who dispute his details worked at the firm he implicates, though one of them, Einar Greve, agreed that loading poor countries with debt was a bad strategy. Both points deserve an answer. On the first, nobody here says that every loan is a trap; the test is who chose it, who gained, and who pays, and a loan that a country’s people would have chosen passes it. On the second, the cloak-and-dagger parts of Perkins’s story may be embellished, and readers should weigh them that way. The mechanism doesn’t depend on them. Bataan is on the public record, the doctrine of odious debt was written long before Perkins, and tying aid to contracts for the donor’s own firms was common enough that in 2001 the rich countries of the OECD formally agreed to untie most of their aid to the poorest countries.
What to keep
A market price is a good thing when it carries the whole cost. The trouble in this chapter isn’t trade, or industry, or lending. It is the part of the cost that leaves the deal and lands on someone outside it. Coase is right that who bears a cost is a matter of rules, and Rothbard is right that the rules once protected the neighbor better than they do now. Where people can bargain, let them. Where a harm can be traced, make the one who caused it pay in full, with no cap on liability for people who never chose to take the risk.
The chapter adds a third test to the two from Size, Leverage and the Casino. The first asked whether a giant still wins without its privileges. The second asked who carries the loss. The third asks who is outside the arrangement, and whether they were asked. If a deal’s costs fall on people who weren’t party to it, couldn’t leave it and had no say in it, then the deal isn’t voluntary, however freely the parties inside it signed. That holds for the river, the village and the generation that inherits a debt.
The test cuts against states first. They make the largest decisions with the least consent from those who pay: wars, loans signed by dictators, licenses to pollute. But it doesn’t stop at the state. A stateless arrangement would face the same question, and would need its own answer, through liability, through commons the users govern, and through people downstream with the standing to say no.
None of the cases in this chapter was run by libertarians. The levers of policy and enforcement were pulled by liberals, neoliberals and neoconservatives, by whoever held the state at the time, and too big to pollute is what that state builds. Still, a fair question remains for this book’s own side. Much of the economics that calls itself right libertarian, from Rothbard’s proof of causation to Austrian accounts of profit as pure discovery, has little to say about people outside the deal. Today that blind spot changes little, since right libertarians hold few levers. It would matter in a stateless society, where there might be no one too big to pollute, but where those rules might be the ones people reach for first. Why the blind spot exists, and what survives once it is fixed, is the subject of the next chapter.
Sources
- Arthur C. Pigou, The Economics of Welfare (Macmillan, 1920). The railway sparks; the gap between private and social cost.
- Morton J. Horwitz, The Transformation of American Law, 1780–1860 (Harvard University Press, 1977). How nuisance law was softened for industry.
- Murray N. Rothbard, “Law, Property Rights, and Air Pollution” (Cato Journal 2, no. 1, 1982). The courts’ license to pollute; strict liability and strict proof of causation.
- Boomer v. Atlantic Cement Co., 26 N.Y.2d 219 (1970). Permanent damages in place of an injunction. case summary
- On Bhopal: RFE/RL, report on the twentieth anniversary (Prague, Dec. 2, 2004), on the exposure, death tolls and the $470 million settlement. original
- John Perkins, Confessions of an Economic Hit Man (Berrett-Koehler, 2004). Inflated forecasts, tied contracts and debt as leverage.
- US Department of State, “Confessions – or Fantasies – of an Economic Hit Man?” (Feb. 2, 2006). The official rebuttal.
- On Bataan: Inquirer Technology, “Mothballed plant cost $2.3 billion” (Sept. 17, 2016). original · Inside Story, on the cost overrun and the repayments to 2007. original
- Alexander Nahum Sack, Les effets des transformations des États sur leurs dettes publiques et autres obligations financières (Sirey, 1927). The doctrine of odious debt.
- Philip Pilkington, “What is Debt? – An Interview with Economic Anthropologist David Graeber” (Naked Capitalism, Aug. 2011). Clean slates and Jubilees; institutions built to protect creditors. original · copy here
- On Plachimada: Down to Earth, “Polluter didn’t pay: Plachimada awaits compensation from Coca-Cola, 2 decades on” and “Plachimada Bill: Centre asks Kerala to approach National Green Tribunal.” The closure, the ₹216 crore claim, the bill that never got assent. original · original
- Nick Cullather, Secret History: The CIA’s Classified Account of Its Operations in Guatemala, 1952–1954(Stanford University Press, 1999). The coup, from the CIA’s own history.
- Stephen Schlesinger and Stephen Kinzer, Bitter Fruit: The Story of the American Coup in Guatemala(Doubleday, 1982). United Fruit, the Dulles brothers and Árbenz.
- On Coca-Cola’s bottlers: Colombia Reports, “Colombia reins in Coca Cola bottler after environmental abuse claims” (Isidro Gil, Carepa); LabourNet Germany, on the Carepa murder, the US suit and the 1980s Guatemala franchise. original · original. Court record: Sinaltrainal v. Coca-Cola Co., 578 F.3d 1252 (11th Cir. 2009), affirming dismissal.
- On Laos: COPE, “Ending the Threat of UXO in Laos.” Missions, tonnage, cluster bomblets and casualties. original
- Frédéric Bastiat, “What Is Seen and What Is Not Seen” (1850).
- Ronald H. Coase, “The Problem of Social Cost” (Journal of Law and Economics 3, 1960). Reciprocal harm; bargaining and its costs. On its citation count: Fred R. Shapiro and Michelle Pearse, “The Most-Cited Law Review Articles of All Time” (Michigan Law Review 110, 2012).
- Ronald H. Coase, The Firm, the Market, and the Law (University of Chicago Press, 1988). His own reading of the “Coase theorem.”
- Elinor Ostrom, Governing the Commons (Cambridge University Press, 1990). Users who govern a shared resource.