Lessons from the History of Economic Thought
Chapter 4: Externality, Community and Wages
INTRODUCTION An externality exists when a person or a business takes an action that harms or helps another person or the community at large without the payment of any compensation. In most cases we tend to think in terms of a negative externality, such as the air pollution that many believe causes global warming. The concept of externality is not usually applied to workers, however. Given their assumption that individual human behaviour is rational and motivated by self-interest, there is an inference among economists that workers can only harm themselves through their labour market activities. We will see in this chapter, however, that economic thinkers argued that low wages and poor working conditions did spill over and aﬀect not only the workers involved but the community as well. Those cases usually involved consideration of how reduced levels of labour force sustainability or capability due to low wages imposed a cost on society. It was not until the early years of the twentieth century that the issues involved in an externality were clariﬁed. Since then, economic thinkers have discovered an array of policies for handling the problem of a negative externality, including policies to address the needs of low-wage workers. In developing those policies, I will also argue, a group of them were motivated by their own version of Smith’s moral economy. To them, that meant that there was a community interest in interfering in the market to take care of externalities of work and wages. Another group of...
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