European Republicanism by Thilo Zimmermann

Author:Thilo Zimmermann
Language: eng
Format: epub
ISBN: 9783030259358
Publisher: Springer International Publishing

7.1 Externalities

The theory of (perfect) abstracts markets presupposes that all agents are able to internalize all relevant information into their behavioural functions. Only if all economic facts and relationships are internalized into the market, its agents, and its price mechanisms, can the system lead to an optimal equilibrium . Today, “externality ” is a widely accepted concept in economic theory in order to explain market failure due to an incomplete internalization of information. However, the theory of externalities still contains astonishing weaknesses. Cornes and Sandler have stated that between economists “there is strong temptation to avoid giving an explicit definition of externality, since even this first step has been a fertile source of controversy” (Cornes and Sandler 1996, p. 39). Baumol and Oates also state that the concept of externalities is on the one hand “straightforward” and, on the other hand, “extraordinarily elusive”. They go on to state that the “definitional issue does not seem to have limited seriously our ability to analyse the problem, and so it may not be worth a great deal of effort” (Baumol and Oates 1988, p. 14). It is therefore worth it to take a closer look at how externalities emerge if an abstract market economy is introduced to a society.

The phenomena of externalities are closely linked to the creation of market institutions and emerged together with the industrialization of Europe. Therefore, it is closely connected to the thorough application of the division of labour and the creation of “market societies” during the “Great Transformation ”, as Polanyi labelled it (see Sect. 1.​1.​2). The concept of (modern economic) externalities derives from the emergence of economic clusters and concentration of capital inside a capitalistic market system since the beginning of the industrialization and especially since the second wave of industrialization during the end of the nineteenth century. The UK witnessed a high concentration of industrial forces in Manchester. In Italy , after the unification, economic investment shifted to the North, which undermined the beginning industrialization of the South. Similar processes happened in the US after the Civil War (1861–1865) and in Germany after the unification in 1871. Furthermore, the economic power of the Ruhrgebiet cluster was a main driver of both world wars and a main incentive for the Schuman plan (see Sect. 3.​2.​1). Also today, some scholars see the flow of capital from South Europe towards the North (and especially Germany) as a main reason for the euro crisis .

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