Our hunter/gatherer ancestors had say 300 SKU (stock keeping units) – the managerial term for kinds of worldly goods. In New York City alone the SKU is well over 10 billion nowadays. If you think nature is multifarious, think again: we have probably created more cultural objects in 10’000 years than nature has created species in 500 million. True, one may not compare brands of breakfast cereals with finches, but what about the innumerable boring species of insects (Haldane quipped that God must have had an inordinate fondness for bugs…)?
SKU are but a small fraction of what John SEARLE calls “social reality”  – the most humongous reality ever conceived by a conscious mind. With our language we create, constitute, and maintain social reality – human civilization. Every sentence we utter bestows one or multiple meanings on a “brute fact” in the material world. There is no limit to our imagination about the real world, hence no limit to the complexity of the social reality we create. This social reality may well be structured, but at the same time wholly interdependent. Everything affects everything – not to speak of its emergent properties.
Now back to goods and services. Each such good has uses (one or few – unless it’s enablers like the internet) – when we buy it, we assume voluntarily consequences, as signified through voluntary exchange. Goods, however, also have collateral consequences: for our health, for the environment, for our social well-being. In fact, their production and use reverberates endlessly across “social reality” well beyond the voluntary transaction.
Everything has consequences. With increased knowledge we are able to discern second- and third-order collateral consequences – as in the case of climate change. Basically, any one use may have higher-order collateral consequences. Dealing with an object’s collateral consequences becomes way more demanding than just using it – we know that from the plain throw-away plastic bag. And there as just sooo many SKU… dealing with it all becomes daunting.
In an economic world “actors” should act in light of the consequences their actions entail. This principle makes sense. But how is one compress all the consequences – both voluntary and collateral – in an actionable decision? How are we to conquer the abundance of social reality into an actionable “yes or no”?
I may accept that a person is able autonomously to attach a value to this or that good or service which is offered to him – and express his willingness to enter in an exchange in order to obtain it. Mind you, it is a heroic assumption already: she would have to be coherent and consistent, have perfect foreknowledge and able to establish relations among all possible choices before him. At a pinch I may even agree that we can aggregate the many expressions of “willingness” into a demand function, though this is possible only by substituting wealth for want (one cannot have more wants than one’s income).
I’d tend to agree with the pragmatic stance of HAYEK that a diffuse mechanism like the market is best equipped to secure that diffuse knowledge is brought to bear on individual decisions. State-based central planning is too ham-fisted a method to yield decent results in time and over time (I’d reserve judgment on privately-led planning: after all firms do not battle for market share as much as dominance). So, let’s go for markets when dealing with voluntary exchanges.
But how is one to deal with collateral (involuntary or unintended) consequences? How are we to fit them into this scheme? We have a problem. Collateral consequences are simply consequences of materiality or have consequences for our social system, of which we know that it is far more complex that the material world. We have left the simple world of voluntary exchange to enter that of unilateral action on the material and social world. This is a totally different game, and markets have to prove their mettle in dealing with collateral effects.
Why is it different? I throw away a plastic bottle, and the environment is affected by my carelessness – my act has collateral consequences. The environment is not party to a voluntary exchange with me – it has no voice in the matter, even less it has a right to reject the deal. So somebody has to “give him a voice”, or allow it to “make a deal”, give him a right to put things “right”.
Only common human intentionality can do so – whether this is the state or any other institution is a subaltern issue. We need to set ourselves a rule – we have to accept or recognize that the object – here the environment – has a social status. It cannot be the concern of the autonomous individual, nor has he the social means to do so, unless he is the despot. Only when we make the environment part of our “social reality” do we need to consider it. So the market – an institution which mediates voluntary exchanges – needs to be supplemented by other institutions, which mediate what originally were involuntary exchanges.
Which institution best does this second task is a tricky question – and there is no a priori answer. May be the market can be tweaked (by whom?) to reflect the material and social consequences. But markets are not “naturals” for this kind of thing. To meet the collateral consequence what needs to be charged is an administered price, which is anathema to free-marketeers. May be an ad hoc regulation is needed. Whether the ensuing hybrid is viable, or whether we should go for separate or novel institutions is a question best answered in the specific context. HAYEK’s alleged superiority of the market fades. After all, KODAK was damn good at making photographic film – but made lousy electronic cameras. When the rules of the game change, the old leader may be ad a disadvantage. There is no reason that the market is superior in dealing with the world of involuntary consequences. So markets may decline in relative importance.
We do not only have collateral consequences outside the individual – we have them within him. I like my gin and tonic, but alcohol has well-known negative effects. So my choice is not just one between an apple and a gin and tonic: I also have to factor in the involuntary health consequences etc. It is hard enough for a rational mind to jostle wants, without having to deal with collateral consequences as well. Here too, we may wish, pragmatically, to supplement market incentives with other means, from nudging to prohibitions.
Faced with this unbelievably complex problem what does orthodoxy preach? Reductionism is the favorite guide to the perplexed. We assert that we can collapse the problem into one single variable – price – and that by following prices we act “efficiently” – making the best of the situation. This is stark – monistic – madness. It can only thrive in a social world which considers materiality a contingent disturbance of minor consequence. It is the shadow in Plato’s cave made policy guide.
Let me sum up: in an ever more complex social reality exponentially increasing collateral effects will dwarf price issues. We feel it already in social life: policy decisions are hamstrung not so much by price as by contextual issues. We blame the government, of course, but that’s just “blaming the messenger”.
Do I have a solution? Of course I don’t – but I’ll state outrights that we cannot compress a hyper-dimensional material and social reality into a point on which even angels would find it difficult to stand. The best we can do is to aim for uneasy compromises, in which we have continuously to watch for its boundary conditions. There is nothing inherently superior in what we are doing – we are playing the music the best we can. Humility is the order of the day.
So let’s be humble and avoid asserting principle superiority of unfettered markets (which, by the way, are themselves part of our social reality, and not – as BASTIAT, the darling of the neo-liberal right, contends – something prior to it).
 Michael SHERMER (2008): The mind of the market. How biology and psychology shape our economic lives. Holt, New York.
 John R. SEARLE (1995): The construction of social reality. Free Press, New York.
 Paul K. FEYERABEND (1999): Conquering abundance. A tale of abstraction versus the richness of being. University of Chicago Press, Chicago, Ill. 285 pp.
 Amartya K. SEN has convincingly argued that this reductionist stance is unwarranted. See: Amartya K. SEN (1999): Development as freedom. Anchor Books, New York.
 Amartya K. SEN (1999): Poverty and famines. An essay on entitilement and deprivation. Oxford University Press, New Delhi. The Nobel-prize winning economist shows that famines were far more caused by lack of entitlements (money to buy food) than phyisical penury – people starved because they poor.
 Friedrich HAYEK (1945): The uses of knowledge in society. American Economic Review. HAYEK did not argue – contrary to neo-liberals today – that the outcome of a market system was Panglossian. He only said it was superior to central planning, which is a far more modest claim.
 John R. SEARLE (2010): making the social world. The structure of human civilization. Oxford University Press, Oxford.
 You don’t believe me? In Switzerland road-building is often underground. It is the only place where social reality has yet to penetrate.