It's Legal but It Ain't Right
Harmful Social Consequences of Legal Industries
Nikos Passas and Neva Goodwin, Editors

“LAWFUL BUT AWFUL”
Excerpted from the Introduction by Nikos Passas and Neva Goodwin

We are going to discuss a certain class of unintended, harmful side-effects. They are things that happen because they produce benefits to some corporation, and that are not stopped because the corporation in question is not where the bad effects are felt. We need a name for the class of thing we want to talk about. Economists and environmentalists – in a rare instance of unified thinking – have provided the needed term (albeit a rather clumsy one); it is "negative externalities".

The idea in back of this, on the economic side, is a theory of market functioning which says that markets convey to all economic actors (producers, consumers, etc.) signals that tell them whether the results of their actions are wanted or unwanted. If a producer puts out an Edsel, the market sends back the signal, "nobody wants it." If people like the environmentally-concerned image of Ben and Jerry's ice cream, they choose that brand. The market conveys these preferences to the producers, and we get more Ben and Jerry's ice cream, and fewer Edsels.

The problems – and they are many – happen when some of the people (or, it may be, animals or ecosystems) who are affected by economic actions aren't able to express their reactions through the market. For example, the people in the infamous "Cancer Alley" region didn't like having ugly, smelly factories built near them, and didn't want to suffer their carcinogenic affects, but this was a poor region whose residents didn't show up in the market response to the cancer alley industries. They were effectively outside of – external to – the market. Similarly, there is a difference between a home owner who gives the neighbors pleasure from her front garden, and one whose barking dogs creates a nuisance, but this difference is also largely external to the relevant (real estate) market. The house with the pretty garden may have a higher resale value, but not because of the neighbors' pleasure; the impact on neighbors in this case is a "positive externality": a case where an economic act has a desirable result that is not fed back through the market to alter the behavior of the economic actor. Fortunately, the market is not the only conveyer of information: positive externalities – where the good effect is not reinforced by a market signal – can be reinforced by neighbors' smiles, and other non-economic rewards. There are some important areas where the lack of market reinforcement for positive externalities is a real problem: e.g., corporations that provide good educational opportunities for their workers may not reap the full economic benefit, if their workers gain stills that they can transfer to another job. However, an exclusive focus on negative externalities will give us quite enough to discuss.

Economists care about externalities because the whole justification of markets is that the information they convey – especially through prices – will motivate economic actors to do what is best for the whole of society, "as though led by an invisible hand", in Adam Smith's famous metaphor. When this doesn't happen, the market is simply not doing what it should; economic theory no longer applies; and if society cannot rely on markets to guard its interests, the question of market regulation becomes urgent.

Environmentalists care about externalities because the best known examples are negative environmental externalities, where producers produce (as by-products) pollutants that harm people who aren't in the market loop. Their concerns, their health, their grief or anger don't get translated into market signals that would say, "stop polluting."

Everyone else cares about negative externalities too, it turns out (once they get past the awkward and unfamiliar word), because concern for fairness is a human universal. And it's clearly unfair for an economic actor to profit from an action that harms someone else.
That is the central topic of this book: the ability of a number of industries to generate huge negative externalities, forcing society to bear significant portions of the real cost of their products. Ironically, at the very time that arguments in favor of economic liberalization have gained support, after the end of the Cold War, hidden industrial subsidies have grown, in the form of costs externalized – passed on to an ever wider circle of stakeholders who are affected by corporate actions. At this time these unacknowledged costs of legal businesses are mainly borne by groups without voice: the weakest and least privileged groups. However negative externalities are potentially destructive to economic growth, democratic institutions and processes of democratization in many parts of the world. Therefore, even those who are not concerned about the people who lack voice have other reasons to care about negative externalities.

A common feature of all of the industries examined in this book is their ability to define their conduct as legal, while blocking attempts at regulation designed to reduce their harmful effects and externalities. Their ability to attract substantial pools of capital is often part of this equation. At the same time, the case of the National Rifle Association (in the chapter by Diaz) shows that the ability to mobilize non-monetary resources can be just as effective. In some cases, grass-root organizations are energized in efforts to ensure the availability and low price of desired goods. In other cases, such organizations are in fact funded or activated by big industries (thus earning them the title, “astro-turf” organizations). All organizations seek to influence their task environment (clients, suppliers, competitors, and regulators). What distinguishes the industries we will highlight is that they are not only highly successful and resourceful, they also are ultimately detrimental to society. This reality conflicts with standard assumptions about the overall advantages the community is supposed to derive from the success of legal enterprises. In a sense, the more these industries flourish, the more societies fail. Indeed, the success of some legal businesses, such as weapons traders or private correctional corporations, can be taken as an indication of societal failure.

The industries with very substantial negative externalities can be divided into three general categories. First, some may be classified as anti-social because their product per se is harmful. Tobacco, weapons, and gambling are three obvious cases. There is certainly demand for those products and services. A strong argument can be made, however, that society would be better off if those industries did not operate at all.

Second, other businesses furnish legal and desired goods or services, but their production processes generate hazardous wastes or socially undesirable consequences. This category is illustrated by the factory farming of chickens and hogs, as well as by the petrochemical and pharmaceutical industries, offshore financial institutions, and the antiquities business as it now tends to operate. One variation within this category – not the sole subject of any chapter in this book – is that of “facilitators”. These are industries that assist others to externalize the costs we document in this book, by keeping practices legal and holding critics or controllers at bay. Such services are provided by accounting, law, and lobbying firms. Some of these firms specialize in assisting anti-social, marginally legal activities, while others do it only occasionally.

Finally, there are industries which deliver privatized public functions or which support public functions, but do it in ways that produce predictably adverse unintended consequences. Perhaps the process of privatization has gone too far. Or perhaps some privatized functions require special supervision that is not included in the system. Examples of this category include private security firms (which supply mercenaries and private armies), or private corrections corporations, established to make profits while managing prisons. Here we find an inherent conflict between public interest and private profit. The more such industries grow, prosper and increase their market share, the worse off societies are in terms of both financial and human capital; i.e., more people find themselves behind bars, stigmatized, disenfranchised, wounded, dead or captured in private wars, homeless, unemployed, forced to immigrate, etc.

There is a common assumption that if an industry is legal it is basically benign and beneficial to society. This obscures the fact that, on balance, society is worse off because of allowing certain operations and practices to continue. Not everything that is good for business is good for America or the rest of the world. Negative externalities that remain hidden from public view are sometimes more dangerous than recognized social problems, such as crime. Unfortunately, the generators of these externalities normally have retained their viability by shaping public opinion and the legal environment. They manipulate the media and persuade policy and law makers, or purchase their support through extensive lobbying and the use of political campaign contributions. As a last resort they can effectively blackmail legislators and policy makers by raising “national economy” type of arguments: that “over-regulation” and “government interference” in their business will render them uncompetitive or unprofitable, they would have to cut down production or services, lay people off, and thereby negatively affect local communities or the whole country.

Whether or not the beneficiary of an externalized cost has contributed to public ignorance or confusion, the enduring possibility of externalizing costs usually depends on keeping the externalities unclear, poorly understood, or regarded as inevitable. Alternatives are thus not considered or are assumed to be too costly. Critics of the industries in question are few and tend to be associated with partisan or radical groups, which are unable to reach a wide audience or alienate those who do not subscribe to their political views. Thus the major negative externalities arising from legal practices and legitimate industries have not been successfully constructed as a social problem. As a result, there is little or no public debate on what can and ought to be done about them.

Our first task, then, is to address the issue of perceptions by defining the problem. Previous attempts to construct a social problem out of routine activities of powerful actors have had limited impact due to misplaced moralizing, the use of loosely defined criteria of wrong-doing, and the introduction of subjective standards on what is desirable, what is harmful, and what should be criminalized. In order to avoid these pitfalls, we need to identify observable negative externalities. These include physical, financial and environmental costs, as well as the undermining of democratic systems, economic growth, and international trade, and the creation of an environment in which crime can flourish while some other valuable potentials wither away.

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