External Costs, Global Warming, Forever Plastics, and Orthodox Economics

Thoughts after Senator Sheldon Whitehouse’s “Time to Wake Up 298: The 10th Our Oceans Conference”

No sooner had I finished my earlier post, “‘Outdated and unjust’: can we reform global capitalism?”, than I came across Senator Whitehouse speaking in the Senate, “Time to Wake Up 298: The 10th Our Oceans Conference”. Here, he reports on global warming, forever plastics, and the corruption of our government by big business, specifically in this case, fossil fuel and petrochemical companies. His presentation is thorough, though not novel if you have been even half awake over the past fifty years.

In the course of my earlier comments, I wrote,

“They [corporations] are, by design, required to grow. Each of them will subject the rest of us to as much pollution (external costs, as orthodox economists say) as possible since not doing so would disadvantage them in the face of their competitors.”

Orthodox economists have almost nothing to say about the pollution, injuries and death of workers, the exhaustion of the earth, and other costs imposed on us by capitalist production. Nor does orthodox economics point out that externalities, external costs, are a required feature for every company. If my competitors are avoiding some production costs by externalizing them —that is, getting someone else to pay for them —I must do the same; otherwise, my profit margins will be lower. Over time, this puts my company at a competitive disadvantage. Imagine a factory farm for pork that sustainably handles it stream of pig poop versus one that just pumps it into lagoons that leak and pollute.

The classic circular-flow diagram¹ from Paul Krugman’s macroeconomics textbook claims to show how the economy works, but does not include external costs.

This should not be surprising. The word “equilibrium,” that magical feature of markets, appears on 174 pages, while “externalities” appear only six times. This says a great deal about why orthodox economics is not particularly useful in understanding how our world works. Given the obvious turbulence of our capitalist economy, it is clear that markets in equilibrium are a feature that appears only in the maths and graphs of economists; meanwhile, the external costs that we all experience daily are barely mentioned. The automatically self-adjusting, maximally optimizing markets of the circular-flow diagram are a moral and intellectual embarrassment.

 

1. ]Krugman is not the inventor of this mythical chart. It has been around for a long time.