Economists might have created for themselves an artificial air of impenetrable intellectualism, but the hoary old concept of externalities is one of the primary means by which the discipline has divorced itself from reality.
Unfortunately, for the rest of us, this has major consequences for the quality of our lives and our children’s future.
Allowing economists to divorce themselves from reality has two main consequences.
Firstly, it has allowed economists to explain away – and often completely ignore – glaring disparities and injustices. The use of externalities in economic theory is a convenient way of avoiding the attribution of costs that businesses, corporations and governments don’t want to pay or account for.
In this way, ‘externalities’ provide a convenient theoretical tool that removes the need for political and social accountability.
Secondly, the use of externalities has allowed long-term costs – such as those associated with rampant climate change, for instance – to be excluded from most, if not all, price signals.
In other words, what we pay for goods and services does not include the costs of items classed as externalities, such as negative, generalised impacts on human health, or environmental exploitation and, especially, resource depletion.
Thanks to ‘externalities’, for instance, economists can tell us that we can drill for, extract and burn oil indefinitely, without any negative economic or environmental consequences.
Talking more theoretically, the use of externalities has enabled businesses, and especially corporations, to avoid the full costs of deploying human and natural capital. And, if ignored, these costs can rise without anyone noticing until, at some point, they become overwhelming. Humanity’s environmental debt is a prime example.
Despite its appearance of academic rigour and independence, the economics profession has helped to neutralise public discussion of otherwise controversial value judgements and political demands. By hiding these costs as ‘externalities’, the economics discipline has lent academic respectability to acts of theft and gross dishonesty.