In 2012, Mike Moffatt, and economist at UWO, wrote a piece called “David Suzuki needs an economics refresher course.” Well, no, actually he doesn’t. Indeed, it’s Moffatt who needs a refresher course – in the ethics of economic decision-making and of public debate.
(I know Moffatt’s piece is a bit old, but I only came across it yesterday while helping my son with his homework, and I just couldn’t resist writing about it.)
Here’s what Suzuki says about externalities.
“…nature and nature’s services… perform dozens of services to keep the planet happening. But economists call this an ‘externality.’ What that means is “We don’t give a shit.” It’s not economic. Because they’re so impressed with humans, human productivity and human creativity is at the heart of this economic system. Well, you can’t have an economy if you don’t have nature and nature’s services, but economics ignores that. And that’s an unbelievably egregious error.”
Here’s what Moffat has to say about externalities.
“An externality is, simply put, a spillover effect. It is the unintended costs or benefits from a transaction or decision experienced by third parties (that is, they were external to the decision). It does not mean phenomena that are external to economic modelling or things outside the interest of economists.” (Some other examples of definitions of “externality” are given at the end of this post.)
Clearly, Moffatt missed Suzuki’s point entirely. Whether he meant to or not, Moffatt moves the goal-posts to deflect from Suzuki’s point and tries to make an argument that is friendly to his own discipline, and does so with fancy rhetoric designed to prestidigitate his way out of the ethical corner that Suzuki has rightly painted economics into.
Suzuki is saying that, in the actual world, economic decisions are made without regard to the environment, largely due to a fundamental privilege we have arrogantly afforded ourselves, and that has been taken as axiomatic in economic theory since its very beginnings. He says that economic decision makers “don’t give a shit” about externalities; that’s why their externalities – they’re external to (i.e., do not influence) the decision.
Moffatt says externalities are “unintended,” which implies the decision-maker either didn’t know about them, or knew about them but couldn’t reasonably act on them. But this aspect of “unintended” doesn’t seem to be a universally agreed feature of externalities. Buchanan’s definition (from Wikipedia, see below) makes no such commitment, focusing instead on the effects on third parties; this opens the door to externalities being intended. (Buchanan won a Nobel Prize in economics, so one may assume he had some idea of what he was talking about.) Indeed, none of the definitions provided at the bottom of this post include the notion of intent, or lack thereof. There are other sources that do include the notion of intent, including this textbook, this article by J.R. Edwards, and this article intended to help teach economics.
We can at best say, then, that the question of whether intention plays a role in deciding what is and what isn’t an externality, is an open one.
Either way, though, Moffatt is in a bind. Let’s say that the effects of externalities are in fact unintended. As mentioned above, this opens two possibilities. It could be that the decision-maker honestly didn’t know about externality. But that’s ridiculous; we’re talking about the environment here. It’s absolutely beyond question that human activities are negatively impacting the environment. To claim that any reasonable decision-maker in modern society is unaware of this is delusional in the extreme.
The alternative is that the externality was known to the decision-maker, but was inevitable. This gets us into the ethics of the matter. What exactly is the context of this inevitability? Consider Ford Motors. In 2014, it made over $7 billion in profit worldwide. It made this profit by manufacturing and selling a type of product responsible for more than 12% of global GHG emissions (remember to add in all the GHG caused by the manufacture of vehicles, the production of the fuel they use, etc). Is this inevitable? Well, yes, so long as it is acceptable to make that much profit without having to offset the damage you cause. However, instead of lining the pockets of the 1%, what if that money were used to cover the costs of public transit, to fund research into alternative systems, and to influence the public to stop using cars? Everything dies; unconstrained growth is a recipe for disaster. Ford would do better by (a) trying to make itself obsolete while (b) simultaneously planning its own “demise” as a transformation into a company that provides a different service.
Furthermore, is it ethical to make that profit at the expense of the global environment? Nope, and it’s been unethical for decades, because we’ve known for at least that long what a horrible strain this puts on the global ecology.
(Please note: Ford is just an example here; a similar argument can be made for virtually any corporate entity in the world.)
So why is it still going on? All kinds of reasons: denial, political corruption, simple human bias,….
But that’s no excuse for economists to wash their hands of the matter. They should be frothing at the mouth and screaming from the roof-tops “This is so fucked up! Do you not see what we’re doing to ourselves?” But they’re not. They’ve forgotten that the dispassionate objective stance they assume is only a professional one to be used to communicate specific information in specific settings. It’s not a lifestyle choice. When they go home at night, no matter how clinical they might be on the job, they should be completely losing their shit over this stupid, stupid behaviour by corporations and other organizations.
(I suppose I should mention the last possible option – that externalities are “not unintended.” But that trivially reduces to a criminal act, so there’s not much point in considering it here. If we did, and if it turned out to be true, then humanity would be entirely bankrupt morally. And we know that’s not true.)
Moffatt also implies that Suzuki is wrong in saying that economics ignores nature: “It does not mean phenomena that are external to economic modelling or things outside the interest of economists.” First, Moffatt calls it “phenomena,” not “nature.” He’s trying to make the argument more abstract and remove the visceral importance that we rightly attach to “environment.” Second, a “phenomenon” can be internal to “economic modelling” (as Moffatt says) and also external to the economic system being modelled (as Suzuki says). Economic modelling is a technique used to develop simulations (of sorts). The economic system being modelled is a real life collection of interacting entities. Two different things. You can include a phenomenon in your modelling technique by simply saying “we decide to exclude this phenomenon from our model.” So Moffatt is really just misleading the reader here and not addressing Suzuki’s point at all.
Here’s something else wrong with Moffatt’s response: he commits the fallacy of moving the goal-post. That is, Suzuki was clearly talking about the real world and about actual decisions made by real decision-makers as evidenced by their spectacularly abysmal environmental stewardship. Moffatt, instead, shifts the discussion to the merits of economics as a discipline. He might as well have been talking about badminton.
Moffatt also ignores the root of Suzuki’s argument which starts with a recognition that we’re abusing our environment, and only then connects this to the notion of externality. That “externalities” are often used to describe environmental impact is obvious from even the most cursory review of readily available information. We’re not talking about Deep Sophisticated Theory here; we’re talking about the kind of information used in real life by policy- and law-makers, and captains of industry. Moffatt seems fixated on making sure we know that the discipline of economics is not to blame for this shortcoming of real life. Again, irrelevant to the point Suzuki was making.
Moffatt also goes after impromptu oral statements by Suzuki rather than carefully considered and scripted writing. We all know that when we’re put on the spot, we may choose our words poorly, even if the message we want to communicate is a good one. Furthermore, the venues in which Suzuki made those comments were not the formal and rigorous venues of academic debate; he was speaking to a particular audience in a particular way. Yet Moffatt makes the assumption that even under those conditions, one can expect only the crispest, most rationally conceived and executed utterances. All this to make Suzuki look bad because he had the stones to speak the truth about the economy and the environment.
This leads to another mistake: Moffatt violated the principle of (philosophical) charity by choosing such a facile interpretation of Suzuki’s remarks. The principle of charity is essential for meaningful discussion, especially in the public sphere where experts can sway public opinion. It says that no matter what someone utters, it behooves the receiver of the utterance to assume there is meaningful, valuable information in the utterance until evidence demonstrates otherwise. In this case, if Moffatt had stopped to think carefully about what Suzuki had actually said – especially considering the venue of those utterances – then he might have realized, as I have tried to describe here, that Suzuki is plainly correct.
Lastly, there’s the obvious ad-hominem attack on Suzuki – the implication that his education is lacking.
So, Suzuki is picking on real-life decision makers for leaving important environmental factors out of their decisions; he uses the term “externality” to describe those ignored factors. The use of that term is very common in the public sphere these days; there’s nothing wrong with using it. But its use also forms a tenuous connection between “the economy” and “economics.” Moffatt sees this as an attack on economics by proxy, and goes after Suzuki, changing the nature of the debate entirely from the pragmatic concern of well-being to the academic concern of the validity of the discipline of economics. That is… I can’t think of a better word: childish!
If anything, Moffatt should be siding with Suzuki because the real enemy here is one common to both serious environmentalists and serious economists: the narrow-minded, short-sighted, utterly selfish economic decision-maker (a group of people who, unfortunately, appear to constitute an infinitely renewable resource of human harm).
It is a disservice to the public debate that Moffatt should write such drivel and that the Globe and Mail should publish it.
Some other definitions of “externality.”
Here’s what Wikipedia says: “…an externality is the cost or benefit that affects a party who did not choose to incur that cost or benefit.” They cite Buchanan’s 1962 article in Economica (1). The Wikipedia article is particularly even-handed, I think, in its presentation of the concept – particularly in the frank identification of externalities as “problems.”
Investopedia says an externality is “A consequence of an economic activity that is experienced by unrelated third parties.”
Another libertarian think tank, the Mises Institute, offers this: “The theory examines cases where some of the costs or benefits of activities “spill over” onto third parties. When it is a cost that is imposed on third parties, it is called a negative externality. When third parties benefit from an activity in which they are not directly involved, the benefit is called a positive externality.”
In “The Politics of Externalities: Neo-liberalism, Rising Powers and Property Rights,” William Davies, Research Fellow at the Institute for Science Innovation & Society, University of Oxford, writes “…externalities can be treated as rare events, ‘market failures’, which make calculation impossible….”
Moffatt is right that externalities have been a subject of economic “research” for a long time. Consider this paper by Saari and Petron, which, though recent itself, implies a very sizeable body of work. It’s also worth noting that this paper has a lot to say about the ethics of making decisions where there are known externalities.
1. Buchanan, James; Wm. Craig Stubblebine (November 1962). “Externality”. Economica 29 (116): 371–384. doi:10.2307/2551386