Capitalism and Externalities

Capitalism has come under fire in the recent years in ways that I would not have predicted as I completed my college degree and entered the workforce. For so many years the idea of capitalism has been central to the American story and to American identity. It may not be perfect, but it has always been held above other economic systems as the best option available. However, recently, people have taken a new look at capitalism to ask if it can be maintained without the plundering of others. Can there be a reasonable sense of equity or equality within a system of capitalism? And in the United States, do we really have a meritorious system of capitalism, or is the American system of capitalism overrun with grift and graft?

 

Allowing people to flourish based on their own talents, allowing people to pursue their own interests, and to accumulate wealth can be a good thing, but it can also be done to excess. Like alcohol, chocolate cake, or Netflix, our pursuit of wealth can essentially be an addiction, and the costs can be born on all of society, not just on ourselves. Our actions and the systems and structures within which we operate have unintended consequences. These consequence, or externalities, can be positive or negative. Within capitalism, positive externalities include new technologies that improve our lives, more efficient markets which minimize waste, and hopefully more goods and wealth for everyone. But negative externalities related to capitalism include pollution, corruption, and extractive processes that harm individuals, communities, and environments.

 

In Letters From a Stoic, Seneca writes to his friend Lucilius, “I myself pray rather that you may despise all those things which your parents wished for you in abundance. Their prayers plunder many another person, simply that you may be enriched.”

 

Seneca is acknowledging that when one person gains resources, often times it is at the expense of another person. The goal of capitalism is for our economic system to be positive sum, meaning that everyone is better off in an exchange – a state known as a Pareto Efficiency. However, this is not always the case. Seneca sees exchanges, or maybe more precisely the accumulation of resources and wealth, as zero sum, meaning that there is a fixed amount of stuff, and that anything that one person accumulates is taken away from another person. This, in my opinion, is where so much of our discontent in the United States and across the globe with capitalism lies.

 

Seneca may not always be correct. There may be Pareto Efficiencies out there and there may be situations in which capitalism builds a positive sum economic system. But it does seem like moderation in our approach to capitalism and wealth accumulation is warranted. At a certain point, for us to have more necessarily mean that we are extracting wealth and resources from other places. Mining, logging, and cattle grazing can have damaging effects on local environments and communities, even if they do help develop industry or increase GDP in the places we take resources from. Beyond a certain level, continuing this trend is likely to make our lives marginally better, while potentially making the lives of others much worse. We should constantly ask ourselves if we are nearing that point, and try to limit our need for more stuff and more wealth when we are at sufficient level where the marginal gain for us is meaningless and effectively just plunders others for our own enrichment. It seems reasonable if we should ask whether limitless growth is really possible, or if capitalism ends in a state of plunder, in which nothing is left for a sustainable existence for everyone.

3 thoughts on “Capitalism and Externalities

  1. This is a very measured and well-written take on the problems of capitalism.
    Do you think we should start including externalities in the price of goods and services as an accountability measure in a capitalistic system?

    1. The way we would consider negative externalities in the price of goods and services would be through taxation. Negative externalities reflect a broken aspect of a market, so expecting market mechanisms to adjust for the negative externality probably wouldn’t be the best approach. At the very least, taxation is the general way we approach negative externalities and try to reduce their harm or minimize the consumption of the thing producing the negative externalities.

      Another approach is the development of societal norms and expectations to pressure people to correct for negative externalities. Smoking is a good example of both approaches. In the United States we have high taxes on cigarettes, and often the money from those taxes are explicitly used to pay for healthcare services. The tax is intended to reduce smoking rates, and to pay for the negative externalities of smoking. That is an example of taxation trying to correct the market failure. But we also look down on people who smoke, force them to go outside if they want to smoke, and put up pictures of black lungs along freeways to dissuade people from starting smoking. There is no financial cost, but there is a social cost that these societal norms place on smokers.

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