The towering problem of externality-denying capitalism

Stepping back

A major first response to our sustainability challenges has been to try and turn a profit to more sustainable ends. Alas, even ‘purposeful profit’ seems unable to overcome the deeper momentum of what might be termed ‘externality-denying capitalism’ – ‘externality-denying’ in that billions of daily investment and consumption decisions ignore certain of their social and environmental consequences. 

As just one example, the World Bank reports that less than 4 percent of global carbon emissions are currently priced at levels consistent with the Paris Agreement’s temperature goals, endorsed by 194 nations. Hence, hardly any of today’s market transactions are fully costed, in terms of reflecting their contribution to climate change. The same neglect repeats to varying degrees for certain other environmental and social problems.  

We don’t call our predominant socio-economic system ‘externality-denying capitalism’, but we should constantly remind ourselves of what we are doing.    

Caught in this embracing dynamic, first-response market-led sustainability strategies – such as SRI, CSR, ESG, sustainable investing, etc. – are showing signs of exhaustion. While these strategies have helpfully accelerated awareness of sustainability challenges and have catalysed fresh innovation paths and business models, they are being overpowered by the externality-denying capitalism that remains the larger force shaping our social and natural worlds. Hence, there is a pressing need to step out of the day-to-day frame to appraise this bigger system. 

Externality-downplaying economics

In part, we have arrived at externality-denying capitalism – read, consequence-denying capitalism – because it has been rationalized by an externality-downplaying economics discipline. Economics has had a theory of externalities for over a century, but a concept that should have been central to the subject was fatefully marginalized – and not for particularly good reasons.  

There were general beliefs that external costs might be small, or that positive and negative externalities might roughly cancel out to leave market signals as a still reliable guide for economic decisions. (Unfortunately, there is an important asymmetry: positive externalities are ‘free good things’, while negative externalities may accumulate to have system-breaking consequences). 

Above all, 20th-century economists’ craving for elegant mathematical models, for which externalities were a complication too far, encouraged a view of externalities as the negligible residuals of an all-encompassing efficient market system.

However, externalities can no longer be dismissed as negligible market failures when they are becoming the main event. Economics’ – and now society’s – markets-first, world-second perspective is no longer credible – no longer sustainable. 

Externality-downplaying economics promotes various ideas – ‘trickle-down’, ‘rising tide lifts all boats’, ‘win-win’, ‘green growth’ etc. – that are all variants of the same basic attitude: whatever the problem, more growth is surely the answer. 

But if the measurement of growth is externality-denying, then the growth that is meant to solve problems may simply create more of those problems along the way. Externality-denying growth may rebound or backfire to become not the solution but the driver of various social and environmental harms.

A virtualizing capitalism

One might hope that rising awareness of the innately physical problems of climate change and biodiversity would prompt a re-grounding impulse, but exactly the opposite dynamic seems to be playing out in the continued momentum behind virtualization. 

Externality-denying capitalism is fundamentally a phenomenon of abstraction (from Latin: ‘drawing away’ or ‘detaching’). We lift selected parts of the world via ‘commodification’ so that we can combine and allocate those parts into new configurations that, by our estimation, are more ‘valuable’ than how the parts were distributed before. We value a car more than the initially widely-dispersed molecules that were consumed or assembled to produce it. 

However, of necessity, these acts of ‘value creation’ are also acts of ‘value destruction’ as potentially critical social and natural patterns are compromised. In only keeping proper tabs on the ‘creation’ side of the ledger, we inexorably disembed economic and financial ‘value’ from a richer social and biophysical reality. This impulse to keep on abstracting and virtualizing – to keep drawing away from reality – continues apace, from derivatives markets to Bitcoin to virtual worlds. We are constructing a virtual exchangeable part-world in which critical connecting relationships – social and natural – are severed and left behind to wither.

Perhaps it is logically consistent that externality-denying capitalism should spawn reality-denying business models, but it feels like we are approaching the terminal stages of what the ‘logic’ can support. Indeed, we seem to have reached the reality-denying stage of capitalism. It is, of course, a delusion because even the latest and greatest virtualizations must have a tether back to the material and energy foundations upon which they entirely depend.

The tower of externality-denying capitalism

We find ourselves atop a high tower. Certain cognitive and behavioural developments of different vintages have proved mutually reinforcing in erecting the perch we are upon. A ‘Western’ mindset has paired with extractive behaviours of Western countries and empires that promoted and exported externality-denying capitalism. The cognitive and behavioural are two faces of the same tower. 

Cognitively, the abstraction that is modern economics is a continuation of the peculiar, biased perspective that took hold at the dawn of the Scientific Revolution in which quantitative ways of knowing the world was granted fateful primacy over qualitative ways of knowing – an intellectual development that has culminated in economics’ eagerness to mathematize social and natural relationships. 

Behaviourally, while ‘externality-denial’ is not unique to capitalism, capitalism happens to be the widely embraced vehicle by which externality-denial has achieved today’s global scale and threatening pace. (Other externality-denying systems had flaws that prevented them from reaching the global scale). For many countries in the Global South, disproportionately on the receiving end of this global cost-shunting system, the experience is that of ‘neocolonialism’ – a continuation of extractive colonial patterns by new, market-led, means. Similarly, from an environmental perspective, capitalism is proving not to be the efficient ideal of economic theory, so much as the most efficient way we have yet discovered to mine, harvest and pollute Nature beyond its capacity to absorb and regenerate.

An excessively abstract approach to the world has licensed large-scale extractive behaviour, which has generated material spoils that reward abstract thinking and encourage more of it… creating a runaway feedback loop. The mutual reinforcement of how we behave and how we have chosen to know (epistemology) is central: 

“Epistemological error is all right, it's fine, up to the point at which you create around yourself a universe in which that error becomes immanent in monstrous changes of the universe that you have created and now try to live in.” (Gregory Bateson)

If market 'fixes' are failing, we must fix markets

Alas, sustainability appears to be a much bigger project of ‘unlearning’ than many are yet reconciled to. Urgent re-grounding would seem to be the order of the day. It is not enough to aim for a 'sustainable economy', but rather we need a sustainable culture that has an economy, rooted in a more sustainable shared cognition of the world.

One critical intervention point is now ‘cultural’ – or extra-market – decisions about the markets we have rather than continuing to hope that markets as currently constituted can deliver enough change, fast enough. If market fixes are failing, among other measures we need to fix markets.  

This is not straightforward. A curious but critical aspect of our current predicament is that the practice of externality-denying capitalism for several decades has produced a surrounding culture whose norms, institutions and power relationships prevent the internalization of externalities that is capitalism’s own proposed remedy for externalities! 

The notion, for example, that we might follow the prescriptions of economics textbooks and levy meaningful taxes on carbon emissions is widely held to be ‘impractical’. Perversely, ‘capitalism’, the idea, has become ‘externality-denying capitalism’ in practice, has begotten an ‘externality-denying culture’ that cannot repair itself, because the remedies proposed by its own rationalizing science – ‘economics’ – are deemed ‘not practical’! Ideologies that beget cultures that cannot implement their very own theories of self-repair are not self-coherent in practice and risk dysregulating as complete systems.  

For want of alternative, ‘growth’ becomes the only ‘practical’ solution, uniting almost all political parties, but only exacerbating problems if the growth is externality-denying. Hence, the degrowth agenda is radical in the true sense of the term – it dares challenge the root problem that superficially opposed parties are all agreed upon (even if the implied ‘degrowth forever’ does not seem quite right).  

We have reached the bizarre point where societies built around a professed enthusiasm for markets find they cannot implement the policy and regulatory changes required for markets to address our largest problems. It is critical to remember that the theoretical superiority of markets as allocative mechanisms rests on all costs being recognized, implying all financial statements are fully costed. According to market logic, if a project’s – or corporation’s or investment’s – revenues exceed costs, it is profitable and so ‘good’ to do. But if a project is not fully costed, we can have no assurance of the equivalence of ‘profit’ and ‘good’, which is the cornerstone premise of a market-led culture. If financial statements are not fully costed, some portion of economic growth and profit just comes from running down valuable resources not recognized by markets because earlier generations did not comprehend the value of those resources. In such circumstances, it is not clear whether we want more or less of what we are measuring as ‘growth’ and ‘profit’.

Mr. Market doesn't yet know about climate change

In essence, we are not only not stewarding the planet well, but we are also not stewarding the market system well. Internalizing externalities is the stewarding duty of market-favouring societies – the basic maintenance required for a market system to remain coherent and so sustainable. A society that enjoys the freedoms and genuine innovative and allocative possibilities of markets must periodically ‘true up’ its market model to realities that become known to its human participants but have not yet been communicated to Mr. Market. With less than 4 percent of global carbon adequately priced, Mr. Market has no real inkling of the climate crisis because it has not been communicated to him in the language he understands. It might help to tell him – by ‘pricing’ carbon so he comes to know of the problem. Certainly, he is likely to respond badly on hearing the news – and might angrily ask why he was not told earlier! – but immediately thereafter, he will prove to be of almost incomparable assistance. 

Of course, it’s telling him that is difficult. While markets can easily and autonomously sniff out new revenue streams, the crystallization of new costs to true up a market system to reality can only be achieved via extra-market regulatory or policy interventions. The latter are difficult to implement because they can be portrayed and resisted as arbitrary interventions in otherwise ‘efficient’ and ‘free’ markets. But this misses that the seeming precision of today's market values is entirely founded on the no less arbitrary patterns of existing property rights and regulations established by prior generations based on their earlier understanding of reality and scarcity. It is to mistake an incumbent model for an accurate model, in the context of ever-changing human comprehension of reality. 

However, the difficulty of introducing new costs is very real, so induces the widespread sense that ‘it’s not practical’ – a refrain that becomes a self-reinforcing belief the more it is voiced. Yet, it is probably behind the door marked ‘not practical’ that genuine sustainability solutions now lie. The sooner we self-organize to open that door, the better.  

The infallible hand and the rebranding of greed

Ah, but now we are finally getting towards the heart of it, for the stubborn force holding the door in place is nothing other than greed – from individual to species-wide. The real barrier to ‘truing up’ markets is that it requires reconciling ourselves to real costs, past and present, that may be painful to accept and share. In many respects, it has been the function of externality-denying capitalism to shield us from this difficult reality.  

The exonerating story we told was that the pursuit of greed was socially acceptable because the Invisible Hand could grasp the expressions of self-interest made in the marketplace and transmute them into the best possible outcome for humankind. This was the counter-intuitive possibility that de Mandeville and Smith glimpsed in the 18th Century, but from cautious and qualified beginnings the Hand has acquired mythical status, gradually being elevated from a beneficial Invisible Hand to an Infallible Hand – able to turn all greed into good. 

This was the transformation of the Hand facilitated by mathematical economics through the 20th Century, for in eliminating externalities from their models because the maths was too complex, the Hand was recast as all powerful. Economists at their blackboards may have understood the limitations of what they were doing, but their models were seized upon by certain political opportunists and brought to real life. 

Yet, if markets are incomplete – if externalities exist – then markets do not capture and neutralize all the effects of greed, with the consequence that plenty of greed slips through the Hand’s grasp and behaves like, well, plain old greed with excesses that dysregulate social relations and undermine ecological systems. 

Morally, the elevation of the Invisible Hand to status of near Infallible Hand has been nothing less than the culture-scale sanctioning of selfishness and deshaming of greed in the belief-cum-hope that the Hand can soak it all up and smooth things out. This has been deeply systemized and normalized, inducing the runaway dynamics we now face. But if a culture has venerated the Hand too much for too long, its counterbalancing institutions and traditions will have diminished. It may even feel uncomfortable to express the view that greed is the root problem for there will be a ‘common sense’ that we have outgrown such old-fashioned ideas. Greed had been discovered to be good, no?  

And so, a moral challenge

The words of Gus Speth crystallize the innately moral dimension of the moment: 

“I used to think the top environmental problems were biodiversity loss, ecosystem collapse and climate change. I thought that with 30 years of good science we could address those problems. But I was wrong. The top environmental problems are selfishness, greed and apathy…and to deal with those we need a spiritual and cultural transformation.”

Sustainability is a profoundly cultural issue – a moral challenge before it is a market opportunity. Moreover, the continued insistence that sustainability be a market opportunity looks increasingly like the effort to fend off acceptance of the moral obligation. The sustainability problem is not ‘out there’, it is ‘in us’ and in our systems, made by humans and alterable by humans.  

This is an abridged version of an article also published on Both Brains Required. illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.