I read about a new movement recently that is bringing to light the effects of traditional (neoclassical) economics curriculum on sustainability (both economic and environmental). Toxic Textbooks points out that most introductory economics textbooks simplify market economics. One important aspect of market economies that is overlooked often is the cost of externalities, that is, the costs of an economic transaction that do not have a direct impact on the parties involved in the transaction.
What do externalities have to do with sustainability? A lot. Understanding externalities is phenomenally important. One of the main reasons we have pollution, disappearing forests, a warming planet, and rapidly depleting oil supplies is that consumers don’t have to pay for all the costs of what they consume. Some of these costs are subsidized (think tax breaks and security for oil companies), and other costs are imposed on others not involved directly in the transaction. What is the real cost of pollution, of using something that can’t be replaced, of climate change, or of importing oil from certain countries? The consumer is not paying for it; the price of their consumption is artificially low. This is an effect of The Tragedy of the Commons, the title of a seminal paper written by Garrett Hardin in 1968. Markets work well when the value of everything behind a product is considered. In many cases, products depend on resources that we do not pay for (non-marketed assets). The cost of products normally do not reflect the value of ‘ecological services‘ provided by the natural environment. These additional resources are the commons, and the tragedy occurs when the commons are exploited to fuel growth in an unsustainable way; the commons are degraded or destroyed as a consequence. Once we start paying the true cost of what we consume, then the market economy will move toward a sustainable state. (See this recent article by Robert Costanza for a great perspective on the role externalities are playing in our current economy).
The only way we are going to shift to new, sustainable ways of doing things on a large enough scale is to provide the right price signals. We don’t need higher taxes overall, just different taxes that help reflect the cost of using common resources, and encourage investment in the right technologies and businesses. Even if some folks don’t buy into global climate change, there are enough other solid reasons (economic, national security, etc.) to justify a change in price signals.
The concept of externalities may be lacking from today’s economic textbooks, which is a problem for sustainability. But would revising all our textbooks solve this issue completely? I believe it extends beyond the classroom. What about those who haven’t learned about economics from a textbook? Many Americans have a pretty good concept of supply and demand. They understand how economic forces push prices up during a shortage, or pull them down when there is a glut. But does conventional economic wisdom include the importance of externalities? I suspect that it doesn’t. If it did, then voters would more universally support gasoline tax hikes, carbon caps, and investment in renewable energy and energy efficiency. Many citizens do support these things, but fewer than we need. We need more people who understand and appreciate externalities. But how do we get there? Perhaps revised textbooks is a start. But what else can we do? What else is being done right now?Posted: June 3rd, 2009 | Filed under: Education, Policy, Sustainability |