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Design Impact » Blog Archive » Toxic Textbooks, Externalities, and Sustainability

Toxic Textbooks, Externalities, and Sustainability

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 |

5 Comments on “Toxic Textbooks, Externalities, and Sustainability”

  1. 1 shanitahel said at 10:06 pm on June 4th, 2009:

    What curious topic

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  2. 2 Liptmaidist said at 6:38 am on June 5th, 2009:

    Hi, Congratulations to the site owner for this marvelous work you’ve done. It has lots of useful and interesting data.

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  3. 3 vantelimus said at 12:03 am on June 12th, 2009:

    A few of observations:

    1. Externalities were covered in the macro class I took. We used Mankiw’s text, which I’m sure covers the topic to some extent. Whether it provides the appropriate emphasis is certainly a subject which can be debated. Unfortunately, “appropriate emphasis” requires a determination that is subject to political preferences, not scientific measurement.

    2. Properly accounting for externalities requires an authority to set prices and distribute revenue to entities who merit recompense. Government ostensibly fills that role through taxes and fees. Currently popular free-market ideologies are antithetical to the idea of governments playing that role. I believe it would require a change in the political sensibilities of the majority of the US before you could see a significant change.

    3. Negative externalities for which compensation is not made provide businesses the opportunity to extract higher rents. Capitalism, by definition, is the wholesale embracement of rent-seeking behavior. As long as free-market capitalism is the preferred economic ideology, it will be nigh impossible to change the situation.

    4. I doubt the state of economic textbooks has anything to do with the poor state of economic knowledge in the public. Most people never take a single course in economics. And of those who do, most people forget most of what is presented in the class. A different emphasis might help that or it might not. I suspect there wouldn’t be much change.

    5. Economics, as a subject, can be scientific. However, the application of economics is mostly political. Theorems which rely on simplified assumptions that don’t hold in the real world are often used by economists to promote a political ideology. Facts and theorems running counter to the political aims of the economist are either ignored or rationalized away. As long as economists abuse their area of study this way, it will rightly continue to be derided as largely pseudoscience.

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  4. 4 Design Impact » Blog Archive » Waxman-Markey Insights From Paul Krugman and an Engineers Perspective said at 10:19 pm on June 28th, 2009:

    [...] warming into the economy, providing incentives to change how we produce and consume energy (see my article on externalities for more on this). He says that the overall number of jobs will remain about the same, but the mix [...]

  5. 5 Robert Searle said at 7:06 am on July 17th, 2009:

    The key to all this is a new understanding of economics in which both the rich, and the poor benefit. See my p2pfoundation entry on TRANSFINANCIAL ECONOMICS.

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