The theory of externalities

In the business world, we can lower our cost by pushing what we can onto others: by externalising costs or clean-up. This has become a field of economic practice where the elements which get externalised are thought of as "externalities". While Milton Friedman defined these as "the effect of a transaction between two individuals on a third party who has not consented to, or played any role in, the carrying out of that transaction" (Akbar et al., 2004, 17:22) - which I find less than clear - Ray Anderson suggested "let somebody else deal with that" (17:53), which is much clearer. That businesses push whatever cost they can onto others.

In fact, considering what Ray Anderson (founder of green flooring business, Interface) had to say in full could be helpful, along with some commentary from corporate advisor Robert Monks:

"Running a business is a tough proposition, there are costs to be minimized at every turn, and at some point the corporation says, you know, let somebody else deal with that. Let's let somebody else supply the military power to the Middle East to protect the oil at its source, let's let somebody else build the roads that we can drive these automobiles on, let's let somebody else have those problems, and that is where externalities come from, that notion of: let somebody else deal with that – I got all I can handle myself" (Akbar et al., 2004, 17.44).

"A corporation is an externalizing machine in the same way that a shark is a killing machine. Each one is designed in a very efficient way, to accomplish particular objectives. In the achievement of those objectives, there isn't any question of malevolence or of will, the enterprise has within it, and the shark has within it, those characteristics that enable it to do that for which it was designed" (18:20).

"So, the pressure's on the corporation to deliver results now, and to externalize any cost that this unwary or uncaring public will allow it to externalize" (18:47).

So where did this idea come from? Well, from Brit and Nobel prize winning economist Ronald Coase, way back in 1960 (Boyle, 2024; Medema, 1994). "Externalities can be positive or negative, but pollution is the most commonly cited example of a negative externality. A polluter might make decisions based only on the direct cost of and profit opportunity from production, without considering the indirect costs to those harmed by the pollution" (Boyle, 2024, 20:49).

He came up with "The Coase Theorem[, which] states that where there are complete, competitive markets with no transaction costs and an efficient set of inputs and outputs, an optimal decision will be selected. The Coase theorem is considered an important basis for most modern economic analyses of government regulation, especially in the case of externalities, and it has been used to analyze and resolve legal disputes" since Ronald came up with the idea (21:10).

Yeah. And look how that is working out for global populations in general. Climate change, anyone? Strip mines? Heavy metals? Land-fill? Leachates? Micro-plastics? 

Sam

References:

Achbar, M. (Director), Abbott, J. (Director), & Bakar, J. (Writer). (2004). The Corporation. Zeitgeist Films/Big Picture Media Corporation.

Boyle, P. (2024, May 12). Shell's Fake Carbon Credit Scandal Explained! [video]. YouTube. https://youtu.be/P1NBGM1ZJ10

Coase, R. H. (1960). The problem of social cost. The Journal of Law and Economics, 3(10), 1-69. https://doi.org/10.1086/466560

Coase, R. H. (1988). The Firm, the Market, and the Law. The University of Chicago Press. (illustration)

Medema, S. G. (1994). Ronald H. Coase. St Martin's Press.