Authors: Paul Craig Roberts
Some other examples will help to illustrate the nature of external costs. A half-century ago, in his book,
The Federal Bulldozer
, Martin Anderson pointed out that urban renewal was a means for liberals to gentrify their cities with federal money at the expense of ethnic neighborhoods and housing for the poor. Anderson was right, but federal spending programs had acquired a moral status that protected them from inconvenient facts. Indeed, today the right of developers to profit by imposing costs on others is more sacrosanct than the Bill of Rights.
In 2009 a developer in Dawson County, Georgia, succeeded in getting the Dawsonville City Council to rezone 150 acres of rural residential land as commercial/industrial. The developer intends to construct a motorsports race track amid horse farms, wildlife management areas, and low density residential use. The maneuvering began with Dawsonville annexing the land, thus preventing the county from protecting the property owners who invested in a tranquil way of life that the developer and obedient city council have conspired to destroy.
The developer’s profits and the tax revenues he has promised the small town of Dawsonville will not reflect the heavy costs his project imposes on residents in an environment where property values depend on natural beauty and peace and quiet.
In economic jargon, the developer is generating external costs that do not factor into his assessment of the value of his project. The costs are external to the project, because they are imposed on others. The project assigns no value to the quality of life that it destroys.
A fair-minded person would say that the developer should not be allowed to proceed unless he compensates those whose tranquility his project disrupts and whose property values it harms. Compensation would raise the cost of the project and perhaps make it unprofitable. Many economists, however, especially free market ideologues, will say that if the residents do not want the project they should pay the developer the present value of his expected profits not to go forward with the project.
Obviously, a policy of buying off the developer would bring in another with an even more outrageous project in order to extract higher blackmail.
Historically, free market economists have been inclined to see the property rights
of the developer
as sacrosanct. The property rights of existing owners in tranquility, low density, unobstructed views, and clean air are treated as expendable.
Zoning is society’s way of protecting property investments from reclassification that would harm their values. But zoning has proven an unreliable instrument as property developers usually prevail over communities. The Dawsonville city council changed the rules after residents had made their commitments and after the area had developed in keeping with the original zoning. Such zoning changes, if permitted at all, should be illegal without a two-thirds or three-fourths vote of the residents. Politicians can be swayed by bribes or promises of increased tax revenues. Consequently, politicians often place special interests above the general interest.
Free market ideologues are opposed to zoning because it protects existing commitments by limiting the rights of a new entrant. Free market ideologues believe that a person has the right to establish a pig farm in the middle of a residential neighborhood or a porn shop next to a church or a half-way house for drug addicts next to an elementary school. Otherwise, the state is interfering with property rights, which means that land is not being put to its most valued use as measured by the profits of the project, profits that are not offset by the costs the project imposes on others.
Developers are notorious for imposing high costs on taxpayers. Some local jurisdictions now require developers to put in curbs, sidewalks, water and sewage. However, many costs of development projects are still passed on to taxpayers.
Consider Walton County in the Florida panhandle. Federal Reserve chairman Alan Greenspan’s unrealistic low interest rates and environmental complaints about St. Joe’s paper mill caused the company to put its vast land holdings into real estate development. The paper company owned miles of undeveloped land along the coast of the Gulf of Mexico and hundreds of thousands of acres inland. These vast holdings that had provided pulp wood for the paper mill and habitat for wildlife became locations for vacation homes and shopping centers.
In less than a decade density increased to the degree that hurricane evacuation became impossible. Taxpayers were shouldered with the cost of turning two-lane roads into four-lane roads and two-lane bridges into four-lane bridges, eventually reaching Interstate-10 seventy miles away. Even if St. Joe had been required to pay this cost, the homes and businesses and small towns along the two-lane highway are forever destroyed. A way of life is gone forever, and no one was compensated.
On the national level, financial interests, the military/security complex, and the American Israeli Public Affairs Committee (AIPAC) rule. On the state and local level real estate developers rule. This is especially the case in Florida where campaign contributions insure that city and county commissions will approve development plans that destroy the natural environment and local communities.
The destruction of Florida by real estate developers is now so extreme that aroused residents organized an initiative for the November 2010 ballot known as Florida Hometown Democracy. The initiative would require all approved changes in growth plans to be decided by voters in referendums in the affected communities. The real estate lobby used its financial resources to fund a campaign of disinformation that defeated the initiative, thus retaining its ability to externalize its costs.
Economists opposed Florida Hometown Democracy as an interference with private property rights that would divert land resources “from their most productive use.” Floridians need to keep in mind that economists measure “most productive use” by profits that are created by imposing costs of the projects on those who suffer from them. If the full costs were imposed on the projects, fewer would be undertaken.
Real estate developers are infamous for naming their “developments” after the vistas they destroy. “Oak Hill,” for example, will be a hillside subdivision where a forest of oaks once stood. “Walnut Mill Run” memorializes the swift running stream that is now encased in galvanized pipe buried in the backyards of the houses built on the site.
It is easy to beat up real estate developers for their destruction of natural habitat, but they are not the worst generators of external costs. I cannot say which profit-making entity deserves that crown. Externalities generated by the high-density factory farming of meat and eggs might prove to be the most dangerous to humans.
American farm soils are depleted, and crops now depend on chemical fertilizers, the run-off from which destroys water resources. The factory farming of animals produces dangerous viruses, such as the H1N1 swine flu virus, which first emerged in the late 1980s from intensive pork production in North Carolina and recently was thought to be threatening the world with a pandemic originating in a subsidiary of Smithfield Farms in Mexico. The “low-cost” production of pork does not include the deaths and illnesses, the expense of treatment, lost incomes and grief suffered by families.
The meat that Americans eat is produced in the most inhumane conditions imaginable. No science fiction could do the production process justice. The animals exist in dangerous germ pools in such deplorable conditions that they must be pumped full of antibiotics. I know people who are not vegetarians who refuse to eat meat because of the inhumane, “low-cost,” conditions in which it is produced.
The same goes for the production of eggs and poultry. There is little doubt that the bird flu virus is a product of the inhumane conditions under which “low-cost” protein is produced.
Unfortunately in America, economists believe that “low-cost” production is the be-all and end-all of “consumer satisfaction.” Until economists, or preferably people in society, realize that in economic jargon “low-cost” production might simply mean maximum external costs imposed on society and the environment, the vaunted unregulated market economy will continue on its path toward the destruction of life on earth.
So far we have dealt with economics within the existing paradigm. This section deals with the economics that is omitted from the paradigm. The omitted economics is so important that the omission indicates the need for a new economic paradigm.
As we have seen, a basic problem is that economics does not measure all the costs, and the omitted costs might be the most important costs. Since economics does not measure all the costs, economists cannot know whether growth is economic or uneconomic. Economist Herman Daly, for example, asks if the ecological and social costs of growth have grown larger than the value of the increase in production.
The costs that are left out of the computation of Gross Domestic Product are the depletion of natural capital, such as oil and mineral resources and fisheries, and the pollution of air, water and land resources.
Economists do a poor job of adjusting economic theory to developments brought by the passage of time. Just as capital theory originated prior to the income tax and free-trade theory originated at a period in history when capital was internationally immobile and tradable goods were based on climate and knowledge differences, economists’ neglect of the ecosystem as a finite, entropic, non-growing and materially closed system dates from an earlier “empty world.”
In an empty world, man-made capital is scarce and nature’s capital is plentiful. In an empty world, the fish catch is limited by the number of fishing boats, not by the remaining fish population, and petroleum energy is limited by drilling capability, not by geological deposits. Empty-world economics focuses on the sustainability of man-made capital, not on natural capital. Natural capital is treated as a free good. Using it up is not treated as a cost but as an increase in output.
Economic theory is based on “empty-world” economics. But, in fact, today the world is full. In a “full world,” the fish catch is limited by the remaining population of fish, not by the number of fishing boats, which are man-made capital in excess supply. Oil energy is limited by geological deposits, not by the drilling and pumping capacity of man-made capital. In national income accounting, the use of man-made capital is depreciated, but the use of nature’s capital has no cost other than extraction cost. Therefore, the using up of natural capital always results in economic growth.
For example, the dead zones in the Gulf of Mexico from fertilizer runoff from chemical fertilizer farming are not counted as a cost against the increase in agricultural output from chemical farming. The brown clouds that reduce light over large areas of Asia are not included as costs in the production of energy from coal. Economists continue to assume that the only limits to growth are labor, man-made capital, and consumer demand. In fact, the critical limit is ecological.
Nature’s resources cannot be replicated or regenerated like man-made capital. These real limits to growth are both neglected and denied by economic theory.
Modern economics is based on a “production function,” associated with Robert Solow and Joseph Stiglitz, two Nobel prizewinners. A production function explains the relationship between inputs and outputs. The Solow-Stiglitz production function assumes that man-made capital is a substitute for nature’s capital. Therefore, as long as man-made capital can be reproduced, there are no limits to growth. As the economists James Tobin (another Nobel prizewinner) and William Nordhaus put it in 1972, the implicit assumption is that “reproducible [man-made] capital is a near perfect substitute for land and other exhaustible resources.”
Nicholas Georgescu-Roegen, one of the world’s most distinguished mathematical economists (now deceased) dismissed the Solow-Stiglitz production function as a “conjuring trick.” However, economists have continued to rely on the Solow-Stiglitz production function, because it rules out ecological limits on economic growth. (See Herman Daly,
Ecological Economics and Sustainable Development
, U.K.: Edward Elgar Publishing, 2007).
Modern economics has turned economic growth into an ideology, just as free trade has become an ideology. The Solow-Stiglitz production function is a false explanation of how inputs produce outputs. In contrast with Solow-Stiglitz, Georgescu-Roegen made it clear that production is the transformation of resources into useful products and into waste products. Labor and man-made capital are agents of transformation, while natural resources are what are transformed into useful products and waste products. Man-made capital and natural capital are complements, not substitutes. Neither can serve as a replacement for the other. The Solow-Stiglitz production function, the basis of modern economics, is fantasy.
The real question is whether the world’s remaining natural resources and the “sinks” for waste products are sufficient to sustain the continuation of economic growth as traditionally understood and its expansion to underdeveloped countries.
Environmentalists and ecological economists are aware that today the limits to growth include the natural environment. Even politicians are aware, as they have imposed laws and regulations designed to limit pollution.
Ecological economists stress “steady-state economics.” The focus of steady-state economics is to maintain living standards into the future. The ruthless exploitation of nature’s capital sacrifices the long-run sustainability of life in order to raise the consumption levels for a few generations. The depletion of natural resources and the pollution of air, water, and soil bite back in the end, and the ability of the planet to sustain life collapses.