#21 The Externalization of Internalities

I am on the journey to the degrowth and ecological economics conference in Pontevedra, Spain. I was preparing (two days in the train for the conference (a panel on investing in degrowth and presenting a paper in post-growth finance), and I was thinking about the underlying assumptions that differentiate ecological economics and degrowth from neoclassical economics.

It seems reasonable to think about it. Not to polarise but to be aware of the difference between underlying and standard economic assumptions.

Some core myths and paradoxes in economics are overlooked or ignored. I like Coscieme’s et al (2019) representation, with some paradoxes and delusions.

On a slightly different abstraction level, I want to add a few:

1. Markets tend, through trade and price adjustments, to an equilibrium
2. Substitution between capital, labour and nature is (to some extent) always possible. Consequently, there is no limit to growth
3. Outcomes of market interaction are neutral, (re-)distribution is up to politics
4. By aggregating micro preferences and actions, we get macro preferences and optimal wellbeing
5. A market-based economy is based on firms making profits and competing. Hence, more is always better
6. And, maybe the biggest assumption of all: we should concentrate our efforts on reducing ‘externalities’.

I will not go into detail now on all of these assumptions. Today is externalities day.

Economists often discuss externalities, referring to all non-priced effects of production and consumption. Essentially, these are all the impacts you experience for free due to the actions of others. This can range from enjoying beautiful graffiti without paying for it to dealing with harmful PFAS in your broccoli. According to market logic, the solution to eliminating adverse external effects is straightforward: ensure that all unintended adverse side effects are priced. This makes harmful actions more expensive and less harmful actions cheaper, leading to more sustainable production. This logic is flawless.

However, despite economists advocating for this policy of internalizing externalities for decades, its success has been limited. Only about a quarter of the largest external effect, CO2 emissions, is priced, and even then, the price is far too low. The most significant success in environmental policy – the phasing out of chlorofluorocarbons (CFCs) to close the ozone hole via the Montreal Protocol – was achieved through a phased ban on products containing these gases. In other words, it is done by limiting markets and not internalising externalities.

Another assumption remains unchallenged in pricing: maximizing market transactions at the lowest cost and with the highest revenue might reduce adverse effects, but it still doesn't explain why we should pursue this. The link between more profit, more production, and happier people has long been untenable in most wealthy countries.

It took me years to realize this despite it being so obvious. How can we discuss the negative side effects of a system (externalities) when the flaws are inherent in the system itself and in ignoring empirical truths that are now called paradoxes and delusions (for neoclassical economists)? Perhaps we should not talk about internalizing externalities but about externalizing internalities.1

These internalities are part of the current economic paradigm. There is a whole bunch of research discussing their flaws and trying to attack the growth paradigm (for instance this article). Let’s call it the growth paradigm. Growth is the basic underlying assumption underlying assumptions and, based on those assumptions, economic structures lead to the conclusion that economies need to grow. Growth is good, which is essentially the same as Greed is Good…

“There is a primary cause of the Continuous Critical Problems:? It is growth. Exponential growth of energy use, material flows, and population against the earth’s physical limits. That which all the world sees as the solution to its problems is in fact a cause of those problems.”

Internalities can be explained as the theories' underlying ‘preanalytic’ assumptions. Because they are presented as facts, these assumptions are somewhat unquestionable for economists.

The fundamental problem with market thinking is that 'the market' is seen as the central point where wealth is continuously generated, and everything else is 'external'. This leads to pricing everything because market efficiency is the most critical criterion. As a result, we aim to produce as much as possible, assuming it makes everyone happier.

What if we reversed this perspective? Would that be possible? We would not ditch everything that is marketing but concentrate on the underlying assumptions to analyse once again whether this serves our objectives as a society: well-being for all.

Please start with the basics: the nature we depend on, which has intrinsic value and which we are a part of. If we want to maintain (or restore) this, it cannot be an external effect; it must be the starting point of the analysis. It's not hard to imagine that banning further destruction is wiser than setting a price.

Does this mean there should be no market? Is efficiency a dirty word? Not at all. But first, we need to acknowledge which underlying assumptions don't always hold. 'The market' will never solve an ecological crisis. Therefore, stricter boundaries are needed than just pricing. Even if this comes at the expense of economic growth, within those boundaries, growth is fine. Beyond them, it is life-threatening.

A recent article precisely depicts that. A corridor of sustainable outcomes, of ‘enoughness’, relates different elements of society and also shows the complexity of individual (and collective) actions on individual outcomes. Relations of enoughness can be connected to sustainability by expanding them into chains of enoughness, which serve as a conceptual foundation for the sustainable consumption corridor approach (see below).

Essentially, this means setting limits which contradict the current paradigm. However, it is likely the only way to achieve an economy that serves everyone and addresses the core assumptions that impede overall well-being.

By establishing boundaries, collective objectives are prioritised over individual utility. These boundaries acknowledge the limits of substitution: nature and solidarity have thresholds below which they cease to function effectively. Moreover, setting boundaries mitigates rebound effects, which obstruct the path to sustainable outcomes.

The concept of "enoughness" underpins the establishment of these boundaries and is the key to creating a more beautiful world that can thrive for future generations. Setting boundaries is the way forward to externalising internalities.

Thanks for reading.

If you want to read more about enoughness and rebounds, see here on substack.

Take care,

Hans