Profit & Externalities

We were talking about externalities the other day, because libertarians like the concept as a way of talking about the costs your activities impose on others. The economic concept can be widely applied, but it really is an economic concept originally:
The notion of “externalities” has become familiar in environmental circles. It refers to costs imposed by businesses that are not paid for by those businesses. For instance, industrial processes can put pollutants in the air that increase public health costs, but the public, not the polluting businesses, picks up the tab. In this way, businesses privatize profits and publicize costs.
We can think of a time when the American West seemed boundless, not just unspoiled but unspoilable. Remember Clint Eastwood's film Pale Rider:



So the claim this article is making is this:
Of the top 20 region-sectors ranked by environmental impacts, none would be profitable if environmental costs were fully integrated. Ponder that for a moment: None of the world’s top industrial sectors would be profitable if they were paying their full freight. Zero.
The author thinks this makes the global economy a fraud, but that's too strong. Two things occur to me reading it through:

1) A lot of these economic costs are 'greenhouse gases,' about the effects of which there is still some debate.

2) On the other hand, there's a sense to it. The law of conservation of energy and matter suggests you shouldn't be able to get more out of a thing than you take from it. That applies to systems as well as objects. If we consider the Earth as a system, of course there's no profit to be made from re-ordering the parts of the system in various ways.

What really matters is the order. If I take gold out of the ground and turn it into wire, and then put that wire into a computer, I can do sorts of work I couldn't do before. If I take the uranium in the ground, use power from burning coal to refine it, and then use the refined uranium to run a reactor, I can capture lots of energy that was otherwise existing as a kind of potential in the earth.

Putting things in the right order is therefore very helpful. It's good to provide incentives for people to do the work necessary to get that done. What we call "profit" is or ought to be a sort of incentive to do work of this kind. It's good work, because it's good for people to have things put in the right order.

God creates. We are merely re-ordering things, bringing to actuality what already exists in potency. There are wise and foolish ways to alter the order of the things in the world. We should take some care to be wise.

16 comments:

Assistant Village Idiot said...

I think you are spot on. For real externalities, the public should in no way be picking up the tab. As you note, however, what he is totting up is a bit suspect. Greenhouse gases 38%. What if that turns out to be far less? Water use 25% - I'm very big on protecting water, so that number may hold full, but I do wonder if that water does go on to other uses in many of those industries. Land use 24%? What is that, exactly? Erosion? Real estate value? The various pollutions I will take at face value, yep, yep, and yep. Pay up, sector.

There's an added piece I'm trying to get my head around. If the public is paying all these costs, what are we paying it with? We are indisputably richer than we were 100/200/300 years ago. Wouldn't that be impossible under his calculations? We can't all be gaming the system.

Grim said...

Well, the payment comes in terms of used-up resources. We're much richer than 300 years ago; but there's less coal in the world. More of the copper has been turned into wire and less is in the ground to be mined. That sort of thing.

Now, the company that puts the wire in the machine pays for the copper wire it uses. The company that makes the wire pays for the copper it gets from the miner. And the mining company pays its workers for their labor, as well as having bought the land (or the mineral rights) where the copper is. But it doesn't pay in a strict sense for the copper: and indeed, if we say that it has to 'fully account' for what it takes from nature, in some sense you'd end up saying that it has to put the copper back somehow.

Of course, if you do that, you've eliminated 'profit' from the system. You can't expect to generate from the mining of the copper both the copper for the wire and an equal amount of copper to replace that first set of copper. That's trivial. It works with lasers, in a way, because you can stimulate the emission of light such that you get two photons from one. But you can't do it with copper. The nature of the thing adequately proves that.

David Foster said...

Sounds like they have basically redefined "externalities" to include the Second Law of Thermodynamics.

MikeD said...

Now, the company that puts the wire in the machine pays for the copper wire it uses. The company that makes the wire pays for the copper it gets from the miner. And the mining company pays its workers for their labor, as well as having bought the land (or the mineral rights) where the copper is. But it doesn't pay in a strict sense for the copper: and indeed, if we say that it has to 'fully account' for what it takes from nature, in some sense you'd end up saying that it has to put the copper back somehow.

Truly? You believe that the copper in a copper wire is expended forever once it is made into wire? Is it impossible to extract the copper wire from the old oven it was used in when the oven is recycled? To smelt the wire back into another form, say copper plating to coat the bottom of a pan? Because I say it is self evident that copper (unless we place it on a space probe and launch it out into the void with no plans of recovery) is still within the closed system of the earth. More over, as it has been removed from ore form, it is now more easily recovered and reused.

The idea that there is some holiness to a resource in a "natural form" that is permanently transfigured and debased by having passed through human hands is just bizarre to me. Every atom of coal that has been dug up, refined, and burned throughout the course of human history (again, save for those we have shot into space beyond Earth orbit) is still with us. Every one. The absolute worst thing you may say is that some of it may have decayed through its radioactive half life into other elements, but they're still with us (and it's likely so are the neutrons they threw off in the decay process). But the majority of the carbon that formed that coal became CO2, which in turn was likely absorbed by a plant, which in turn will likely some day decay, and in the distant future compress and heat into peat, and thus into coal again.

The sheer arrogance of the environmental movement in believing that the Earth is "despoiled" by the human touch is staggering. We've been on this planet for less than a quarter million years as a species. Less than 10 million as a group of primates. Our ability to alter the destiny of this planet is vastly overestimated. For decades, people spoke of a nuclear exchange "destroying the world". What a laugh! Sure, we could have certainly made it uninhabitable for mankind, and likely most life at this time. But far greater catastrophes than what we are even currently capable of have occurred in the history of this planet. We don't possess the power to destroy this planet, or even all life upon it (there are bacteria alive in the ruins of the Chernobyl reactor; a discovery which stunned the scientific community as it should be impossible for anything to live there). We are not nearly so important as we make ourselves out to be.

Grim said...

You believe that the copper in a copper wire is expended forever once it is made into wire? Is it impossible to extract the copper wire from the old oven it was used in when the oven is recycled?

No, but you'll need to expend substantial additional resources to recycle it. Sometimes this makes sense -- aluminum, for example, is very hard to make into a usable form, but pretty easy to recycle by comparison. On the other hand, scavenging the landfills of the world, extracting wire by hand, and then recycling it is pretty labor intensive.

Grim said...

I say it is self evident that copper (unless we place it on a space probe and launch it out into the void with no plans of recovery) is still within the closed system of the earth.

Right -- that's the point I was making. Solar energy is a kind of exception, because it is coming into the system from outside. But in terms of making stuff out of stuff on Earth, of course you're not profiting in a strict sense. You're re-ordering. That uses energy, so in a sense there's a net loss; but if the new order is more useful, the loss is easily offset by the utility.

David Foster said...

"Coal is the enemy of the human race"

A rather different view from (socialist) George Orwell, who referred to the coal miner as "a sort of caryatid on whose shoulders everything that is not grimy is supported."

Prior to the widespread mining and distribution of coal, forests were being cut down at an alarming rate...not only for wood for heating and cooking (and plenty of people went without much of those things), but also for construction and, especially, the refining and forging of the relatively small amount of metal that was then used.

I would say that the intellectual quality of the Leftist breed has declined quite a bit since Orwell's time.

E Hines said...

You can't expect to generate from the mining of the copper both the copper for the wire and an equal amount of copper to replace that first set of copper.

I don't need to. The copper doesn't get used up; it still exists. The ground isn't necessarily the optimal resting place for the copper when "the system" is done with it, either. In the end, the copper is still hanging around, it's just not in its original location or state.

Which is pretty much what MikeD said.

...scavenging the landfills of the world, extracting wire by hand, and then recycling it is pretty labor intensive.

Kind of like mining. We're just digging a different hole for a related ore instead of the "original" ore.

Eric Hines

Grim said...

Which is pretty much what MikeD said.

It's also exactly what I said. :) It's not a question of what you need to do, but what you can possibly do. You can re-order the copper. You can't create ex nihilo. So if we're required to leave the environment in exactly the same state as before we began, of course profit is impossible. We'd have to put a lot of energy and work into restoring just what was taken, which means we wouldn't have the taken-thing to put into a new order. It's just a loss, since we don't get the benefit of the better order.

douglas said...

"On the other hand, there's a sense to it. The law of conservation of energy and matter suggests you shouldn't be able to get more out of a thing than you take from it."

What of human labor? A man's will to work isn't governed by physics really- so yes, there can me more or less or no profit at all to had from it. Some is more than none, and nature promised you none. Something from nothing (but potential- but not the sort you measure with physics).

"Right -- that's the point I was making. Solar energy is a kind of exception, because it is coming into the system from outside. But in terms of making stuff out of stuff on Earth, of course you're not profiting in a strict sense. You're re-ordering. That uses energy, so in a sense there's a net loss; but if the new order is more useful, the loss is easily offset by the utility."

But solar energy coming in is captured in plants, and stored as they decay as carbon in the earth, and millennia later after heat and compression, it's coal, or oil, and there we have the energy of the sun to burn as we need. Lucky for us millennia ago was the most beneficial time for plant growth, and that left us vast reserves of solar energy. Earth is one hell of a battery.

" So if we're required to leave the environment in exactly the same state as before we began, of course profit is impossible. We'd have to put a lot of energy and work into restoring just what was taken, which means we wouldn't have the taken-thing to put into a new order. It's just a loss, since we don't get the benefit of the better order."

Good thing we aren't required, or for that matter even able to leave the environment as we found it. Our existence changes the Earth just as the existence of every other living thing and natural systems does. The division between man and nature is artificial- it exists to us, as we consider our place, but it matters not to nature- it simply proceeds existing, in whatever form it is changed to- but it will never cease to exist- or at least not until the universe disappears, if it ever does. Also, how does one know what the better order is? I'm quite sure that what I think is a better order and what a supporter of Greenpeace have quite different views on the subject- so whose view is determined to be the better order? How?

Texan99 said...

As usual, I'm with Douglas.

Grim said...

That's a nice point about trees, anyway.

The point I was making lies between you and Greenpeace supporters (such as this guy who wrote the linked article). It sounds as if they have a standard that is impossible to meet: corporations should pay to restore the environment to fully account for everything they take out of it. That would mean somehow generating enough work to undo all the work you did.

Now, it sounds to me as if that means you'd be allowed to capture profits only in the event that you managed to magic something out of thin air, since you couldn't really take from nature without putting it back. It'd be nice if we could magic out of thin air, but as far as I know that can't be done. Solar energy -- taking on board your point about plants -- is the only case of energy being regularly introduced into the system.

As for human beings, I don't think that's as strong a point. A man's labor isn't governed by physics in the same way as a ball rolling down hill, but it's still subject to all the regular laws. We just have, or think we have, more election in what we choose to do.

MikeD said...

Now, it sounds to me as if that means you'd be allowed to capture profits only in the event that you managed to magic something out of thin air, since you couldn't really take from nature without putting it back.

Once again, I strongly disagree. Profit may be made anytime I exchange something I have for something you have that I consider to be of greater value to me. If we are in a hunter gatherer society, and I make the best flint spear points in town, and you make the best woven baskets in town, and I trade you my spear points for your baskets, then we both have profited from the exchange. And our ability to replace the flint and reeds back into the earth is meaningless.

To take this a little further forward, I am a watchmaker, you a gunsmith. I need a gun, but you don't need a watch. But thankfully, we have developed a trade medium wherein I can trade the products of my labor to those who need it, for this medium which you will accept in trade for the products of your labor. We generally call this money. If I pay you more money for your gun than it cost you to produce then you have profited by the exchange. I in turn have sold my watches for money by which I profited.

Profit is not a zero sum game where one must lose for another to gain. This is the fundamental misunderstanding of the Left. As a watchmaker, I must buy the parts which I use to make my watches from a jeweler. He in turn buys the metals that he uses to make the springs and gears from a smelter. The smelter buys the ore from a miner. The miner buys the tools to perform his job from the blacksmith, and so on. Unless there is slavery involved somewhere in this chain of supply, every individual along the way is profiting by their labor. If they did not profit by it, they would surely be doing something else (who voluntarily works themselves into penury?). The more watches I sell, the more parts I buy which increases demand for supplies and labor right on down the line. In this way, human productivity increases the wealth of the world.

"But what of the natural resources?" Well, what of them. They are, as you say, reordered, but they've gone nowhere. They're all still here, and in many cases much more easily recovered than that which lies in the ground. I suppose on a long enough timeline, it might be conceivable that one could mine out all the ore that exists on the planet (though I actually doubt we could achieve that goal) thus putting the miners out of work. They'd all need to find new jobs. Likely scouring the landfills as you said. Both jobs are labor intensive, but both have pretty much the same goal. Digging through dross to find items of value.

Good thing we aren't required, or for that matter even able to leave the environment as we found it.

This exactly. There is no requirement that we leave the world exactly as we found it. Only the most crazed of environmentalists believe that. Even the paragons of environmental virtue, the American Indians, never did so. I do believe we should not poison the soil, water and air, and I believe we should try to minimize damage we do to the environment in pursuit of progress. But I don't believe that there is any need for us to have "zero impact" as the Greenpeace types seem to want (and for a group wanting to leave "zero impact" they seem to have a strange way of showing it.

Grim said...

Once again, I strongly disagree. Profit may be made...

I think you're contesting the definitions of the original article, rather than disagreeing with me. I get that you don't like his definition, but do you think I'm wrong that it is his definition?

Maybe you do think that, based on your last link which suggests that point of view. However, the link is broken, so I'm not sure what you meant to follow it.

MikeD said...

The link merely goes to a search result of "greenpeace nazca lines". I figured it was better to let the reader decide which link they wanted to follow.

You are correct. I was disagreeing with the definition. Nothing more.

douglas said...

I suppose the ultimate argument against him then would be the question "How then do we eat?"

Sure, it goes back, but not in the same form. It's a shorter cycle than say the degradation of copper wire back to elemental copper in ore, but it will happen just the same. People have a nasty habit of thinking of Earth's concerns in human scale- in geologic time, there's no reason to think any of what we've done till now will have a trace left in a 'few moments'.