Economics – 2. Price & Externalities

Capitalist economists claim, without evidence, that the price mechanism efficiently allocates resources. Capitalist economic theory fundamentally relies upon price theory to justify its regime. If instead the price mechanism is an unreliable compass, capitalist economics is a hoax. So it is.

Economists refer to a product as a good, which by definition places a positive value judgment toward all material things consumed. No one worships mammon more than an economist.

Once the means of production are set in place, companies may produce more goods even if the price falls, especially when the current price is still above cost. The fond hope behind that is that the goods made will be sold at a profit. Capitalism is above all a confidence game.

Oversupply is a habitual problem in modern market economies. Falling prices may provide an opportunity for a dominant supplier to drive weaker competitors out of the market by bankrupting them.

Cost is the starting point for a supplier determining the price at which a good can be profitably sold. Therein lies the crux of the failure inherent in price theory.

Cost is the price of materials and labor. If cost does not reflect environmentally sustainable activity, then the price of a product or service understates the societal cost of having that output available.

Such is the case for most products, with prices that do not reflect externalities of production.

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Anything taken from Nature cannot be taken again: an exploited natural resource is no longer natural. A hillside gouged out for coal or minerals is never the same, nor will the desired material renew itself.

The exception is organic resources which, in time, may replenish themselves, though the disruptive effect may last for centuries; certainly not the time scale in which economics operates. Overexploitation of an organic resource may tip its local population past self-organized criticality, and so foreclose the prospect of recovery.

Vikings discovered the rich forests of Iceland in the late 9th century. Within 3 centuries deforestation had destroyed the woodland biome. Forests never again took root in Iceland, even after applying the most modern agricultural technology to engender growth.

Producers manufacture products. Anything produced that does not go into a product is an externality of production.

Making any product invariably creates externalities. Building a factory takes land and water that precludes other use. Manufacturing takes raw materials, most of which are unsustainably gouged from the earth.

The production process itself produces more than just the products. Waste – in the form of heat, scrap, and pollution of the soil, air, and water – is inevitable. It is impossible to make anything without producing waste.

Producers ignore externalities as much as possible. Getting rid of manufacturing waste is a cost, which, like all other costs, is minimized. Beyond that, in a market economy, whatever bad results from a good is not captured in its price.

Externality costs are not voluntarily factored into price. Only a government can impose internalization of externalities. None do, other than in a token sense: of the most flagrant pollution, and rarely even that.

Waste is also theoretically messy. Economists lump all waste into a terminological dump called externality and leave it be. Externalities are of little interest to economists of the capitalist faith.

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By promoting pollution through underpricing products, the capitalist price mechanism is the wellspring of the mass extinction event that will end human civilization by the end of the century. Industrialization has been the engine of self-extinguishing pollution, but bad pricing has been its fuel.

There is no theoretical justification for capitalism. Beyond pollution, this conclusion is proven true when considering the irrationality behind economic activity, and the gross inequities which invariably despoil capitalist societies.