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Paying the real and full costs

  • Published at 01:34 am January 13th, 2019

The best way to clean up the environment is to make sure that all costs are included

Shishir Reza tells us that the environment of the country is in danger from those who would destroy it in the name of profit. This is true, however, we should not then take the next step of decrying the making of profit itself. For that is to mistake the method for the thing itself. We can and perhaps should criticize those who eat soup with a fork, but there’s no valid critique of soup eating itself.

The problem with profit-making through environmental destruction: Profit at a cost to others. Dumping pollution in the rivers harms the lives of others who depend upon those same rivers - to drink, to fish in, to irrigate from. The profit is, therefore, coming from taking value away from others.

This is not true of the making of profit more generally - the producer of something would like to make a profit, of course. But they can only do so if the value we, consumers, place upon that thing produced is higher than the costs of production. If we don’t think something is worth it, then of course, we don’t buy it. Thus, by definition, any price that we’re willing to pay must mean that we value the item at least that much.

Equally, the price paid for any of the inputs into the production process is worth their value in a market society. That price that must be paid for them is the value all of us accord them as inputs into other production processes. Those inputs are, therefore, just as the final retail price - true and valid measurements of the value of the items. Simply because they’re what we value them at and there’s no one else around here with a value system to tell us any different.

So, what’s profit in this? It’s the addition of value in that production process. We start with inputs worth, cumulatively, one amount, we end with the things produced worth some other amount. Both are, as above, valid prices. Profit is simply the difference between them. Or, possibly more likely, loss is that difference. 

If the value of the produced item is higher than what is used to produce it, that’s profit. It’s also, quite obviously, value added. And it is the value that we consume, the value which makes up our incomes. This we know from the GDP equation, which is the value of all production, the value of all incomes, or the value of all consumption - the three always equal each other. So, if value-added rises, then incomes have just risen, consumption possibilities have just risen.

Yes, obviously, we can get into all sorts of lovely arguments about the disposition of that value, who gets to do the consuming and so on. A Marxist would insist that the capitalist getting any of it is exploitation, expropriation even. But that profit is value added is still true in any such argument. Who gets it can be argued, but the existence not so.

We thus rather like people making a profit because that’s the very evidence we need that value is being added. More value being added means that, in aggregate, we’re all getting richer. Which is where we can start to critique that idea of profiting by trashing the environment, or any other method which requires taking value away from others. For if the value is being accumulated in one place only as a result of taking it away somewhere else, then we’re not sure at all that value is being added overall, are we? 

Thus, we can set up our desired world. We’d like people to be adding value - making profits - which does add value overall to our economy, nation, or people. And we’d like them not to be doing so where the profit is made by reducing the value elsewhere. Fortunately, economics already has a method of doing this, in theory at least.

If we insist that everyone pay the real costs, the real and full costs, of their inputs, then the only activity remaining will be that which truly does add value. Which is, as we’ve just said, our aim. Thus, we should charge people who put the pollution in the rivers. And we should charge them the full cost - all that damage to drinking, fishing, irrigation, the water they cause. If the value they add is higher than that then they’ll continue to do it, and we’ll still be getting richer even at the cost of a stinking river. Usually enough, they won’t be still making a profit, so they stop and go and do something else.

We’ve even a name for this and it’s called “Pigou Taxation.” If people get to do something for free which damages others then charge them a tax of the level of that damage. Not to punish them, not to compensate the losers, but just to make sure that damage is included in their input costs before they work out whether there is a profit from doing it. This is why near every economist insists that the cure for climate change is a carbon tax - tax people the costs of the damage that their carbon emissions cause.

As a general principle, we’re not just fine with the idea of people making a profit; we positively desire that people do the things which are profitable. But we do have to insist that this profit be calculated after all the costs involved. Near all environmental problems flow from some of those costs, say of pollution, not being included - thus the economists’ insistence that the best way to clean up the environment is to make sure that all costs are included by taxation if necessary. 

Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.