4: We Don’t Live in Financial Statements. There Are No Externalities 

Posted: February 4, 2025

The stock market represents an inadequate picture of the productive economy, heavily slanted towards the capitalist class and their wealth accumulation. Capitalism’s stock market focus reduces the dynamic economic world of work and life to money and stock price movements. This creates a hard border between what is and isn’t considered economically relevant. Nowhere is this more clear than in the economic concept of externalities. 

An externality, in capitalist economics, is a cost or benefit caused by one party, at the expense of another. These occur within the production or consumption of a good or service. The most frequently discussed externalities are environmental, especially various types of pollution. An example of a production-side externality is waste run-off from a steel factory into a local river. An example of a consumption-side externality is the air pollution caused by gasoline-burning automobiles. 

So in what way are these externalities actually external? They clearly occur within the natural and social context we have outlined as vital to a socialist economy. This means that they must be external in a specifically capitalist sense. In fact, an externality is considered external because it does not affect a company’s financial statements. In a context solely concerned with the stock market, an externality does not directly affect a company’s stock price. 

This is the economic theory, but under the concrete conditions of capitalism, we can learn more about externalities by studying how they occur in practice. Let’s continue with the example of a river polluted by run-off from a steel factory.  

Water pollution is obviously an incredibly costly problem for any society, both in financial and non-financial terms. Increased water treatment is necessary to make the water safe for use. Healthcare costs and preventable disease rates for communities living near the polluted water will rise sharply. The community will lose the river as a recreational space for swimming, kayaking, and fishing. There are also long term environmental costs from ecological collapse in industrial areas. Government organizations and taxpayer money then bares the financial burden of water treatment, healthcare, new recreational spaces, and environmental clean-up. 

First of all, we must recognize that the problem here is not steel factories, or even industrial production. We need both of these to create a society that gives people good jobs and high standards of living. The problem is that the company that owns the steel factory is minimizing its operating costs by offloading the responsibility for waste management and ecological clean-up on to the public. 

Under capitalist economics, almost all externalities are categorized as ‘negative.’ This is because the vast majority of externalities lead to increased costs rather than increased benefits. We can again trace this back to the profit motive. Profit-seeking decisions generally have a negative impact on anything except a company’s bottom line, because these companies always monetize any positive impact they create. 

Second, we need to understand that, in any class society, negative impacts don’t happen in a vacuum. Social divisions mean that it is vital to understand 'for whom' something is negative. In a capitalist economy, stock ownership and corporate control is restricted to a tiny elite. The vast majority of taxpayers are workers. Negative externalities, therefore, burden the working class masses and their families with additional social costs. Capitalist elites benefit from this through increased profit margins and stock market gains. 

This reveals to us what junk economics uses the concept of externalities to disguise: privatized gains for capitalists, and socialized costs for workers. This concept simply obscures the reality that externalities are never actually external to a society. In this way, the superficial prosperity of endlessly rising stock markets can be used to camouflage mounting social and environmental problems. This is becoming crystal clear to us through the accelerating climate crisis, at a time when most stock indexes are hitting all-time highs.  

So, how would a socialist economy deal with capitalism’s ‘externalities’? By expanding the economic horizon. Today, capitalism’s tunnel vision on profit leads to far more harm than good. While the capitalist class’ economic power covers all spheres of society, including the political, social, legal, media, scientific, philosophical, etc., its ‘eternal truths’ are increasingly being shown to be damaging myths.    

Capitalism must be replaced by a socialist economy, where both costs and gains are shared equally. What then would replace profit as the basis of economic decision-making? The maximum satisfaction of everyone’s constantly rising material and cultural needs. That is the driving economic principle under socialism. These needs will be secured through the continuous expansion and perfection of socialist production, on the basis of higher scientific techniques. Since this economic principle includes everything, nature, humanity, art and culture, science and technology, there are no externalities.  

This guiding socialist economic principle holds true for everywhere on earth, both in the present and the future. Think of the polluted rivers, lakes, and cities of Asia, Africa, and South America. These countries are polluted through the production of goods for North America and Europe. Their land is also home to huge portions of the waste from Western consumption. How can these nations raise their peoples’ quality of life under these constraints? That’s why socialism is a necessarily global project. Each nation must be responsible for its own production, waste, and commitments to other nations. In socialist economics, nothing is external. This will remain true even if we manage to make our society interplanetary. Unless we build socialist principles into our economic institutions, some galactic equivalent of climate change is inevitable. 

In our next post, we will take a closer look at the theoretical mechanisms behind the profit motive, and capitalism’s blind drive towards the commodification of everything on earth.  

If you're interested in these ideas, don't hesitate to reach out. This project is a conversation, not a lecture, so all good faith feedback is encouraged, especially from trained economists.