Sujato's Questions (3): Economics - can we eliminate externalities?

The Buddha said that we are the owners of our deeds, and must take ultimate kammic responsibility for them. In that we we can console ourselves that cosmic justice will ultimately be served. But it is of little for those suffering right now.

It seems a lot of people are unfamiliar with the concept of externalities, so let me define it first. Hopefully the better-informed people in the comments can define it better!

An externality is a cost of economic activity that is not borne by those who benefit from the activity.

In my high school economics, it was explained that a factory might make noise, annoying the neighbors. Or toxic waste might be dumped in a stream. In such cases, the company reduces its costs. It may or may not pass on those reductions to customers, so that they too indirectly benefit. But others suffer the costs.

This was explained more or less as a side-effect, a minor adjustment to the economic equation. But the more you look at it, the broader it becomes.

Pollution is an externality, with all its resultant harms. This includes mass extinction, and poisoning of waters and oceans. Externalities are also foisted on the poor and the powerless, working in unsafe conditions for a pittance. And not just the works, but their families and communities too.

Ultimately, climate change is perhaps the greatest externality of all. Facing the probability of global collapse of civilization, mass extinction, and the death of billions of people, we can no longer think of externalities as a regrettable side effect.

In fact, while capitalists like to argue that they drive wealth creation via innovation, efficiency, and hard work, it is tempting to see the profits of modern capitalism as being driven by our ability to extract value from nature, the future, and the poor, skim off profits, and externalize costs right back. The ones who bear the cost are the ones who have no voice and no power.

Currently economies handle externalities in a fairly ad-hoc manner, via environmental legislation, worker safety, and the like. But what if we were to recognize that all externalities are immoral, and strive to create an economy where all costs are borne by those who benefit?

This would make a radical change in how economies are structured. Take a simple example, a cabbage. A commercial cabbage is produced using chemical fertilizers, energy-intensive machinery, and environmentally-insensitive land clearing. A cabbage produced by organic farming—or what was until a few decades ago just called “farming”—uses local and natural fertilizers, less machinery, and uses land more responsibly. Now, we expect that the organic cabbage is more expensive, and pay a premium for it. And the capitalist argument is that the methods of production are simply more efficient. But let us factor the externalities back in: the cost to the future of using fossil fuels; the cost to the environment, not only of the chemicals used on the farm, but the production chain right back to the mining of the raw materials for the chemicals; the erosion of local communities due to corporate farming; and so on.

Once all that is done, it’s likely the organic cabbage is in fact cheaper. Not that it would have zero externalities: nothing comes without a price. But it would be a lot less. Why, then, does the commercial cabbage appear cheaper, while its actual cost is greater? Because its production has more effectively maximized externalities.

To accept the reality of the cost of externalities is a huge moral shift. People don’t like to acknowledge that their yogurt, their t-shirts, their carpets, everything they use and consume every day, has a cost to others, to the weak, the powerless and the voiceless.

This is the insight that the Bodhisatta had, when, according to the traditional story, he saw as a child the worms being overturned by the plough, cut up, exposed, and fed on by birds. And that was all-natural organic vegan farming!

All activity creates harm: we should accept this, and we should pay the cost.

Were we to do so, the economic landscape would be transformed. Most consumer goods would become massively more expensive, especially anything dependent on fossil fuels—which means just about everything.

So here is my question. I regard the elimination of all externalities as a moral imperative. Is there an economic system that takes this into account on a fundamental level? Have any mechanisms been proposed that would make it doable? Has anyone assessed the macro-economic implications? I am aware of attempts to address this in specialized contexts, such as Gugler’s cradle-to-cradle printing. Has there been any proposal for something like this on a wider scale? I’m think of something like the Green New Deal, but more fundamental, a basic principle of economic priority.


Speaking again as a political scientist and not an economist (although it is impossible to think about politics without also considering economics, and vice-versa), I return to some of my observations in a related discussion:

Ask about economics (2): can money be defined solely in units relative to the value of human life?

There are three fundamental difficulties in devising a system that eliminates the harmful effects of externalities:

First, the number of variables that influence economic outcomes are incalculable. As I stated in the other thread, this is one of the reasons why the planned economies of the Soviet bloc failed so spectacularly. It wasn’t that the leaders were necessarily malicious in their intent (although perhaps some were), but that they were mistaken about the ability to control every aspect of a system so complicated as economics. Perhaps if an economy made only one thing (the ubiquitous “widget” of economics theory), it would be possible to calculate all the costs involved in making a widget and its outcomes, including unintended ones, i.e., externalities. However, human economic interactions involve commerce in millions, maybe billions, or even trillions of goods and services. Moreover, all these goods and services are interconnected, such that a change in the production of one item could have spillover effects to dozens of others. Not even the most advanced supercomputer existing today could even begin to calculate a way to eliminate the harm caused by externalities for the billions or trillions of goods and services produced in today’s economy.

Second, they are called “variables” because they change. Here is where basic Buddhist principles are astoundingly prescient. Everything is impermanent and changing in human life, including in economics. New products are invented every day. New manufacturing techniques come about with amazing speed. Even if a supercomputer could calculate a way to eliminate the harmful effects of externalities today, tomorrow would be different.

Third, human beings are unpredictable in their behavior. As Bhante Sujato observed in the other discussion:

Economics (the “dismal science”) is not really a “science” in the same way as the physical and natural sciences such as physics and chemistry. The physical and natural sciences such physics and chemistry aim for theories of regularity. They are built on hypotheses, if-then propositions, that yield theories which explain regularity and thus facilitate prediction. The social sciences (economics, political science, sociology, etc.) aim for theories of probability, not regularity. They too begin with hypotheses, but the theories which result from testing those hypotheses explain the probability that an outcome will occur, not a regularly occurring result. This is why prediction in the social sciences is a much dicier endeavor than in the physical and natural sciences.

As a “social scientist” myself, if there is one thing I have learned in the twenty-seven years since earning my doctorate is…humility! I entered graduate school thinking that eventually I would develop a theory of politics that would so revolutionize thinking that it would alter the course of human events. Ha!! Good economists, like all good social scientists, realize the limitations of their “theories.”


Not that I am aware of. And as per @Metaphor remarks, it is more about a political system than an economic system.

Or more precisely it is all about defining a framework in terms of political economy in which individuals are exposed to all these aspects of what is implied in their consumption and production choices, and then allowed to explicitly choose to work towards an less harmful outcome in total, or not… (yes, we need to acknowledge that it may be the case the an overwhelming majority chooses to not change!)

If we as a species decide to readdress the socialist calculation debate and/or economic calculation problem I am optimistic that current computational powers and capabilities could allow us to get closer to a satisfactory answer.

But above all, for any theoretical solution to make a difference it will have to be adopted as a working model, and that is a political decision above all.

At a completely comprehensive manner no, not that I know of… But we could collate from different studies on things like anticipated costs of climate change, inequality, etc enough information to come up with a ballpark of what is at stake, how much the perpetuation of status quo is and will continue costing humans, both those currently alive and yet to be born.

For example, if we can quantify how many lives are and will be lost, shortened or affected by climate change, then we can just multiply that by a comprehensive and relevant measure of value of life to understand how to re-balance and review the economic variables used to measure the flow and stock of value and wealth in the global economy.

However, as per my remarks in previous topics, unless we review the foundations of the production system adopted there will still be some huge elephants in the room:

I am very skeptical of there being any true solution to the issues you note without firstly addressing these elephants in the room.

I can recall reading here and there big picture costs studies on things like poverty, climate change, pollution etc.

One organisation worth of being noted here is Oxfam, the article belows talks about their latest annual inequality report:

World’s billionaires have more wealth than 4.6 billion people | Oxfam International

The issue is not much about developing such attempt but the sad fact that there is not much that will be done with all that by leaders, countries, international organisations, etc. And hence, it will very likely not be effective as we may want it to be! This is why, a century ago, a socialist revolution took place…


Following up on my previous comments about the sheer number of variables in an economy and the interconnected nature of those variables, as well as unpredictability in human behavior, there are also unintended consequences. Bhante Sujato asks if we can eliminate externalities? That would seem to be impossible.

Efforts to eliminate externalities can have uintended consequences that create new externalities. Take the current worldwide response to Covid-19 whereby many activities such as dining in restaurants have been restricted so as to limit the spread of the virus (an externality of the food service industry). It would appear that the curtailment of the restaurant industry has created an externality in the form of aggressive rats:

The effort to eliminate one externality (disease spread) has created another, and in this case, one that could lead to other forms of disease spread (inasmuch as rats are well-known sources of disease spread)!


Indeed. Gabriel is proposing that computers can calculate the necessary, and that may be so, but still.

I guess underneath my inquiry is a lurking suspicion that there is a more elegant solution. Something like the “invisible hand” but that includes externalities.

Having said which, I think there are some things that could majorly simply the calculation.

First, the tax burden would not be the literal cost, but the efficient cost to the industry: however much is enough to stop the bad thing from happening or (as for example with cigarettes) to bring it within boundaries that society deems acceptable.

Second, it doesn’t have to be all at once. if the principle is accepted, the application becomes a matter of “what next?” Determine a major, or the major, source of externalities, and tax that at a level that radically shrinks the harm.

But I’m not sure if that matters. We respond as best we can today, and as best we can tomorrow.

I get what you’re saying, but I’m not sure that this is a valid point of distinction. Physical sciences use probability all the time, and since there is no such thing as a perfect physical measure, in effect every physical calculation is probabilistic.

A mean a political system has to implement it, but the issue is economic.

Why should we be allowed? We’re not allowed to throw litter on the ground. Factories are not allowed to dump chemicals in drinking water supplies. What moral case is there that any externality should be legal?

Perhaps one way of enforcing this would be to use monitored self monitoring? Industries are told to clean up their externalities. A certain percentage are audited each year, and if they are cheating they face stiff penalties.

Okay, thanks.

Indeed. So far I have skirted around the issue of transnational entities. I’m trying to break it down! But ultimately I don’t think there is a definitive solution so long as we remain wedded to the idea of the nation-state.

Yes, also a hard problem!


The Obama administration took a very modest step in this direction by mandating that all Federal cost-benefit calculations include the “social cost” of Carbon emissions.


The notion of “externalities” is not specific nor unique to economics. All actions bear some costs in the form of unintended consequences which might bring harm in ways that are not necessarily discernible at the source. Because externalities are not strictly economic in nature (even when they might exist in the context of economic exchange), it takes more to eliminate them than additional economic incentives or political rules.

Culture can be an impediment to eliminating externalities. I happened across this fascinating article in The New York Times this morning regarding the use of chopsticks in Chinese food culture:

The externality here is harm in the form of disease spread brought about by using the same chopsticks one uses for eating to take food from a communal serving dish.

Governments can try to enforce the use of serving chopsticks in restaurants, but what people do in their own homes is an entirely different matter. The solution is to educate people to adopt a new food culture. But culture is not so easily changed and requires far more than the imposition of fines/taxes (economics) or rules (politics).


Okay, but here I am specifically asking about economic externalities.

You may have noticed that in these questions, I am deliberately trying to frame things in a naive, simplistic way. I know that there are countless variables and exceptions. My problem is, I think we get too caught up in them, regarding them as somehow “real”, and lose moral clarity.

I think this is a really simple moral imperative. We should avoid doing things that create harm, even if the harm is inadvertent.

So in the case of the chopsticks, any moral person, when alerted to the fact that the practice may spread disease, would stop.

To me, the moral issue is no more sophisticated than toilet training. We teach a child to poo in the toilet. If they fail to learn that, we conclude that they have a developmental disorder. Once a child is a few years old, we stop making excuses for them, and when the topic comes up, we don’t shift the problem to a consideration of all the complexities of sewage systems and waste disposal. There’s something deeply wrong with you if you’re an adult and you don’t get toilet hygiene. You need help, and if you really can’t learn yourself, well, ultimately someone’s going to make you.

Why do we allow any more latitude to corporations and consumers? Why is it somehow a morally acceptable thing to shit all over the planet, and still put on a suit and tie and appear to the world as a respectable and decent human being? Why do we not fundamentally get it? As far as I can see, literally the only reason we are not outraged and disgusted at human consumption is because the shit is somewhere else. That’s it. As long as it’s out of sight, we really don’t care.


It is also that consuming the excessive infinitude of useless products and services these corporations allure us with distract us from the “poop” being smeared everywhere, including our very lives.

And this a good segway to another key aspect of Marxian analysis, his theory of alienation and how it is key for capitalism to persist:


Right, and alienation is a more subtle, but perhaps ultimately more powerful, kind of externality.

We can look at the Clive Palmers of the world, with their dinosaur theme parks, their me-too Trump-lite aspirations, and their corrupt billions, and see an irredeemable fool. Or we could see a Buddha-in-progress. Every one of us has incredible potential. By freeing ourselves from drudgery and hand-to-mouth existence, we were supposed to have freed ourselves for higher things. But what happened?

It’s something I’ve noticed, even in monasteries. If you look at monastic communities over time, you’d think that these are full of people who are intent on higher spiritual development. But it’s not really true. Actually there are all sorts. Some are just getting by. Some are full of conceit. Some have no options. Some like the perks. But if you have a kernel of good intent, you can grow. That’s why a regular schedule of work and study, and collective ritual is pursued. Not to enable those who actually benefit from extended deep meditation, but because a lot of people are just not there yet.

I feel like we have unleashed opportunity on people, and have not paid enough attention to getting them to use it well.


As The New York Times article observes, with regards to chopsticks, the obstacle to transitioning away from using personal chopsticks to serving chopsticks is not a moral issue but a cultural one. I am dubious that people in China who persist in using the same chopsticks they eat with to serve themselves out of a shared serving dish are not so much immoral. More likely, they find it hard to break with longstanding cultural habits.

As for toilets, my response is…India. The lack of toilets and toilet etiquette in India is a political issue first and foremost. The alarming sanitary and health problems created by the inexcusable lack of public policy to provide everyone in India with sanitary toilets is an example of externalities as Ajahn Sujato so well explains. However, efforts to coerce government officials at all levels in India to solve this externalities problem have had limited results. What appears to work better is education, intervention by charitable and non-governmental organizations, and efforts to change deeply ingrained cultural habits.

My point is, coming up with solutions to externalities that involve coercion are probably going to be less effective in the end than methods which acknowledge the variable ways in which humans respond to perceived costs and benefits.

1 Like

Is there anything in the EBTs that relates to externalities?
How does all this align with the 8fNP?

Forgive me, but I’m not an economist :yawning_face: and I am a moderator on this Buddhist forum. :buddha:


Yep, the eighfold path - as a praxis towards complete cessation of rebirth and suffering associated with it - is the only and true way to the complete ending of all externalities! :slight_smile:


Accounting for externalities seems to be a slippery slope, partly due to the endless number of variables as metaphor mentioned, and partly due to the selective nature of choosing a particular externality to highlight or to bring to the collective attention for action.

If we use the cabbage example provided by bhante, once highlighting the externality of the impact on nature, those who are benefiting from the status quo would highlight the externality that the current technology keeps more people away from the agricultural sector through mass production to pursue better employment and higher paid jobs. This is just one example.


When I looked into Bhante @Khemarato.bhikkhu’s new course outline I became convinced that my question was answered satisfactorily. :smiley:


Just to provide some further context, the externality concept is rooted in mainstream neoclassical economics. There are also many other strains of economics (called ‘heterodox economics’) who start with different assumptions than the neoclassical, and therefore reach different conclusions.

Personally I am a fan of ecological economics (which is easily confused with environmental economics, but they are not the same) which attempts to ground economics in the actual social and physical systems in which it is embedded.

When you think about it, it’s kind of amazing how treating ‘the economy’ as this separate, abstract entity allows you to do economics without considering the second law of thermodynamics!

Anyway, I wonder what the consequences of accounting for rebirth would be. Take for example MN 129:

And if there’s anything of which it may be rightly said that it is utterly unlikable, undesirable, and disagreeable, it is of hell that this should be said. So much so that it’s not easy to give a simile for how painful hell is.”

And if there’s anything of which it may be rightly said that it is utterly likable, desirable, and agreeable, it is of heaven that this should be said. So much so that it’s not easy to give a simile for how pleasurable heaven is.”

This would drastically change utility functions and ideas about rational behavior. E.g. food would have extreme utility for a generous person who gives it away, but might be extremely negative for a greedy person who hoards it, keeping it away from others.

Moreover, if nibbana is the highest happiness, then any rational, utility maximizing individual should be practicing the noble eightfold path.

So from a Buddhist perspective, I think we have to start with the assumption that generally people are quite bad at maximizing their utility. E.g. AN 3.54:

A greedy person doesn’t truly understand what’s for their own good, the good of another, or the good of both.

When greed has been given up, they truly understand what’s for their own good, the good of another, or the good of both. This is how the teaching is visible in this very life, immediately effective, inviting inspection, relevant, so that sensible people can know it for themselves.

Since we unenlightened humans generally have greed, hatred and delusion in our minds, a lot of the time we are not able to do things that are good for ourselves and others.

An externality is basically when the market price doesn’t reflect the “true cost”. But what is the “true cost” and what are the “true benefits” of things?

If a bunch of ordinary worldlings get together to figure it out, would they even be able to get it right?


Arthur Cecil Pigou
The Economics of Welfare
Published in 1920

This is one of the first extensive analyses of externalities. To my memory - I think I read it 20+ years ago when I first became interested in green economics- it sets out the principles on which green economic theory is based. It does not - again to my memory - try to create an externality-free economic model. But it was a great and prescient analysis of the issue.

Just a thought, if it is of any interest. :slightly_smiling_face:

It’s available free in a number of formats here:

Brilliant point. Wow, that’s a rather searing indictment of basic economic assumptions.

Okay, yes, this is the kind of thing I was groping towards.

Right? I mean, if we took it seriously, our policies on the climate would be very different.

And therein lies the rub.

I think it’s important to take a gradual and practical approach here. Clearly something like, say, the deleterious medium-term effects of unfettered fossil-fuel extraction is a cost that is both huge and solvable. Start there, then see what’s next.


There’s a good flavor of dialectical materialism in this…Checking the below may help.

In it you find a very relevant quote from Richard Lewontin, someone approaching the topic from an evolutionary biology perspective:

Dialectical materialism is not, and never has been, a programmatic method for solving particular physical problems.
Rather, a dialectical analysis provides an overview and a set of warning signs against particular forms of dogmatism and narrowness of thought.
It tells us, “Remember that history may leave an important trace. Remember that being and becoming are dual aspects of nature.
Remember that conditions change and that the conditions necessary to the initiation of some process may be destroyed by the process itself. Remember to pay attention to real objects in time and space and not lose them in utterly idealized abstractions.
Remember that the qualitative effects of context and interaction may be lost when phenomena are isolated”.
And above all else, “Remember that all the other caveats are only reminders and warning signs whose application to different circumstances of the real world is contingent.”[38]
… when presented as guidelines for a philosophy of change, not as dogmatic precepts true by fiat, the three classical laws of dialectics embody a holistic vision that views change as interaction among components of complete systems and sees the components themselves not as a priori entities, but as both products and inputs to the system.
Thus, the law of “interpenetrating opposites” records the inextricable interdependence of components: the “transformation of quantity to quality” defends a systems-based view of change that translates incremental inputs into alterations of state, and the “negation of negation” describes the direction given to history because complex systems cannot revert exactly to previous states.[40]