Regarding David Suzuki’s inability to understand “externality”

How can it be that David Suzuki can so consistently and for so long get this straightforward concept so spectacularly wrong?

If you ask an economist where in your economic graphs – with all these little arrows going from the manufacturer to the dealer to the household and so on – where in these graphs of how the economy works are air, water, soil and biological diversity? They’ll tell you, “oh, those are externalities.” They’ve been externalized from the economic system. Well, then these guys live in a loony tunes world that’s not connected to reality at all. They live in a world which they take to be infinite, a world where human creativity is so great that if we run out of something , well, we’ll find some other alternative. They do not live in the real world, and the things which sustain our very lives they completely discount as of no concern.

First of all, nature performs all kinds of services. Nature pollinates all of the flowering plants, it is nature that decays material, returns it to the earth. It creates soil, participates in the nitrogen cycle, the carbon cycle, and the water cycle. All of these are economically valuable services performed by nature but economists called them ‘externalities’, by which they mean that they are not in the economic equation. Economists externalise the real world that keeps us alive. […]

You can find many examples of David Suzuki scathingly announcing economists think that environmental damage is irrelevant because it’s “not in the economic equation” by simply googling for “David Suzuki externality.”

Suzuki makes a number of very wrong claims about what economists believe, but utterly misunderstanding the concept of an externality is perhaps the most glaring. OK, the claim that economists are indifferent to the end of humanity is the most glaring. Perhaps the notion that economic models are variants on the circular flow of income diagram used to illustrate national accounting identities to high school students “with all these little arrows going from the manufacturer to the dealer to the household and so on” is the most glaring. No, maybe the claim that the problem with economists is that we just don’t get that stuff is scarce is the most glaring. But let’s nonetheless focus on the constant abuse of the concept of externalities.

An externality isn’t “something left out of the economic equation.” An externality occurs when A takes an action which harms (or benefits) B but A does not compensate, nor is he compensated by, B. The most important example of externalities, and invariably the first example used when the concept is brought up early in Econ 101, is environmental damage: when a firm pollutes it harms everyone who is affected by the pollution. The result, as every Econ 101 student learns, is that there will be too much pollution in the absence of government intervention.

The entire, large field of environmental economics is devoted to studying the consequences of environmental externalities and proposing government policies which improve human welfare by reducing the resulting damage. Mainstream, neoclassical, economic theory holds that policies which reduce production (and GDP) are desirable when they mitigate externalities.

So why does Suzuki repeatedly tell his readers that an externality is “something left out of the economic equation”? Did he just hear the word “externality” at some point and just plain guess what it means, and not bother for decades to spend a minute finding out whether he guessed correctly?

Update 24/08/11: see comments for the explanation of how Suzuki came to so profoundly misunderstand the concept.

29 Responses to “Regarding David Suzuki’s inability to understand “externality””

  1. Yes, Suzuki has the definition of externalities wrong in that quote. However, he has the externally apparent behaviour of economists pretty much down.

    How many economists include the impacts of externalities when they write outside the journals?

  2. All of them.

    Suzuki not only butchers the concept of an externality, he massively misrepresents mainstream economic thought on environmental policy. As one example, consider the notorious left-wing economist Greg Mankiw proposing a “Pigou Club” in the notorious left-wing pop rag the Wall Street Journal (recall a “Pigouvian tax” is by definition a tax imposed to correct an externality). The specific policy Mankiw most forcefully advocates is a gasoline tax, which is politically unpopular but widely supported amongst economists.

    I don’t know of a single economist who thinks that government intervention is not necessary to protect the environment, and if there are such economists they are far from the mainstream and not basing their opinions on the literature. Even if we ignore Suzuki’s ongoing inability to get the concept “externality” remotely right, the substantive charge that economists are indifferent to the environment is demonstrably, ridiculously wrong, either in journals or otherwise.

  3. They’re left out of the optimizing agent’s equation, no? Could that not be what he means?

  4. That would an extraordinarily generous interpretation of the quote above, and if you read through more of Suzuki’s assertions on the topic you’ll find he makes it very clear what he thinks the word means, and what he thinks economists think about the environment.

    “However, economists dismiss this as an “externality”. What they mean is that photosynthesis is not relevant to the economic system they’ve created! … No wonder futurist Hazel Henderson describes conventional economics as “a form of brain damage.”

    “All of these are economically valuable services performed by nature but economists called them ‘externalities’, by which they mean that they are not in the economic equation.”

    It goes on and on and on. He thinks “externality” means something economists ignore. He’s been saying these remarkably silly things for many years. The most telling quote is this one:

    “David Suzuki is another skeptic and he offers a great anecdote about economic thinking. While at the University of British Columbia, Suzuki figured it would be a good idea to supplement his academic background in biology with an understanding of economics. During the first class, Suzuki’s instructor stood at the blackboard drawing lines in chalk to show the flow from the resource base into the market, with subsidiary industries adding value and creating wealth for investors.

    Suzuki pointed to the side of the blackboard that was empty of equations, the resource base, and asked whether the calculations took into account the effect of human activity on the environment, the diminishing reserves and growing waste that Suzuki reasonably regarded as a cost mortgaged into the future. “That’s an externality,” the instructor responded drily. In other words, the environment is something external to the grand human workings of the market and not worth factoring in. Suzuki left the class on the spot.”

    So, literally: he went to an Econ 101 class, sat through part of the first lecture in which apparently the instructor discussed national income accounting using a circular flow diagram “with all these little arrows going from the manufacturer to the dealer to the household and so on,” noted environmental damage was not one of the little arrows, and misunderstood a response which included the word “externality” as implying the word means “something external to the grand human workings of the market and not worth factoring in.”

    Maybe Dr. Suzuki should have forced himself to sit through at least one entire Economics 101 lecture. Or maybe he should read a book.

  5. I’m not usually too generous; thought I’d give it a try for once. Glad to see that my more standard stingy heuristic is the right one.

    I worry about what our Principles students take away from how we treat market failure. There’s a whole ton of kids that do Principles, but only do Principles. And a lot of them will come away with an understanding like Suzuki’s. Or, one only slightly less mangled: that the presence of any market failure justifies pretty much any intervention, and all of econ can be thrown out the window whenever somebody says externality or imperfect information.

  6. Enjoyed the post!

    I’ll admit that I don’t know a lot about economics, so maybe I’m well suited to speak to Mr. Suzuki’s level of expertise. 🙂

    It’s reassuring that most economists believe that government intervention is needed to mitigate (environmental) externalities. But that’s the beautiful world of academia. I feel Mr. Suzuki’s anger stems from on-the-ground big oil, big agriculture, big pharma doing very little about the damage they’re causing. They also get huge taxpayer subsidies despite record profits, and taxpayers also have to face the brunt of these externalities through pollution, increased health care costs, etc. So I feel like Mr. Suzuki thinks we’re getting a bit hosed on both ends. Where’s the fairness, the justice, etc.

    As someone with minimal knowledge in economics, I feel like our society is in a massive catch 22. If we punish big oil/ag/pharma with more taxes/fines to mitigate these externalities, they will simply punish us right back by raising their prices making life more difficult for everyone. If we maintain the status quo (i.e. do next to nothing), we face more pollution, greater corporate power , higher health care costs, and perhaps “slightly” lower prices for consumers. What can we do?

  7. Thanks for your remarks Mike. It is true that imposing taxes to mitigate environmental damage will increase the prices of some goods, but that’s not because firms are punishing consumers, it’s just how markets work. And it’s what we want to happen: in the absence of intervention, those prices are too low.

    Basically, we have too much stuff and too little environmental quality in the absence of intervention: we’d be better off if we had more environmental quality even though we’d have less stuff. I know that remark flies in the face of popular claims about what economists believe (and in particular Dr. Suzuki’s claims), but these are perfectly mainstream, Econ 101 ideas.

    Note there’s a huge caveat to the concern that output would fall under better environmental policies: if we use taxes to reduce environmental damage, those taxes provide government revenue. That revenue can be used to reduce other taxes or to increase government services. Since pollution taxes both reduce pollution and generate revenue, economists refer to such taxes as having a “double dividend.”

  8. Is that a rhetorical question?

  9. Any comments on this observation from a yr ago on WCI? Seems timely.

    http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/09/some-implications-of-thinking-of-trade-as-a-form-of-technology.html

    Suppose there are two sectors: a “good sector” and a “bad sector”. (Dream up whatever sophisticated theory you like about why one sector is good and the other bad, just make sure you use lots of buzzwords).

    The symbiosis created when a booming frontier town engulfs a generation of male highschool graduates, and entrains a culture of boozin’, fightin’, and whorin’, maintains a high average standard of living, while maximizing comparative advantage, is the best economic strategy for the short term, well, until at least the manic pace of building stops.

    Here’s an economics question. Say it costs industry $5 /barrel to clean up the oil sands (water,air pollution, emissions) and the output is forecast to grow to 3 million/day. So, roughly $5 billion/yr.

    Do you:

    a) Invest in R&D, bite the bullet, and fix the problem , thereby maintaining your comparative advantage (security of supply to friendly countries)

    b) Spend a bunch of money on pr, spin doctors, talking heads, doomsdayers and engage politicians to “market” your story in order to maintain status quo? It’s cheaper.

    Which is the best allocation of resources?

    In related news:
    Alberta’s water watchdog under tighter scrutiny over oil sands [link since subscriber only]

    Prentice, saying he’s ‘disgusted’ by images of deformed fish from the Athabasca River, will review agency overseeing province’s water quality

    Posted by: Just visiting from Macleans | September 18, 2010 at 09:34 AM

  10. I attended a lecture by Dr. Suzuki 9 years ago at SFU. I was eager to see the guy who I had grown up watching on The Nature of Things speak in person. In response to a question on how to improve the world he suggested that a good start would be to blow up the world’s economics departments. I was rather taken aback by this as I had just become a grad student in an economics department.
    Dr. Suzuki then gave the disclaimer that he does not condone violence or the criticism of things that one does not understand. He spoke glowingly of his experience of sitting in on an introductory macroeconmics lecure, in which an instructor sketched a plot of GDP over time on the black board. He said that the instructor described the image as conveying progress over the past two hundred years. Dr. Suzuki then claims that he raised his hand and asked the instructor where the environment was being measured in that diagram. The instructor replied back that it was not included in the diagram of GDP over time. At this point in relaying the story Dr. Suzuki pandered to the audience with a grin as most of the crowded auditorium laughed and agreed with the sentiments that he conveyed…. “silly economists sticking to the labels on their diagram”. I remember looking around the room, realizing for the first time the value of my undergraduate education in economics: I was likely one of the few people in that room to have taken a course in environmental economics. I felt sorry for Dr. Suzuki and those that were laughing along with him.
    Dr. Suzuki showed a complete lack of appreciation for the discipline of economics both in his actions in that story, and in his re-telling it to others. It took no time at all for Dr. Suzuki to decide that he knew more than the instructor. Unfortunately for him, his critics give him about the same amount of patience. That’s karma for you.
    When I read this post and the comments it made me laugh because I used to think that poor old Dr. Suzuki really could have learned something if he sat in a microeconomics class. I use to wonder if he would have had the patience to sit through an introduction to supply and demand. But your reference to the adbusters article mentions him sitting in on a principles of microeconomics class… hmmmm…..It seems that the legend of Dr. Suzuki’s economics lecure continues… there was no mention of the flow diagrams when he spoke of this 9 years ago at SFU… his PR team must have still been working the bugs out of that juicy tidbit at the time! Hahaha
    Thanks for the entertaining post!

  11. Thanks for the story Ross. I wonder if he really ever set foot in an Econ 101 class?

    I’ve been reading more of his output on economics. In this book Suzuki and his coauthor point out that firms treat the environment as if it’s free, and continue:

    “But what if we did put a price tag on things like clean air and water? If we assigned a monetary value to natural systems and functions, would we be more inclined to conserve them? The idea was pretty radical when it was first seriously proposed in 2000 by an international group of ecologists writing in Science.”

    They go on to discuss this amazing new idea from ecologists that we tax activities which cause environmental damage, and even uses phrases like “external costs.” They claim one of the problems with economists is we fail to consider Garret Hardin’s Tragedy of the Commons.

    Of course, Suzuki and his coauthor just sketched an Econ 101 lesson motivating Pigouvian taxes; Pigouvian taxes were not first proposed in 2000 by a group of ecologists, and Garrett Hardin invented the catchy phrase “tragedy of the commons” but the idea was part of economic theory long before Hardin.

    I wonder if Suzuki would still want to kill us all if he knew he was just the slave of some defunct economist?

    The Science paper, incidentally, is probably this one (the book isn’t properly cited), which offers bog standard economic arguments including, in addition to Pigouvian taxes: marginal valuation, revealed preference based methods, and hewing to consumer sovereignty. Probably not surprising since the authors include well-known ecologists such as Ken Arrow and Partha Dasgupta.

  12. Any comments on this observation from a yr ago on WCI?

    Guess not. And I even accommodated your main interests partially ( health; labour; education).

    Anyway, good luck blogging. And grow a thick skin. It took SG a couple of years of badgering to admit lowering CIT to improve perceived productivity deficiencies is NOT relevant to Canada’s economy in the past decade. Though he won’t admit it in those terms.

  13. I went to a talk by Suzuki a few years ago and was profoundly disappointed at the shallowness and emptiness of his arguments. I don’t have any formal training in economics whatsoever and there were holes the size of 18-wheelers in his logic and his explanation of basic economic concepts, holes that even I could spot. His completely mistaken explanation of “externalities” was the most glaring.

    After the talk I chatted with him (as part of a larger group) and tried to get him to acknowledge the issue of incentives, but he just wouldn’t bite. His basic argument was that we do what he thinks is best because it’s the right thing to do. I tried using the example of extinction and how we don’t run out of privately-owned species. His answer was along the lines of “well, there are some decent people ranching out there.” Of course, even he understands the concept of incentives because he did those ads where he tells the guy to switch off his beer fridge because it costs hundreds of dollars a year to run.

  14. Although you are correct in Suzuki’s misunderstanding of externality, your interpretation of what Suzuki is saying is incorrect.

    He is a geneticist and not an economist. I would no more expect him to make economic pronouncements than I would you on genetic issues. He is a TV personality who popularizes science to the masses. I don’t expect “Bill Nye the Science Guy” to completely understand astrophysics even though he does talk about it.

    What he is saying is that the environment is real and economics is not. It is a pretend science populated with pretend people and anything that does not take the environment into account isn’t even a good pretend science.

    He places your opinion roughly in the same category as astrologers, ghost hunters and people who still believe in cold fusion.

    You can be ridiculed with impunity because you are incapable of attacking him in a meaningful way and given the performance of of the world’s economic superstars over the past decade, he is correct

    RESPONSE.

    Thanks for your thoughtful remarks, Gord. I gather you would respond, “Not at all” to the survey question discussed here? -C.

  15. “It is a pretend science populated with pretend people and anything that does not take the environment into account isn’t even a good pretend science.”

    That doesn’t explain then why David himself thinks imposing a tax on environmental damage would work. He’s using pretend science to make that prediction.

    In any case, calling something an “externality” isn’t a judgement or philisophy, it’s simply a definition. Replace “externality” with “Un-incurred Cost” and suddenly you’re David’s best friend.

    It’s disappointing that David’s reasoning on this is so sloppy though.

  16. “Mainstream, neoclassical, economic theory holds that policies which reduce production (and GDP) are desirable when they mitigate externalities.”

    Prove it. How many working economists approve of job-killing regulations?

  17. “…there will be too much pollution in the absence of government intervention.”

    Horse pucky:. Government is the facilitator, the incentiviser, the mother of all moral hazards where pollution is concerned.

    That is because the environment is a) public; and/or b) otherwise not protected because property rights are external to our legal and political system.

  18. “230 economists teaching in Canadian universities …”

    Let me rephrase. What percentage of economists working at banks, large corporations, governments, influential think tanks, etc, etc, support policies which mitigate externalities?

  19. Same answer: all but all of them, and any who don’t are explicitly disregarding the literature.

    It isn’t as if the concept of an externality is some obscure, advanced topic only encountered in the late stages of PhD programs at the best universities, it’s Econ 101, and has been for a very long time.

  20. That’s great to hear. I assume there is empirical data someplace to back up that view?

  21. Name 10 who don’t.

    And if you can find them, then you’ve found ten people who are inventing an economic theory to suit what they want to say. Just like David Suzuki.

  22. I’m not sure if taxes are the best way to off set externalities, mostly because I’m not sure that the government will administer those taxes fairly and not give exception to politically connected corporations, or to union companies to prevent job loss. There is no question that private ownership of land, fisheries, wildlife (as in Nambia), natural resources and water as well as liability of damage to other people’s property is the best way to protect the environment.

    Fuel tax is to offset an externality, but the main externality is government maintenance of roads and highways. Gas tax was meant to be a user fee, I would support raising this tax if it went into roads and not other uses, especially subsidizing mass transit systems that no one rides such as the current Amtrack and VIA Rail systems, and certainly not high speed bullet trains (Suzuki, say we can design the economy but the Chinese have certainly been unable to do it!). Roads could also be funded through tolls, this would be better since the tolls would be collected based on the distance traveled and where the road is used, beter reflecting which roads and portions of road would be more profitable to expand. There is also the question of whether roads should be owned by the government or privately owned with examples of successful private roads in Sydney, Paris, San Diego and mush of Indiana. in this system operators would be motivated to use process to control traffic, do repairs at low use times, and generate profits that could be reinvested in the road system or invested by other areas based on profit instead of political motivation.

    While air pollution is an externality, fuel is a real cost, so industry has a strong incentive to burn fuel as efficiently as possible which reduces particulate pollution, there is also good reason why high carbon fuels like coal are starting to be displaced by oil and gas with the latter having a huge potential to reduce CO2 emissions. It is unclear the benefit of national regulations but there are plenty of reasons why local regulation of heavy industry would be effective in protecting homes from pollution.

  23. I think he is broadly correct that the economy needs to be placed in a more environmental context.

  24. Chris, I am glad there are economists out there like you, but I would be very surprised if you are in the mayority. This is a baseless belief of mine, granted, but one informed by my reading of material such as that published by The Economist. It seems to me that the problem isn’t the theory. Theories predict outcomes based on initial conditions, they don’t set goals or agendas. I think that the problems we face are related to a sorely needed paradigm shift. Our society does seem to cherish some deep mythology regarding the inevitability of “progress”, the “practical infinity” of resources, and the potential of technology to both actualise this “infinite resources” and lift us out of any hole we dig ourselves into. I assume many economists subscribe to these myths, not by dint of being economists, but merely because most of our society uncounciously does, except for the few who are deeply familiar with the issues. (Granted, that probably includes more than a fair share of economists.)
    All that being said, we definitely need to bring economists on board, because they are the ones with the requisite training to help guide the much needed changes to our economic systems. We also need to bring politicians on board. The thing is, and this is another point that fuels my sceptisism of some of your assertions, most politicians are advised by economists. I don’t really gibe with any mainstream economic platform, be it those on the right, center or left. Why? Well, I have yet to encounter a viable political party which clearly states in their platform the need to carefully contract our economies and mitigate environmental damage.
    Maybe I sound a bit extreme, but then again, so do the most conservative projections arising from such little publicised fenomena as the holocene manmade mass extinction. This is the kind of scenerio that makes global warming sound like a walk in the park. Anyway, none of this is meant to imply that raising straw men benefits anyone.

  25. Where is the line item in the accounting that calculates the GDP for air, water, soil and such-like? How are they included as assets other than private ownership? They only show up as liabilities when cleaning up is needed or assets when sold to somebody. That makes them externalities because they are not always accounted for in the balance sheet. Suzuki wants a bigger balance sheet than the GDP that includes air, soil, water, etc. as assets and damage to them as liabilities. That is NOT how we do it now. When the environment needs cleaning up we then get an increase in the GDP but once clean it is lost as an asset. Other disasters and their clean-up also contribute to an increase in the GDP. Economists often sound like the most important economic measurement is the GDP. The environment is an externality to the GDP except as noted above. An externality it seems to me is something not included in the balance sheet of corporations or governments.

  26. Herb, the word “externality” does not mean “something not included in the balance sheet of corporations.” “The environment is an externality to the GDP” is non sequitur. The post to which you’re allegedly responding even plainly notes, “mainstream, neoclassical, economic theory holds that policies which reduce production (and GDP) are desirable when they mitigate externalities.”

    If you want to understand what mainstream economics says about environmental issues, read this article in Nature by Don Fullerton and Robert Stavins,

    http://www.hks.harvard.edu/fs/rstavins/Papers/How%20Economists%20See%20The%20Environment.pdf

    or open any Economics 101 textbook.

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