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.