Economic Update with Richard D. Wolff

Episode: Externalities and Capitalism’s Inefficiencies — January 7, 2021

Brief Overview

In this episode, Richard D. Wolff delves into the concept of externalities and how their persistent neglect in capitalist decision-making results in systemic inefficiency and harm. He provides accessible explanations, concrete examples (from building developments to pandemic preparedness), and challenges the narrative that capitalism is an "efficient" system. Wolff passionately advocates for a socialized approach that accounts for both private and social costs in economic decisions, ultimately arguing that capitalism’s disregard for externalities makes it not only inefficient, but also unjust.

Key Discussion Points and Insights

1. Defining Externalities and Capitalist Decision-Making

• Explanation of Externalities
  • Externalities are the real costs generated by economic decisions that capitalists do not have to pay for.
  • [01:10] "It is, in fact, a very easy idea to understand and an enormously powerful tool to understand our economic system these days."
• Capitalist Calculus
  • Capitalists only count the costs and benefits to themselves, not to the larger community or society.
  • [04:12] "Capitalists don't count the costs and benefits. They only count the costs to them and the benefits to them when they make a decision."
• Example: Building Development
  • When a new high-rise and restaurant is put up, capitalists consider their direct costs (construction, labor, etc.) and revenue, but ignore impacts like increased parking costs, pollution, pet deaths, and accidents for the neighborhood.
  • [07:11] "We will all suffer a cost of that project, namely the higher amount of money we have to spend for parking our car. But that's just the beginning. There's going to be a lot more traffic on the street..."

2. Private Costs vs. Social Costs

• How Externalities Manifest
  • Private costs are those the capitalist must actually pay; social costs are real burdens shifted onto others (neighbors, environment, society).
  • [09:35] "All the rest of us who live on that block, who had nothing to do with the decision to build a high rise with a restaurant, we will all suffer a cost of that project..."
  • [14:20] "When you count the costs to the world the capitalist works in...the costs are worth much more than $200,000. If you had counted all the costs...they would have exceeded the money, the revenue that that project brought in. And therefore the conclusion would have been, don’t do it."
• Impact on Efficiency
  • Decisions based only on private costs allow 'profitable' but inefficient outcomes for society as a whole.
  • [15:50] "It's not efficient to use resources in a way where the real costs of doing so exceed the benefits. That's the opposite of efficiency. When you do that, capitalism does it all the time."

3. The Social Cost of Unemployment

• Analysis of Firing Decisions
  • Capitalists fire workers if wages paid exceed direct contributions to profit, not accounting for broader social consequences.
  • [17:50] "What is the cost to the capitalist? The answer is you don’t have the output that that worker's effort helped you to get to sell."
• Broader Social Impacts
  • Job loss incurs major psychological, familial, and social costs: increases in therapy, alcoholism, divorce, child trouble, more pressure on social services.
  • [18:30] "The cost isn't just what you, the capitalist, lose...the costs are much larger than that. They're all the costs of unemployment to a person."

4. Environmental Externalities

• Pollution Example
  • Capitalists count only the direct costs (trucks, drivers, gas) but ignore pollution impact, medical costs, property damage, and community burdens.
  • [23:01] "The costs are real, but they're not paid for by the capitalists...the capitalist only counts the private costs he or she has to cover."

5. The Coronavirus Pandemic as an Example of Systemic Inefficiency

• Failure to Prepare
  • Capitalism did not provide sufficient ventilators, test kits, or hospital stockpiles because it wasn’t profitable, despite clear social need.
  • [30:01] "It wasn't profitable for companies to store ventilators, test kits, hospital facilities, doctors, nurses, orderlies, beds, all the things you need for a dangerous virus."
• Social vs. Private Profitability
  • The cost of unpreparedness (lost lives, economic loss) far exceeds what would have been spent on preparation—highlighting a profound inefficiency.
  • [31:25] "The number of people who will get this virus...will be devastating. The loss of life, the loss of value, of product, of wealth, is staggeringly larger than what it would have cost to produce and stockpile what was necessary."
  • [34:14] "What is profitable is not what's efficient. What's efficient is a social calculus."

6. The Call for Socialized Economic Decision-Making

• Systemic Solution
  • Advocates for an economy organized around social decision-making: incorporating all costs, not just those counted by capitalists.
  • [35:00] "It makes no sense to take a minority of the population, capitalists, and organize. The decision about how we use our resources to produce profit for them."
  • [37:20] "Capitalism's time has come, but it has now gone. We can do better. We know what we need. We understand the limits of capitalism, including its incapacity faced with the costs it calls externalities."

Notable Quotes & Memorable Moments

• On the false idea of capitalist efficiency:
  • [05:55] “So here comes the answer: No, it isn't wonderful. It is actually nonsense. And let me explain.”
• On the true costs of business decisions:
  • [09:49] “Cats and dogs are going to get run over in that street in a way they didn't before. Meaning an enormous cost, not just financial, but emotional, for whoever those pets live with, or I should say lived with.”
• On the social irrationality of firing workers:
  • [29:25] “It would be less costly for the society to keep those people working. Because when you look at all the costs of firing them, they exceed the benefit to the capitalist.”
• On pandemic preparedness and profit:
  • [31:18] “It wasn't profitable for companies to store ventilators, test kits... We are going to be losing way more money by not having prepared than it would have cost us to prepare.”
• On why a new system is needed:
  • [36:45] “We are not machines. We're human beings. The vast majority of us are not capitalists. And yet we're required to live with the inefficient decisions we allow to be made by a small minority of capitalists who only count the costs they have to pay for... That’s unjust and it’s also inefficient.”
• On the reality of 'externalities':
  • [37:44] "They’re not really external because we have to live them. They’re internal. They’re only external for the capitalist to whom we have given a pass, that they don't have to count and take account of them just we do."

Important Segment Timestamps

• [00:10] — Introduction to externalities and outline of capitalist decision-making
• [07:00] — The building development/restaurant example and explanation of uncounted social costs
• [14:20] — Why apparent profits mask hidden social costs
• [17:50] — Firing workers: private calculus vs. social destruction
• [23:01] — Environmental pollution as an externality example
• [30:01] — The COVID pandemic: unpreparedness as systemic inefficiency
• [34:14] — Profitable vs. efficient: why capitalism fails on social calculus
• [36:45] — Call for a different economic system and lesson for the future

Overall Episode Flow and Tone

Richard Wolff uses clear, relatable examples (building developments, job firing, waste trucking, pandemic response) and maintains a passionate, sometimes sardonic, tone throughout. His message is urgent but accessible, drawing listeners in as both participants and victims of the economic system’s failures. Wolff’s focus on social impacts and justice, as well as his direct challenges to orthodoxy (“That is nonsense. And let me explain...”), make the complex topic of externalities vivid and personal.

Bottom Line: Wolff compellingly argues that capitalism’s inability to account for externalities renders it fundamentally inefficient and unjust. Only by shifting to a system that uses “social calculus”—that is, accounts for all real costs—can true efficiency and justice be achieved.