How an abstract economics concept lets corporations off the hook

We have been conditioned to bring our own bags to the grocery store, carry metal straws, drink from non-disposable bottles and dispose of our trash in the right bin. 

But will these actions really save our waste-strewn world from environmental collapse? Or are they the result of efforts to deflect responsibility from the corporations that produced the waste in the first place?

In the 1950s, plastic producers and the packaging industry coined the term “litterbug” as part of their efforts to overturn state laws that mandated the use of returnable glass bottles. The hope was that people would feel ashamed for littering, and direct their energies to their habits. As the responsibility shifted to us, we were less likely to consider the root cause of the waste.

The power of these messages is that they are, in part, true. We unquestionably should not throw trash out of our car windows and should make every effort to ensure our waste is disposed of properly. However, corporations have promoted these actions extensively to direct attention away from their responsibility for environmental degradation.

The more costs for which companies can avoid responsibility, the higher their profits. The more devastating the environmental and societal consequences, the larger their reward for evading them.

For example, research shows that $10 worth of coal-fired electricity causes at least $8 worth of increased health care expenditures — from respiratory diseases such as asthma, bronchitis and even lung cancer. It also causes a minimum of $8 in environmental damage, so the public’s real cost is closer to $26. 

Yet no one expects the power companies to pay for the $16 of harm. By shirking responsibility, corporations save significantly, thus increasing their profits.

Economists talk about unrecognized and unaccounted factors such as the “external costs” or “externalities” of business: That is, the negative side effects of a company’s operations and practices that are not factored into its profit and loss statements. 

This concept is just abstract enough to limit full understanding to the accountants, sustainability experts and activists trying to hide or expose externalities. But externalities are not a neutral assessment of costs and benefits, as economists typically consider them. 

Companies employ many tricks to hide information and misdirect our attention to socialize their costs while privatizing their profit.

Fossil fuel producers are obvious examples, but the problem is much more insidious and diffuse. Research has shown that if they had to pay for externalities, profitability would be seriously constrained. About half of those studied would have their earnings reduced by greater than 25 percent.

This brings us to the recyclability of plastics, which are mostly made using fossil fuels. It’s a “big lie” decades in the making, deliberately propagated and maintained by industry trade groups. Plastic recycling rates are under 10 percent, but instead of rethinking supply chains rife with plastic, business leaders continue to implore us to recycle when they know the plastic recycling system does not work. 

Thanks to their efforts, it is now commonly accepted that once a product leaves a manufacturer’s possession, it is the sole responsibility of the buyer to dispose of it properly. The recycling symbol of three “chasing arrows” is ubiquitous on plastic packaging; recycling bins are everywhere. The implication is it’s up to us to use them.

Corporations must be accountable for the negative consequences of their operations, like greenhouse gas emissions, plastic pollution and even income inequality. This is no easy task and one that is aggressively opposed by industry players. 

While traditional economic thinking advocates regulatory approaches like pricing, taxes and cap and trade to solve these “market imperfections,” these solutions fall flat because of co-opted political interests.

For instance, the Trump administration priced the social cost of carbon emissions at between $1 and $7 per metric ton within the United States, while the Obama administration estimated a price of $43 per metric ton globally. Though steps are being taken in many countries to create market systems to price and trade carbon, issues like human rights, inequality, discrimination and other forms of pollution and waste don’t easily fit into traditional systems that hold companies to account.

But this does not mean these issues should be ignored. For instance, the Dutch NGO True Price has devised a system to assess societal and environmental externalities based on United Nations guidelines. It tracks whether human rights, such as housing, food security and access to water, are respected throughout supply chains. 

In 2013, Dutch chocolate company Tony’s Chocolonely partnered with True Price to assess the real price of the cocoa it was buying and accordingly increased wages for producers to ensure they were being paid fairly.

While such systems will never be perfect, we will keep giving companies a free lunch at our collective benefit unless we start. Any effort to properly quantify and account for corporate social harms will need a multi-faceted, multi-stakeholder approach that involves companies, governments, investors and the general public. 

Through collective action and systemic change, we can ensure that the true costs of business practices are recognized and addressed, paving the way for a world where profit no longer comes at the expense of people and the planet.

Christopher Marquis is Sinyi Professor of Management at the University of Cambridge and author of ”The Profiteers: How Business Privatizes Profits and Socializes Costs.”