35.3 – The Social Costing of Social Provisioning
Learning Objectives
By the end of this section, you will be able to:
- Define social costing and social opportunity costs
- Discuss social costs in various contexts and their policy implications
- Explain why market prices are not reflective of social costs
Closing the gap between actual and the most basic levels of human need satisfaction has costs attached to it. These are the social costs of a social provisioning. Social costs can thus be defined as the costs society needs to pay for its ideals:
“Humanity will only be free when it understands what it must pay for its ideals. Only then will humanity come to recognize that the realization of these ideals depends exclusively on humanity itself.” (Polanyi 2016, 416)[1]
However, social costs are not; they become. This is why it is more appropriate to speak of social costing, which is essentially a deliberation process that establishes the right measure for the balanced satisfaction of different human needs for social provisioning. Social costs thus emerge in a collective decision-making process that is facts and norms based. It consists of scientific discovery of facts surrounding human needs and their satisfiers and normative judgment regarding the necessary social opportunity costs for achieving the ideal of social provisioning. This means that social costing is neither purely subjective, nor purely scientific or technical. Instead, it is a social evaluation process concerning social use values based on empirical facts. In other words, social opportunity costs emerge as the price that has to be paid for closing the gap between the actual and the minimally necessary level of social provisioning. The latter is at the same time the aspirational level based on humanitarian ideals.
Social Costing = Normative costing of social opportunities (foregone alternatives)
Social Opportunity Costs = the normatively evaluated alternatives society chooses to forgo by enacting particular means-ends combinations to guarantee sustainable social provisioning
Social costing as deliberation determines not just levels or magnitudes of necessary and desirable social costs of social provisioning. It also determines who bears these costs or to what extent, how to prevent or reduce avoidable and unnecessary social costs through precautionary strategies. Social costing is a combination of quantitative scientific research regarding human needs and ways to satisfy them in real terms (as indicated above) and qualitative normative evaluations by society of the foregone alternatives (opportunity costs).
This means social costs are not given data from accounting or natural sciences. It also implies that sustainable social provisioning is essentially based on social costing procedures that are neither reducible to quantitative reasoning or calculation, nor to monetary exchange values. Social costing is always prior to decision-making and implementation as the latter changes the situation and hence also the cost structure qualitatively, requiring new deliberation. Social costing is thus part of an on-going deliberation process. Social costs are not givens in the sense of monetary or in-kind accounting data because these data are merely the recorded outcome of completed economic transactions. While these data are an important part of decision-making, recorded data alone are void of future-oriented social valuation of foregone alternatives in social provisioning. These are the main reasons why the concept of social costing developed here differs from orthodox economics’ notion of social costs. The latter does not start from the definition of economy as social provisioning and does not have a normative understanding of cost s. Instead, it simply derives social costs from recorded market data. (See below for a critique of this approach.)
For example, during the COVID-19 pandemic European public health authorities enacted a “whatever it takes” strategy to securing personal protective equipment, building up intensive care capacity, as well as to vaccine development and lockdowns to save lives, prevent illness and premature deaths. This was done largely without regard for the monetary costs or foregone economic output and income. But while the saving of lives seems to have been adopted as a goal by most governments, the social costing of the means to achieve them was more difficult as it involved deliberation and moral judgments. See for example the following discussion:[2]
“The dilemmas are achingly familiar by now. Should we lock down or stay open? If we lock down, when and in what order should the different sectors of the economy open up? What about schools? Places of worship? Cultural and sporting venues? In each case, the question being asked is essentially the same: is saving x lives from Covid-19 worth y potential damage to society? The question is usually framed in terms of damage to the economy rather than damage to society, because the former is easier to measure (how do you measure the damage done to religious people of not being able to pray together, to schoolchildren of not being able to mix, or to any of us of being deprived of art?) That calculation is complex enough, but feeding into it is another that’s even more morally fraught: are some human lives more valuable than others?”
The quality of social costing as deliberation determines the level of social costs. During the COVID-19 pandemic many countries witnessed unnecessarily high social costs due to instances of profiteering and corruption surrounding government contracts and procurements, miscommunications, unnecessary delays, unforeseen and unintended consequences.[3] While scientific research on the effects of policy measures is still ongoing, available evidence seems to suggest that social costs from excess mortality, hospitalization and infection rates were kept relatively low in countries that had effective and centrally coordinated responses, high levels of civility following stay at home orders, social distancing, calls for vaccination, and mask mandates, had contingency plans for pandemics, including sufficient stocks of personal protective equipment, and provided access to vaccines.
Social costing: the empirical basis of social overhead
Social costs are the costs of achieving the satisfaction of basic human needs as a minimal precondition of securing sustainable social provisioning over long periods of time. Due to the universal nature of basic human needs these are relatively fixed for a given society, and independent of short run variations of economic output and employment. This is why they may be considered as necessary and desirable social overhead costs[4] that can only be avoided at the cost of foregoing social reproduction. The reason for their stability is that they are rooted in human nature, ecology, and societal relations and norms, all of which exhibit relatively stable requirements of reproduction and provisioning. Basic human needs can be measured and quantified scientifically, which narrows down the range of means and ends conducive to achieving social reproduction. These have to be selected and prioritized in normative social costing deliberations. The latter also involve distinguishing human needs from luxury wants, like the private jets, yachts, or vacation homes of the super-rich, which are in no way necessary for societal reproduction, and can be given up without incurring harm to the Human.
Examples of basic needs are apparent in many areas, such as safety standards for air, water, food, housing, transport, and consumer products, as well as minimum income standards, health and safety standards, nutrition, and public health standards to name but a few. And the COVID-19 pandemic and its aftermath have shown that there are many unsatisfied human needs. The cost-of-living crisis means that even food, housing, and electricity or gas for heating and cooking have become too expensive for millions of people in the UK:[5]
“More than 2 million adults in the UK have gone without food for a whole day over the past month because they cannot afford to eat, according to a survey revealing the “catastrophic” impact of the cost of living crisis.”
The existence of social overhead costs has recently become apparent in the so-called “furlough schemes”, which many countries adopted in an effort to protect themselves against the COVID-19 pandemic. People were asked to stay at home to stop the spread of the virus and to prevent avoidable excess mortality and illness. As part of this measure households received a certain percentage of their previous year’s average income from the government acknowledging the contractually fixed costs of many basic necessities, such as housing, food, utilities etc. The pandemic thus made apparent the social overhead costs that cannot be avoided and are born by the community as a whole in order to secure social provisioning.
Those countries or policies that tried to avoid responsibility for these social overhead cost in an effort to “save money” simply left them unpaid and shifted them towards the most vulnerable and weak, igniting thereby a vicious cycle of increasing social overhead costs in the form of preventable excess mortality, long-term illness, disability, productivity loss, insufficient disposable income, homelessness, crime, poverty, and further declining life expectancy. Indeed, it is more efficient, just, and sustainable to acknowledge and pay the social overhead costs. The breakout box below offers examples of how this could be done.
Policy implications – Some examples
The arguments above for the payment of social overhead are behind job guarantee or employer of last resort[6] programs, as well as guaranteed income or minimal universal income support, payable to everyone “simply because one is human”.[7]
Another example of how the recognition of social overhead costs can drive economic policy making is from Ghana and the Ivory Coast where authorities have decided together with industry to set a fixed “living income differential” of 400 USD per ton of all cacao contracts sold by either country in 2020/21 to guarantee a living income to cacao farmers. The living standards of these farmers has been a pressing issue across cacao-producing countries. Most of the value-added and profits in the supply chain of cacao occurs at the final two stages, including trading and branding for sales, leaving little for the farmers themselves. As a result, this living income policy benefits the poorest and weakest members of the value chain while having a negligible effect on consumer prices.
Social Costing: Ethics as qualitative constraints
Identifying and determining the social overhead costs of social provisioning, however, differs from the technician’s task of scientifically finding the most efficient (output per input or output per time) production method. While social costs reflect empirical needs they are not reducible to an empirical or scientific problem because they involve ethical concerns and require collective decision-making that is normative. For the same reason, social costs are also not reducible to the individual entrepreneur’s subjective or accountant’s legally mandated calculations of the lowest cost combination of inputs based on market prices of factor input.
Above cited human rights and sustainable development goals are rooted in ethical principles that view human being as possessing dignity and absolute value as an end in themselves.[8] Human life and health are thus not of the nature of exchange values or market prices as they cannot be exchanged against an equivalent. This implies taking a principled stance of preventing or reducing harm to human health or life by provisioning for the matrix of human needs. Such a preventive and precautionary ethics implies a qualitative and absolute normative constraint to economic activity. For example, with regard to infectious diseases or pandemics this approach is best characterized by an elimination strategy rather than only suppressing the virus or adopting a herd immunity strategy.[9] In the face of global warming this approach is best reflected in proposals for capping greenhouse gas emissions in order to keep global warming below 1.5 degree centigrade (2.7 F °) to avoid a catastrophic runaway heating of the atmosphere from triggering tipping points.
It has been argued that proper safeguards have to be enacted to ensure that human life and health are protected as preconditions for human dignity and freedom. An example of this kind of reasoning is reflected in the German Supreme Court ruling of 2021. There, the Court judged the German government’s climate policies unconstitutional as they are inconsistent with preventing climate change and thus violate constitutionally protected human rights, such as dignity and freedom.
“[…] the German Constitutional Court said on Thursday that current measures ‘violate the freedoms of the complainants, some of whom are still very young’ because they delay too much of the action needed to reach the Paris targets until after 2030. ‘In order to achieve this, the reductions still required after 2030 will have to be achieved more urgently and at short notice,’ it said. Should Germany use up most of its permitted CO2 emissions by this time, future generations could face a ‘serious loss of freedom’. ‘Virtually any freedom is potentially affected by these future emission reduction obligations, because almost all areas of human life are still associated with the emission of greenhouse gases and are therefore threatened by drastic restrictions after 2030,’ the court said.”[10]
In this sense efficient, just, and sustainable social costing is in essence about taking responsibility for the minimal “costs of the Human”[11] of the social provisioning process especially by preventing unnecessary social costs. For example, ever increasing levels of social cost payments do not necessarily signify an improvement or a good measure of human need satisfaction. Ever increasing social cost payments may reflect spending more time, resources and money on fighting the unnecessary and preventable consequences of global warming. In other words, allowing social cost deficits to pass thresholds can trigger a self-reinforcing vicious cycle of run-away social costs.
Social Costing: Why market prices are not enough
According to the United Nations human development index health expenditures as a percentage of GDP in the US are nearly twice as high: 17% in the US vs. 9% in Finland and New Zealand.[12] Does this mean healthcare in the U.S. is better than in Finland or New Zealand? Several measures suggest otherwise. To give only one example, the life expectancy in Finland and New Zealand is 82 years; in the U.S., it’s only 77 years. There are various reasons why ever-increasing health care costs in the U.S. measured in market prices are not an adequate indication of the social costs of social provisioning.
Taking recorded accounting information consisting of monetary exchange values means reasoning with information that is the recorded outcome of past market process and its unequal and largely arbitrary income distribution, as well as non-full-cost pricing procedures. This is a past-oriented understanding of “social costs” that loses sight of the future-oriented prevention and normative valuation of social opportunity costs (forgone alternatives), which is the only way for the Human to give measure and weigh social costs before they occur.
Expressing social costs in terms of market values promotes compensation or bargaining as sufficient solutions. From the above principled-ethics perspective this is problematic as the absolute value of human life and health cannot be exchanged for an equivalent, and is as such not of monetary exchange value. Indeed, life and health can be lost irreversibly and are therefore not subject to a reversible transaction. The same is true for the social and ecological overhead that can be irreversibly damaged, as, for instance, in run-away global warming. Therefore, not only a preventative but also a precautionary approach to social costs is required, an approach that stays well clear of tipping points that can trigger self-reinforcing vicious cycles with infinitely high social costs. Moreover, reasoning in terms of exchange values cannot adequately reflect the irrevocable nature of the economic process, which is entropic on the bio-physical level.
The essence of what is at stake in social costs, i.e. the Human, is different in kind from market exchange values and thus cannot be computed from market prices of factor inputs recorded in accounting information. The latter reflect first and foremost the principle of investment for profit rooted in the institution of ownership. As a consequence, market prices as information reflects largely arbitrary and highly unequal income distribution, purchasing power, and market power. This information is not only arbitrary due to conventional mark-up pricing, and errors in consumer choice induced by manipulative advertisement. It is also incomplete information due to cost shifting, and the exclusion of future generations and destitute members of society from the market process. And, last but not least, it reflects the one-sided perspective of owners, managers, and accountants of money capital (public or private) rather than the Human as a measure. This incomplete, arbitrary and one-sided nature of market price information is exacerbated under the conditions of today’s extremely hierarchical global value chains, giant multinational corporations, and (mis-)information processes[35] of the platform economy under the guidance of the demands of corporate finance[13] and financialization.[14]
Social cost calculations based exclusively on market (accounting) prices are a merely formal employment of reason (in form only) that is in substance operating with incomplete, arbitrary, and one-sided information based on make-belief etc. This means that the formal meaning of economy is a mode of reasoning based on monetary quantities, devoid of higher values, such as human dignity. This can be viewed as an abuse of reason, or folly,[15] as it eclipses genuine deliberation of social (opportunity) costs based on scientific facts and social norms. As economist K. William Kapp wrote “The question is not how ‘profitable’ it would be to prevent the pollution of the natural environment, but what importance we attach to clean air and clean water.”[16]
Taking market prices as a given objective quantitative measure of social opportunity costs would not be appropriate principally for ethical reasons that reject the application of monetary cost-benefit analysis to the valuation of human life. See for example this discussion in the media in the context of Covid-19 lockdown in Britain, which was accompanied by financial aids acknowledging the need for provisioning for social overhead costs:[17]
“An obvious question, therefore, is was it worth it? Have the costs of shutting down a great chunk of Britain for three months and leaving many restrictions in place after six months been outweighed by the benefits? An obvious answer is that this is the wrong question to ask, because you can’t measure the value of a human life in terms of gross domestic product, the unemployment rate or the size of the national debt. The tough action taken by the government at the end of March saved lives, end of story.”
Nevertheless, market prices can give a preliminary indication of the magnitude of a social cost deficit and the need for preventative, protective and precautionary policies–for example, for filtration systems (water, air etc.), transaction and administration costs for implementation and monitoring, costs for suitable technological research and development, payments for cleaning up pollution and spills, foregone wages and outputs due to work-related accidents or exposure to pollution, spending on worker compensation or insurance schemes, unnecessary costs from depleting or over-harvesting resources, over-heating or over-cooling of homes etc. From this perspective the above mentioned relatively high and rising health care costs in the U.S. are not a sign of sustainable social provisioning, but the opposite. They are an indication of lacking prevention strategies against the vicious cycles of social cost deficits, as evident in the opioid, obesity, mental health and public health crises, resulting in excess mortality and declining life expectancy.
Glossary
- social costing
- a deliberation process that establishes the right measure for the balanced satisfaction of different human needs for social provisioning
- social opportunity costs
- the normatively evaluated alternatives society chooses to forgo by enacting particular means-ends combinations to guarantee sustainable social provisioning
- Polanyi, Karl (1922) “Sozialistische Rechnungslegung” (“Socialist Accounting”). Translated into English for the first time in 2016: https://link.springer.com/article/10.1007/s11186-016-9276-9 ↵
- https://www.theguardian.com/world/2021/feb/14/coronavirus-covid-19-cost-price-life ↵
- For a recent discussion, see https://www.theguardian.com/commentisfree/2022/may/18/a-million-have-died-of-covid-19-in-america-how-did-this-happenv ↵
- The term “overhead costs” was instrumental for John Maurice Clark’s understanding of “cost shifting” in business operations. Cf. chapter 5.3 in Berger, S. (2017) The Social Costs of Neoliberalism, Spokesman: Nottingham. ↵
- For the entire article see https://www.theguardian.com/society/2022/may/09/more-than-2m-adults-in-uk-cannot-afford-to-eat-every-day-survey-finds ↵
- Randall Wray, Government as Employer of Last Resort - Full Employment without Inflation, Working Paper 231, Levy Institute. Accessible at: https://www.levyinstitute.org/publications/government-as-employer-of-last-resort ↵
- Chancer, Lynn S. “How Fromm’s Ideas Resonate Politically as well as Philosophically: The Contemporary Case of Guaranteed Income”, Paper presented at the Fromm Institute’s Online Meeting May 21, 2022. ↵
- This perspective is reflective of the philosophy of Immanuel Kant. The implications for economics have been elaborated more recently for example by Mark D. White (2011) Kantian Ethics and Economics: Autonomy Dignity and Character, Stanford University Press. ↵
- https://www.theguardian.com/world/commentisfree/2021/jan/28/all-countries-should-pursue-a-covid-19-elimination-strategy-here-are-16-reasons-why ↵
- https://www.bbc.co.uk/news/world-europe-56927010 ↵
- Cf. Francois Perroux in Kapp, K. William (2011) “The Foundations of Institutional Economics”, Routledge. ↵
- https://hdr.undp.org/en/countries/profiles/FIN https://hdr.undp.org/en/countries/profiles/USA https://hdr.undp.org/en/countries/profiles/NZL https://hdr.undp.org/en/countries/profiles/DEU ↵
- Kapp, K. William (2011) The Foundations of Institutional Economics, Routledge. ↵
- Mirowski, Philip (2013) Never Let a Serious Crisis go to Waste - How Neoliberalism Survived the Financial Crisis, Verso. ↵
- John Dewey in Kapp, K. William (2011) The Foundations of Institutional Economics, Routledge. ↵
- Kapp, K. William (2015) The Heterodox Theory of Social Costs, Routledge, p. 107. ↵
- https://www.theguardian.com/business/2020/sep/06/how-much-did-the-covid-19-lockdown-really-cost-the-uk ↵
a deliberation process that establishes the right measure for the balanced satisfaction of different human needs for social provisioning
the normatively evaluated alternatives society chooses to forgo by enacting particular means-ends combinations to guarantee sustainable social provisioning