35.6 – Cost shifting and Social Waste: The End of Capitalism?
Learning Objectives
By the end of this section, you will be able to:
- Discuss the non-sustainability of capitalism
One of the crucial questions is whether capitalism would continue to exist if accounting rules were to be changed, such that cost shifting becomes impossible. If human beings and nature were treated with the same conservation rules that apply to businesses financial capital, cost shifting as a source of profits would shrink considerably and even disappear as firms have to pay the full social costs of production. Currently, firms are not held accountable for social costs because holding them fully accountable for the full consequences of their actions would probably mean that many of them simply declare bankruptcy.
Consider for example the social costs of runaway global warming and species extinction. These are similar to the costs of nuclear fallout, which no private insurance company can or will insure. Thus, society as whole bankrolls the profit-making nuclear industry through government paying the costs associated with fallout risk. This playbook is well known since the Great Financial Crisis of 2008. Money managers claimed excessively inflated salaries and bonuses for “their productivity” in blowing a financial bubble. Next, they left the firm – albeit with a golden handshake – when they had bankrupted them and handed the losses to the public’s balance sheet. Without this option, the financial sector as we know it would have ceased to exist in 2008. The same is true for various other industries, such as nuclear, automobiles, etc.
Currently, insurance companies and oil companies are in disagreement over who pays the legal costs for the increasing lawsuits oil companies are facing from governments and civil society for damages arising from global warming. Insurance companies deny payments to oil companies, trying to avoid the social costs associated with climate change litigation against their clients in fossil fuel industries. The financial sector overall, banks and insurance companies, is increasingly exposed to negative feedbacks of social costs trials in the judicial systems. As a result, legal disputes erupt between capitalist financial sector and capitalist real producing sector over who pays for the social cost backlash. The risk exposure of the financial sector in the form of liability for social costs is deemed significant enough by regulators to pose a threat to financial stability as damages from global warming increase exponentially. Another financial crisis could thus come about through social costs dynamics feeding back into the capitalist system, causing bankruptcies. The latter could trigger the end of capitalism if it is not again delayed by ever more government bailouts and public money.
Cost Shifting: The Social-ecological Inefficiency of Capitalism
While capitalist firms may reduce monetary costs through technical efficiency gains such as standardization, economies of scale and scope, this often is accompanied by social costs and social wastes. For example, economies of scale can be achieved in a process of industrialized growth based on non-renewable fossil fuel resources, which allows for luxury consumption beyond basic needs and exhaustion of waste absorption capacity of ecosystems. Such a profit-generation process may be monetarily efficient in terms of profits, and even technically efficient in terms of maximizing output per time (maximum speed). However, at the same time this is socio-ecologically inefficient as output per input is diminished.
For example, the planned obsolescence of consumer products is very profitable for the firm because premature product breakdown and shortened life cycles force consumers to buy new products faster, increasing the speed of production and generating more profits. But this leads to premature resource depletion and pollution, which is socio-ecologically inefficient and a socio-ecological waste in the sense of a social (opportunity) cost. This is so because the same quantity of given and finite resources and ecosystem waste absorption capacity could last humanity much longer (more output over input) if it were used more efficiently from a socio-ecological perspective. Socio-ecological efficiency implies a reduced rate of throughput, meaning lower output per time. Monetary efficiency (profits) from technical efficiency (output speed maximization) are thus bought at the expense of socio-ecological inefficiency.
Social Costs: Social and Environmental Injustice of Capitalism
In this light, social cost deficits reveal that the non-full-cost pricing of businesses is a social as well as environmental justice issue as those who have to bear these social costs do not voluntarily agree to this as this mostly happens behind their backs. Mostly these costs are shifted to third parties (workers, consumers, residents, citizens), society as a whole, and future generations. Indeed, cost shifting is a matter of the relative power of agents and as such are arbitrary. The result is that those who are weakest can mount the least resistance and are thus exposed to the highest level of cost shifting. These are typically the most disempowered and vulnerable. Who are these disempowered groups that primarily pay the social cost deficit:
– generations not yet born,
– the old,
– children,
– the weak,
– the ill,
– the poor,
– the uninformed,
– minorities,
– women
– nature
They all pay the bill that should have been the responsibility of business. The future is thus already burdened by accumulated social costs deficits from past generations that are often long-term and irreversible burdens, which are added on top of their own social costs of social reproduction.
Cost shifting is a redistribution of disposable income as real losses or damages often necessitate payments for healthcare, repairs for property damage, environmental remediation, defensive expenditures etc. Consider for example, the social costs of burning fossil fuels and the resulting polluted and overly hot environment. Social costs arise from payments for air filtration and air conditioning systems, their maintenance and energy bills. More social costs arise from health care for respiratory illness, excess mortality, developmental problems in children from overexposure to particulate matter, relocation from flooded coastal areas and islands, drought and fire-stricken areas, loss of harvest, investments and properties. This redistribution is socially and environmentally unjust as it violates property rights, as well as the human right to stay free from bodily and mental harm, and even society’s right to survive.
Social Costs: The Non-Sustainability of Capitalism
Amongst others social cost deficits and non-full-cost pricing contribute to the problem of over-consumption of resources and over-pollution as prices are artificially low from the perspective of the whole of society or humanity. This means that cost shifting is at the root of an unsustainable economy. If firms had to pay the full costs of production, many product prices would be higher and output lower, all else equal. This would translate into lower levels of consumption at higher price levels, that is, a materially degrowing yet monetarily inflated economy. This scenario is also referred to as stagflation because it combines a stagnant economy that is no longer growing in material throughput with inflation of all monetary values. However, an inflated economy that is actually shrinking in material throughput is more appropriately labeled “degrow-flation”.
This scenario will also come about through cost push inflation from increasingly scarce natural resources and defensive expenditures against an increasingly hostile and unstable environment at lower output levels in a degrowing economy. To protect profit levels from the rising costs for natural resources at lower output levels capitalists can be expected to raise profit margins. This can be achieved simply by increasing the mark-up itself or by resorting to increased cost shifting towards workers (lower wages) and social and ecological systems (ramping up environmental pollution). This redistributes income, lowering levels of disposable household income, consumption, and output even further in an accelerated vicious cycle of degro-flation.
Another way to temporarily delay a scenario of degrowth coupled with rising prices and to protect profit margins is to secure public subsidies to keep costs for fossil fuels artificially low. In 2021 governments around the world have subsidized fossil fuel companies with approximately 700 billion USD, keeping prices artificially low, while oil and gas companies have reaped an average annual profit of 1tn USD for the past 50 years. For instance, the International Monetary Fund estimates that society subsidizes fossil fuel industries with approximately 6 trillion USD in 2020 alone by letting them pollute the environment free of charge. Given the above average annual profit of oil and gas companies, the end of cost shifting would make this industry unprofitable.
For example, the farmers’ association in the UK has warned that drought and heat waves are likely to cause a crop failure of 50% in 2022. The scenario they outlined goes like this: Not only will this lead to higher food prices for local foods and an increasing reliance on imported foods, which have expensive import tariffs added onto the sales price. In addition, lower crop yields result in lack of feed for cows for the winter such that livestock has to be slaughtered prematurely. As a result, there will be less milk production at higher prices. And this is only the beginning of runaway global warming, which leading scientists have warned about for many decades.