26 – Full Cost Accounting 2017-07-10T03:11:46+00:00

Pattern #26


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Full Cost Accounting

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Most economic, technological, and political decisions routinely ignore major negative impacts. They often “externalize” social and environmental costs on disadvantaged people, taxpayers, ecosystems and future generations. So when determining policy, developing technology or establishing prices, take due account of downsides as well as upsides, both proven and potential.

Related: 4 Big Empathy, 7 Checks on Extreme Inequality, 10 Commons, 17 Deep Time Stewardship, 27 Full Spectrum Information, 34 Life-Enhancing Enoughness, 40 Nature First

Going deeper …

This is an edited version of the video on this page.

I should note right up front that “cost” and “accounting” are words biased towards numerical financial forms, but that they also cover things that have non-financial costs and that need to be “accounted for”.

In our working definition for wisdom in the public domain we seek to take into account what needs to be taken into account for long-term broad benefit. In full-cost accounting we try to do that, too, looking at both the benefits and costs of any product, service, policy, program, etc. Sometimes we have to translate essentially non-monetary and even non-quantitative phenomena into quantitative financial terms so that money-oriented minds can take them into account.

But an important part of this is to look at the downsides of such things.  The idea that you would just look at the upsides of things means that you are not taking into account what needs to be taken into account. There are going to be downsides in practically anything that are going to mess with the benefits you see in your policy or in your economic decisions.

I see this a lot in technology and technological development. Promoters say a particular biotech or nanotech innovation is going to increase the crops, or it is going to solve some medical problem, and they don’t take into account what happens if this thing, for example, gets loose in the environment or is used for some destructive purpose.

I ran across an article recently about a bacteria genetically engineered to eat up the plastic in garbage dumps, and this is going to solve a lot of our dump problems because all these plastics are going to get eaten up.  I found myself wondering what if that bacteria gets loose, and suddenly all the plastics that we have and use every day are getting eaten up by this bacteria. There’s no discussion of that – not even a mention of it – in the mainstream article in TIME magazine, which just applauds how this is a really brilliant ecological innovation.  This kind of one-sided hype is endemic to so many dimensions of technology development.

To that dynamic we can add the economic, political, and many other decisions that routinely ignore likely or possible negative impacts of those decisions.  They “externalize the social and environmental costs” onto taxpayers, citizens, ecosystems, future generations… onto anyone but the people and corporations making and hyping these developments.  If the costs were internalized into their accounting and the prices of their damaging products and activities, we wouldn’t be in the mess we’re in.

Meat and gas-powered cars are typical examples.  We love these things. They have a major roles in our lives.  AND they have all these negative impacts that we and their producers don’t have to pay for.  We can eat our meat and drive our gas guzzlers and leave it to future generations and the climate and millions of poor people and lowland communities to deal with the horrendous consequences.  There’s no feedback mechanism to get us to change our behavior.

An ecological justice movement is getting underway because a lot of the most polluting areas are where poor people live. None of the rich people want to live in the pollution, so the poor people end up living there. We have people who are hardly being paid anything. We have people who are close to slave labor.  We even have real slave labor in our private prisons. Prisoners are making things for company profit and are being paid hardly anything.  We have sweatshops creating our clothes and our sports paraphernalia, etc.

It’s done because it’s cheap. We have a whole economic system that is based on getting a good deal. Corporations and consumers want a good deal.  They want to pay as little as possible.  And the system is set up in a way that allows corporations and consumers to take social or environmental costs and externalize them into the larger society and into larger natural systems where the negative impacts play out.  And in this way they can get a good deal, paying as little as possible.  But the ultimate outcome is disaster!

One of the other patterns in this set is “self-organization”.  If you have a system that is self-organized, where the costs are always being externalized, the system will self-destruct because the people and institutions that cause damage won’t experience the effects of that damage. But if you have a feedback-rich environment, where all the costs of the associated harms are internalized into the system, so that the people who are making or buying or using the harmful stuff are having to experience the resulting harms or pay for dealing with those harms, that creates a balancing feedback loop that enables the system to become more healthy.  The negative costs and experiences will incentivize fewer damaging products and activities.

To have wise policy decisions – and wise prices to guide economic decisions – they must account for downsides as well as for upsides, both proven and potential. This is where it gets dicey, when you are in a fast developing economy, in a fast developing technological environment, where new crises are developing and you have fast developing political or social situations, often combined with very slow-moving government decision-making. Proving that some new development is going to create negative impacts often takes time or faces other obstacles.  Having the system moving too fast or too slow to investigate this and decide on it, means that most of time you will not be able to take into account what really needs to be taken into account.

A principal in technology development called the precautionary principle suggests that if a new technology has not proven to be safe, it cannot be used in any expansive way. You might be able to develop it, but it is never allowed outside the lab until it is proven safe. There are very few areas which consider this principle in their activities, like San Francisco’s city government.  But it’s really hard to apply the principle, given the speed with which technologies are developing.

The Amish provide a really interesting approach to technology development.  They don’t automatically go, “Wow, here is something that is going to make our lives easier, more convenient and more efficient!“ They are not anti-technology, but they carefully review technologies before they adopt them.  They put a lot of thought and deliberation into considering what the impact will likely be on their communities. They will tentatively accept certain technologies and if they don’t work out well – if there’s too many negative impacts – they will just stop using them. Not all of us want to be Amish, but that’s a piece of Amish practice we should seriously think about.

In a wise democracy there would be much more of that kind of consciousness. There would be more things like carbon taxes whereby if you’re contributing to climate change, you are going to pay for it. If you have an economic system where all the downsides are somehow included in the prices of the products, suddenly and miraculously the cheapest things become the benign things and the most the destructive things are more expensive. Suddenly everything turns upside down and we have a free market that heals the earth instead of destroying it.

People blame the free market and free market capitalism for destroying the world.  But it’s the way the free market is designed that’s the problem, because it doesn’t internalize its costs. And “capital” is seen as just “money”, rather than all its other forms like human capital, natural capital, social capital, built capital, cultural capital, spiritual capital… Once you start putting all these kinds of capital into to your computations, capitalism starts to look very wholesome indeed. So how do we design systems like that which integrate all the appropriate feedback-loops?

That goes for the political system, too. If I have a proposal I want adopted, I promote all its advantages and ignore and downplay all its downsides. And the people who are against my proposal try to ignore its positives and highlight its negatives.  If all this can be packaged up in a rational debate, it can sometimes be useful.  But usually it just creates a lot of political noise and is very inefficient compared to a shared exploration to clarify both the positive and negative aspects of any proposal.

And when you have power distorted in the system, suddenly it’s only the positive things or only the negative things that are being featured, depending on where the power and money are. The full complexity is not being wrestled with.

So we want to internalize basically not just the cost, but the full complexity. Part of that complexity is full cost accounting, taking into account often and in financial terms, the social and environmental costs of certain kinds of economic activities, political decisions, and technological developments.

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