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On Externalizing Costs, or…The Price of My Chair

January 30, 2017

I am sitting in my house in my tenure chair, writing this post about the economics of the furniture in my house. In reality, this post could be written about anything in my house that I have paid money for but I will stick to this furniture because I really like my chair, on lots of levels.

The chair is a Stickley Morris Chair with accompanying ottoman. It is made out of oak and upholstered in leather. It is a classic. And it cost me $2207 for the chair and $432 for the ottoman. You are probably saying WOW! that is a lot of money for a chair.

file-jan-30-23-12-30The reason I own this furniture is partly because I like the design aesthetic. I like Arts and Crafts furniture. I like that it will outlive me and I will leave it to my nephew and he will enjoy it for years to come and then pass it to his children, etc. But there are deeper reasons.

The furniture is made by the L. & J.G. STICKLEY, INC., a company that has been based in Manlius, New York since 1900. As an American company, it is subjected to labor laws that protect workers, OSHA regulations that create a safe workplace and environmental regulations that keep the region where their workshop is located unpolluted. They provide their workers with a good wage, health insurance, a retirement plan, etc. All these things cost money but that cost is accounted for in the price of the product that I pay for. I am providing those protections and benefits when I buy the chair.

In this way costs are internalized. The person buying the product has now paid for a large proportion of the costs inherent in the production of the chair. Those costs are not passed on to the workers or the people who live around the workshop. They are paid by the person who receives the most utility from the product purchased.

This is different from externalizing costs. Costs become externalized when the person buying a product only pays a portion of the costs associate with production. So, if I buy a chair at a discount retailer that is made in another country, let’s say…China, it is cheaper, in spite of having to be shipped to the US across the ocean.

How can this be? Because…that chair has more of its costs externalized. The chair is made in a country with fewer environmental regulations and thus has more problems with clean air and clean water. There are fewer worker protections so their workers work under conditions that are less safe and they have fewer guarantees that they will be able to keep their jobs. They lack health insurance and retirement benefits. For all these reasons, the company making that chair can produce the chair at a much cheaper price than the Stickley chair because more of the costs of production are not included in the price of the chair. When one of their workers gets sick, the worker has to pay full price for their medical bills. Perhaps what made the person sick is the level of pollution they live with because of the lack of environmental protections. In any case, a portion of the costs of production are being paid by people who receive nominal utility (a poor wage) from the production and sale of the chair. Companies have even externalized costs to their own customers (self-service gas stations and the self checkout line at the grocery store).

I teach this basic concept in my Ecology of Food class because there are lots of externalized costs in our food production systems and I think that they should be aware of these costs when they buy a head of lettuce. I think it is also something that should be taught more widely to society in general because it affects our perception of value which, in turn, affects what we buy.

When we complain about unemployment in the United States and our jobs being shipped overseas, we have to realize that we did this to ourselves.

When we go to the store and buy things that are made in countries without the worker and other protections we have in the United States, we are getting things at a cheaper price than we would if more of the costs of production were internalized to the product we are buying.

Because we want “everyday low prices”, we are sending the message to corporations that says, “Go somewhere and make products where the costs of production can be externalized.” OK, we don’t say it in this way, but in terms of economics, this is exactly what we are saying. Because the responsibility of a corporation is to maximize profit to its shareholders.*

So, what should we do?

First, buy American. Not because it is the patriotic thing to do. Not because it puts Americans to work and keeps jobs here. Do it because it is the right thing to do because you are not getting something on the cheap and making someone else pay for some of the costs of production, often economically as well as with their health and quality of life. But you might say, “Life is more expensive to live this way.” Sure it is, but we can save up for things, live more simply, not be so committed to the disposable culture we have become. I had to wait until I got a bonus at work after earning tenure before I could buy the tenure chair. And did I mention how durable these chairs are? People pass these things down from generation to generation. How many Nebraska Furniture mart chairs would you buy in the same time period? What are the actual long term costs of making a given buying decision. But we are terrible at thinking about longer time periods when making decisions.

Second, when you talk to your representatives and senators about economic matter, ask them how their economic policies encourage companies to internalize costs rather than externalize costs. They will generally look at you like you are crazy but then that gives you an opportunity to teach them something that they probably don’t think about on a regular basis but probably should.

Third, think about this concept whenever you have to make a buying decision. It makes life more difficult. When you are on a diet, trips to the grocery store are more difficult because you have to think about every item you buy and the effect it will have on your calorie count, your body, etc. Now you can think about every non-food item you buy and ask yourself, “To what degree are the people who made this product protected in terms of their environment, their workplace, their health, their future?”

Doesn’t that sound fun? No. It is a total grind.

But once again, we can do it because it is the right thing to do.


*Not strictly true but often true.

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