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Externality: The Corporate Alibi

Published on 15th June, Edition 24, 2015


Like mathematics, economics has proved to be a ruthless subject. It has not only written its own rules of the game but has also trespassed on alien territories with poise and authority. It made the world believe that the level of material well-being was the only yardstick with which to measure the status and stature of nations. Economics was genetically more close to knowledge than faith. It dominated almost every sphere of human life and strived to bring everything else, even faith and morality, under its rule.
Economics devised the classic theories of demand and supply, production of goods and services besides introducing the concepts of market place and market competition. For measuring a nation’s economic condition such indices were introduced as GDP and per capita income. For cross-border trades, the book of the rules of imports, exports and tariffs was written. For recording economic transactions, rules of accounting were devised. To facilitate movement of money and swift execution of economic transactions, fiat money, and banking system were introduced. The system was further strengthened with the creation of such high-powered financial institutions as the IMF and the World Bank. To measure the growth of corporate sector organizations, the idea of a balance sheet and related financial statements was introduced. To streamline countries’ economic performance, fiscal and monetary imperatives were designed.

The phenomenon of economics has steadily but surely transformed into a compact system. The system is cynically called “capitalism” by its critics. An eighteenth century economist Adam Smith wrote The Wealth of Nations. The event marked the baptism of capitalism. The time was ripe to tell the world that capitalism was the system it will have to live with for centuries to come. Prior to writing of The Wealth of Nations, Adam Smith had presented a synopsis of what was to follow by mentioning in his book The Theory of Moral Sentiments:

‘The rich only select from the heap what is more precious and agreeable. They consume little more than the poor and in spite of their natural selfishness and rapacity, though they mean only their own convenience, though the sole end which they propose from the labor of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of species.’

Adam Smith thus heralded the arrival of the mace-bearer of capitalism – the corporation. The “invisible hand” that sets the world markets going and keeps the poor supplied with the necessaries of life — though through minimum wages — in fact turned out to be the embodiment of the collective power of the rich who unknowingly acted “generously” for the good of others, and knowingly for the greater good of their own.


The eighteenth-century naivety of Adam Smith failed to see the real face of the monster we all know as corporation today.

When hawkish armies attack weaker nations, the death of the unarmed non-fighting people of the victim nation is recorded as “collateral damage”; when corporation acts to pursue its mandated goal of profit maximization, similar losses are registered as “externalities.” Joel Bakan writes in the third chapter titled The Externalizing Machine, of his 2004 book the Corporation: ‘As a psychopathic creature, the corporation can neither recognize nor act upon moral reasons to refrain from harming others. Nothing in its legal makeup limits what it can do to others in pursuit of its selfish ends and it is compelled to cause harm when the benefits of doing so outweigh the costs… Far less exceptional in the world of the corporation are the routine and regular harms caused to others – workers, consumers, communities, the environment – by corporations’ psychopathic tendencies. These tend to be viewed as inevitable and acceptable consequences of corporate activity – “externalities” – in the coolly technical jargon of economics.’

Modern day corporate executives are trained to know the importance of cool cost-benefit analyses. They know that it is imperative to put a dollar value on human life and that: the lower the value the higher the corporate profits. Confronted with a decision to set a dollar cost on a safe/safer placement of fuel tank in Chevrolet Malibu car, a General Motor engineer concluded in his report that the company was to pay in compensation on an average $2.40 for each prospective fatality that may occur with the plying of 41 million cars of the said model with a “safe” placement of fuel tank, while a “safer” placement would entail an additional cost of $8.59 per unit. GM went for the obvious decision: a safe rather than a safer placement of fuel tank. The decision brought additional profits of $253.79 million [($8.59 – $2.40) x 41 million] to GM at the risk of its consumers. The irony is that GM had to pay in a single fuel-fed fire case compensation and punitive damages to the tune of $1.2 billion. The engineer making the cost-benefit analysis admitted in his report, according to Joel Bakan: ’a human fatality is really beyond value, subjectively, it is really impossible to put a value on human life.’ But being an instrument in the hands of the corporation, he had to do that.

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