The Romance of Cost Accounting

When we think of persons associated with the phrase “social justice,” any number of images might spring to mind. Some might think of Dorothy Day and the Catholic Workers Movement. Others might conjure up an image of revolutionaries seeking to overturn the capitalist system, or of reformers trying to change it. And some might simply regard the term as a fixation of fuzzy-headed liberals, with little connection to the real world of business and economics. But one person we rarely think of is precisely the person whose role might just be the most critical, and that is the cost accountant.

Now, we rarely associate accountants with either romance or revolution, much less with fuzzy-headed liberalism. Nevertheless, if we take the notion of justice seriously, then surely it must involve the notion that costs are fairly allocated to the persons who cause them. That is to say, one person is not making an involuntary contribution to the success of another, that one person's poverty is not subsidizing another person's wealth. We assume that when we purchase something, the price covers all of the costs; we would be surprised to learn that some portion of the cost was not included in the price, that someone else was helping us to pay for what we consume. And yet, this is something that happens all the time; the price we pay for products does not cover the cost of producing and disposing of them. This is a phenomenon known to economists as externalized costs, that is, costs of a transaction that are not borne by the parties to the transaction, but are passed off to someone else, someone not involved in the transaction and who derives no benefit from it. The most obvious examples of externalities are pollution and subsidies. When a company can get the government to bear some portion of its expenses, its costs are passed on to the general public, while the profits are kept by the company; its expenses are socialized, its profits remain private. When a production process devastates the environment, then real costs are incurred—in the form of higher health care and ruined land—but not included in the price.

To the extent that prices do not cover costs, then basic justice is denied. When we rely on exploitation, subsidy, and pollution to provide us with all the goods that we purchase, then basic justice is denied. We may think that we are getting a bargain, when what is really happening is that someone else is getting shafted. Now, it is the job of the cost accountant to pore over columns of figures in ways that would not be interesting to you or me. Indeed, the accountant performs a function which would be tedious to the reformer, but without which reform has no real function. To the extent that justice can be reduced to a proper accounting of costs, than the cost accountant is the real revolutionary, the genuine reformer. And one way to judge the justness of an economic system is to measure the amount and extent of the externalities.

But the job explaining externalities is a difficult one, and the task of spotting them is a tedious one. At least it always has been for me. But comes now Annie Leonard who has made a light-hearted animated film, The Story of Stuff, that explains the topic and examines the extent of the problem. And it turns out that the economy is rife with externalities, with costs that are sifted freely from one group to another, creating an economy of winners and losers that has nothing with “market forces” but rather with the application of force to the market. Here is the trailer:

The film is 20 minutes long, and can be purchased for $10 or downloaded for free. I highly recommend this movie for anyone who wants to understand the real economy, and not the fantasy economy described in so much popular literature and political rhetoric.