The Hidden Story Behind Externalities

When we talk about capitalism and economic growth, we often hear about efficiency, innovation, and freedom. But what about the costs we don’t see? The ones that don’t show up on price tags but affect our environment, communities, our future? These are called externalities. A concept first clearly defined by British economist Arthur Pigou in the early 20th century, who wanted to clarify the unseen side of economic activity.

Pigou argued that these external costs like pollution, health impacts, resource depletion are real and damaging but often ignored by markets. To fix this, he proposed taxes on those who cause these harms, to make them pay the true social cost. Sounds fair, right? But guess what? The business world wasn’t having it.

You see, traditional accounting and the rules that govern it, the so-called Generally Accepted Accounting Principles, or GAAP, were developed and controlled largely by the business community itself. Groups like the American Institute of Certified Public Accountants shaped these rules to focus narrowly on financial profits and direct costs. They conveniently left out the messy, hard-to-quantify social and environmental costs that don’t show up in a company’s ledger.

This was not done by accident. Hell no! By deciding what counts as a cost, the business sector effectively sets the game’s rules, often excluding the real price paid by society and the planet. And who benefits? The wealthy owners and executives who look down from their towers, confident in their models and numbers, often unaware, or unwilling to admit, that the profits they celebrate come with a hidden price tag, borne by everyone else.

This arrogance, the belief that economic models prove their superiority and that wealth equals worth, helps maintain a system where the rich get richer while the rest of us carry the fallout. It’s a classic story of bamboozling: making money from systems that don’t measure their true costs, then acting as if that success is a sign of wisdom or superiority.

As consumers, citizens, and human beings, we need to challenge this. We need to demand transparency that includes those external costs. We need accounting principles that measure all the costs, present and future, not just what’s easy and advantageous to count. Otherwise, we keep paying the price for profits that never reflect their true cost.

I will continue writing on this subject through several posts that clearly demonstrate what it´s being argued here. I I do believe there is a nice book to be written about this topic that hopefully will make some people think about the reality of our modern societies.

Thanks for Reading. Abrazos.

Diego Rojas