E.5 How does its need to focus on short-term profitability affect capitalism's ability to deal with the ecological crisis?

Harmful environmental effects such as pollution, global warming, ozone depletion, and destruction of wildlife habitat are referred to in economics as "externalities," which are not counted as "costs of production" in standard methods of accounting because they must be borne by everyone in the society affected by them. Since their costs are thus spread out over the whole society, externalities can be ignored by capitalists when planning future production. But this means that they will be ignored, since competition forces firms to cut as many costs as possible and concentrate on short-term profits.

Here's an example (paraphrased from Noam Chomsky): Suppose there are 3 automobile companies, X, Y, and Z, which are competitive (not conspiring to fix prices) and which exist in a typical capitalist society where there is no democratic community control of the economy. Then suppose that company X invests in the project of developing a non-polluting car within ten years. At the same time its competitors, Y and Z, will be putting their resources into increasing profits and market share in the coming days and months and over the next year. During that period, company X will be out of luck, for it will not be able to attract enough capital from investors to carry out its plans, since investment will flock to the companies that are most immediately profitable. This means that the default position under "free market" capitalism is that the company (or country) with the lowest standards enjoys a competitive advantage, and drags down the standards of other companies (or countries).

The supporter of capitalism may respond by arguing that business leaders are as able to see long-term negative environmental effects as the rest of us. But this is to misunderstand the nature of the objection. It is not that business leaders as individuals are any less able to see what's happening to the environment. It is that if they want to keep their jobs they have to do what the system requires, which is to concentrate on what is most profitable in the short term. Thus if the president of company X has a mystical experience of oneness with nature and starts diverting profits into pollution control while the presidents of Y and Z continue with business as usual, the stockholders of company X will get a new president who is willing to focus on short-term profits like Y and Z.

In general, then, if one company tries to devote resources to develop products or processes that are ecologically responsible, they will simply be undercut by other companies which are not doing so (assuming such products or processes are more expensive, as they generally are), and hence they won't be competitive in the market. In other words, capitalism has a built-in bias toward short-term gain, and this bias -- along with the inherent need for growth -- means the planet will continue its free-fall toward ecological disaster so long as capitalism exists.