Capitalism, Economics, and Externalities: What Are Externalities External to?

ABSTRACT Externalities, as both a pervasive phenomenon and a concept, lie at the centre of ecological thought and policy debates. This paper questions the adequacy of deeming of pervasive phenomena as externalities including by some authors in the (eco)socialist tradition. It critically reflects on the epistemological underpinnings of what is seen as internal and what as external, and reveals the role of methods used in economics as well as real social and economic processes characterising capitalism in configuring these so-called externalities. The roots of said externalities are traced beyond Marshall and Pigou, to whom the concept is usually attributed, and associated with political economists, especially Mill and Sidgwick. Despite all the metamorphoses in the content and implications of the concept of externalities since its birth, the constitutive role of methodological individualism as a common ground of all particular uses of externalities is demonstrated. However, externalities as a concept do not owe their existence solely to the individualistic method of mainstream economics. Real and practical processes defining capitalism are at least as important in understanding the content and function of externalities in both theoretical economics and political debates.