Blog post

sunk cost [suhngk kawst]: Cost already incurred which cannot be recovered regardless of future events.

It's almost too easy to vilify corporations. What, with all the evil stuff they do. Take the coal industry for example, who blow up our mountains, poison our air and water, contribute massively to global climate change, and spend untold millions of dollars on disinformation campaigns, lobbying Congress, buying Senators, and lying to block efforts to tackle the climate crisis. I mean, they are practically begging for our hatred, right? Right. 

But all too often there's a fundamental lack of understanding, and dare I say hypocrisy, about some of the key drivers behind industries' and politicians' unwillingness to step away from business as usual. One of these is the reality of sunk costs. Bill McKibben, in his latest masterpiece, Eaarth: Making Life On a Tough New Planet, sums it up with this nugget:

The journalist Paul Roberts figured earlier this decade [2000s] that "the existing fossil fuel infrastructure, from power plants and supertankers to oil furnaces and SUVs," is worth at least $10 trillion, and scheduled to operate anywhere from ten to fifty more years before its capital costs can be paid off. If we shut it down early, merely to save the planet, someone will have to eat that cost. Given such a "serious asset inertia," no owner or investor in a power plant is likely to accept the writedown without a "nasty political fight."

Conventional economic theory dictates that sunk costs shouldn't influence business decisions. But let's get real here. People just don't behave that way, and neither do corporations or governments.

And now add in the worst economic downturn since the Great Depression. Again from Eaarth:

The sole even remotely plausible way out of this box canyon would be, as I've said, massive investment in green energy; but our mountains of accumulated debt make that harder, not easier. The current Australian government was elected on the promise of fighting global warming, but the economic slowdown quickly cooled its ardor, delaying the start of even modest plans for carbon reductions by two years. In equally progressive New York, Democratic Governor David Paterson quietly undercut the state's plan to control greenhouse gas emissions, a plan that had been crafted by a Republican predecessor, but in better economic times. On the other side of the globe... China was backing down on plans to close some polluting factories: "Money is increasingly needed to pay the salaries of workers whose companies have gone bankrupt and to provide social services for the rural poor who are having trouble selling their crops. There has been less money left over for environmental initiatives."

If your neighbors came to you and said that you could no longer drive the car you bought last year for $30,000 because it got too poor gas mileage, would you throw the keys in the garbage and leave the car in the driveway to rust? Be honest. And what if you had loved ones to care for? Kids to drive to school or a chronically ill mother to care for, or a desperately needed job that was 20 miles away from home. You'd tell those neighbors, in no uncertain terms, to mind their own *$%@ business, right? Right.

What's my point? Is it to somehow excuse away our political leaders lack of, you know, leading or the single-minded greed of corporate interests? No. But the truth is that our entire way of life—consumer culture, globalized economies, cities, suburbs, millions of miles of roads, lack of civic engagement, etc.—is one big sunk cost. We've invested the last 150 years—and really, the last 60—building it. They may have built the cars, the roads, the oil derricks, and the coal plants, but we own them. We own them because we use them. And until we stop, until we voluntarily shift away from the world we've built, we can't rightly expect them to. Can we?

So yes, lobby against new coal plant construction. Yes, demand meaningful climate legislation. But for every second we spend lambasting the fossil fuel industry or haranging our elected officials, we better spend 100 seconds walking our talk. Which is not to say it's easy. The very fabric of our lives, literally, was built with cheap fossil fuels. But that also means you can throw a dart in just about any direction and hit on someplace to start.

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Sunk costs

From: Alan , Mar 10, 2010 03:10 PM

Yes, we all have sunk a whole lot of our capital in what we now know are exactly the wrong things. But, that's no excuse to continue sinking our scarce capital in more and more of those wrong things. We should build no more coal-fired power plants, no more low-mileage vehicles, no more non-energy efficient homes, and for pete's sake, no more bombers, tanks, and warships!

great post

From: matt, Mar 9, 2010 10:16 PM

Thank you Asher for shedding some light on the poorly understood issue of sunk costs. And your final sentence sums it all up. Time to get to work. Thank you.

It's already written down

From: Peter Bockenthien, Mar 8, 2010 04:48 AM

The problem I have with the bailout is that it didn't actually bail out mortgages that were already written off. Those big banks had unfathomable losses - that means the asset was sunk and gone forever. It went on the books, so how come tens of thousands of people didn't outright own their homes clear and free of debt?

We're so far in debt with no hope of recovering that we should seriously consider Jewish Jubilee: forgive everyone of their debts, corporations included.

Let's just start over. Simplistic, yes, but simple is better. I don't know why it absolutely HAS to be a long drawn out drama filled with angst, bloodshed and finger-pointing.