The importance of sunk costs


George Monbiot manages, surprisingly, to address the correct point here:

That the Conservatives, following the Liberal Democrats and the Greens, can outflank Labour so easily on this issue shows how attached the governing party has become to "sunk costs". By this I mean the lobbying power of companies which have already made their investments and want to squeeze every last drop out of them before they expire.

George Monbiot has, unsurprisingly, however managed to address it in the wrong manner.

Now it is true that it's a fundamental tenet of decision making that you shouldn't consider sunk costs. What you've already spent on something shouldn't cloud your judgement as to whether you should spend more on it, for example. Throwing good money after bad is not to be recommended after all.

However, we do indeed want to think about the type of sunk costs that George is referring to when we adress the thorny subject of climate change. The cost of whatever it is that we do (assuming that we do anything at all) is going to be massively influenced by whether we think about all of the investments we have already made or not. No, not quite "sunk costs" in the sense of those we shouldn't be thinking about but the costs we have sunk in assets that are still viable, still operating.

Whatever it is that we do to create non (or low) carbon emission energy generation, just as an example, should be done in sync with the requirement to replace our current energy generation system as it wears out. We shouldn't simply tear down what works now and replace: we should wait until it needs to be torn down anyway and then replace with whatever new system we decide upon. This is true of all of the various measures suggested. We really don't want to throw away hundreds of billions of pounds worth of currently operating infrastructure and build it all again: we want to wait until we have to replace it in the normal cycle and then do it in the new manner.

And it isn't just "companies" which want to squeeze every last drop out of such things. We all want to get those last drops for it is we who have paid for the originals (people being the only people who can actually pay for anything, companies simply being a convenient legal fiction) and we who will have to pay for the new.

If we throw away hundreds of billions of assets that are still adequate and functioning then we will make ourselves poorer by precisely those hundreds of billions we are throwing away. Which really doesn't sound like a very good idea.