The Problem with Relying on Markets for Solving Climate Change
In short, acting proactively is not something they do.
[Note: spellchecker has somehow disappeared for me, so misspellings due to poor typing skills are probably present.]
(Inspired by “Yes, Greenland’s Ice Is Melting, But…,” by Bret Stephens: The New York Times, October 28, 2022.)
The ‘subtitle’ of that article is, “A trip there changed my mind about climate change while reinforcing my belief that markets, not government provide the cure.” On the face of it, that sentence impunes any claim of even a modicum of ‘objectivity’: Stephens is at least forthright in acknowledging that he is acting on “belief,” not rationally derived knowledge.
A belief is a form of truth/knowledge that is not derived using the rational faculty. We can reason rationally from beliefs, using a belief as a starting point, but we cannot reason our way to accepting a belief. To accept any belief as truth/knowledge is in the end, as Kierkegaard put it regarding believing in the existence of God, a “leap of faith.”
Stephens ‘believes in’ markets as the solution to the problem of global warming. He is a fool. In this world substituting belief for rationally derived knowledge is a reicpe for material diaster.
While all of us will use the word ‘belief/believe’ when we really mean ‘idea/think’ (or some similar words), that Stephens is motivated by belief, not rationality, is revealed by the material context of his statement. How could simply looking at physical evidence of climate change in Greenland “reinforce,” rationally, that “markets, not governments, provide the cure?”
I do endorse the idea of a market-based economy. By that I mean allowing supply and demand to set prices and (thus) determine the distribution of investment where markets perform that function well — which is most areas of the economy (defined as the production/acquisition of goods/services).
A market-based outcome is the result of myriad choices that have been effected, with each of those choices based on self-interest. It is possible, no matter how many people share a heartfelt belief in Adam Smith’s ‘Invisible Hand’, that the sum of those effected choices will produce results that are bad for society as a whole. A form of that truth is often illustrated as ‘the problem of the commons’. The existence of unemployment and poverty is another example of that truth.
One thing markets cannot do is to act proactively for the benefit of society as a whole. Markets are responsive. While all economic activity is in a sense forward-looking, all such actions are a response to existing conditions.
Global warming has been recognized as a looming problem for decades, first by a few experts then by more and more people. Until very recently, however, markets had continued to invest virtually 100% in fossil fuels and products/equipment powered by them — the overhwleming source of global warming — and invest almost zero in alternative sources of energy and products/services related to them. Meanwhile, that “looming problem” has become an emerging crisis.
Stephens would probably respond that the problem was that the public was too unwilling to pay for alternatives because the price would be higher. That is precisely the market-based problem: investment was required to lower unit cost (thus price), but the incentive to invest did not exist because the demand would not be there for the resulting supply because the prices for alternatives would be too high.
Solving the problem of global warming does require investment. Would it be posssible for markets acting alone to direct enough investment towards solutions to this crisis in a timely enough fashion? The answer to that question has been revealed by actual experience. It is, ‘No’. Government eventually encouraged increased investment in those areas by using tax-based incentives to lower the total cost of both production and consumption of alternatives.
‘Oh’, some might respond, ‘so the existence of taxes was the problem’. That would be a puerilely specious thing to say: while taxes add to the total cost of the production/acquisition of all goods and services, they would only have discouraged investment in alternatives if they had been higher for them than for fossil fuels and fossil-fuel-based goods/equipment.
Indeed, an absence of taxes would have meant no means would have existed to induce greater production/consumption of alternatives. The wierdly named Inflation Reduction Act of 2022 is mostly government doing more to provide incentives to investors and consumers to encourage a transition from a fossil-fuel-based economy to one based on other forms of energy.
That Act is a big step in the right direction. It is only one step, however, and one that was too long in coming. To resolve the environmental crisis we now face — which is more than just global warming (though that by itself could well be too much of a challenge) — we cannot rely on markets acting alone. Acting proactively in order to stave off disaster for whole societies is not something markets left to themselves are capable of doing.