Droughts desiccating the Southwest. Hurricanes whipping the shorelines of the Gulf states. Wildfires flaming through the parched forests of the West. Floods swamping riverside towns in the Midwest. In recent years many of us have learned that these so-called natural disasters are often largely unnatural, caused or exacerbated by climate change.
But we have another lesson to learn. Climate change is not the root cause of these mounting unnatural disasters—our economic system is. It helped spawn global warming and it stifles efforts to mitigate the climate crisis.
Note the word system. Greedy, uncaring individuals, especially those with power and wealth, deserve plenty of blame. Some fossil fuel company executives and investors come to mind. But America’s laissez-faire-leaning economic system, which can roughly be labeled neoclassical economics, is the primary culprit. Flaws in its DNA not only enable greedy, uncaring individuals, but lead the rest of us to unwittingly make choices that inflict terrible harm on people and the planet.
Take the seemingly innocuous act of buying ice cream. You consider the flavor, the brand, the price, and whether you really should be getting broccoli instead, and then you slip that half gallon of Quadruple Chocolate Heaven into your shopping cart. However, you probably didn’t consider the damage you’ve just done to the climate.
Many brands of ice cream contain palm oil, as do many cookies, crackers, soaps, breads, chocolates, toothpastes, and loads of other products. One estimate calculated that roughly half the packaged food items in a grocery store include palm oil, most of it produced by clearing tropical forests and planting oil palm plantations. Burning and cutting down those forests releases about half a billion tons of carbon dioxide and methane a year, more than California’s annual amount of greenhouse gas emissions.
Supply and demand—the heart and soul of our market economy—depends on communication between consumers and producers, including the need for producers to make their full costs known to consumers via the prices companies charge for their goods. But that crucial communication becomes garbled when prices omit some of the production costs, such as harm to our climate. Shoppers might prefer a palm-oil-free brand of ice cream if they realized that buying Quadruple Chocolate Heaven increases the risk that a climate-stoked wildfire will burn down their houses.
If such hidden costs were rare, we consumers could blithely shop on, comfortable in the knowledge that our purchases would seldom cause collateral damage. But most of the stuff we buy carries unseen costs, and they’re often sizable. If the price of Quadruple Chocolate Heaven reflected the full costs of palm oil—not only a chaotic climate but air and water pollution, diminished biodiversity, and the displacement of Indigenous peoples—its price would rise dramatically. In a well-studied example, researchers estimate that the true cost of gasoline is two to four times higher than what we pay at the pump. It’s a safe bet that we would have more walkable cities, better public transit, and far more electric vehicles if we’d been paying the real cost of gas since the first Ford Model T rolled off the assembly line.
Another characteristic of the market that leads to failure is its inability to deliver profits that would entice businesses to provide or protect public goods. Most crucial, the market doesn’t generate monetary incentives for companies to provide or protect ecosystem services, a class of public goods that includes essentials like nutrient cycling, soil formation, pollination, and, most pressing, a livable climate.
Recall the flooding that drowned parts of coastal Louisiana and Mississippi in 2005 when Hurricane Katrina thrashed the Gulf Coast. More than 1,800 people died, cherished communities disintegrated, and the cost of repairing damage from the storm topped $100 billion. Much of the devastation occurred because oil and gas development had sliced and diced the coastal wetlands that had previously tamed storm surges. The protection intact wetlands provide is clearly a valuable service, yet the market has not motivated entrepreneurs to deliver that protection.
And why would they? The market isn’t going to reward them. Due to the nature of public goods, even if a company did restore a wetland, they wouldn’t be able to sell that storm-surge-protection service because they couldn’t exclude anyone living on that coast from using the protection for free.
Not only does the market fail when it comes to ecosystem services—it often fails to deal with the realities of the natural world in general. Case in point, the production function, a stalwart of market economics. It asserts that the quantity of an item that is produced depends on the factors that go into its production, traditionally capital, labor, and resources. So if a commercial fisher isn’t catching enough fish, she need only add capital (buy another boat) or labor (hire more crew members), and problem solved. One factor can simply substitute for another. But reality punches holes in the hull of this leaky notion of easy substitution. If there aren’t enough fish in the sea, which is often the case these days, no number of new boats or additional hired hands will make more fish appear. The production function departs from reality in other ways, too, such as overlooking the waste that production creates or the energy needed to power production. Neoclassical economics suffers from a production function malfunction.
The market also fosters inequity. Nobel Prize–winning economist Amartya Sen sees the lack of equity as a profound flaw in a key theoretical goal for which neoclassical economics strives: the Pareto optimum. Markets achieve Pareto bliss when they allocate society’s resources with optimal efficiency—at least, what the market perceives as optimal. But this vision of efficiency doesn’t care about the distribution of wealth and well-being. The Pareto optimum exemplifies neoclassical economics’ general shunning of ethics and values. As Sen says, “A society can be Pareto optimal and still be perfectly disgusting.”
For a manifestation of perfectly disgusting, consider breakbone fever, river blindness, leprosy, hookworm, and the many other afflictions that are officially classified as “neglected tropical diseases,” or NTDs. Overwhelmingly these are diseases that plague poor inhabitants of the tropics (though NTDs are spreading out from equatorial regions due to climate change). About 1.5 billion people are living with the debilitating misery of NTDs, and about 170,000 die from them each year. What makes this disgusting rather than simply sad is the fact that most of this pain and death could be avoided if the market allocated sufficient resources to NTDs. Unfortunately, demand drives markets, and dollars create demand, so markets channel medical resources toward those with the most dollars.
For example, some years back a drug company stumbled onto a cure for sleeping sickness, an NTD that at the time was killing hundreds of thousands of Africans every year. The drug, eflornithine, was affordable, too—by American standards. However, few of the affected Africans could afford it. Confronted with a dire need but no profitable market, the company didn’t bother producing eflornithine even as multitudes continued to sicken and die. But the story does have a fairly happy ending. Eventually another company found a lucrative use for eflornithine—removing unwanted facial hair in women—and began producing it. Naturally, the market aimed the drug at relatively wealthy consumers, but pressure from governments and activists convinced the company to provide significant amounts of eflornithine to people stricken by sleeping sickness.
The eflornithine story shows one of the many ways in which our market system fails to carry out the basic purpose of an economy: allocating limited resources among competing ends to provide the greatest well-being. The market can be an effective tool when used for the right job, but relying on the market to deal with something like neglected tropical diseases—or climate disruption—is like trying to saw wood with a hammer.
The market’s inability to thwart climate change underscores its profound deficiencies. “Climate change really is the litmus test for neoclassical economics,” says economist Kristen Sheeran, director of Oregon’s Climate Policy Office. “This is clearly an issue where the standard tool kit of neoclassical economics doesn’t apply. And what does that say then for neoclassical economics if it is inherently ill-suited to dealing with the most fundamental question of our time, a true civilizational challenge?”
So, what should we do?
Let’s start with something we shouldn’t do. We should not try to jettison all of neoclassical economics and abruptly institute an entirely new economic system. To successfully tackle climate change we need to move fast, and there’s no chance we could switch to a completely different system quickly enough.
Besides, the market has its strengths and can serve us well if we recognize its failings and guide it better—much, much better. Take hydrofluorocarbons (HFCs), a group of synthetic chemicals widely used for air conditioning and refrigeration. Though far less common than carbon dioxide, they’re thousands of times more potent per unit in terms of warming the planet. Market forces led to rising emissions until world governments began reining in HFCs. The US got on board recently when Congress passed legislation to limit and eventually phase out these destructive chemicals and the Environmental Protection Agency (EPA) began developing a rule to carry out that law. Seeing the regulatory writing on the wall, some companies have already gotten a jump on developing viable alternatives to HFCs. The new EPA rule will further focus the market and accelerate innovation and production. In fact, many in the industry welcome the clarity the rule would provide and support its implementation. EPA administrator Michael Regan noted that the rule would give a boost to American companies that produce alternative coolants.
While each of us should strive to be a responsible consumer—buy LED lightbulbs, insulate our homes, and try to find ice cream that’s free of palm oil—such individual actions won’t accomplish nearly enough fast enough to corral climate change. Sometimes the opportunities for individuals to act simply don’t exist: maybe you’d like to commute via electrified train, but your city has no such trains. Other times sustainable actions exist but identifying and implementing them is tough or impossible. Simply trying to determine which products contain palm oil is baffling because producers have come up with dozens of aliases to put on ingredient labels, such as vegetable oil, sodium kernelate, stearate, and Elaeis guineensis. Most daunting of all, the sheer volume of products and services in the marketplace swamps the capacity of an individual to make sustainable choices.
But collectively we do have the capacity. This is most evident when we, the people, work together through government. Consider the energy efficiency standards for appliances set by the feds and some states in the 1980s. Those regulations have quietly saved us more than $1 trillion to date and have reduced greenhouse gas emissions roughly equal to the annual belching of 800 million cars. Via our representatives in government, we citizens determined the goals, industry adapted, and people and the planet benefited. Laws go upstream and change the flow at the headwaters, so that all of us downstream are doing the right thing whether we know it or not.
Laws such as those that generated the efficiency standards are a key type of collective action that can guide the economy to create the systemic change we need to combat the climate crisis. (Another type is the political pressure that’s often necessary to light a fire under lawmakers.) But we face many obstacles when we try to pass laws that will protect the climate and other public goods. Most of us are familiar with some of the impediments, such as the fossil fuel industry’s lobbying and misinformation campaigns. A major underlying barrier that’s less recognized is widespread hostility toward government. For decades powerful people with deep pockets have been preaching deregulation and belittling bureaucrats in a largely successful effort to discredit government. Ronald Reagan captured this pervasive antipathy in his famous line, “Government is not the solution to our problem. Government is the problem.”
This anti-government attitude must change, and the time may be ripe. Empowered by the results of the 2020 election, most Democrats seem intent on actively using government to take on issues that the market alone can’t handle. Predictably, most Republican politicians and many of their supporters are condemning these government initiatives as destructive meddling with “free” enterprise. “Free” belongs in quotes because laissez-faire ideologues often contort this complicated concept into simply meaning that everyone should be free to make money regardless of the damage caused to others. But what if your freedom to drill for oil takes away my freedom to have a home that isn’t washed away by a climate-induced flood? Perhaps the Republicans should listen to Lyle Perman, a fourth-generation South Dakota rancher who told The American Prospect, “I don’t like government telling me what to do. But if your actions impact somebody else, then it becomes somebody else’s business, too. And that’s where I draw the line.”
Many free-enterprise loyalists see the use of our judgment to shape the economy as interference that fouls the liberating gears of supply and demand. Friedrich Hayek, a deity in the pantheon of conservative economics, urged people to submit to “an impersonal mechanism [the market], not dependent on individual human judgments.” Another member of the pantheon, economist Milton Friedman, even wrote a song that includes the lyric “let markets rule us.”
But bending the knee to the market actually makes us less free and self-reliant. We need to dethrone the market and use our judgment and our values to consciously guide the economy. People should be in charge of the market, not vice versa. This doesn’t mean we impose Soviet-style micromanagement, dictating whether to produce black shoes or brown shoes. It means we broadly steer our economy. Maybe we account for at least some hidden costs by applying a carbon tax. Or perhaps we institute building codes that require new housing to be energy efficient. It’s up to us humans, not a soulless economic system, to decide what a sustainable, equitable, and prosperous economy looks like.
As we start along this path, we’ll wobble a bit. For too many years we’ve surrendered too much autonomy to the market. Our decision-making muscles have atrophied, and we’ll need time to strengthen them. But we’ll get strong again, and soon we’ll grow beyond being mere consumers and become forceful citizens.
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