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Tuesday, May 16, 2017

Why Environmentalists Need to Understand Economics

When it comes to the environment, activists would do well to take advice from market economists.

One of the trickiest set of issues for defenders of free enterprise is environmental concerns, especially large-scale ones like climate change. What makes more sophisticated environmentalist arguments so challenging and so interesting is that they often use ideas and terms that are frequently used to describe economic systems.

Markets work much like Darwinian evolution, at least by analogy.

For example, both natural and social systems are evolutionary. Nature, like society, is an emergent (or what Hayek called “spontaneous”) order. I have described markets as “epistemological ecosystems.”And both ecology and economics share the same prefix. More interestingly, environmentalists often use words like “resources,” “scarcity,” and “efficiency” which we also hear in discussions of markets and economics more generally.

Because of those similarities, defenders of free markets and those concerned about human interference in the natural world should listen to each other more carefully than they often do. I recently had the chance to engage in just this sort of conversation and it got me thinking about some of the sources of miscommunication, and about what economics can add to the way environmentalists often see these issues. What follows are some related thoughts on that theme.

Economists and Environmentalists 

One idea is that defenders of markets should draw more upon the analogies to natural ecosystems when talking to environmentalists. Markets work much like Darwinian evolution, at least by analogy. Entrepreneurship and innovation are the economic equivalents of “mutations,” and profit and loss are the economic equivalents of “natural selection.”

Just as the biological process leads to species adapting to their environments because those mutations that enhance survival will get passed on to future generations, so do economic processes lead to humans better “adapting to their social environment” by rearranging the physical world in ways that create more value.

There is evidence that green energy is much more labor-intensive than fossil fuels.

Environmentalists recognize how these sorts of complex adaptive systems create order without a designer in the natural world and noting how the same description applies to markets can be a way to generate more interesting and productive conversations, not to mention an enhanced appreciation for markets.

Like economists, environmentalists are concerned about scarce resources and efficiency. What often divides us is how we understand those terms. For example, environmentalists tend to think about resources being physical objects that are products of nature, as in “natural resources.” They sometimes overlook the man-made resource of capital and the combination of nature and humanity that is the resource we call labor.

As an example of this confusion, consider the argument I encountered recently that green forms of energy like solar power are desirable because they use fewer scarce natural resources and because they create millions of jobs.

To an economist, however, the relevant efficiency is “economic efficiency.”

My response as an economist is to applaud any way of producing something that uses fewer natural resources all other things equal. If I can make the same amount of energy by using less coal and no more of anything else, that’s good. But notice the rest of the claim: green energy also requires more of the scarce resource of human labor. That’s what it means to “create jobs” in this context. There’s a great deal of evidence that green energy is much more labor intensive than fossil fuels or other carbon-based forms.

Environmentalists rightly understand that it’s good to use less of a scarce natural resource, but seem to forget that idea when it comes to human labor.

Is It Worth It?

Husbanding scarce resources means we have to consider how much labor it will take to produce a particular amount of energy. Just as using more natural resources than we might have to means we give up alternative things those resources could so, so does creating jobs that might be unnecessary to produce the energy we need mean that we are giving up other things we could have had.

Part of this confusion comes from different meanings of “efficiency.” Environmentalists are often concerned with “energy efficiency” or “resource efficiency.” An example here might be gas mileage. Cars are more efficient if they get more miles to the gallon.

To an economist, however, the relevant efficiency is “economic efficiency,” or “is it worth it?”

We have the technology to create much more fuel efficient cars, but if they can’t be built for less than, say, $100,000, most people will say it’s not worth it. Such cars might be more technologically efficient, but they are less economically efficient.

Put differently, such cars would be using valuable resources to produce something that we think is less valuable than the alternatives those resources could produce.

Understanding Scarcity

This point is also where the word “scarcity” comes into play. It seems as though environmentalists treat “scarcity” as a synonym for “rarity.” A thing is scarce if it is few in number. But for economists, scarcity is not a matter of a physical stock, but a relationship between the physical stock and the human desire for the good.

For example, to my knowledge, there exists only one Steve Horwitz autographed baseball in the world. There are, by contrast, many Derek Jeter autographed baseballs. Despite being greater in number, the Jeter baseballs are much more scarce (as is reflected in their much higher value) because no one wants a Horwitz autographed ball, but many people want a Jeter ball.

What markets enable us to do is to have an indicator of that scarcity – prices. The fact that people will pay much more for the Jeter ball than the Horwitz ball tells us that the Jeter ball is more scarce and more valuable. Prices provide knowledge and incentives about the scarcity of goods, including natural resources, and enable us to use them only for those things whose value to people is high enough to justify it.

Bureaucratically set fees don’t have the same powerful incentives for careful behavior.

Markets enable us to make such comparisons of value, and thereby get beyond just technological efficiency to economic efficiency. That is, markets force us to think about cost.

The most sophisticated environmentalists get this at some level, which is why the best proposals for dealing with climate change are those that try, to some degree, to enlist the price system in the process.

Government Fines Won’t Solve the Problem

Carbon taxes/fees, for example, try to include the external costs of carbon-based energy in the decisions made by energy producers. Those proposals then often try to return to consumers the revenue collected so as to help them afford the higher prices of energy caused by the tax.

These proposals are better than the old command-and-control regulatory approach, but they suffer from two problems that economists are uniquely positioned to note.

First, finding the right tax/fee/price is not a simple thing. We know that market prices are the emergent outcome of what Mises called the “higgling of the market.” Mises also noted that the changes in prices we observe are the visible end of a chain of causation that begins deep in the human mind. What makes market prices work is that they are the outcome of the decision-making processes of the people in those markets, risking their own resources and deploying their own knowledge.

Bureaucratically set prices or fees do not have the same powerful incentives for careful behavior, nor will they ever capture as much knowledge, as do real market prices. Given that, political battles over those taxes and fees are inevitable, and with such battles out goes any semblance of economic rationality.

And that brings the second point economists can make to environmentalists: market failure is not a sufficient condition for government intervention. Carbon tax proposals, like any other policy, can look great on paper but we must always ask whether politicians can do and will do what those proposing the policy have designed.

For example, suppose a carbon tax collected billions in revenue that was to be set aside for redistribution to US households. Given the history of Social Security, would we really expect politicians to not try to use that revenue to satisfy powerful special interests or for other purposes that would deliver more votes per dollar than a dividend check to US households?

Economists can remind environmentalists that as messy as markets are (much like nature is), government intervention is often worse. We have to compare the reality of two imperfect processes and the fact that markets are less than perfect is not, by itself, a justification for government intervention.

It is said that the most interesting things happen on borders where cultures clash. That’s true of the borders between the spontaneous orders of markets and ecosystems.

Though I’ve focused on what environmentalists can learn from economists, the learning runs both ways. Figuring out how to draw the lines when two emergent orders interact in the ways nature and economies do requires careful thought and patient dialogue. I hope both groups are up to the challenge.

  • Steven Horwitz was the Distinguished Professor of Free Enterprise in the Department of Economics at Ball State University, where he was also Director of the Institute for the Study of Political Economy. He is the author of Austrian Economics: An Introduction.