We are naive fools to wait for the free market to save us from impending shortages of critical natural resources

| March 11, 2008 | 10 Replies

“The free market–the invisible hand–will take care of everything.”

I’ve addressed this topic of the free market as alleged panacea several times before.  I’ve referred to this blind faith in the market as unsubstantiated.  I’ve mockingly referred to the common belief in the wisdom of the invisible hand as a belief in the Fouth Person in the Holy Quartet.  Why mock?  Because stark shortages of critically important natural resources loom in every direction.   And yet we’re in denial. You deny the denial?  Then how is it that we tolerate, this year, big U.S. metropolitan areas like Raleigh-Durham and Atlanta had only a few weeks left of their municipal water supplies?  We tolerate that we are drawing down unreplenishable water sources throughout the desert southwest.  Intelligent civilizations don’t deny such dangers.  They consciously deal with their problems.

I’ve just read a well-phrased description of why the modern version of the free market can’t save us from our problems regarding impending shortages of essential natural resources.  The following quote is from a new book available free on-line from Population Connection: PLAN B 3.0: Mobilizing to Save Civilization, by environmental analyist, Lester R. Brown (2008).

Now with the economy as large as it is, the indirect costs of burning coal—the costs of air pollution, acid rain, devastated ecosystems, and climate change—can exceed the direct costs, those of mining the coal and transporting it to the power plant. As a result of neglecting to account for these indirect costs, the market is undervaluing many goods and services, creating economic distortions.

As economic decision-makers—whether consumers, corporate planners, government policymakers, or investment bankers—we all depend on the market for information to guide us. In order for markets to work and economic actors to make sound decisions, the markets must give us good information, including the full cost of the products we buy. But the market is giving us bad information, and as a result we are making bad decisions—so bad that they are threatening civilization.

The market is in many ways an incredible institution. It allocates resources with an efficiency that no central planning body can match and it easily balances supply and demand. The market has some fundamental weaknesses, however. It does not incorporate into prices the indirect costs of producing goods. It does not value nature’s services properly. And it does not respect the sustainable yield thresholds of natural systems. It also favors the near term over the long term, showing little concern for future generations.

Dick Cavett once said: “It’s a rare person who wants to hear what he doesn’t want to hear.”  Plan B 3.0 is the kind of information that those rare people ambivalently clamor to hear.    It’s clearly written and well documented.  There’s nothing shrill in Lester Brown’s book; just the facts—lots of facts that paint a dire picture.  Over and over, humans are overexploiting precious resources, and the situation is getting dangerous in many ways.  What’s at stake?  You name it.  Oil, food, water, forests, health, fisheries.   On the topic of fisheries, did you know that there are essentially no cod to be caught in the North Atlantic Ocean any more?   Gee, how did that happen?  Why didn’t the “free market” protect the North Atlantic Ocean?

Brown argues that we need to dramatically change the way we live and consume.   He argues that the “free market” is not a cure, unless we first make the true costs of over-exploitation visible and force purchasers to pay the full price.   We need to “Get the market to tell the ecological truth.” For example, the true cost of a gallon of gas is not $3/gallon, but more like $12/gallon.

One of the best examples of this massive market failure can be seen in the United States, where the gasoline pump price in mid-2007 was $3 per gallon. But this price reflects only the cost of discovering the oil, pumping it to the surface, refining it into gasoline, and delivering the gas to service stations. It overlooks the costs of climate change as well as the costs of tax subsidies to the oil industry (such as the oil depletion allowance), the burgeoning military costs of protecting access to oil in the politically unstable Middle East, and the health care costs for treating respiratory illnesses from breathing polluted air.

Based on a study by the International Center for Technology Assessment, these costs now total nearly $12 per gallon of gasoline burned in the United States. If these were added to the $3 cost of the gasoline itself, motorists would pay $15 a gallon for gas at the pump. In reality, burning gasoline is very costly, but the market tells us it is cheap, thus grossly distorting the structure of the economy. The challenge facing governments is to restructure tax systems by systematically incorporating indirect costs as a tax to make sure the price of products reflects their full costs to society and by offsetting this with a reduction in income taxes.

But what can we really do about our dire situation?  Here’s how Lester Brown concludes his book:

The scale and urgency of the challenge we face has no precedent, but what we need to do can be done. It is doable. Sit down and map out your own personal plan and timetable for what you want to do to move the world off a path headed toward economic decline and onto one of sustainable economic progress. Set your own goals. Identify people in your community you can work with to achieve these goals. Pick an issue that is meaningful to you, such as restructuring the tax system, banning inefficient light bulbs, phasing out coal-fired power plants, ending the use of tax money for bottled water, or working for “complete streets” that are pedestrian- and bicycle-friendly in your community. What could be more exciting and rewarding?

The choice is ours—yours and mine. We can stay with business as usual and preside over an economy that continues to destroy its natural support systems until it destroys itself, or we can adopt Plan B and be the generation that changes direction, moving the world onto a path of sustained progress. The choice will be made by our generation, but it will affect life on earth for all generations to come.

Oh, and we’re going to have to squarely face the issue of how many people this planet can actually support.  We’ll have to start acknowledging this issue of population control or we’ll have to deal with the much harsher consequences of not acknowledging it.

[Ira Flatow of Science Friday interviewed Lester Brown on January 11, 2008.  In this interview, Brown confronts the unwillingness of governments and large financial institutions and analysts to confront shortages of natural resources, including peak oil, which might have already occurred.  The failure to confront population growth also takes center stage].

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Category: Consumerism, Economy, Energy, Environment, Food, global warming, Statistics, Technology

About the Author ()

Erich Vieth is an attorney focusing on consumer law litigation and appellate practice. He is also a working musician and a writer, having founded Dangerous Intersection in 2006. Erich lives in the Shaw Neighborhood of St. Louis, Missouri, where he lives half-time with his two extraordinary daughters.

Comments (10)

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  1. random guy says:

    Im a libertarian on most social and financial issues, but on this one I agree with you whole-heartedly. If there is anything economics and sociology has taught us is that people are incapable of making rational decisions in cost-profit analysis.

    You talk about the overfishing of cod, I remember reading about the overfishing of a certain fish in the mediteranian. Every year these fish school together to mate and they create these large schools that are easily visable to anyone on a boat. So every year the fishing boats rush towards these schools and dredge up all that they are legally allowed to do, which is still very high, given Europe's demand for fish. Except now this particular species is being overfished, and as their rarity increases so does the price for each shipfull that comes in. So you now have a market system set up to reward people for depleting an already declining population of fish, and the techniques used for fishing this species grabs them at a critical period of their life-cycle ensuring diminishing returns with every year.

    Its depressing, but I really don't see a solution to these problems until we experience some form of economic or enviromental collapse due to our policies. On the supply side there is just too much money invested in maintaining the status quo, and on the demand side people are too unwilling to give up their creature comforts.

  2. Dan Klarmann says:

    Actually, the cost of gas at the pump in the U.S. does not include discovery. The USGS is tax funded and it maps out where natural resources such as oil are to be found. Tax money also supports low interest (and forgiven) loans for exploration and construction of extraction platforms, refineries, and the rails and roads to get the gas to the pump.

    To get an idea of what gasoline actually costs (ignoring environmental damage) look at world prices at the pump (up to $6.48/gal).

    As for efficient light bulbs: Let's not ignore the environmental cost of all that improperly disposed of mercury and other exotic compounds found in fluorescent bulbs. Most people don't know any better than to throw them in the trash.

    It is a finite world, and unless we can start mining other places our time here is very limited. Also keep in mind that we will never be able to exploit space unless we do it while we are flush with resources. That light at the end of a tunnel is probably a train! The time to move is now.

  3. PeterM says:

    A wholehearted 'Amen' to the article, but I'd be careful about following Brown's (and others') knee-jerk rush to 'energy-efficient' lightbulbs. Consider how much non-recyclable plastic is used in these items and how much oil is used to produce it, quite apart from the toxic chemicals Dan mentions. An ordinary lightbulb may use more electricity, but it's made up of metal and glass, and almost nothing else. Much easier to manufacture and recycle using low-tech methods. Not to mention the ghastly light from CFLs. If the UK ever legislates for compulsory CFLs, I'll be stockpiling incandescents.

  4. Erich Vieth says:

    Wikipedia has an extensive article on CFL's (energy efficient light bulbs). I'm a believer in them –I have very few incandescent bulbs still being used in my house.
    http://en.wikipedia.org/wiki/Compact_fluorescent_

  5. Dan Klarmann says:

    I use CFL's more and more. The latest generation warms up even faster to a comfortable color. I just wanted to remind people of the hidden costs, as the original post was about.

  6. Erich Vieth says:

    Federal fisheries managers on Friday took the initial step toward imposing what could be the strictest limits ever on West Coast salmon fishing amid a precipitous drop in fish returning to California's Sacramento Valley.

    The Pacific Fishery Management Council unanimously adopted three options for sport and commercial fishing off the Pacific Coast, including an unprecedented complete shutdown of fishing off California and Oregon.

    http://www.msnbc.msn.com/id/23641437/

  7. Erich Vieth says:

    It appears that "mechanism design theory" is an attempt to address Lester Brown's pointed criticism of those who blithely rely on the "free market" to solve our problems. http://dangerousintersection.org/2007/11/28/the-i

  8. Erich Vieth says:

    Everyone thinks of changing the world, but no one thinks of changing himself.

    Leo Tolstoy (1828 – 1910)

  9. Erich Vieth says:

    The EU has now banned incandescent light bulbs, stepping in to give the "market" some direction. Good for the EU! http://redgreenandblue.org/2008/10/11/eu-bans-inc

  10. regeya says:

    Sadly, there will be a number of free-market proponents who will read what you wrote, snort, and scoff: "Silly Erich, the free market hasn't failed because it's never been tried!"

    Totally agree. The flow of money alone cannot save the world.

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