Real-World
Economics

 

George H. Blackford, Ph.D.

 Economist at Large

 Email: george(at)rwEconomics.com

 

It ain't what you don't know that gets you into trouble.

It’s what you know for sure that just ain't so.
Attributed to Mark Twain (among others)

 

Home
Economic Papers
Political Essays
Bibiliography
Biography
Links

 

Pollution, Natural Resources, and Ideology*

George H. Blackford © 5/15/2013

Globalization, combined with technological improvements in transportation and communication over the past thirty years have led to incredible growth in productivity and output throughout the world.  Unfortunately, this growth is derived from the same failed nineteenth century ideological paradigm of free-market capitalism that led to the deregulation of our financial system.  This paradigm is terribly flawed in its failure to understand the necessity to regulate financial markets or to understand the dependence of mass-production technologies on the existence of domestic mass Markets. It is also terribly flawed in its failure to understand the necessity to regulate pollution and to preserve our natural resources.

Externalities in Free Markets

This nineteenth-century paradigm assumes that the quantities of goods and services produced are determined in markets through the interactions of buyers and sellers in such a way as to minimize the costs of producing while at the same time maximizing the benefits to society as a whole.  The academic discipline of economics has provided a logically consistent and mathematically elegant model of market behavior that describes how this ideal system of human interaction is supposed to work as well as the prerequisites for the existence for such a system to actually work.

Unfortunately, the assumptions on which the logical consistency of this model depends—the most important being that no economic actor has the power to directly influence a market price, all market participants have perfect information as to the determination of all market prices, that there are no external costs or benefits associated with the production or consumption of any good, and that people behave rationallyare impossible to achieve in the real world.[1]  The particular shortcoming of this model I wish to discuss here is the problem of externalities.

At the core of the economic theory that explains how the benefits to society as a whole are maximized in a market economy is the requirement that market prices reflect the costs to society as a whole that result from producing goods and services and that market prices also reflect the benefits to society as a whole that result from consuming the goods and services that are produced.  This theory breaks down whenever there are costs or benefits that are external to the process of production or the act of consumption and, as a result, are not reflected in the market price.  (Musgrave)  To see how this breakdown occurs, consider the problem of disposing of the toxic waste generated in the process of producing chemicals.

A chemical company can minimize the cost it must pay—its private costs—to dispose of its toxic waste and, thereby, maximize its profits, by simply dumping its waste into the nearest stream or ditch.  The polluted streams and aquifers that result threaten our supplies of potable water and cost society dearly.  When a chemical company is able to externalize the costs of disposing of its toxic waste in this way, the private costs of producing chemicals are substantially less than they would be if the company had to pay these costs, and the true costs to society as a whole of the chemicals produced are not reflected in their prices.  This leads to an over production of chemicals in the sense that if chemical companies had to pay the true costs of producing chemicals, which would include the cost of safely disposing of their toxic waste, the price they would be willing to sell chemicals for would be higher, less would be purchased, and less would be produced.  (Smith Kuttner Musgrave)   

What’s more, if chemical companies are not prevented by law from dumping their toxic waste, they will have no choice but to dump it because those companies that try to be socially responsible and dispose of their toxic waste safely will have higher costs than those that do not try to be socially responsible.  As a result, socially responsible companies will be driven out of business by socially irresponsible companies as irresponsible companies drive market prices below the costs that must be paid by companies that try to dispose of their toxic waste responsibly. 

In other words, chemical companies must be forced by the government to be socially responsible or they will be forced by the market to be socially irresponsible.  That’s how markets work, and the only alternative to government intervention in the face of these kinds of external costs is to allow the external costs to destroy the environment on which the human race depends for its very existence. 

This problem is, of course, not limited to the chemical industry.  The cheapest way to produce electricity is by burning high sulfur coal and spewing the effluent into the atmosphere.  The acid rain and concomitant deforestation of the planet that result are costs to society as a whole that are not reflected in the market price and are not borne by the producers or consumers of electricity in the absence of government regulation. 

The cheapest way to run a nuclear power plant is to scrimp on safety, a practice which places enormous geographical regions at risk of utter devastation, the costs of which are not reflected in the market price of nuclear generated electricity and are not borne by the producers or consumers of nuclear generated electricity in the absence of government regulation. 

The cheapest way to control pests in agricultural is through the use of long lasting, carcinogenic chemicals such as DDT which have devastating, long lasting consequences for human health and the environment, the costs of which are not reflected in the market price and are not born by the producers and consumers of agricultural products in the absence of government regulation. 

The cheapest way to make paint or gasoline is by adding lead to the mix which spreads this toxic element throughout the environment, the costs of which are not reflected in the market price and are not born by the producers and consumers of paint or gasoline in the absence of government regulation. 

The list of dangers to the environment from unregulated markets when there are external costs goes on and on, and the dangers are not confined to external costs of production.  There can be external costs of consumption as well.  The most obvious threat to the environment today is the buildup of greenhouse gases in the atmosphere that is leading to global warming.  One of the largest sources of greenhouse gases is the carbon dioxide produced by burning gasoline in the internal combustion engines that power our automobiles.  The threat to the planet is imminent, and there is no way markets can deal with this threat because it arises from the external costs of consuming gasoline, costs that are not reflected in the price of gasoline.  

Since the price of gasoline does not come anywhere near reflecting the costs to the world community from driving our cars, consumers of gasoline do not have to pay these costs.  Consumers of gasoline gain all of the benefits of cheap transportation while they destroy the ecological balance of the carbon cycle, and there is no market mechanism that can keep this from happening in the absence of government intervention.  In fact, in the absence of government intervention, it is inevitable that the market must destroy the carbon cycle balance because it will always be cheaper and more convenient for most people to drive cars than to utilize more fuel efficient forms of transportation so long as those who drive cars have to pay only the private costs of producing gasoline and do not have to pay the social costs of consuming gasoline. 

There exists no mechanism within a market system of economic organization to control the external costs of production and consumption in the absence of government intervention, and it is inevitable that a system of free markets that allows each individual and firm to force the rest of the world to pay these costs will eventually destroy itself if the government does not step in to keep this from happening.  

Free Markets and Natural Resources

Not only does the nineteenth century ideological paradigm of unregulated free markets ignore the serious environmental problems that result from external costs, this paradigm also ignores the voracious appetites with which free markets devour natural resources.  This aspect of free-market capitalism, along with the problem of pollution, was of little consequence in the nineteenth century when the world’s population was but a fraction of what it is today, when only a small fraction of world’s economy was industrialized, and when the vast majority of the world’s population lived a communal existence based on self sustaining, renewable technologies.  The fact that a relatively small industrialized sector of the world community consumed natural resources at an accelerated rate and polluted the environment out of proportion to its size was of little consequence in such a world.  This is not the case today.

Figure 1 plots the United Nations estimates of the world’s population from 1000AD through 2150.  It should be clear from this plot that today’s world is dramatically different from what it was in the nineteenth century.  The world’s population increased by 68% in the 100 years from 1800 to 1900 as it went from 980 million to 1.65 billion.  In the next 50 years it increased by another 53% to 2.5 billion.  It then increased dramatically as it went from 2.5 billion in 1950 to 6.06 billion by 2000, a 142% increase in just 50 years.  Barring a worldwide economic catastrophe, the world’s population is expected to increase by another 50% in the next 40 years as it approaches 9 billion people by 2050.  (UN Sachs)

Source: United Nations, The World at Six Billion.

Not only has the world’s population grown at an astounding rate over the past fifty years, the world’s output of goods and services has grown at an even more astounding rate, especially in recent years.  As the world’s population increased by 11% from 1980 through 2010, its output of goods and services increased by almost 50%.  At the same time the proportion of the world’s output produced by the advanced countries fell from 80% in 1980 to 67% in 2010.  (UN

This 16% drop in the contribution of the advanced countries to the total output of the world’s economy as total output increased by 50% is both gratifying and alarming.  Gratifying because it means a larger portion of the world’s output is being produced by the less developed countries of the world with all of the potential that holds for the improvement in economic well being for the impoverished in those countries.  At the same time it is alarming because that increase in output is based on a flawed economic paradigm that is unsustainable. 

The tremendous increase in economic productivity and output that has made the remarkable increase in the world’s population possible over the past three-hundred years have come from technological advances that have allowed us to harness the energy stored in but three natural resources, namely, coal, oil, and natural gas.  In the eighteenth and nineteenth centuries we mastered the technology of coal, and in the twentieth century we mastered the technology of oil and natural gas.  Today’s economic system depends crucially on these three natural resources, especially oil, all of which are nonrenewable and all of which pose a serious threat to the environment. 

As was noted above, this was of little consequence in the nineteenth century when the world’s population was relatively small and a relatively small sector was industrialized, but in the twenty first century with the world’s population approaching nine billion people and the entire world striving toward industrialization, the nonrenewable nature of our resources and the inevitable consequences of accelerating pollution cannot be ignored.  The economic output of the world would have to increase by a factor of 3.5 over the next forty years to bring the rest of the world’s population up to the standard of living enjoyed by the advanced countries today even if there were no increase in the world’s population or in the standard of living in the advanced countries.  The increase would have to be by a factor of 4.6 if the world’s population were to rise to the expected nine billion, and even more if the standard of living in the advance countries were to increase as well.[2]  The math is irrefutable, and there is no way unregulated free markets are going to defeat this math.

With the incredible advances in transportation that have evolved over the past sixty years, combined with the unimaginable network of instant worldwide communication that came into being during the last twenty, the drive for industrialization in today’s world cannot be stopped.  The concomitant effects on the environment and the limitations placed on development by the finite nature of our natural resources—specifically, oil but potable water as well—must be acknowledged and dealt with if widespread famine and starvation are to be avoided in the future. (Sachs)

Conclusion

In dealing with the problems of pollution and dwindling natural resources, free-market ideologues are in a state of denial.  When it comes to global warming they argue 1) there is no such thing as global warming, 2) even though there is global warming it’s not our fault, and 3) if the government will just get out of the way free markets will solve the problem.  (PRC)   In dealing with the problem of preserving our natural resources they insist that the actions of free individuals in unregulated free markets that are free of government intervention will solve these problems without our having to worry about them. 

It is worth keeping in mind, however, that these are the same people who deregulated our financial system, facilitated the concentration of monopoly power into the hands of larger and larger, too-big-to-fail institutions, guided our trade policies into continuing trade deficits and the outsourcing of our manufacturing sector, failed to enforce laws against fraud and unfair labor practices, and imposed a tax structure on the populace that is incapable of maintaining the public infrastructure and social capital from which those at the top of the income distribution have benefited so greatlythe same people whose policies undermined our mass markets and drove the world’s financial system to the brink of destruction.  And these same free-market ideologues are now blaming “entitlement programs” for the economic catastrophe their policies have created as they block the tax increases needed to deal with the resulting deficit/debt problem and insist on cutting Social Security, Medicare, and other social-insurance programs in order to balance the federal budget. 

Given this record, it is difficult to understand why anyone would take these people seriously, but, unfortunately, much of the electorate does take them seriously, as does the leadership of both the Republican and Democratic parties.   

Over the past thirty years free-market ideologues have been able to block virtually every attempt to deal with the problems posed by rapidly rising external costs brought about by rapidly increasing population and economic growth in a world economy fueled by nonrenewable natural resources.  Their influence in the United States has led to Carter’s energy program being dismantled in the 1980s, CAFÉ standards that barely changed after 1984 until gasoline prices peaked in the mid 2000s, funding for the cleanup of superfund toxic waste sites being allowed to expire in 1995, the United States walking away from the Kyoto Protocol on global warming in 2001, and water pollution restrictions being reduced in 2003.  (Hartmann NHTSA GAO Time CSM)  

Their continued success in this regard does not bode well for the future.  Aside from the problem of global warming, the transportation and agricultural systems we have developed as a result of modern technology depend crucially on oil.  These systems have led to incredible increase in productivity over the past fifty years, but in the face of increasing world population and economic growth this technology is unsustainable. 

As world oil reserves dwindle and the demand for oil increases, the price of oil must increase, and, in turn, the productivity of our transportation and agricultural systems must decline.  Until we are able to find a renewable source of energy to replace oil, prospects for the future are dim.  In the meantime, it is going to become more and more difficult to feed the world’s population, and a rise in conflict, political instability, and turmoil throughout the world is inevitable. (EB)

If we value the kind of world we leave to our children and grandchildren we cannot sit back and hope for the best as unregulated markets squander our natural resources and pollute our planet.  The problems posed by population growth, the drive to industrialize, and the finite nature of our natural resources cannot be solved by markets alone.  They can only be solved through the international cooperation of governments.  (Sachs)

Endnotes

 * This essay was at one time, Chapter 19 in Where Did All the Money Go?

[1] It is, perhaps, worth noting that this fact is well known and well understood within the discipline of economics and is accepted by virtually all who know anything at all about the discipline or about the world in which we actually live. It’s not open to debate except, of course, among those who are either completely out of touch with reality or who make their living by denying this fact.

[2] The populations in these calculations are derived from the following table taken from the International Monetary Fund, World Economic Outlook Database:

Country Group Name

Subject Descriptor

Units

Scale

2010

Adv. economies

GDP(PPP)

Cur.Int.dollar

Billions

38,693.78

Adv. economies

GDP(PPP)/capita

Cur.Int.dollar

Units

38,024.65

Adv. economies

Population

 

Billions

1.01

Emrg. & dev. economies

GDP(PPP)

Cur.Int.dollar

Billions

34,505.83

Emrg. & dev. economies

GDP(PPP)/capita

Cur.Int.dollar

Units

5,953.64

Emrg. & dev. economies

Population

 

Billions

5.80

where population is estimated by dividing GDP(PPP) by GDP(PPP)/capita.

Hit Counter