Market Failures and Social Costs
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According to Adam Smith, self-interested participants in a competitive marketplace will be unwittingly led to promote the common good by the "invisible hand" of the market. That is, with consumers and producers acting rationally to maximize their own gain, the market will automatically allocate resources with greatest efficiency and generate a maximum of individual and social prosperity. Thanks to the invisible hand, self-seeking individuals, despite the lack of any intention to do so, will benefit their fellows as they enrich themselves. Smith therefore argued for a laissez-faire, competitive market system of economics.
As we have seen, the premise of abundance necessary to support Smith's contention has vanished. Thanks to ecological scarcity, rational self-seeking individuals, despite the lack of any intention to do so, harm their fellows as they attempt to enrich themselves. As steady-state economist Herman Daly (1973, p. 17) aptly puts it, the invisible hand has turned into an "invisible foot" that threatens to destroy the common good with pollution and other "external diseconomies" or "externalities," the economist's terms for the social costs of production that are not accounted for in the price mechanism. In fact, the problem of the invisible foot is simply the economic version of the commons problem discussed in the preceding chapter. Individuals rationally seeking gain (or at least non-loss) are virtually compelled by the logic of the marketplace commons to make economic micro-decisions that are aggregated by the invisible foot into an ecological macro-decision that is increasingly destructive tor the society as a whole- and therefore, paradoxically, for the individual as well. Thus an unregulated, competitive, laissez-faire market system, in which all have access to the economic commons and in which common-pool resources are treated as free goods, has produced a tragedy of the commons: the overuse, misuse, and degradation of resources on which we all depend for ecological health and economic wealth.
Other properties of a free-for-all system of wealth-getting strongly reinforce its tendency to destroy the commons. For one thing, market decisions are inevitably short-sighted, because the economic value of the future is understated or "discounted." Future values are usually discounted at the interest rate available to a prudent investor; at a interest/discount rate, the investor would just as soon have $100,000 now as $800,000 in 30 years. Why? Because if he or she invests the $100,000 at 7%, it will be worth $800,000 in 30 years. The investor will have the same amount of money and will have run little or no risk to get it. Similarly, at the same interest/discount rate, a resource that 30 years from now will be worth $800,000 has a present value of no more than $100,000. In fact, for all practical purposes, costs and benefits more than 20 years in the future are discounted to zero; owing in part to such additional factors as the prevailing rate of return on capital, it is a rare economic decision maker whose time horizon extends more than 10 years into the future. Thus critical ecological resources that will be essential for our well-being even 30 years from now not only have no value to rational economic decision makers, but scarcely enter then-calculations at all. They are therefore likely to make decisions that irreversibly deplete or destroy vital resources (especially since each decision maker realistically fears that his or her own self-restraint would simply hand over to another the opportunity for profit). Thus, as Karl Marx put it a century ago, the watchword of market capitalism is "Apres nous le deluge," as entrepreneurs strive to maximize current benefits at the expense of the future.
An additional problem is that although the market price mechanism handles incremental change with relative ease, it tends to break down when confronted with absolute scarcity or even marked discrepancies between supply and demand. In such situations (for example, in famines), the market collapses or degenerates into uncontrolled inflation, because the increased price is incapable of calling forth an equivalent increase in supply* In a famine, supply and demand are eventually brought into balance by death, emigration, or the deus ex machina of relief efforts—that is, by physical readjustments, not by the price mechanism. Thus the market is unlikely to preside over a smooth and trouble-free transition to a steady state, for the crisis of ecological scarcity involves absolute physical scarcities (lack of food, water, time, or human physiological tolerance for poisons) that mere money can remedy, if at all, only in part (and certainly not indefinitely or all at once). Indeed, shortages leading to rising prices may simply increase the incentives to exploit remaining resources heedlessly in a desperate attempt to meet current demand. Rising prices, then, are not likely to induce timely and appropriate responses to ecological scarcity, and they will certainly not preserve resources from exhaustion and degradation. In fact, they may simply intensify the pressures that are producing the current mode of ecological overshoot.
* To use the economist's terms, the market is splendid at coping with relative scarcity, shifting the burden of scarcity so that it is least uncomfortable (for example, by inducing substitution of one resource for another), but it is incapable of dealing with absolute scarcity except by raising prices in general—that is, through inflation. There is reason to suspect that this is the underlying cause of the inflation existing in the industrialized world.
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Additional problems of a more structural nature abound. In the first place, in a market economy—where the market is the economic tool, not just one among others—all the incentives of producers are toward growth and the wasteful use of resources. It is in the interest of producers to have a high-throughput economy characterized by high consumption through product proliferation and promotion, rapid obsolescence, and the like. It is just not economically advantageous for a producer to make an indestructible, easily repaired, inexpensively operated car. If consumers were perfectly rational—that is, if they acted solely according to their economic advantage—they could no doubt oblige producers to turn out nothing else, but we know very well that consumers are not completely rational (about cars least of all) and that producers do everything in then-power to exploit this irrationality to boost sales (for example, by using ads that play upon consumers' social and sexual insecurities). By comparison, the incentives to satisfy needs with minimum inputs of energy and material and the lowest real or long-term cost are quite weak, as is well exemplified by the entrepreneurial flight from passenger rail transportation. In their pursuit of economic advantage, producers can be expected to promote higher consumption and in general to exploit every opportunity to profit by not counting the ecological costs. And of course the growth orientation of the private sector is reinforced by the government, which uses its taxing, spending, and monetary powers to promote prosperity and full employment.
Conversely, producers lack significant market incentives to respond alertly and appropriately to many of the problems created by ecological scarcity. For example, it is simply not in the interest of oil companies or electric power companies to promote alternatives to the current fossil-fuel-based energy economy or to the centralized system of power production and distribution. In fact, for the purely "economic" person, the best of all possible worlds would be one in which people are almost literally dying for lack of what only he or she can supply. It is therefore entirely rational for entrepreneurs to let scarcity reach uncomfortable levels before innovating or bringing new resources to market. Thus the market price system is unlikely to favor far-sighted, much less public-spirited, investment decisions or to promote ecologically sound alternatives to current technologies, especially because some of the logical alternatives, such as alternatively fueled automobiles, could reduce the dependence of consumers on producers. At the very least, producers are likely to wait until demand builds up, and they are ensured of large profits before they invest heavily in such alternatives as fusion, which may require a great deal of time and money to develop to the point of commercial viability. Thus there are major structural obstacles to innovation and investment that will seriously impede response to the pressures of ecological scarcity (particularly in regulated monopoly industries, where real market competition does not exist). At best, market solutions will lag well behind the rapidly developing real-world problems of ecological scarcity.
In short, an unregulated market economy inevitably fosters accelerated ecological degradation and resource depletion through ever-higher levels of production and consumption. Indeed, given the cornucopian assumptions on which a market system of economics is based, it could hardly be otherwise; both philosophically and practically, a market economy is incompatible with ecology.
-pp. 218-22; Ecology and the Politics of Scarcity Revisited; William Ophuls & A. Stephan Boyan