PERC - The Property and Environment Research Center: Excessive Claims For the Market

PERC Reports: Volume 18,
No.3, September 2000

E-mail

Excessive Claims For the Market

By Peter Grosvenor

Free market environmentalists have improved the quality of environmental debate in several respects. Economic growth and environmental degradation are no longer equated. Economists such as Julian Simon have falsified the apocalyptic extrapolations of neo- Malthusians. In some cases, free market theory has also persuasively criticized overregulation and its unintended consequences.

Despite these contributions, free market environmentalism has serious flaws. First, it relies on abstract economic reasoning from prior assumptions and is poorly grounded in real historical experience, as these examples indicate:

In Britain at the height of the Industrial Revolution, unprecedented population densities required public provision of sanitation facilities. Every subsequent industrializing nation has replicated this process. It is a classic example of environmental protection as a public good, the provision of which Adam Smith himself recognized as a legitimate function of government.
The 'tragedy of the commons' posits that the depletion of resources held in common is inevitable. This ignores the fact that the commons operated successfully under customary regulation for many centuries, until they were destroyed' not by overgrazing but by the state-sanctioned coercion of the enclosure movement (McCoy and Acheson 1987; Thompson 1991).

A second problem with free market environmentalism is its frequent attachment to libertarianism and market fundamentalism. Libertarianism prioritizes a radically individualistic conception of freedom over all other political values and claims the market as the ultimate guarantor of this freedom.

Some of the excessive claims made on behalf of the market mirror the religiosity of the Greens. Steven Landsburg (1993, 73) comes close to imputing supernatural qualities to the market when he says, for example: 'In biology, there is no equivalent of the Invisible Hand. . . . Nothing in evolutionary theory either promises or delivers the spectacular efficiency of the competitive marketplace.'

The Greens' apocalyptic warnings also have a libertarian parallel in cornucopian naivete. The late Julian Simon (1998) jeopardized an otherwise useful argument when he implied that the world is underpopulated and that there can be no long-term negative consequences attached to population growth.

Indeed, market fundamentalists contend that if any market transaction is unimpeded, its outcome must be optimal and that any reduction in the scope of the market results in economic inefficiency and loss of personal freedom.

But such an ultra-individualist view will not find support even in the works of a market theorist, F. A. Hayek himself, who viewed some health and safety regulation as appropriate. 'To prohibit the use of certain poisonous substances or to require special precautions in their use, to limit working hours or to require certain sanitary arrangements, is fully compatible with the preservation of competition,' he wrote. 'The only question here is whether in the particular instance the advantages gained are greater than the social costs which they impose' (Hayek 1994, 43).

Hayek's sentiment is effectively indistinguishable from the views of a mixed economy advocate such as Robert Kuttner (1997, 304), who writes: 'Advocates of a mixed economy do not insist that regulation always improves on markets'only that it sometimes improves on some markets, and that one must get down to cases.'

There are both ethical and technical limits to the competency of the market. Ethically, all societies, past and present, have deemed whole spheres of life to be beyond the acceptable scope of markets. As philosopher Michael Walzer (1983, 9) has argued, '...the words prostitution and bribery, like simony, describe the sale and purchase of goods that, given certain understandings of their meaning, ought never to be sold or purchased.' Limits on commercial intrusion into public parks is a contemporary example of appropriate restraints.

Consider now the technical limits. In some instances, markets are inadequate and require 'command- and-control' regulation. Such regulation is not necessarily ineffective or counterproductive.

Robert Gordon (1994) of the National Wilderness Institute, a fierce critic of the Endangered Species Act, argues that the act has contributed nothing to the recovery of the Arctic peregrine falcon and the bald eagle. Instead he credits the DDT ban'another case of 'command-and-control' legislation.
Economists Crandall and Graham (1989), working from a 1984 study that correlated car mass with occupant fatality, have claimed that fuel economy regulations increased fatalities because auto manufacturers reduced vehicle weight and therefore safety. But their study ignores the law of substitution (Kuttner 1997, 305-308). The notion that auto manufacturers compromise safety to comply with fuel efficiency regulations reflects a level of cynicism about business motivation more commonly found on the Marxist left. In practice, regulation has provided incentives for innovation, resulting in cars that are lighter, more fuel efficient, and safer.

In the case of fuel efficiency, 'command-andcontrol' regulation has had net benefits that would not have resulted from either the free market or a lighter regulatory regime. For example, some economists have proposed the more market-based mechanism of gasoline taxes to reduce fuel use. Taxes have been used to good effect in Europe, where a highly developed infrastructure of public transportation provides an alternative. In the United States, by contrast, gasoline taxes would allow the wealthy to consume fuel at their previous rate, while exacerbating financial pressures on the poor, results acceptable only to ideologues who insist that market outcomes by definition constitute distributive justice.

Having said this, the efficiency of the free market does justify a presumption against regulation, and where regulation is necessary, it should be as market-based as possible. The 1990 introduction of tradable emission rights created a decentralized regulatory regime under which a reduction in emissions would profit the polluter by freeing emission rights for sale.

The historical record demonstrates that, left entirely to its own devices, the free market results in pollution, hazardous working conditions, and dangerous products. Societies use the political process to set environmental minima. The view that the free market will always produce optimal environmental outcomes represents a triumph of libertarian ideology over historical experience.

References
Crandall, Robert W., and John D. Graham. 1989. The Effects of Fuel Economy Standards on Automobile Safety. Journal of Law and Economics 32(1): 97-118.
Gordon, Robert E. 1994. Help Landowners Save Endangered Species. Insight, May 30.
Hayek, F. A. 1994. The Road to Serfdom. Chicago: University of Chicago Press.
Kuttner, Robert. 1997. Everything for Sale. Chicago: University of Chicago Press.
Landsburg, Steven E. 1993. The Armchair Economist. New York: Free Press.
McCoy, B., and James M. Acheson. 1987. The Question of the Commons. Tucson: Edge City.
Simon, Julian. 1998. The State of Humanity: A Cornucopian Appraisal. In The Global Agenda, C. W. Kegley & E. R. Wittkopf eds. Boston: McGraw Hill, 487-98.
Stigler, George. 1971. The Theory of Economic Regulation. Bell Journal of Economics and Management Science 2(Spring): 3-21.
Walzer, Michael. Spheres of Justice. 1983. New York: Basic Books.
Thompson, E. P. 1991. Custom, Law and Common Right. In Customs in Common. London: Penguin, 97-185.

Peter C. Grosvenor is Assistant Professor with the Department of Political Science Pacific Lutheran University. This paper is based on a talk he gave at the annual meeting of the Association of Private Enterprise Education (APEE) held in Las Vegas in April 2000.

[ More about Peter Grosvenor]