The “Free Markets Destroy the Environment” fallacy argues that free markets and capitalism are destroying the environment as they exhaust global resources.
Earlier in this series I made the observation that the material world is both the object of human work and the human habitat. The Bible teaches us that nature is good but incomplete. Humanity is called to be co-creators with God in bringing the created order to completion. If by “destroy the environment” we mean any human alteration of nature, then much like in the movie “the Matrix” we have defined humanity as a virus. Human beings are part of nature and they have an impact upon the world. The Bible has humanity as part of the eco-system but we are also stewards over creation. Wasteful destruction of resources by stewards is disobedience to the master stewards serve. Therefore, neither pristine preservation nor wanton destruction is part of Biblical stewardship. So what can we say about markets and the environment?
First, we need to deal with the widely presumed notion that we are exhausting the earths resources. We are not. Commodities prices factor in present and anticipated future demand combined with estimated reserves. If a commodity is getting scarcer in relationship to demand, then the price of that commodity will rise. I present once again the conclusion of a study presented to the IMF in 2001:
“Using the longest dataset publicly available (The Economist’s index of industrial commodity prices), we analyze the behavior of real commodity prices over the period 1862-99, and have two main findings. First, while there has been a downward trend in real commodity prices of 1.3 percent per year over the last 140 years, little support is found for a break in the long-run trend decline in commodity prices. …” (The Long-Run Behavior of Commodity Prices: Small Trends and Big Variability by Paul Cashin and John C. McDermott, International Monetary Fund.)
As resources become scarcer, the price will rise. People will begin to find ways to use less of the commodity, to recycle, or to find more plentiful substitutes (renewable resources being the most desirable.) Markets are an economic eco-system that directs us toward sustainable growth. Present global economic growth is easily sustainable for populations well beyond our present worldwide levels. When resources become an issue, we have markets to signal a problem. Because of constant innovation and ever improving productivity we simply can’t project today’s usage into the future and say we are depleting resources for future generations.
Second, we must be cognizant of the “tragedy of the commons.” This concept has been understood at least as far back as the Greeks. Nineteenth Century demographer William Lloyd gave the most popular example this concept using the idea of multiple herders owning grazing land in common.
From this point, Hardin switches to non-technical or resource management solutions to population and resource problems. As a means of illustrating these, he introduces a hypothetical example of a pasture shared by local herders. The herders are assumed to wish to maximize their yield, and so will increase their herd size whenever possible. The utility of each additional animal has both a positive and negative component:
- Positive: the herder receives all of the proceeds from each additional animal.
- Negative: the pasture is slightly degraded by each additional animal.
Crucially, the division of these costs and benefits are unequal: the individual herder gains all of the advantage, but the disadvantage is shared among all herders using the pasture. Consequently, for an individual herder weighing these, the rational course of action is to add an extra animal. And another, and another. However, since all herders reach the same rational conclusion, overgrazing and degradation of the pasture is its long-term fate. Nonetheless, the rational response for an individual remains the same at every stage, since the gain is always greater to each herder than the individual share of the distributed cost. The overgrazing cost here is an example of an externality. (Wikipedia)
By contrast, when herders own their own herds and land they have incentive to preserve and protect the two in relationship to each other. Property rights and private ownership foster sound management of resources.
Property rights also allow owners to protect their property from devaluation by others. Without a clear title to private property (as is the case in most developing nations), on what basis does someone downstream from a major polluter along a river bring remedial forces to bear on the polluter? They can’t. Costa Rica has come up with an innovative market solution for protecting their eco-system. The have set aside a large percentage of their land area as reserve, essentially holding it in trust for the people, and begun offering eco-tourism packages. This land, now removed from the commons, generates considerable income for the nation and gives people the incentive to respect the property because they want the income to continue.
It is alleged that free markets leads to environmental exploitation. But if we look at nations with free markets and property rights we find they are the least polluted and best cared for nations on the planet. The worst environmental degradation is seen in two other types of societies.
The first place we see environmental exploitation is in the former Soviet Bloc nations. Government bureaucracies made decisions to sacrifice environmental protection for the sake of economic expansion creating some the most toxic air, soil, and water conditions on the face of the planet. Individual property rights were weak or nonexistent, leaving the populace with little recourse against the externalities of the government's policies. Had their been strong rule of law and democratic freedoms, the environment would be in a far better state than it is at present.
The second place we see environmental problems is in developing nations. People who are living hand-to-mouth have are not concerned about the environment. Deforestation for construction, firewood, or to make room for more crops is critical to survival. Environmental protection is a luxury. Several years ago a World Bank study suggested that pollution per capita rises as per capita annual income rises into the $3,000-4,000 range. Beyond that, per capita pollution goes into decline. At that level, most people have met basic survival needs and they can begin to focus on other issues. With rising wealth, they now have more to lose. They begin to insist on rule of law and greater say in political decisions. With greater protection of property rights comes greater prosperity. With greater prosperity come better institutions and more resources for addressing environmental concerns.
The environmental exploitation of some developing nations by large corporate entities is not a function of the free market system but rather the lack of such a system. Because the developing nation is without a market system with a strong juridical framework there is no way local inhabitants can protect themselves. Complicating matters are differing societal standards of what constitutes environmental abuse. What appears to Westerners as abuse of a developing nation’s environment may be considered an utter irrelevancy by people living at bare subsistence. According to a recent Pew study, substantial majorities of people in most developing nations have a favorable view of foreign corporations in their country. It often appears that many from developed nations have greater concerns about the environment in poor nations than the residents of the poor nations do.
It is not my intention to make excuses for environmental exploitation. There are corporate abuses. Rather I wish to point out that what constitutes exploitation is not as straightforward as it seems. What does seem apparent is that greater prosperity combined with an effective property rights system and rule of law lead to greater care for the environment.
Finally, we turn to pollution in economically advanced nations. Pollution per capita has been in decline for decades. Right now fossil fuel emissions from power plants, factories, and vehicles are of great concern. Regardless of what credence should be given to the impact of human generated carbon dioxide into the air we know without a doubt the fossil fuels put toxic substances in the air. Renewable less toxic sources of power would be an environmental improvement, particularly as the economies in developing nations grow (not to mention the geopolitical advantage of taking petro-dollars out of the hands of rouge nations). But it is unjust to claim that because we can now see the consequences of fossil fuel technologies, that those who first brought these technologies into existence were malevolent people out to exploit the environment. Each advance in technology brings latent and unintended consequences into existence that must be addressed.
Thankfully, free markets give entrepreneurs the freedom, the incentive, and the access to resources to innovate solutions to new problems. As environmental concern is feed into the marketplace, markets can do their magic in accessing and mobilizing human creativity for solutions.
Markets don’t destroy the environment. Poverty, lack of property rights, and insufficient rule of law destroy the environment. There is no impending exhaustion of natural resources and innovation through markets holds greatest promise of rectifying the problems of pollution.