Eco-Economics

Costing the Earth, by Frances Cairncross, Boston: Harvard Business School Press, 341 pages, $24.95

Changing Course, by Stephan Schmidheiny, with the Business Council for Sustainable Development, Cambridge, Mass.: The MIT Press, 374 pages, $35.00/$16.95 paper

Beyond the Limits, by Donella Meadows, Dennis Meadows, and Jorgen Randers, Post Mills, Vt.: Chelsea Green Publishing, 300 pages, $19.95

Casting himself as protector of the environment in a speech last August, Bill Clinton outlined his plans for our planet: "I would support a market-based system to make manufacturers and importers pay more of the cost of disposing of the goods they produce." Later, borrowing from standard economics lingo, he cautioned, "polluters should pay [for their] externalities."

Clinton's speech echoed the new environmental refrain: Markets are in; central planning with command-and-control regulations is out. In rhetoric, at least, many environmentalists now champion markets, since evocations of planning and top-down regulations conjure up visions of failed communist economies. So pronounced is this trend in rhetoric that supporters of a 1992 Massachusetts ballot initiative that prescribed detailed packaging regulations felt impelled in their campaign to call the regulations a "free-market" solution: The private sector would "freely" decide how to comply with the rules.

But the trend is more than strictly a rhetorical one. In the 1970s, most environmentalists disclaimed any relevance of economic theory to environmental policy. Perceived as absolute values, environmental goals were to be pursued regardless of costs. Proposals for pollution charges were dismissed as unacceptable "licenses to pollute." And market institutions were deemed not a remedy but a cause of environmental woes.

By the late 1980s, however, some mainstream environmentalists had begun to see economic theory and market processes as essential to thinking about environmental problems and policies. Two new books fit into this trend. Frances Cairncross, environmental writer for The Economist, embraces market-oriented environmentalism in Costing the Earth. And Changing Course, a collective effort by a group of international business leaders headed by Swiss businessman Stephan Schmidheiny, strives to blend economics and environment, market processes and public policy, into an analysis of what's wrong with our planet and how we can make things better.

A third book, Beyond the Limits, reaffirms old viewpoints with a strong dose of skepticism about markets as an antidote to environmental degradation. The book, by Donella Meadows, Dennis Meadows, and Jorgen Randers, is a sequel to the best-selling 1970s doomsday proclamation Limits to Growth, which denounced a great deal of what markets have produced in the last few centuries and (wrongly, it turns out) prognosticated near-term depletion of many basic raw materials.

But even in their skepticism, the authors of Beyond the Limits pay some homage to markets (and technology). "If we suggest that technology or markets have problems or limits," they write, "some will label us antitechnology or antimarket." They retort, "we are neither." Rather, "we…respect the virtues of the market. Two of us have Ph.D.'s from a major business school; one of us has been president of another business school and is currently a business manager." These credentials, they presume, should reassure us. And they also feel obliged to underscore that they don't endorse a "world of strict, centralized, government control."

So markets, at least in rhetoric, are in. But these books prod us to inquire just what we mean by "market-oriented environmentalism" and to explore the philosophical differences that divide those who now operate under that banner. Most of the newly popular market environmentalism shares with the more traditional command-and-control school of thought a reliance on collective goal setting: Political processes determine ends. Markets offer a toolkit of means with which to pursue those ends. And the means do not emerge through a series of decentralized transactions, a process dubbed "spontaneous order" by the late Nobel laureate F. A. Hayek. Instead, the tools, just like command-and-control specs for antipollution technologies, are designed through top-down legislative action.

This is the vision of market environmentalism offered for the most part by Cairncross and to some extent by Schmidheiny. It is a vision that leaves mostly unexplored some crucial questions about the nature of markets, the ways in which they function, the conditions under which they allocate scarce resources efficiently, and the connection between free markets and liberty.

Last things first. In his book Knowledge and Decisions, economist Thomas Sowell describes the market as "nothing more than an option for each individual to choose among numerous existing institutions, or to fashion new arrangements suited to his own situation and taste…the market is simply the freedom to choose among many existing or still-to-be-created possibilities." Viewed this way, markets are the processes by which individuals, through their transactions with others, express their own priorities. Through markets, people make tradeoffs among multiple goals as they decide how to allocate their (always) limited resources.

As Sowell points out, "the diversity of personal tastes ensures that no given institution will become the answer to a human problem in the market…responsiveness to individual diversity means that market processes necessarily produce 'chaotic' results from the point of view of any single given scale of values." Market processes, described in this way, are the essence of liberty; they are the expression of individual values.

This focus on the individual is altogether absent from Beyond the Limits. Meadows et al. push for a world that is "materially sufficient, socially equitable, and ecologically sustainable." To achieve this essentially redistributive vision, they claim, "no one need engage in sacrifice or in strong-arming, except, perhaps, to get some people to stop deliberately confusing or distorting or ignoring information." While they skirt around just what they mean, their agenda is essentially a call for a "new man"—not the Chinese new socialist man but a new "green" man for whom material consumption yields to spiritual nourishment.

And it is "society" that will accomplish this transformation. The authors suggest that some "growth" could occur, but "before society would decide on any specific growth proposal, it would ask what the growth is for, and who would benefit, and what it would cost, and how long it would last…and when any physical growth had accomplished its purposes, it would be brought to a stop."

How would this lockstep process be implemented? Not through any strict, centralized, government control, Meadows et al. insist. But they do tell us we will "need rules, laws, standards, boundaries, and social agreements, of course, as does every human culture." They admit that some of these rules will be different from what we now have. For example, they justify bans on some resource use, asserting that such prohibitions serve a purpose similar to a ban on bank robbery. But they do not explain what limits, if any, would be placed on such restrictions.

Moreover, the analogy obscures important differences between the two kinds of bans. We outlaw bank robbery because it constitutes an act of violence, a taking of property deemed to belong to the victim. The ban on robbery thus preserves private property. Outlawing some resource use, by contrast, has to rest on a philosophical foundation that jettisons notions of private property. To justify interfering with voluntary transactions—buying and selling of basic resources—requires recasting resources as "common property" subject to political deliberations about their allocation. It may be possible to erect a philosophy to support this view of resources. But it is not possible to do so without rejecting the kind of property rights fundamental to market processes.

Notwithstanding their avowals to the contrary, the authors of Beyond the Limits convey a worldview embodying just about everything that is wrong with most modern environmental politicking. Its frame of reference is the collective decision maker; its focus is on redistribution of wealth and political allocation of resources; its vision of resources and human action is, if not altogether static, highly constrained. Beyond the Limits thus serves as a benchmark against which to assess the views set forth in the other two books, whose authors fully embrace the attempt to use market processes to achieve environmental goals.

In contrast to Meadows et al., the authors of Changing Course understand the dynamism of human action. Schmidheiny writes, for example, that "what separates a 'waste' from a 'raw material' is economic usefulness," and he cites a series of cases that "demonstrate how research and imagination can turn wastes into resources." In fact, both Costing the Earth and Changing Course express an optimism alien to the authors of Beyond the Limits, notwithstanding their periodic acquiescence to crisis scenarios.

For Cairncross and Schmidheiny, time offers opportunities, not constraints. For Meadows et al., time is the enemy: "Time is in fact the ultimate limit—in the 'real' world. The reason that growth, and especially exponential growth, is so insidious is that it shortens the time for effective action." This view of time underlies a portrayal of a world in crisis: We are running out of resources, running out of "sinks" into which we can emit pollution, so "poverty…will have to be addressed while the material human economy contracts."

This crisis orientation emerges naturally from a perception that resources are finite, nature not very resilient. And behind these perceptions lurks a view of human creativity as limited also. For Meadows et al., resources are the panoply of raw materials "out there." Sometimes these resources are renewable, but the basic array of materials available to us remains unchanged. Cairncross and Schmidheiny, on the other hand, acknowledge that the industrial age has witnessed constantly increasing efficiencies in resource use—more bang for the buck, less energy per unit of output, more farm produce per unit of land, and so on. They emphasize the possibilities of change.

Meadows et al. dish up their world vision in a series of scenarios that they run through a computer model in order to anticipate possible outcomes. They warn that the models are not intended to predict the future, and they admit that human choices can change outcomes. But the assumptions of their model give us a sense of their worldview.

For example, "the model does not allow industry to make something out of nothing." So far as the authors of Beyond the Limits are concerned, resources are essentially fixed. Yet resources are not fixed. True, we can't make something out of nothing. But it is the attributes of particular raw materials that we seek, not each stone, chemical, or organic product per se. We seek fuel, not necessarily oil; material that can be woven, not just cotton, wool, or nylon; materials that are malleable, strong, or conductive, not copper or iron or silica per se. This opens up vast possibilities for invention, substitution, and expansion of our resource base. It is human action that turns a sow's ear into silk—or, more realistically, sewage sludge into energy, oil into usable fuel, or old plastic scrap into tennis ball fuzz.

This more optimistic view, shared by Cairncross and Schmidheiny, is part of a trend away from the Meadows vision, and market-oriented environmentalism has helped foster that trend. Nevertheless, Costing the Earth and Changing Course are often troubling.

Individual decision making, for example, has little role in the market schemes proposed by Frances Cairncross in Costing the Earth. On that score, she doesn't differ notably from Meadows et al. Cairncross repeatedly reminds us that "society" must set our environmental goals. "Only government," she writes, "can decide how much society should value the environment, and how that value should be inserted into economic transactions." Her vision is consciously collectivist.

The authors of Changing Course grope toward a more individualistic perspective when they claim that "markets empower people." They warn that "sustainable development cannot be secured efficiently by government decisions alone. Governments should instead provide a framework in which it can happen." But, like Cairncross, they usually assume that environmental goals have to be set collectively. "Society—through its political systems—will have to make value judgments, set long-term objectives," they tell us.

Thus, Cairncross and sometimes Schmidheiny, despite their strong endorsement of the marketplace, abandon one of its principle virtues—individual rather than collective allocation of resources. They justify the move to collective decision making by frequent appeals to "market failure" and "negative externalities." Schmidheiny notes that markets "often fail to integrate environmental costs into economic decisions." For example, without air-emission regulations, people don't pay for use of the air when they emit pollutants into the atmosphere. Few, if any, economists would disagree. Indeed, one of the central challenges for environmental policy is to overcome such externality problems.

For Cairncross and many other champions of market environmentalism, this translates into an appeal for government to "set prices on environmental resources" and "make sure consumers and producers pay the true costs of the environmental damage they cause." Market environmentalists are generally right in this appeal, and Cairncross brings up all the usual examples. The government often subsidizes water use, economic calculations often do not take air emissions into account, and so on.

But there are problems with the conclusions that many market environmentalists draw from these observations about externalities and pricing. They sometimes misapply the concept of externalities, arguing for government intervention to "set prices" for values that may already be reflected in market transactions. Cairncross, for example, tells us, "there is a housing market, but there is no beauty market. So if government is to make sure that the beauty spot is properly valued, it has to put a price on loveliness."

Cairncross may be right if the land is publicly owned. Under such circumstances there is no mechanism for individuals to express their estimation of the land's value by bidding for its preservation or its development. Or she may be trying to illustrate a problem in a growing neighborhood where current residents have long enjoyed a view of land that is about to be developed. The value of their property may decline as a result. Is compensation justified?

But Cairncross doesn't investigate these issues. She simply makes a blanket statement that markets fail to "value" beauty. Yet surely transactions over private property incorporate "loveliness," and a host of other intangible factors, into sales prices. Cairncross may actually be trying to say that individuals, in their private transactions, do not value "loveliness" (or recycled paper, organic vegetables, or whatever) to the degree that many environmental activists do. Hence the push for collective decision making to impose one set of values on the rest of us.

Elsewhere, Cairncross tells us that "government needs to find ways of encouraging industry to use raw materials frugally." If Cairncross is alluding to resource subsidies that interrupt market signals and encourage "overuse" of raw materials, she is stating the obvious. Where resources are owned, market prices provide information about changing relative scarcities. Rising prices signal that supply is shrinking relative to demand, and higher prices prompt conservation. Subsidies, by definition, interfere with this process. But Cairncross seems to have something else in mind when she exhorts governments to prod industry toward frugality. She seems to be imagining some fixed, absolute notion of efficient resource use.

The discussion of "setting prices" in Costing the Earth and Changing Course often betrays misconceptions about how markets work. No one "sets prices" in free-market transactions, at least not in the sense implied by many market-oriented environmentalists. Prices emerge through the dynamic transactions of buyers and sellers. If no transactions are actually occurring, we know nothing about how much individuals value, say, cleaner air relative to driving solo to work in their polluting cars. And determining the "costs" to society of certain externalities is equally problematic. Cairncross acknowledges difficulties in "pricing" externalities, but she treats the difficulties as merely technical rather than conceptual.

Because market prices arise from a dynamic process, they fluctuate, depending upon supply and demand. There is no "intrinsic" and absolute "true price" for, say, oil. Yet Cairncross tells us to "put a proper value" on environmental "goods" and tells us to "properly price" energy. One is left with the sense that much of the appeal to markets is really a way of disguising a scheme for taxing anything deemed to be "politically incorrect."

And, indeed, that's just what a lot of so-called market environmental proposals are all about: Tax the automobile, tax plastics, tax fossil fuels. These proposed taxes have little to do with internalizing external costs. Most such taxes are designed simply to raise revenues. And even where they are supposed to combat "pollution" or other negative externalities, the tax is seldom if ever set on the basis of any information, however imperfect, about the environmental costs associated with consumption of the targeted item. This sort of arbitrary intervention in the marketplace interrupts the information flows that give us signals about the changing scarcities of resources relative to demand.

This is not to deny the problem of "unpriced goods." But to understand markets and their impact on environmental values, we need first to distinguish situations in which prices already are conveying information about resources from those in which they are not. And we need to think hard about whether, under what conditions, and how market prices might be introduced to incorporate environmental costs into decision making.

Consider oil prices. Using the language of markets, many environmentalists push for higher oil taxes, arguing that market prices don't take into account the pending depletion of particular oil fields. Meadows et al. say "the price signal [of oil] provides information only about the relative scarcity or surplus of oil wells, not—until the very end of the depletion process—about the scarcity of oil." The implication, often repeated among market environmentalists, is that markets don't convey information about the future, only about the present.

This claim ignores reality—the prices of oil reserves very much do reflect depletion. It also misses the very essence of market systems. Rising prices for resources stimulate investment to increase supplies. Eventually, other things being equal, that means investment in more-marginal, costlier supplies. Costlier supplies mean continued higher prices, as long as demand remains constant or grows. Each price increase under these conditions offers, in effect, a glimpse into the future—a signal that supplies are diminishing. And that glimpse kicks off efforts to conserve or find substitutes. This process rests on two pillars: private property rights and freely moving market prices.

Here and there, Cairncross understands that establishment of property rights to land, mineral, and water resources may overcome the "externalities" problem. And both Schmidheiny and Caimcross point to the "commons" problems in which unowned or publicly owned land is overexploited. Both see public ownership of forest lands as having led to a razing of forests, with no concommittant investment in reforestation. Both see a connection between "overfishing" and an absence of property rights to fish in rivers, lakes, and oceans.

In fact, the authors of Changing Course make establishment of secure and transferable property rights a centerpiece of their recommendations for improving forestry and agricultural practices. They point out, for example, that privately owned forests have growth rates "as much as 30 times those of natural forests." And they note that, although private plantations "account for less than 4 percent of total forest area, they provide about 20 percent of the world's industrial wood."

More than Cairncross, Schmidheiny understands the market as a decision-making process. He calls for deregulation, free trade, competition, and a stable legal framework (including secure property rights) in which market transactions can flourish. Applying this thinking to energy use, he writes, "we must describe not a final target but a process that allows for and fosters a continuous change in energy use patterns; a move toward more efficient production, transmission, and conversion of energy into social goods."

Cairncross, by contrast, more often sees markets as a means of more efficiently reaching collectively set environmental goals. For example, she is inclined to support energy taxes to achieve some predefined reduction in fossil-fuel consumption. And she supports a proposal by the Environmental Defense Fund to create "tradable efficiency credits," which are supposed to lower the costs of reducing energy consumption to some politically prescribed level.

This really gets to the heart of the problem with so-called market-oriented environmentalism. Too often it sees markets simply as tools for the efficient delivery of environmental goals—for example, cleaner air or cleaner water. Resource-use taxes, pollution-trading schemes, and deposit-refund systems for hazardous-waste disposal all use prices or some form of trading, rather than prescriptive regulations, to achieve goals. But the goals themselves remain collectively determined.

No doubt this is a step in the right direction. If we can reduce air emissions at less cost through tradable permit schemes, surely that is preferable to old-style regulations. But a lot of tough issues are glossed over in this new market environmentalism. For example, does each of us really want to eliminate all externalities? To do so means, among other things, eliminating all air emissions. But achieving zero emissions, even if possible, would cost a bundle. Unlike the market, collective decision making does not allow individuals to determine whether the costs are worth the benefits.

In other words, the method for setting a goal matters at least as much as the method for achieving it. Are there ways to address environmental problems while allowing individuals to pursue a diversity of goals? For problems like air pollution, where it's difficult to internalize all the relevant costs, the answer seems elusive. Yet if we view markets simply as instruments of efficiency in reaching predetermined, politically set goals, we will not even ask the question. Indeed, if efficiency is all we want, it may be that regulatory solutions work better for some environmental problems. On the other hand, if individual choice matters, not only intrinsically but as a key to making markets work in the way they do, then much of what passes for market-oriented environmentalism has little to offer us.

Lynn Scarlett is the Reason Foundation's vice president for research.