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The Case for Economics and the Environment

Don’t miss Gernot Wagner’s latest piece in the Washington Post. Wagner teaches at Columbia, is the author of But Will the Planet Notice? How Smart Economics Can Save the World, and is an economist at the Environmental Defense Fund.

Wagner points out that it has become acceptable to say that markets don’t work, just look at “the demise of Lehman Brothers and the subsequent swoon of the global economy.”

The next time you hear someone say this, you can tell them they’re wrong for two reasons: Lehman Brothers is more a symptom of what happened rather than the underlying cause, and it was guided by much larger forces than itself. Markets, in fact, work all too well. They are an aggregator of wishes and desires, however misguided they may be.

Furthermore, how can we say that markets don’t work when we are “far from having anything approaching a free market?”

Fossil fuel subsidies and various other loopholes and distortions make the playing field uneven. More significantly, we violate one of the most basic tenets of economics, that there is no free lunch. In reality, it turns out, we all get a steady stream of free passes. It starts in the financial sector, where the benefits of bankers’ actions are often and almost entirely privatized: They pocket the bonus if the bet pays off. But the costs are socialized: Bankers pay but a tiny fraction of the costs of their failed bets; society pays. The fundamental mismatch, as evidenced by the collapse of Lehman Brothers, has enormous consequences for the rest of us.

So what can be done? Perhaps more people should study economics. When people think about economics, Wagner writes, “their minds turn to business and finance. But economics goes beyond these fields, and the difference between business and economics goes beyond size.” Economics is about a way of thinking.  “Economics is organized common sense,” and as Wagner points out, “If there is anything we need right now to guide our economy and the planet out of this dual malaise, it’s more common sense.”

Comments

  1. “Fossil fuel subsidies and various other loopholes and distortions make the playing field uneven…”

    Certainly, the fossil fuel subsidies don’t match renewable subsidies. Should they be increased to make the playing field more even.

    Energy Source/Subsidy per kwh
    Coal $0.0006
    Natural Gas and Petroleum Liquids $0.0006

    Renewables $0.0154
    Biomass Power $0.0020
    Geothermal $0.0125
    Hydroelectric $0.0008
    Solar $0.9680
    Wind$0.0525

    Source: http://environmentblog.ncpa.org/which-energy-source-receives-the-largest-subsidy/

    • I agree with your aensssmest that many environmental problems are problems associated with the allocation and consumption of commons. In Santa Barbara County in California over the last 40 years, we have seen a dramatic improvement in air quality that has been achieved solely by regulation. While market-based approaches may provide efficacious solutions to some commons related problems, it cannot be denied that the air quality regulatory effort has been one of the most successful public policy enterprises ever pursued.With regard the negative effects of regulations on the economy, it is interesting to note that in 1970 when the Santa Barbara County Air Pollution Control District was established, there were about 250,000 residents in Santa Barbara County and about 90,000 jobs. Today, there are a little over 400,000 residents in the County and about 200,000 jobs. During that 40 period, the air quality improved from exceeding the health standards nearly 100 days a year to exceeding the standards on only 7 days in 2010. The regulations that are responsible for this dramatic improvement restricted neither population growth nor economic growth in the County.Market-based approaches to environmental protection problems are all well and good; however, considering the successes that have been achieved by regulatory programs, I would caution against abandoning the regulatory approach altogether.Terry Dressler, DirectorSanta Barbara County Air Pollution Control District

      • Economics is about the allocation of capital. If the point of government is to make lives better by providing rules then we should make sure those rules make sense.

        “[When we look at the Harvard University Center for Risk Analysis reports by Tengs et al. 1995; Tengs 1997; Tengs and Graham 1996; Graham 1995; and] we only compare those environmental interventions whose primary goal it is save human lives (as in toxin control) with life-saving interventions from other areas…it is quite obvious that there are tremendous differences in the price to be paid for extra lifeyears by means of typical interventions: the health service is quite low-priced at $19,000, and the environment field stands out with a staggeringly high cost of $4.2 million.

        “The advantage of this method of accounting is that it is possible to see the overall effectiveness of the American public effort to save human life. Information exists about the actual cost of 185 programs that account for the annual spending of $21.4 billion which saves around 592,000 life-years. However, had the spending been used to save the most lives, the Harvard study shows that 1,230,000 life-years could have been saved for the same money. Without further costs it would have been possible to save around 600,000 more life-years or 60,000 more human lives.” – Bjørn Lomborg, Ph.D, “The environmental Litany and data” 2001.

  2. The article has too much Pigou and too little (actually, not any) Coase or Demsetz for my tastes, especially given his claim “Economics is about setting the rules in the first place.”

    Coase and Demsetz were all about setting the rules. Pigou (and Wagner in this article) seem to think of economists as tweaking the dials on a machine.