Masthead graphic based on a painting by Gudrun Thriemer.

Sunday, December 10, 2006

"Climate change is the face of market failure," December 11, 2006.

This week, practically everyone in the Canadian media took a shot at the new Liberal Party leader for not bringing greenhouse gases under control when he was Paul Martin's Environment Minister. But the increase of greenhouse gas emissions since the signing of the Kyoto Treaty is not just a failure of the Liberal Party.

Nicholas Stern, a former chief economist of the World Bank, in a 700-page report to Britain's Chancellor Gordon Brown, calls climate change "the greatest and widest ranging market failure ever seen" (Oct 30 06).

A core article of the capitalist faith is a belief in the so-called "invisible hand" of the market.

Adam Smith, author of the great treatise on capitalism, Wealth of Nations, was especially fond of the "invisible hand," as for example in this passage:

The rich, he says,

"consume little more than the poor, and in spite of their natural selfishness and rapacity,[...] they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants...".

In other words, by means of this "invisible hand," those who seek wealth by following their own personal self-interest and greed, nevertheless unintentionally assist the poor and promote the common good. Ethics is an accidental result of pursuing riches.

"Market failure" is a term used to describe those times when this "invisible hand" does not do its magic.

For example, market systems have a structural tendency distribute wealth unevenly. Although Smith believed that the rich distributed "the necessaries of life" "nearly" equally, all but the most ardent proponents of absolute economic freedom agree that unequal distribution is a common market failure.

Last year, Foreign Policy magazine and the Fund for Peace published a study in which they used 12 social, economic, political and military indicators to rank 60 states in order of their vulnerability to violent internal conflict. The authors noted that among the 12 indicators they used, two consistently ranked near the top.

"Uneven development is high in almost all the states in the index, suggesting that inequality within states--and not merely poverty--increases instability.”

Back in March of 2002, investment banker Henry Liu wrote an article on market failure for Asia Times in which he included the uneven distribution of income, monopolies, the inadequate provision of public goods, and negative externalities as examples. (Liu Failed markets Mar 26 02).

"Negative externality" is a fancy technical term in economics that means I get to enjoy it, but you have to pay for it. Liu sees globalization as "basically a game of negative externalities," and cites the infamous World Bank Summer memo on the logic of locating pollution in the poorest countries.

Climate change is, among other things, a negative externality. We get the cheap gas and the cut-rate air fares, but someone else is paying for our bargain prices.

Consider for example the shepherds of northern Kenya. According to research commissioned by the humanitarian organization Christian Aid, consecutive droughts in the eastern provinces of Kenya have decimated their livestock and forced hundreds of thousands of seasonal herders to abandon their culture.

Dr David Kimenye, a livestock specialist hired for the Christian Aid project, talked to pastoralists in 5 areas across the Mandera district which is home to 1.5 million people. He found that the regional incidence of drought has increased fourfold in the last 25 years. About half a million herders have been forced to abandon their way of life. During the last drought, so many cattle, camels and goats were lost that another 60% of the families who remain as herders need assistance because their surviving herds are too small to support them. (Beaumont Guardian Nov 17-23 06)

Or consider Australia which this winter (which is their summer) is now suffering what some reckon is the worst drought in 1000 years. (Vidal Guardian Nov 17-23 06) Water levels in the Murray-Darling river system, which provides three-quarters of the water consumed in Australia, are already 54% below the previous record minimum. Two months ago, the system saw the lowest October flows ever recorded. Inflow this year was just 5% of the average.

Speaking recently in New York City Sheila Watt-Cloutier, former chair of the Inuit Circumpolar Council. had this to say:

“…several communities already, as we speak, are so damaged by global warming and climate changes that relocation at the cost of millions of dollars is
now the only option.


“And in 2003, the Arctic Climate Impact Assessment released the world's most comprehensive detailed assessment, regional assessment of climate change, and it was prepared by more than 300 scientists from 15 countries, but it included the traditional knowledge throughout this process, because we said it had to…And so, I just want to read two quick key conclusions of this assessment, which are very stark reading for the peoples of the Arctic and particularly Inuit. And it says marine species dependant on sea ice, including polar bears, ice-living seals, walrus and some marine birds, are very likely to decline, with some facing extinction. And two, for Inuit, warming is likely to disrupt or even destroy their hunting and food-sharing culture, as reduced sea ice causes populations to decline or become extinct.”

Not everyone agrees what is or is not a market failure. Some proponents of what Watt-Cloutier calls “short term economic ideologies” such as anarcho-capitalists and others from the so-called Austrian school of free enterprise argue that by definition an unregulated market cannot fail. Market failure does not exist for them.

Vancouver's Fraser Institute is a Canadian near approximation to this extreme view. Its analysts usually see government interference in market processes as counterproductive.

Predictably, the Fraser Institute has sponsored events featuring speakers who emphasize "conflict in the scientific community about global warming" and "the long-term 'natural’ variability of climate."

An article published by the Fraser institute entitled "Greenhouse Gas Reductions: Not Warranted, Not Beneficial," warns against putting too much faith in regional climate models and relying on policies that reduce economic freedom.

But the examples from Kenya, Australia, and the Arctic are not predictions based on models; these events are under way, these disasters have already happened and are not finished happening. The environment which provides what economic freedom the people have is being destroyed from afar.

Briefly put, the Stern Review argues convincingly that climate change is indeed occurring. It goes on to paint a vivid picture of the havoc that will be wrought if it continues. And it proposes that the remedy is market-based economics.

Dion has made it clear that he intends to oppose Stephen Harper's ultra rightwing neoconservative agenda. He has not made it clear that he understands this spectacular failure of the free market agenda.

In an article on the Stern Report for this month's Red Pepper, Derek Wall cautions that "markets generally work when we consume more."

Carbon trading, which is the core of Dion's proposal, replaces government regulation with a market in which the right to pollute is bought and sold.

Wall, himself an economist, points out that "Economists are not centrally concerned with the ‘end of civilisation’ as we know it, social justice or ecological sustainability.... environmental problems come down to unpaid costs" (Wall Red Pepper Dec 1 06).

It would be a mistake to suppose that climate change as we are coming to understand it is merely a failure of the market's "invisible hand." Privatization hasn't helped. Neither have environmental regulations as we understand them; nor has deregulation turned the tide. Capital liberalization has just provided for more foreign ownership. Free trade has not reined in carbon emissions. Indeed, the apparatus of economic freedom has been used to create the illusion that science sees climate change induced by human activity as a "great debate" and not an advancing human disaster.

Wall argues in general terms that "climate change is a product of capitalism, and [that] its solution will come about by creating practical alternatives to the market."

He believes that “The logic of market based instruments such as green taxes and a global carbon market should make way for more radical policies.

“The Green Party [in England] has long backed more redistributive and greener taxes … George Monbiot’s call for an end to road building and new airports is also essential. The international Rising Tide network has identified a number of key policies and social changes to tackle the root causes of climate change, including a moratorium on all new fossil fuels extraction; the rapid phase-out of coal for energy; cancellation of airport expansion plans, a tax on aviation fuel and plane tickets, and an end to short haul flights; abandonment of fossil fuel-intensive industrial agriculture in favour of decentralised, locally-grown, sustainable food sources; drastic increases in energy conservation; and the immediate transition to clean energy sources such as wind, solar and tidal power.”

Speaking recently in Berlin, Britain’s Foreign Secretary Margaret Beckett

“This is not just an environmental problem. It is a defence problem. It is a problem for those who deal with economics and development, conflict prevention, agriculture, finance, housing, transport, innovation, trade, and ealth.”

As Watt-Cloutier says,
“…climate change is not just an environmental issue with unwelcome economic consequences. It really is a matter of livelihood, food, individual and cultural survival. And it is absolutely a human issue affecting our children, affecting our families, and certainly our communities. And the Arctic is not a wilderness or a frontier. It is our home. It is our homeland.”

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Anonymous said...

I am doing a sociology course and have to do an assignment on how climate change may be seen as market failure and did not fully understand the concept of what market failure is, on finding what you have written I now have a better understanding so thank you very much, and may I say it was very well written and interesting to read.Danny