Thursday, March 20, 2008

Can the Free Market Solve the Problems Posed by Climate Change?

When confronted by the possibility of climate change, many libertarians default to the position that the free market, with its ability to mobilize the ingenuity of the economy for the satisfaction of the desires of the people, will provide the solutions we desire. I want to discuss this view, because I think it is the result of a mistaken understanding of the nature of the free market. For an example of this view, consider George Reisman's comments in his essay, "Environmentalism in the Light of Menger and Mises":
The appropriate answer to the environmentalists is that we will not sacrifice a hair of industrial civilization, and that if global warming and ozone depletion really are among its consequences, we will accept them and deal with them--by such reasonable means as employing more and better air conditioners and sun block, not by giving up our air conditioners, refrigerators, and automobiles.

In his essay, "Global Warming Is Not a Threat But the Environmentalist Response to It Is," Reisman elaborates:
...if global warming is a fact, the free citizens of an industrial civilization will have no great difficulty in coping with - that is, of course, if their ability to use energy and to produce is not crippled by the environmental movement and by government controls otherwise inspired.

He goes on to say that global warming
...would certainly not be too great a problem for tens and hundreds of millions of free, thinking individuals living under capitalism to solve. It would be solved by means of each individual being free to decide how best to cope with the particular aspects of global warming that affected him.

Reisman makes an important point. When it comes to allocating resources efficiently, the free market is unparalleled in its effectiveness. In his essay, "The Use of Knowledge in Society," Hayek explained:
...knowledge of the circumstances...never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all...separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate "given" resources--if "given" is taken to mean given to a single mind which deliberately solves the problem set by these "data." It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge not given to anyone in its totality.

Hayek points out that
...there is...a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others in that he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active cooperation.

He concludes:
If we can agree that the economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place, it would seem to follow that the ultimate decisions must be left to the people who are familiar with these circumstances, who know directly of the relevant changes and of the resources immediately available to meet them. We cannot expect that this problem will be solved by first communicating all this knowledge to a central board which, after integrating all knowledge, issues its orders. We must solve it by some form of decentralization.

This decentralization is the free market. Hayek explains that a system where the knowledge of the relevant facts is dispersed among many people, prices can act to coordinate the separate actions of different people in the same way as subjective values help the individual to coordinate the parts of his plan.

And indeed, it's been demonstrated in practically every instance that the free market has the capacity to satisfy the wants of the population better than centrally organized alternatives. So I think Reisman is largely right in saying that when it comes to adapting to new problems, the market does do great work.

But when we talk about the free market, we generally have two things in mind. The first, which Reisman focuses on, is a system in which property titles are traded voluntarily in a mutually beneficial way, resulting in a continuous progression towards a more efficient allocation of resources. But the second, which underpins the first, is a system in which rights are enforced, so that individuals who infringe on the rights of others are punished, and those whose rights are infringed are compensated for the harm they suffer. It is my contention the Reisman's argument breaks down by completely brushing off this second feature of the market.

Imagine if we were trying to discuss the proper social response to a particular theft. It might be true that of all social systems, a victim of theft would be best equipped for dealing with her loss in a capitalistic free market. She would not need to consult a central planning board in order to replace the things that were taken, and her higher purchasing power, enabled by her participation in a thriving market economy, would enable her to afford the replacement with comparative ease.

And yet we would obviously not be satisfied with this "solution." The reason is simple. The thief did something wrong, and therefore, the thief ought to be held responsible for fixing it, never mind that we should perhaps have tried to stop the theft from happening in the first place. Accordingly, by suggesting that we simply allow the free market to operate so that adaptation will be easier, Reisman is smuggling in the claim that we do nothing wrong to the victims of climate change.

This seems obviously contentious. The question should not be, as Reisman seems to want to make it, whether or not the free market is the best system for facilitating adaptation to changing conditions. The question is whether we do something unjust by contributing to climate change. To be fair, Reisman briefly addresses this issue, as I discussed here. But my point is that by glossing quickly over the issue of justice, many libertarians have completely missed the point. If the free market is to be relied on to provide a "solution" to climate change, it must be through a strict adherence to the principles of justice. If we simply ignore injustice, and define fairness in terms of mere participation in the market, then we cannot claim to be advocating libertarianism.


Kailash Chand said...

Nice blog climate change. I have also a blog on effects of global warming.

J. V. said...
This comment has been removed by the author.
J. V. said...

Danny, I appreciate the work you are doing in approaching real world problems while trying to respect man's individual rights. I enjoy following your reasoning and look forward to similar essays in the future. Thanks for making your thoughts known to the rest of us on the internet.

Danny Shahar said...

Thank you so much, both of you! I'll certainly keep working, and it's nice to know you'll be reading. Bhuvan, I'll check out some of your work when I get the chance; thanks for the link!

Anonymous said...

Truly free market capitalism of the type implied by the quoted author relies not on ignorance of justice but on the recognition that defense of property rights and provision of justice are productive services that must be provided at the cost of time and effort. In coversations such as this we too often conflate the existence of a right with the extistence of defense of that right. The former may or may not be inalienable, that is a philosophical discussion. The latter is certainly not inalienable in so far as it must be provided by people if it is to exist.

If the market has not arrived at an efficient means regulating itself (compensating those damaged) then a government certainly will not be able to affect such a regulation efficiently. The cost of the regulation must be weighed against the benefit it provides. If economic growth is retarded by inefficient regulations, do we not harm future generations more than by waiting for the market to develop a mechanism to efficiently distribute justice?

Danny Shahar said...

Gregory, I definitely hear where you're coming from. In his essay, "Restitution in Theory and Practice," Bruce Benson made a similar point. He wrote, "...criminals should be responsible for their actions, individuals must also take responsibility for protecting themselves and their property. Individuals reap the primary benefits from secure property rights and therefore they should have primary responsibility for that security. They certainly may cooperate with others in fulfilling this responsibility, but the cooperation of others should come at a voluntarily agreed-upon price; it should not be expected to be provided free upon demand." As far as the position goes, I think Benson formulates it quite elegantly. To be honest, I'm not sure I agree with that view, but I admit that it will not do to simply brush it off. In passing, I will say that such a view ends up sounding a lot like "might makes right" in some cases. But I haven't given the issue enough thought to come down decisively on one side or the other.

That being said, I don't think I said that individuals have an inalienable right to the enforcement of justice on their behalf. Nor did I discuss government involvement on any level. I only argued that justice needed to be taken into consideration in discussing free-market solutions. I can see, though, how if justice were provided by the market, then "mere participation in the market" could, in a sense, be the only factor of interest.

Your second point is one which I'd like to address in a future post on my blog, since doing so here really wouldn't do it justice. The post should be up within the next day or so.

Anonymous said...


Canan Eoy

Danny Shahar said...

You're welcome?

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