While the emphasis in Chapter 4 was on presenting insights from mainstream environmental economics clearly and in ways that help explain why the economic system puts the environment at risk, the emphasis in this chapter is on issues where mainstream economics provides little insight or obfuscates important causes of environmental distress. We explore why there is a counterproductive “growth imperative” in corporate capitalism, why salvation does not lie at the end of the environmental Kuznets curve, why the cure of Pigovian taxes is a pipe dream, and why the debate over “jobs versus the environment” is badly distorted.
Mainstream economists have long regarded economic growth as something positive, and for many it continues to be their primary economic goal. On the other hand, many environmentalists increasingly view growth with suspicion, worrying that a growth imperative is at the bottom of our environmental problems. Growth is good … growth is bad … what are we to think?
As discussed in Chapter 4, when properly interpreted, mainstream analyses of perverse incentives created by externalities, public goods, open access to common pool resources, and rates of profit higher than a justifiable rate of time discount for environmental decisions all help explain important, systemic causes of environmental distress. But when people talk of a growth imperative, they usually mean something more than this. Unfortunately, the case that, above and beyond the perverse incentives discussed in the last chapter, an unhealthy growth imperative is putting the environment at risk is often not presented as well as it should be and therefore often fails to convince anyone who is skeptical to begin with.
What are we to make of statements like “On a finite planet infinite economic growth is impossible” from ecological economists? Or “Capitalism is a system that must continually expand. No-growth capitalism is an oxymoron” from Marxists? A good place to start is by asking precisely what it is that is growing, because often economists are not talking about the same thing at all.
As explained in Chapter 1, the growth of what ecological economists call throughput is limited. Supplies of different materials from the biosphere (and beneath) that we use as inputs in production are finite and limited, and the capacity of the biosphere (and the atmosphere above) to absorb material wastes is finite and limited as well. So infinite growth of throughput is impossible.
Nor is there any doubt that throughput has been growing mightily over the past few hundred years, and as a result we are nearing crucial limits on the ability of important components of throughput to continue to grow much longer. As mentioned in Chapter 1, contrary to what environmentalists believed in the early 1970s, the component of throughput that we seem to be exhausting most rapidly is the ability of the planet to absorb different kinds of physical waste products that are outputs of human economic activity, rather than the ability of the planet to continue to provide natural resources we use as inputs. Either way, there is strong evidence that we left the “frontier economy,” where our impact on the natural environment was not yet significant, long ago, and we are now well into a “bull in the China closet economy” where we are a serious threat to ecosystem resilience, even if we have not yet reached a “spaceman” economy where every aspect of our natural environment must be meticulously managed.1 Clearly we are pressing up against environmental limits to the growth of some components of throughput, and even if we are further away from reaching those limits than environmental alarmists claim, eventually if throughput continues to grow we will reach a limit.
However, throughput is not gross domestic product (GDP). And when mainstream economists talk about growth, they mean growth of GDP. As explained in Chapter 3, GDP is the value of final goods and services produced during a year. It is measured in dollars, not in the units we use to measure different kinds of physical matter throughput. “Real” GDP is measured in “constant” dollars in order to prevent inflation from deceiving us into thinking that the value of goods and services produced is rising when really all that is happening is the prices of goods and services are rising on average. As explained in Chapter 3, the process of correcting for inflation by using constant prices is inherently imperfect so that estimates of the rate of growth of real GDP depend arbitrarily on what base year is selected. But these complications are beside the point. The word real in front of GDP should not be taken to mean “physical” because it does not. The first question is: Is it theoretically possible for real GDP to grow infinitely even though throughput cannot grow infinitely? The answer is “yes.” And that is the end of the all-too-facile claim that infinite growth is impossible on a finite planet, if what we are talking about growing is GDP.
Those who initially formulate an argument are often more careful than those who follow them. In this case, Herman Daly is aware of an important distinction, although his choice of words is partly responsible for the errors of his disciples. Daly acknowledges that “it is important to distinguish between the terms growth and development.” He defines growth as “a quantitative increase in the scale of the physical dimensions of the economy, i.e., the rate of flow of matter and energy through the economy (from environment as raw material and back to the environment as waste), and the stock of human bodies and artifacts.” Daly contrasts growth, so defined, to development, which he defines as the “qualitative improvement in the structure, design, and composition of physical stocks and flows, that result from greater human knowledge, both of technique and of purpose.” He then concludes: “On a finite earth there are biophysical and ethicosocial limits to the growth of aggregate output, but there may not be any limits to development” (Daly 1995, 125; italics added).
Using Daly’s definition of growth, infinite growth on a finite planet is impossible, as his disciples often quote him. However, Daly has defined growth in such a way that to all intents and purposes it is growth of throughput. It is certainly not growth of real GDP as defined by mainstream economists. The confusion arises where Daly draws a line between “quantitative” and “qualitative.” When development is defined as something that is qualitative, it is easy to acknowledge that it may have no limits, whereas the growth that Daly defines as quantitative clearly must have limits as he has defined it. Since mainstream economists define GDP as something that is quantitative, and since many economists acknowledge that growth of GDP is not synonymous with economic development, which they also treat as a qualitative concept, it appears that Daly’s definition of growth as something that is quantitative rather than qualitative must be the same as mainstream economists’ definition of growth. But it is not. Nowhere in Daly’s definitions of growth and development is there room for the quantitative concept, real GDP, which is what his opponents claim can, at least in theory, grow without limit.2
The phrase aggregate output adds to the confusion because almost everyone thinks of aggregate output in physical terms. As used by Daly, aggregate output is physical matter. As used by mainstream economists, aggregate output is an admittedly misleading phrase because it does give the impression that it is something measured in physical terms. But the fact is that for mainstream economists aggregate output is synonymous with real GDP, which, as we have seen, is a quantitative, aggregate value and not physical matter at all.3
The next question is: Is it easy to imagine how real GDP could continue to grow even though throughput cannot? Before we consider this question, let us clarify any ambiguity in the phrase continue to grow. Just how long are we talking about? At some point the solar system will no longer exist. Before that, planet Earth might well become as lifeless as Mars through nonhuman causes. But we generally assume that these endings are a long way off. Prominent founders of ecological economics such as Nicholas Georgescu-Roegen and Herman Daly have suggested that the second law of thermodynamics provides a possible ending to our story that, unlike the end of our solar system, is worthy of consideration. This law states that the amount of energy available for work in a closed system necessarily decreases with use. This law is also known as the law of entropy, which is often stated as: In a closed system, if work is done, entropy necessarily increases. However, not only is the earth an open, not a closed system, since we get inputs of entropy-decreasing energy from the sun, but death by entropy would take place so far in the future that … what can I say? We should be so lucky as to last long enough to die from too much entropy!4
Unfortunately, our problem is much more immediate. We are on track to render the biosphere uninhabitable long before entropy engulfs us. In any case, what “continue to grow” means in the question above is “can real GDP continue to grow long enough so the end comes from some other cause, not because an exhausted biosphere has stopped GDP from growing further.” Now that we are clear about exactly what the question means, how do mainstream economists answer it? Most answer it in the affirmative, and many would add “no sweat” for emphasis.
Mainstream economists explain their answer by pointing out that the value of goods and particularly services people enjoy can increase even while the throughput used to produce them, and the throughput released as by-products in their production and consumption, do not increase and even decline. In the computer industry, throughput per unit of computing capacity has dropped dramatically since the 1940s. Suppose it had dropped by a factor of 10. This would mean that we could consume five times more computing capacity now than in 1940 while cutting throughput for computing services in half.
Many mainstream economists also answer yes because they believe that before we exhaust one kind of throughput, we can change production technologies to substitute a different input that is still plentiful or, if necessary, we can consume a different good or service instead. Sometimes called technological optimists by their critics, these mainstream economists point out that this is now the plan for energy inputs. We now know we must become carbon neutral before the end of the century in order to avoid risking cataclysmic climate change. That means those planning to prevent climate change believe it is possible to substitute renewable sources for fossil fuels before we run out of atmospheric storage space for greenhouse gases. Just as GDP can grow 10 percent a year without any increase in carbon emissions as long as carbon efficiency also grows at 10 percent a year, many mainstream economists argue this can be true for other kinds of throughput as well.
Instead of the above questions, however, what we need to be asking ourselves is this: Is there something about our economic system that keeps us on a trajectory to produce the kinds and quantities of goods and services that will continue to increase throughput? In other words, is there a growth imperative in our economic system that is environmentally unsustainable? In the words of Herman Daly, is there something about our economic system that generates uneconomic growth—growth that is environmentally destructive and fails to yield real economic development? If so, what are the causes of uneconomic growth, and what can be done to stop it? Of course, this is the question concerned environmentalists thought they were asking all along.
Citing the master himself—“Accumulate, accumulate! That is Moses and the prophets!” (Marx [1867] 1967, 595)—Marxists have long argued that capitalism is nothing if it is not about accelerating economic growth. Whereas Marxists long emphasized what they called “internal contradictions” that render capitalist growth economically unsustainable,5 some now argue that an even bigger problem arises when capitalism does sustain economic growth sufficiently to surpass critical environmental thresholds and become environmentally unsustainable. Four American Marxists who have written extensively on capitalism and the environment recently are James O’Connor (1998), John Bellamy Foster (1994, 2000, 2002, 2009), Joel Kovel (2003), and Paul Burkett (2006).
In a recent example, John Bellamy Foster and Fred Magdoff (2010) begin their essay “What Every Environmentalist Needs to Know About Capitalism” with an excellent summary of evidence indicating that we are experiencing a “planetary ecological crisis.” They begin a subsequent section titled “Capitalism Is a System That Must Continually Expand” as follows: “No-growth capitalism is an oxymoron. … Capitalism’s basic driving force and its whole reason for existence is the amassing of profits and wealth through the accumulation (savings and investment) process. It recognizes no limits to its own self-expansion.” Foster and Magdoff go on to explain that because capitalism recognizes no limits to its self-expansion, environmental crises will continue to worsen until capitalism is replaced by socialism. We will consider system change in the conclusion of this book, but for now the question is whether the arguments offered by many Marxists that capitalist growth is necessarily incompatible with environmental limits are any more compelling than the reasons given by many ecological economists that infinite growth is impossible on a finite planet.
What Marx was at pains to explain was that capitalism drove capitalists relentlessly to appropriate and invest greater amounts of what he called surplus value. And just as mainstream economists do not measure the market value of goods and services produced in units of physical matter, Marx did not measure surplus value in units of physical matter either. Instead, he defined surplus value as the difference between the number of hours of labor needed to produce all goods and services minus the number of hours needed to produce the intermediate goods used up in the production process and the consumption goods purchased by the workers with their wages. In other words, the accumulation Marx referred to above is an accumulation of hours of labor expended, which he called exchange value, and the growth of surplus value is limited only by the total number of hours worked and by how many of those hours capitalists can manage to appropriate. Capitalist accumulation of surplus value is not necessarily limited by the availability of physical matter any more than the growth of GDP is.6 Just because the planet has physical limits does not mean that capitalist accumulation of surplus value cannot increase indefinitely, any more than it means that the market value of goods and services produced, GDP, cannot increase indefinitely.
In conclusion, the claim that infinite growth of capitalist accumulation of surplus value is impossible on a finite planet is no more compelling than the claim that infinite growth of GDP is impossible on a finite planet. In both cases, those who make the claim, failing to realize that value is not matter, carelessly apply reasoning to value as if it were matter. Either conclusion may still be true, but would only follow if surplus value or GDP cannot grow unless throughput grows as well. Since this is precisely what is at dispute, and since neither facile argument addresses this issue, both ecological economists and Marxists who present the case that infinite growth is environmentally impossible in these ways are in effect guilty of assuming their conclusion.
However, this does not mean there is not an unhealthy and environmentally destructive growth imperative in today’s capitalist economies and perhaps in any capitalist economy. It just means we must go beyond facile arguments that upon inspection prove not to be compelling.7
The problem is not that human beings have become more and more economically productive—which is what people should mean when they say that, at least in theory, human economic well-being can grow without limit. Infinite economic growth is a comment on the capacity of humans to continue to become more and more clever in how we go about our economic activities. It is an expression of faith that there is no inherent reason we cannot continue to satisfy our economic needs in an ever-shrinking portion of the twenty-four-hour day—if only we do not needlessly expand our economic needs! When understood in this way, the problem is not increasing productivity or an economic system that promotes energetic and creative pursuit of increasing economic productivity. Instead, the problem is (1) what we do with increases in our productivity, and (2) how we expand economic needs into desires whose satisfaction does little or nothing to increase economic well-being.
Why not more leisure? According to standard measures, productivity in the American economy increased fivefold between 1950 and 2000.8 Yet the average American worked more hours per year at the end than at the midpoint of the century. This is amazing when you pause to think about it. It was this epiphany that led Juliet Schor (1992) to write her brilliant best seller, The Overworked American. In 1950 the United States was not a poor, underdeveloped economy where critical economic needs went unmet for an overwhelming portion of the population. It was the wealthiest country on the planet in 1950. Yet Americans “chose” to take 100 percent of their increase in productivity over the ensuing half-century in the form of increased consumption of material goods and services rather than in the form of increased leisure time. As a matter of fact, apparently not even that was sufficient as they dipped into their leisure time even deeper to get even more goodies! Had Americans instead taken all their increased productivity as leisure, their material standard of living would have been exactly the same in 2000 as it was in 1950, and the standard workweek, not workday, would have been eight hours instead of forty. In other words, working only one day a week instead of five, they could have been materially no worse off, and throughput would have been no greater in 2000 than in 1950. Clearly it is not endless increases in human economic productivity that threaten the environment.
Perhaps Americans chose to take so much of their increase in productivity in the form of consumption goods whose production and consumption required huge increases in throughput because they were unaware this was causing environmental problems. Maybe that old empty-world mind-set and mental lag time was the problem. No doubt this is partly true. Few Americans in the 1950s were aware that increasing throughput was rapidly creating a serious problem. And many since then who have come to environmental awareness have made a conscious choice to cut back on material consumption and place a higher priority on leisure. But however many people increased leisure at the expense of material consumption for environmental reasons, there were even more who worked more than before because on average Americans worked more hours per year in 2000 than they did in 1950. While environmental education and consciousness-raising no doubt help, it is hard to believe they suffice as a solution.
Perhaps the increase in productivity was captured mostly by people at the very top of the economic pyramid, leaving those at the bottom no choice but to keep working long hours to maintain their standard of living. Particularly during the last quarter of the century, when inequality of income and wealth accelerated dramatically, this explanation makes a great deal of sense. Since much of the productivity increase went to people who do not work at all, and little went to those who could work less, much of the productivity increase had to take the form of increases in consumption by the wealthy. In this case the solution is clear. We need to redistribute wealth and income to redirect productivity increases to those who have not already maxed out on leisure! But does the evidence suggest that once Americans reach middle-class status they typically begin to enjoy their productivity increases in the form of more leisure? After World War II, more of productivity increases took the form of longer vacations, earlier retirement, and more family leave in Western European countries than in the United States. But few would argue that consumerism among the middle classes has not flourished in Europe as well as in the United States, even if somewhat less so.
Concluding that Americans were overworked because they were overspent, Juliet Schor argued that the real question therefore was what drives them to consume more than they should. In The Overspent American (1998), Schor showed that middle-class Americans in particular were spending more than was fiscally prudent, more than they had in the past, and more than they realized. She fingered what she called competitive consumption as the chief culprit, placing herself in a heterodox tradition dating back to Thorstein Veblen that challenges how mainstream economic theory treats consumption. Veblen ([1899] 2008) identified the underlying mechanism as “invidious comparison,” whereby people attempt to increase their stature relative to others in a social hierarchy. In capitalism he famously identified “conspicuous consumption” as a principle means of demonstrating status. The theory that people often seek social recognition, or status, rather than satisfaction of needs through consumption, later referred to as “keeping up with the Joneses,” became the basis for James Duesenberry’s “relative income hypothesis” in 1949.
Schor argued that two trends accelerated competitive consumption in the United States beginning in the mid-1970s. Most importantly, increasing income inequality put greater pressure on people, particularly those in the middle, to overspend to keep up with those toward the top. In an interview about her book published in the September 1998 issue of the Multinational Monitor, Schor explained:
The lifestyle of the top 20 percent of the income distribution has come to be an important aspirational goal for people throughout society, many of whom earn far less than the roughly $100,000-a-year incomes that are represented by that group. That is part of how I understand the middle-class squeeze in this country: people in the $50,000 to $100,000 range, earning what in an earlier time would have been a comfortable income, now feel squeezed, as if they don’t have enough, as if they are barely making it. And these are the people who have taken on the biggest increases in consumer debt in recent years and are feeling the pressure to upscale.
The second trend Schor identified was the increasing importance of television in defining status hierarchies in a society where “people know each other less and know television characters more.” After controlling for other factors, she found that people who watch TV more spend more, and she hypothesized that this had more to do with the nature of the shows advertisers were paying for than with the advertising itself. “TV mainly shows people in the top 20 percent of the income distribution. A family that is supposed to be an ordinary middle-class family on TV has a six-figure lifestyle. TV inflates people’s perceptions of what is normal and raises their consumption aspirations.”
Stimulated to further investigation by Schor’s book, sociologists have since offered competing hypotheses about why Americans do not take more of their productivity gains as leisure. In particular, researchers have concluded that time spent in work is not a voluntary decision by employees but is instead constrained by the demands of employers.9 Recent research also suggests that increases in average income seem to have little positive effect on how happy people are on average, while increases in income inequality have a negative effect on most people’s sense of well-being.10 Many sociologists, environmentalists, and progressives, but few mainstream economists, now see a tragicomedy unfolding: A social species, hard-driven to compete for status in a hierarchical society, is fast becoming like the proverbial lemmings, trapped in an economy where the primary means of demonstrating social status is through competitive consumption that yields diminishing aggregate benefits even as it accelerates destruction of the environment we depend upon.
Why not more collective consumption? While productivity increases taken as leisure put far less strain on the environment, as people who have calculated their ecological footprint know, not all consumption is created equal as far as the environment is concerned.11 Not only does eating a pound of hamburger tread more heavily on the environment than eating a pound of tofu, but individual consumption is more environmentally damaging than collective consumption, dollar for dollar.12 So the problem is not only that we take too little of our productivity increases as leisure and too much as consumption; it is compounded by the fact that we engage in too much individual consumption and too little collective consumption.
As explained in Chapter 4, market economies predictably undersupply public goods because market demand for public goods grossly underrepresents their true social benefit due to the free-rider problem. Sometimes the inefficiency is so great that, in order to prevent it, we substitute an entirely different decision mechanism for the market. For example, no market economy leaves decisions about national defense to the market system because if it did there would be very little national defense, if any. Instead, governments supply the demand for defense spending that the market will not. But special interventions are always limited in number, leaving uncorrected many less striking inefficiencies in public good provision in market economies. Therefore, not only in a theoretical pure market system, but also in real-world market economies where some corrective action is taken, a perverse bias in favor of private over collective consumption remains. This bias generates an efficiency loss regardless of any environmental issues. However, because collective consumption is, on average, less environmentally damaging than individual consumption, this bias is also part of the reason we fail to use our productivity increases in ways that minimize throughput. Moreover, as explained below, there is every reason to expect this efficiency loss to grow over time once we recognize that people’s preferences are endogenous to some degree.
Executive officers of corporations whose stock is publicly owned—which actually means privately owned by absentee owners—have a legally binding fiduciary responsibility to maximize profits. Managers who fail to do so are likely to be dismissed by shareholders whose only interest is the size of their dividends and the market value of their shares. And finally, corporations that fall behind in the race to maximize profits will be replaced by more successful corporations as financial markets favor more profitable firms. In sum, competition and absentee ownership will relentlessly enforce profit maximization as the decision-making criterion in private enterprise market economies. It was Adam Smith, not Karl Marx, who taught us that “it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest” ([1776] 1999, chapter 2). The question is not if the economic system is driven like no economic system before it. The question is not if the system is soulless. Smith knew that production is for profit and not for use in capitalist economies long before Marx was born. Smith knew capitalism for the heartless creature it is, but he argued that it serves us well nonetheless.
However, Adam Smith was unaware of many of the perverse incentives the system contains. Nor did he have before him the mounting evidence available to us that crucial ecosystems have been compromised. The question for us today, who do understand the perverse incentives and can see the environmental damage they have wrought, is whether our situation is all the more precarious because the system is designed to relentlessly follow a single rule, literally, come hell or high water. Those who make the crucial decisions about what we produce and how we produce it have been systematically rendered powerless to exercise discretionary judgment no matter how damaging the consequences of maximizing profits prove to be. And because we have been taught to defend the rule of profit maximization as our great benefactor against all detractors, timely reform becomes more difficult and therefore less likely.
The fact that the economic system is driven is not the problem per se. If the system were driven to maximize economic progress with regard to efficacy, equity, and economic democracy; if it were driven to achieve intergenerational equity; if it were driven to achieve social as well as environmental and economic sustainability, that would not be a problem but a godsend. It is not even necessarily a problem that the system is driven single-mindedly to maximize something that has nothing to do with our real goals if it were, without intending to do so, truly maximizing economic and social progress along all the dimensions we have identified as being worthy and important. The problem is that single-mindedly maximizing profits does not coincide with achieving all our goals and is, in fact, highly detrimental to achieving some of our most important goals, environmental sustainability among them. It is in this context that the single-minded, relentless energy of the system is part of the problem. We are like a racer who is programmed to run fast, but prone to racing off in a wrong direction. The problem is that we are running in the wrong direction, not our speed per se. But given the fact that we are running in the wrong direction, running fast does takes us farther afield and therefore is problematic as well.13
Mainstream economics always puts the blame on consumers for any problem regarding what the economy produces because it presumes that in market economies producers will simply, only, and always supply whatever consumers want.14 If developers build McMansions in what used to be farm fields, it is because that is what new homeowners and farmers want. Mainstream economics even has a name for this—consumer sovereignty. It is true that profit-maximizing corporations will not continue to produce goods and services they cannot sell. But this does not mean that consumers are the “sovereign” overlords over what is produced in private enterprise market systems.
First of all, as has often been pointed out, consumer sovereignty is a strange notion of economic democracy. Democracy usually means that everyone gets the same vote, or if some are much more affected by a particular decision than others, democratic “self-management” might mean voting in proportion to the degree one is affected.15 But in market economies consumers get as many votes for the mix of products that will be produced as they have dollars to vote with. Unless we assume that the rich are affected more by the mix of goods the economy produces than the poor are, this is a very undemocratic election indeed. Even if consumers as a whole were sovereign, rich consumers are clearly “more sovereign” than poor ones.
Second, it is naive to deny that giant corporations have both an incentive and the capacity to influence consumers’ desires considerably. Not all products are equally profitable, and businesses understand that steering consumers toward goods with higher profit margins is important to their bottom line even if mainstream economic theory does not.16 Marketing would not be the most popular major in business schools and U.S. businesses would not spend over $250 billion a year on advertising if businesses did not want to influence what consumers buy or if consumers were beyond their influence and truly sovereign. And one thing that businesses do not want consumers to buy when their productivity as workers increases is “nothing”—because they choose to consume more leisure instead. “Nothing” is not at the top of the list of products with high profit margins that businesses have for sale.
However, there is a third reason that consumer sovereignty falls far short of what is advertised. As explained in Chapter 4, while markets minimize the transaction costs associated with expressing desires for individual consumption, they do not provide an institutional framework that helps people express their desires for collective consumption as easily, and they fail to register external effects on parties other than the buyer and seller. While market enthusiasts praise markets for allowing consumers to choose among different private goods, they fail to point out how markets infringe on consumer sovereignty by tilting the playing field in favor of private goods and against public goods, and in favor of private goods whose production or consumption generates negative external effects and against private goods whose production or consumption has positive external effects. This is a more subtle way to undermine consumer sovereignty than advertising, but it is no less important.
Once we recognize that markets are not neutral institutions that register different categories of preferences without prejudice, once we realize that markets do not provide an even playing field for public and private goods or for goods with associated positive and negative externalities, an interesting question arises regarding how people will respond to these biases. As we have seen, mainstream economic theory teaches that markets make it more difficult for people to acquire environmental protection and preservation than it should be and cheaper for people to buy goods whose production or consumption generates pollution than it should be. Mainstream theory also teaches that under free access it is easier for people to exploit common pool resources than it should be. If some things are harder to obtain or more expensive than they should be, while other things are easier to obtain or less expensive than they should be, how will people respond?
Anyone who has studied the substitution effect in a microeconomics class will recall that when price signals are wrong, they lead people who are attempting to maximize their satisfaction, given the preferences they have, to consume too little of things that are more expensive than they should be and too much of things that are less expensive than they should be. This means we will experience a degree of inefficiency whenever prices diverge from their true social opportunity costs. However, while this is where mainstream theory stops, this may not be the end of the story if people’s preferences are not fixed, or what economists call exogenous. If instead people’s preferences can change over time in ways they have some influence over—that is, if their preferences are endogenous—why would people not try to diminish their preference for things for which they are consistently charged more than their true social cost, and increase their preference for things that are cheaper than they should be?
A central tenet of evolutionary economics is that people’s preferences do not fall from the sky but are instead formed and molded by social institutions, including our major economic institutions. Thorstein Veblen’s famous caricature of the “hedonic calculus” was intended to drive this point home. The conviction that preferences and values are formed by social processes requiring analysis, and therefore should not be treated merely as givens, has played a central role in the contributions of luminaries like Gunnar Myrdal, John Kenneth Galbraith, and John Dewey to disparate fields of economic study.
In Quiet Revolution in Welfare Economics (1990), Michael Albert and I developed a formal model suitable to exploring the predictable consequences of what happens when economic institutions create biases in the terms upon which goods or services are made available when people’s preferences are endogenous to some extent.17 Recognizing that people’s environmental preferences are influenced not only by information, but also by biases in our basic economic institutions deepens our understanding of why the environment remains at risk despite tremendous improvements in environmental education.
A model of endogenous preferences implies there are two effects of individual choice. (1) The preference fulfillment effect means that when an individual chooses a particular consumption/work bundle today, she will fulfill her present preferences to a greater or lesser extent. That is the effect of the choice on well-being in the present. (2) The preference development effect means that by choosing a particular consumption/work bundle today, to some extent the individual will affect the human characteristics she develops for the future. Since those future characteristics “parameterize” her future utility functions, changes in future characteristics will change the amount of satisfaction or utility she will receive from any given consumption/work bundle in the future. Any consequent change in well-being that results is the effect of today’s choice of a consumption/work bundle on the individual’s well-being in the future. Individual rationality requires considering both the preference fulfillment effect and the preference development effect on one’s overall well-being when choosing consumption/work bundles in all time periods.
Once we have a model of endogenous preferences capable of tracking the preference development effects as well as preference fulfillment effects of people’s choices, what remains is a way to model institutional pressures or biases. As already explained, particular institutions can be thought of as lowering the transaction costs of engaging in particular kinds of activities. For example, the transaction costs for nonfarmers of acquiring potatoes to consume are lowered by the existence of a market for potatoes. And the transaction costs of loaning savings are lowered by the existence of banks. On the other hand, the transaction costs of engaging in some activities remain high for lack of a facilitating institution. For example, in Chapter 6 we discover that multiple victims of pollution face free-rider problems when confronting a polluter in a free market environment. As a result, multiple victims of pollution often opt not to negotiate with polluters regarding pollution reductions because the transaction costs for individual victims are too high. So the transaction costs of coordinating pollution reduction are high in the absence of an appropriate facilitating institution, while the transaction costs of consuming potatoes and saving are lowered by the facilitating institutions of potato markets and banks. When we consider the entire set of economic institutions that constitute an economy, we can think of them as lowering the transaction costs for some kinds of activities or behaviors relative to the transaction costs of other kinds of activities or behaviors.
Through their effects on transaction costs, institutions affect the terms of availability of different kinds of economic activities that individuals choose from, which we can model as follows: If a set of economic institutions charges individuals who engage in an activity the true social cost of carrying out that activity, we say there is no bias in how the economic institutions make that activity available to people. But if a set of institutions charges those who choose an activity more than the true social cost for that activity, we say those institutions have a bias against that particular activity. And if a set of institutions charges less than the true social cost for an activity, we say those institutions have a bias in favor of that activity. The advantage of rigorous models is that they make it possible to prove theorems like the two below that illustrate the logical consequences of assumptions that may not be apparent.
Theorem 1: Snowballing inefficiency: In an economy that contains a bias in the relative terms of supply of two economic activities, and in which people have perfect knowledge about their endogenous preferences, (1) the divergence from the optimal, or efficient outcome will be greater than indicated by traditional welfare theory, which treats preferences as exogenous; and (2) the divergence from optimality will increase, or “snowball” over time.18
Theorem 1 is relevant to why the environment is increasingly at greater risk than mainstream economic theory leads us to expect because markets are biased in favor of goods whose production or consumption pollutes more, compared to those that pollute less; because markets are biased in favor of individual consumption, which generates more throughput as compared to collective consumption, which generates less; because markets are biased against environmental protection and pollution reduction because these are both public goods; and finally, because free access to common pool resources creates a bias in favor of their exploitation as compared to any procedure that charges users for the true social cost of using the common pool resource, which includes the negative effect their use has on other users. What theorem 1 tells us is to expect more pollution, less environmental protection, and more overexploitation than traditional economic theory predicts. But it also tells us something more disturbing. It tells us to expect the degree or extent of overpollution, underprotection, and overexploitation to grow over time.
While the proof of theorem 1 is not straightforward, the intuition behind the theorem is. Based on experience, individuals foresee the bias in the relative conditions of availability of activity choices they will face in the future. Recognizing that they can mold their preferences to some extent away from desiring activities for which they will be overcharged and toward activities for which they will be undercharged, rational individuals will take into account both the preference development effect as well as the preference fulfillment effect of their present activity choices. They thus select present activities that tend to generate future human characteristics that in turn support future preference structures that permit them to attain greater future satisfaction than had they not adjusted their human characteristic trajectories appropriately. When faced with an overcharge in the future period, rational individuals will lower the quantity demanded to some extent simply by moving up along their future demand curve when they arrive in the future. But when afforded the opportunity to shift their future demand curve as well, rational individuals with endogenous preferences will avail themselves of a second means of adjusting to the biased conditions of availability: They will make consumption/work choices in the present that shift their future individual demand curve downward for the good for which they will be overcharged in the future.
Unfortunately, the effect of all individuals making these individually rational adjustments is to shift the future market demand curve downward for activities for which individuals are overcharged as compared to what it would have been in absence of such individually rational preference adjustments. In an economy in which production responds to market demand, this implies that the production of goods for which individuals are overcharged will be even less than had individuals not adjusted their preferences. As a result, the underproduction and consequent misallocation of scarce productive resources that would have occurred in any event due to the overcharge are aggravated by the process of rational individual adjustment. Individuals mold themselves to better cope with a bias in the economy, but the collective result is to move society farther away from the optimal production program than had people not engaged in individually rational preference adjustments. In other words, when people act in an individually rational way and take the preference development effects of their choices into account along with the preference fulfillment effects, their behavior is socially irrational because it generates a more inefficient use of society’s scarce productive resources than would have occurred had people not adjusted their preferences in light of the bias in the economy. The more time people have to adjust, the greater the inefficiency becomes.
A second theorem predicts that environmental educators face a harder uphill battle than they may realize when they encourage people to develop stronger preferences for environmental protection and amenities based on a better understanding of their value.
Theorem 2: Warped human development: In an economy that contains a bias in the relative terms of supply of two economic activities, and in which people have perfect knowledge about their endogenous preferences, (1) individual human development patterns and the preferences that depend on them will be “warped” in a manner that can be rigorously defined; and (2) the “warping” will increase, or “snowball” over time.19
Theorem 2 reveals a principle mechanism through which institutional biases affect human characteristics and therefore preferences. When a set of economic institutions creates a bias in the terms on which different activities are available to people, it is individually rational for people to choose consumption/work activities that are different from those they would have chosen had there been no bias. Since different consumption/work choices lead people to develop different human characteristics and therefore preferences, the institutional bias has promoted development of some kinds of human characteristics and preferences at the expense of others.
It is appropriate to call this individual adjustment, or human self-molding process, “self-warping” even though we recognize it to be individually rational and caused by institutional bias. Individuals who did not make preference adjustments to economic biases would be irrational in the sense of failing to maximize personal well-being under the biased conditions of supply they face. However, the adjustments they engage in are self-warping in the sense that (1) they are freely and rationally chosen, but (2) nonetheless diverge from an optimal human development trajectory that is physically possible and would have afforded the individual greater well-being as she defines it.
So the problem is not only that people are unaware of all the benefits environmental protection brings and that therefore more education is required. The problem is also that it is rational in market economies for people to dampen their preference for leisure, which pollutes less, and enhance their preference for consumption, which pollutes more; to enhance their preferences for private goods, which pollute more, and dampen their preferences for public goods, which pollute less; to enhance their preferences for those private goods that cause more pollution and dampen their preferences for those private goods that cause less pollution; and to enhance their capacities to exploit common pool resources where access is unrestricted. The conclusion that the divergence from the optimal production program (theorem 1) and the rational self-warping of human characteristics and preferences (theorem 2) increase or snowball over time follows directly since the more time people have to adjust, the greater the self-warping and economic inefficiency that results will become.
Simon Kuznets had even less to do with the “environmental Kuznets curve” than Jean-Baptiste Say did with “Say’s Law”—whose principle architect was David Ricardo. In 1955 Kuznets published an article on the relationship between per capita income and income inequality. Measuring income inequality as the dependent variable on the vertical axis and per capita income as the independent variable on the horizontal axis, he found an empirical relationship that took the form of an inverted U. In other words, as per capita income grew, income inequality at first increased, but at some point the relationship between economic growth and inequality reversed, after which increasing per capita income was associated with a reduction in income inequality. Kuznets speculated about what might explain the inverted U-shaped relationship he had discovered in the data, and that was that. His article had nothing to do with the environment whatsoever, but the inverted U-shaped graph had caught the eye of economists.
Decades later, other economists, interested in what explains how much pollution economies generate, began with the same empirical approach Kuznets had used when studying income inequality (Grossman and Krueger 1995; Seiden and Daquing 1994; Shafik 1994). When these economists plotted pollution of different kinds on the vertical axis and per capita income on the horizontal axis, they also found an empirical relationship that took the shape of an inverted U, suggesting an initial positive relationship between economic growth and pollution that at some point reversed, after which higher per capita income was associated with lower levels of pollution. Their inverted U-shaped curve is the famous, misnamed “environmental Kuznets curve,” and these and many more economists have been speculating about how robust the empirical finding is and how to explain it ever since.
Just as proponents of trickle-down economics used Kuznets’ own inverted U-shaped curve to argue against the need for policies designed to reduce economic inequality, others have cited the environmental Kuznets curve as evidence that environmental problems are merely a transitional phenomenon that economic growth will eventually resolve. And just as Kuznets cautioned against interpreting his findings as evidence that we could simply grow our way out of inequality, Grossman and Krueger, for example, issued a similar warning about growth and the environment, saying “there is no reason to believe the process is an automatic one” and opining that only when higher income “induced” a policy response did higher income reduce pollution (1995, 371). However, before evaluating the debate over the environmental Kuznets curve, it is worth considering a related equation that ecological economists often use to explain why they believe the relationship between growth and pollution is exactly the opposite of what the environmental Kuznets curve suggests it is.
Ecological economists like to begin with the equation I = PAT, where I stands for environmental impact (which ecological economists think of as throughput), P stands for population, A stands for affluence (which ecological economists define as per capita consumption, but we can think of as per capita income for purposes of comparison with the environmental Kuznets curve), and T stands for technology, meaning new technologies that increase “throughput efficiency,” such as increases in “energy efficiency.” In terms of growth rates, the I = PAT equation says that throughput will grow at a rate equal to the sum of the population growth rate and the rate of growth of per capita GDP, minus the rate of growth of throughput efficiency. Ecological economists conclude that increasing the rate of growth of GDP per capita clearly has a positive effect on the rate of growth of throughput, or pollution, which is the component of throughput that those who study the Kuznets curve focus on.
This conclusion is beyond dispute, provided we add a phrase economists often use, ceteris paribus, which means holding all other things equal. But those who study the Kuznets curve understand this point because they acknowledge that what they call the scale effect of increasing per capita income increases pollution. However, the Kuznets curve literature also considers what they call the composition effect and the technology effect of increasing per capita GDP. When per capita income increases, the composition of output shifts between sectors that may differ in their pollution intensity. For example, the service sector may grow relative to the manufacturing sector, which would lower the pollution intensity of output. Or when per capita GDP increases, sectors may adopt new technologies because they conserve resources and lower costs or because some antipollution policy induces them to do so. So how does the Kuznets curve with its scale effect, composition effect, and technology effect really differ from I = PAT?
They do not differ regarding some key factors. According to I = PAT, throughput (pollution) will increase or decrease depending on whether the sum of the rates of growth of population and per capita income are higher or lower than the rate of growth of throughput (pollution) decreasing technological changes of one kind or another. According to the Kuznets curve, pollution (throughput) will increase or decrease depending on whether the scale effect is larger or smaller than the sum of the composition effect and the technology effect. But this does not mean there are not subtle differences between the two treatments.
If they are calculating properly, those who estimate environmental Kuznets curves for different categories of pollution measure pollution levels per capita, not simply pollution levels on their vertical axis. In that case they have implicitly held the P variable in I = PAT constant. Environmentalists may find this misleading and therefore objectionable since population growth does impact the environment, ceteris paribus. But one could easily argue that the negative impact of population growth is taken for granted and certainly not disputed by those who think in terms of the environmental Kuznets curve. More importantly, the Kuznets curve analysis treats the composition and technology effects as associated with growth of GDP per capita. The thinking suggested is: as GDP per capita grows, this causes one bad thing to happen to the environment (the scale effect), but two good things to happen to the environment (the composition and technology effects.) The I = PAT analysis, on the other hand, treats the good technology effect as distinct and independent from the bad scale effect. In this case, the thinking is: when GDP per capita grows, that is bad for the environment, whereas when technology becomes more throughput-efficient, that is good for the environment. Each effect is independent of the other. The Kuznets framework suggests that you can only lower T by raising A, whereas the I-PAT framework suggests that T can be lowered while holding A constant or even while reducing A.
So where does all this leave us? I suspect not much farther along than we were already. As far as the environment is concerned, only throughput matters. Even if we cannot measure aggregate throughput quantitatively, we can measure its important components quite well. The question is what causes helpful composition and technology effects and how fast we can enhance them—because growth of GDP per capita will increase throughput unless these effects are strong enough to offset the negative effects on the environment.
More recent empirical work has added two new findings of interest. James Boyce and Mariano Torras (2002) added several variables to the data used by Grossman and Krueger. They included a GINI coefficient to measure the degree of income inequality in a country, the literacy rate, and also the cube of per capita income to test for the possibility that the environmental Kuznets curve might start to rise again when GDP per capita passes a second threshold, taking on a sideways S-shape rather than simply an inverted U-shape. Boyce and Torras found that higher income inequality and lower literacy rates were strongly associated with higher levels of pollution, particularly in less developed countries, and that inclusion of these “power” variables diminished the significance of the per capita income coefficient. They also found that for some of the seven pollutants they studied, the cubic term was significant, indicating that after GDP per capita reaches a high level, pollution levels may well begin to rise again as GDP per capita rises further, casting further doubt on the hypothesis that countries can solve environmental problems simply by growing. Instead, Boyce and Torras conclude: “We believe, like Grossman and Krueger, that citizen demand and ‘vigilance and advocacy’ are often critical in inducing policies and technological changes which reduce pollution. However, we do not regard these as simple functions of average income. … We hypothesize that more equitable distributions of power tend, ceteris paribus, to result in better environmental quality. Our regression results are generally consistent with this hypothesis” (61).
As explained in Chapter 4, early in the twentieth century A.C. Pigou proved that when there are negative external effects in a market, a corrective tax is required to eliminate the inefficiency, and when there are positive externalities, a corrective subsidy is indicated. Moreover, Pigou also taught us that the corrective tax or subsidy should be set equal to the magnitude of the external effect to fully correct for inefficiencies. So in theory we have long known how to use what are now called effluent taxes, green taxes, or pollution taxes, but are really just good old Pigovian taxes, to correct for inefficient environmental degradation from pollution.
But here is the rub: how are we to know what the size of the external effect is and therefore how high to set the tax? It is hard to calculate how high corrective Pigovian taxes and subsidies should be because there are no convenient or reliable procedures in market economies for estimating the magnitude of external effects. In this crucial regard, the market offers no assistance whatsoever because it does not contain what we might call a “pollution-damage-revealing mechanism.”20 As a matter of fact, as we discovered in Chapter 2, the problem arises precisely because the market ignores the effects on external parties entirely, so in market economies we are forced to resort to very imperfect and unsatisfying measures to try to estimate the magnitude of environmental damages and benefits. This situation hardly breeds confidence in the accuracy of the estimates economists come up with; rather, it provides interested parties with strong incentives and ample opportunities to object to estimates that disadvantage them and to finance alternative studies that yield widely different results. So the first problem with Pigovian taxes is that it is difficult to know how high to set a Pigovian tax or subsidy. The only thing we can predict with certainty is that interested parties will come up with very different estimates and be willing to devote a great deal of time, energy, and money to challenging each other’s results.
The second problem is that because they are unevenly dispersed throughout the industrial matrix, the task of correcting the entire price system for the direct and indirect effects of externalities using Pigovian taxes and subsidies is much more daunting. Even if the external effects of producing or consuming a particular good were estimated accurately, if the external effects of producing or consuming goods that enter into the production of the good in question are not also accurate, the theory of the second best warns us that the Pigovian tax we place on the good in question may move us further away from an efficient use of our productive resources rather than closer. In other words, the improbability of setting Pigovian taxes correctly in many interconnected markets means it may not even be worthwhile trying to set the tax correctly in any individual market even if we could.
Finally, in the real world, where private interests and power take precedence over economic efficiency, the beneficiaries of accurate corrective taxes are all too often dispersed and powerless compared to those who would be harmed by an accurate corrective tax. As Mancur Olson explained in The Logic of Collective Action (1965), this makes it very unlikely that full Pigovian correctives would be enacted in most cases, even if they could be accurately calculated. More often than not, we will end up with no Pigovian tax or subsidy, and in the rare cases where we impose one it will predictably be much lower than necessary.
In the 1992 presidential campaign, President George H.W. Bush adamantly opposed the plan of candidate Bill Clinton to protect substantial tracts of old-growth timber on federal lands in the Pacific Northwest, claiming: “We’ll be up to our neck in owls, and every mill worker will be out a job.” Bush also justified his administration’s opposition to a strong international agreement to reduce greenhouse gas emissions at the Earth Summit in Rio de Janeiro in 1992 as “protecting American jobs from environmental extremists.” On the eve of negotiations in Kyoto in 1997, the U.S. Senate passed a resolution declaring that any treaty that did not require developing countries to adhere to the same timetable for greenhouse gas reductions as the industrialized countries was not acceptable. The vote was an astonishing 95 to 0 as a parade of Republican and Democratic senators predicted that the Kyoto treaty, which had been negotiated by the delegation President Clinton sent to Berlin in 1996, would cost between 1 and 2 million jobs and shut down manufacturing plants across the country. Not a single Democratic senator dared to challenge these claims even though the White House submitted a brief to the Senate explaining why it estimated that employment impacts from the Kyoto Protocol would be negligible. In the midst of the battle over amendments to the Clean Air Act in 1990, the Wall Street Journal reported that one out of three respondents in a national poll said that they personally felt they were likely to lose their job as a result of environmental regulation. Clearly not just politicians, but many citizens also believe the myth that protecting the environment is a threat to their jobs.
And it is a myth. Economists identify three kinds of unemployment: cyclical unemployment, frictional unemployment, and structural unemployment. Stricter environmental standards have nothing to do with cyclical unemployment, which is due to insufficient demand for goods and services in general and must be addressed by appropriate expansionary fiscal and monetary policies. Stricter environmental standards also have nothing to do with frictional unemployment, which results when people change jobs and spend a little time unemployed in between. However, stricter environmental standards do change the mix of goods and services produced and the technologies used to produce them and thus can cause structural unemployment, which results when those out of work do not have the skills necessary for the available jobs, or live where available jobs are located How serious is this threat?
First, we need to understand what is being accomplished by raising environmental standards at the price of creating some structural unemployment. Before the Clean Air Act tightened standards on sulfur dioxide emissions from power plants, the U.S. economy was producing an inefficient mix of goods and services and going about it in inefficient ways. We were producing too much electricity by burning too much high-sulfur coal. When the Clean Air Act put a price on sulfur dioxide emissions in 1990, economic efficiency was increased in four ways. The biggest efficiency gain came in the form of switching from high-sulfur coal mined mostly in eastern coalfields to coal with less sulfur mined principally in the West. A smaller efficiency gain came when a few electric utilities installed scrubbers in their smokestacks that captured not only sulfur dioxide before it was released but other harmful toxins as well. A less immediate efficiency gain came when a few utilities planned to eventually replace coal-fired plants with plants burning cleaner fossil fuels and to reconfigure grids to allow for greater use of renewable energy sources like wind power. And finally, to the extent that electricity prices became higher than they would have been otherwise, causing households and businesses to reduce energy consumption, the economy became more efficient for that reason as well.21
In other words, any structural unemployment caused by improving environmental standards is part of making the economy more efficient by moving resources, including labor, out of activities where the costs outweigh the benefits into activities where the benefits outweigh the costs when all the costs and benefits are correctly accounted for. So what we are talking about are short-run transition costs to achieve long-run efficiency gains. As long as the efficiency gains from the new, more efficient production mix and technologies are greater than the transition costs of getting there, it is in society’s interest to make the change. In sum, the first problem is that those who argue against stricter environmental standards because they will cause structural unemployment seldom bother to point out that these standards create a substantial, permanent efficiency gain or that the unemployment is transitional and temporary.
The second problem is that those who wield the job loss argument against stricter environmental standards22 seldom apply the same argument against other sources of structural unemployment where the argument is far more compelling. Tightening environmental standards may cause some structural unemployment, but it is by far the least important source of structural unemployment in the U.S. economy. Empirical evidence indicates that the amount of structural unemployment caused by efforts to better protect the environment in the United States over the past two decades is insignificant compared to the amount of structural unemployment caused by trade and capital liberalization, technological change, and corporate downsizing. Eban Goodstein (1999, chapter 3) estimates that during the 1990s more than 2 million workers per year were laid off due to import competition, shifts in demand, or corporate downsizing, while only 2,000 workers per year lost jobs due to environmental regulations.
Goodstein also debunks the myth that environmental regulations play a significant role in the relocation of new manufacturing investment overseas. So-called free trade agreements like the North American Free Trade Agreement (NAFTA), which are actually more about capital liberalization than trade liberalization, have encouraged firms to invest abroad, and this has cost U.S. workers millions of jobs. But all studies confirm that these firms did not relocate because of lax environmental regulations abroad, as much as environmentalists feared this might be the case. Goodstein explains that even in highly regulated industries, regulatory costs are still only a small percentage of total costs and therefore provide little incentive to relocate. Labor costs, on the other hand, are a significant portion of total costs, particularly for manufacturing industries, which is why multinational manufacturing firms have been relocating abroad where wages and labor standards are much lower. Put differently, the evidence does not suggest that lowering our environmental standards would be a good strategy for trying to bring jobs back to the United States!
Third, we need to ask if there are ways to share more equitably the transition costs of whatever structural unemployment stricter environmental standards do create. Pretending there are no transition costs when, in fact, there are, and showing little concern over who is paying those costs when the costs are distributed very unfairly, are mistakes many environmental organizations have made in the past. Letting the chips fall where they may is not only unfair; it is also unnecessary and politically self-defeating. There are policies that can relieve coal miners in West Virginia from bearing the cost of making the U.S. energy sector more efficient and placate their opposition to legislation like the Clean Air Act and climate bills, as well as to treaties like the Kyoto Protocol. The problem is that readjustment assistance and economic conversion policies are very underdeveloped in the United States compared to elsewhere.
In Sweden, victims of structural unemployment receive unemployment compensation that is far more generous than in the United States and lasts longer, when necessary. Laid-off workers also receive free retraining and education carefully tailored to suit them for employment in industries and occupations where employment is growing. And if moving to a different part of Sweden is necessary, relocation expenses are covered as well. Needless to say, Swedish workers and labor unions show little hostility to efficiency-enhancing changes in the mix of outputs produced in Sweden or the technologies and skills used to make them. In comparison, study after study has demonstrated that the underfunded, short-term approach to training under the U.S. Job Training Partnership Act (JTPA) has practically no positive impact on raising the earnings profiles of its graduates. But instead of dismissing programs like JTPA and the “Jobs in the Woods” program, aimed at providing living-wage jobs in forest restoration in the Northwest, what is needed is to increase their funding and competence. After all, there is every reason to believe they can be successful. By definition all the participants have already demonstrated that they are fully capable of doing hard, productive, steady work. That is the kind of selection bias any educator would give her right arm for!
Goodstein (1999) takes up the two worst cases of “environmental unemployment” in Chapter 4 of his excellent book. Considering timber workers versus old-growth forests in the Pacific Northwest and coal miners versus clean air in the southern Appalachians, he estimates that the number of direct layoffs was less than 10,000 and was spread out over several years and several states. As Goodstein points out that number is dwarfed by even one moderate corporate downsizing. But the important point is this is not a lot of people to “make whole,” and when victims of direct layoffs are adequately taken care of, the number who are adversely affected indirectly shrinks dramatically as well.
For decades the U.S. labor movement has predictably lobbied for expanding and improving readjustment assistance programs. The problem is that it has received little support from other political circles. That is now changing as more and more environmental and labor leaders realize they can both accomplish more of their goals by working together. The unlikely sight of teamsters marching arm in arm with environmentalists in sea-turtle costumes at the demonstrations against the World Trade Organization in Seattle in 1999 has blossomed into the labor-environmental Apollo Alliance.
While adjustment assistance is an important palliative, the long-run cure for structural unemployment of any kind is a conversion program. The only reason it is no longer efficient for people to engage in their traditional line of work is because there is some other kind of work where they would be more socially useful. Creating whatever those industries of the future are at the same that declining industries are phasing out, and facilitating the movement of human resources from one to the other, is the way to minimize structural unemployment and its social costs as well as distribute those costs more fairly. While location may be crucial in real estate, timing is crucial in responding to structural unemployment. We need to be proactive about creating the new industries with new jobs as well as retraining the unemployed.
1. The metaphors of a frontier, bull in the China closet, and spaceman economy we owe to ecological economist Kenneth Boulding (1966). Along with important concepts such as empty-world and full-world mind-sets and throughput, these are all extremely helpful in reorienting our thinking about our relationship with the environment.
2. In one passage Daly does discuss gross national product (GNP) explicitly and acknowledges that it is a measure of value, whereas throughput is measured in physical units. “Although GNP is measured in value terms and cannot be reduced to a simple physical magnitude, it is nevertheless an index of an aggregate of things that all have irreducible physical dimensions. The relationship between real GNP and throughput is not fixed, but neither is its variability unlimited. And to the extent that one believes that GNP growth can be uncoupled from throughput growth, then all the more reason to be willing to accept limits on throughput growth. If the environmental protection achieved by limiting throughput costs little or nothing in terms of reduced GNP growth, then no one should oppose it. If GNP could grow forever with a constant throughput, then ecological economists would have no objection” (Daly and Farley 2003, 230). The question is to what extent GNP growth can, or cannot be “uncoupled” from throughput growth. Even in this passage Daly tries to rig the debate by asserting that GNP is “an index of an aggregate of things that all have irreducible physical dimensions”—implying that while the rate of growth of throughput need not be as great as the rate of growth of GNP, nonetheless GNP cannot grow without some increase in throughput. But this does not follow logically. With enough of what Daly calls “decoupling,” at least in theory GNP can grow while throughput does not. However, Daly offers a peace treaty at the end of the passage quoted which decoupling pessimists and optimists would do well to accept: Limit growth of throughput, as protecting the environment requires, and then go ahead and grow GDP as much as you can.
3. At the risk of beating a dead horse, there is one last ironic twist in this Shakespearean tale of mistaken identities. Whereas many ecological economists believe it is difficult to quantify the benefits that come from all our economic activity in a meaningful way because different categories of benefits cannot or should not be measured on a single dimension, mainstream economists question whether it is possible to quantify throughput for the same reason. They point out that throughput comes in different components—top soil, oil, carbon emissions, and so on—and while each component can be quantified and measured in physical terms separately, there is no easy or meaningful way to aggregate them into a single quantitative measure of aggregate throughput. The two sides in this debate have not only talked past each other, they also have opposite views about what can and cannot be meaningfully and usefully quantified.
4. For an excellent explanation of why entropy is a red herring with regard to environmental problems, see Schwartzman (2008). Many ecological economists now admit that death by entropy is so far in the future that it is irrelevant to our present environmental problems. Nonetheless, many other ecological economists erroneously continue to cite the second law as the root source of environmental problems. This perceived need to continue to discuss entropy in ecological economics textbooks is disturbing since it only serves to undermine the credibility of ecological economists on matters where they have a great deal to contribute (Costanza et al., 1997). Georgescu-Roegen and Daly are great economists who have provided us with many brilliant insights, but bringing entropy into discussions of our current environmental problems was not one of them. The best way to honor these founding fathers of ecological economics is to emphasize their insights and abandon their mistakes.
5. For a brief critique of the notion of “internal contradictions of capitalism” and traditional Marxist crisis theories, see Hahnel (2009b).
6. To be precise, Marx’s argument was that competition would drive capitalists to seek to accumulate an even larger percentage of the exchange value produced. In theory, this percentage could continue to increase indefinitely as it approaches 100 percent in the limit.
7. I hasten to add that we have ecological economists like Herman Daly and Marxists like John Bellamy Foster to thank for pointing out many of the reasons reviewed below for why so much of our growth is uneconomic and environmentally destructive.
8. As explained in Chapter 3, the growth of per capita GDP overestimates how much productivity has truly increased in many ways. But whether productivity has increased fivefold or twofold, the point remains.
9. For a review of competing hypotheses and evidence, see Maume and Bellas (2001).
10. For an early example of this research, see Zoltas (1981).
11. The notion that people’s consumption has an implicit “ecological footprint” is useful, even if measuring it is inherently more problematic than its supporters like to admit. In any case, anyone who has not done this exercise should do so. For more than ten years I have asked my students in environmental courses to take an ecological footprint quiz twice. First, I have them answer all questions as accurately as they can based on their actual lifestyles. Second, I have them answer the questions again after making a New Year’s resolution to be as environmentally conscientious as possible. The results show how heavily or lightly students tread compared to their classmates, fellow Americans, or citizens in other countries. Some students are surprised at how much lighter their imprint could be if they tried harder. Many others are surprised to discover that no matter how hard they tried, given constraints they operate under such as not living near public transportation, there is very little they can do personally to reduce their footprint. The exercise invariably leads to interesting discussions about the limits of individual solutions and the importance of collective solutions. Redefining Progress is one organization that offers a footprint calculator online: www.myfootprint.org.
12. If we separate military spending from the rest of collective consumption, this difference would be even more dramatic.
13. Critics of capitalism are often challenged to deny that it has proven to be the most energetic and dynamic economic system humans have devised to date. Dynamism can be good, but when misapplied to produce uneconomic growth, this strong point only magnifies the damage.
14. The only exception is when few firms supply a product, in which case mainstream theory acknowledges that profit-maximizing firms in monopolistic and oligopolistic industries use their market power to produce less than consumers want in order to secure higher prices.
15. For a defense of this definition of economic democracy, see Hahnel (2005a, chapter 2; 2009c).
16. How anyone could believe that profit margins on all products are the same may seem strange to anyone who is not an economist. However, economists reason that, absent barriers, in the long run profit rates in different industries, profit rates of firms within industries, and profit margins on all products any firm produces will equalize. Unfortunately, as a famous economist once quipped, “in the long run we are all dead.” In any case, in the real world there are barriers of many kinds and economic behavior invariably takes place in contexts where not all equilibrating dynamics have had time to work themselves out. Advertising to steer consumers to purchase products with higher profit margins is one such behavior.
17. See Hahnel and Albert (1990, chapter 6), and Hahnel (2001).
18. Proved as Theorem 6.6 in Hahnel and Albert (1990).
19. Proved as Theorem 6.7 in Hahnel and Albert (1990).
20. Lack of a pollution-damage-revealing mechanism in market economies is a critical blow to any hopes of sensible policy interventions to protect the environment. We return to this issue in the conclusion, which proposes a pollution-damage-revealing mechanism that is feasible in an egalitarian economy.
21. Not only is the efficiency gain from higher electricity prices generally ignored by opponents of stricter environmental standards, they almost always misinterpret the higher price as a sign that the economy has become less efficient at producing electricity. What this fallacious reasoning fails to take into account is that we were only deceiving ourselves about how efficiently we were producing electricity in the first place, because we were deceiving ourselves about how cheap it was to produce electricity with high sulfur content coal from eastern fields. Only because we ignored the damage from acid rain caused by sulfur dioxide emissions did we think the cost of producing a kilowatt-hour of electricity was as low as we did. Once we take this external cost into account, we discover that a cheaper way for society to produce coal is with low-sulfur coal from the West. However, since western coal must travel farther on trains to reach power plants in the East, it now costs more per kilowatt-hour to produce electricity in the East than we used to think it cost us. But what we used to think it cost us was wrong! When we correct our calculations to account for the external cost we mistakenly ignored, we discover that producing electricity in the East from low-sulfur coal mined in the West actually costs society less even though shipping costs are higher, and our electricity industry has therefore become more, not less efficient.
22. When relaxing environmental standards is recommended—as it often is these days—environmentalists should hasten to point out that if tightening environmental standards produced structural unemployment, then relaxing standards must also produce roughly the same amount of structural unemployment! If there are adjustment costs associated with changing technologies and the mix of outputs, there will be adjustment costs of moving in either direction—toward a “cleaner” economy or toward a “dirtier” economy. It also bears pointing out that the claim that capital and trade liberalization yield efficiency gains, even if they regrettably also create adjustment costs and job losses for some, is highly debatable. In many situations, trade and capital liberalization yield global efficiency losses for reasons that mainstream international economists fail to explain. See Hahnel (1999, 2005b).