Economists talk a lot about market failure – when free exchange can produce socially undesirable results despite everyone working in their best interest. The ascendancy of liberal, free-market wisdom over the past three decades unchained a host of industries to pursue their sole economic objective: profit. Culminating spectacularly in the sub-prime mortgage crisis, global finance was one notable case. The freedom to buy and sell comes with the freedom to make enormous mistakes. Economists are fully aware of this possibility. Tackling failure is necessary if the case for markets is to have any credence.
Like many, I am thus far underwhelmed. In 2007-8, the market was so hardwired into our political economy that when it failed, private liabilities were underwritten by sovereign debt. The ensuing outrage was understandable. The finance sector was hit hard, losing 325,000 jobs in 18 months. But the doubling of unemployment in industrialised countries carried a clear message – if these giants fall, the damage will be felt where they land.
We are familiar with the most tragic of these ‘inefficiencies’. Sir Nicholas Stern, of the 2006 Stern Review, deemed climate change “the greatest market failure the world has seen.” On September 22nd, Radio 4’s The World Tonight announced that it would ask: ‘what is the relationship between business and the environment?’ I listened with pessimism. Indeed, Bill McKibben – author of The End of Nature – went on to reveal just how opprobrious a bond it really is.
The matter in question was the Volkswagen scandal that came to light on September 21st. Diesel cars being markedly bad at not emitting nitrogen oxides –a constituent of smog – most models with such engines were disallowed in the United States. Fitting sophisticated software to their diesel cars in the US, VW ensured that emissions tests would produce benign (and fallacious) results. This charade may have accounted for up to 11 million cars worldwide, hoodwinking Europeans in similar fashion.
Now the game is up, VW has joined a long list of corporations to enrage the Environmental Protection Agency (EPA). BP’s Deepwater Horizon oil spill in 2010 landed it with the largest ever fine levied by authorities (which could yet be surmounted if Volkswagen’s clobbering $18bn potential fine rises any higher). 4.9 million barrels flowed into the Gulf of Mexico before the spill was capped. The chemical titan DuPont, which environmentalist Curtis Moore claims “has consistently treated the long-term interests of humanity as largely irrelevant”, was last year fined around $3.5 million for toxic releases in Virginia.
But VW stands out because of the degree of perfidy involved. Above and beyond the level of accident or irresponsibility, the firm flagrantly and extensively cheated the authorities to boost production and raise profit margins. This behaviour persists, despite the massive stakes in the automobile industry: cars and trucks are responsible, according to the Union of Concerned Scientists, for one-fifth of all US emissions. While nitrogen oxides – the main product in the diesel scandal – are not directly responsible for global warming, they are linked to widespread health and respiratory problems. Regardless, the principle of acceptable losses (in the eyes of the firm) translates easily to wider themes. And so this colossal market failure begins to look even more miserable. When the authorities that do exist to solve these issues are so contemptuously cheated by corporations, what is the solution? We dismiss this question at our own peril. Rank duplicity is not far-fetched.
One might try to find hope in the evolution of a public consciousness hostile to environmental abuse. The rapid drop in the VW share price on the 21st and 22nd might be thought of as the market’s own way of punishing transgressors. But already the business strategists are forming ways of ‘regaining consumer confidence’. Eventually, they will arrive at a familiar decision: pollute, and gain profits. And this says nothing about other potentially mendacious firms, with their own elaborate hoax waiting to be discovered. As George Monbiot writes, in the UK, “corruption, like pollution, is omnipresent and invisible.”
The sad fact is that the topic of climate change leaves most people feeling fatalistic at best, and uninterested at worst. The level of abstraction required to figure from the particular act of consuming a product to the environmental damage committed by the producer means that most people just don’t think about it. Aside from a few impassioned voices – those whom Mr McKibben calls, in his 2001 essay Speaking Up for the Environment, ‘guardians of the places and communities that they love’ – the public is unmoved.
The proportion of Brits who believe that people should be allowed to drive their cars to their heart’s content, irrespective of the environment, has risen since 1993. In the US, Gallup polling finds that only 46 per cent of the population would give priority to the protection of the environment over economic growth. This compares to 71 per cent at an early 90’s peak, and 60 per cent in 1985. Economic slowdown means that even as the climate disintegrates, the urgency of its cause is lost on many.
It seems to me that the dearth of successful environmental policies from the champions of the free market fuels and is fuelled in turn by this lack of engagement. Economics offers solutions in theory. But this week we have seen the determination of the corporation to avoid authority. And political division scuppers policies. Cap and trade schemes (to legally limit companies polluting without first purchasing permits to do so) are not coordinated between regions. It is the uninspiring record of such initiatives as the Kyoto Protocol and the European ETS that leaves those who do find themselves upset and angry about environmental damage searching for increasingly bold ideas.
Green politics seems at times to be a relatively quiet subset of the political left. But look at the broader trend. Fundamentally, it seems like the calls for a ‘new type of politics’ seen in Jeremy Corbyn’s rise to the head of the Labour Party are cries for a renewed sense of collective purpose. There is a reaction, particularly among young people, against the increasing emptiness they see in traditional liberalism, as it fails to deal with the problems the modern, cosmopolitan left cut their teeth on: global poverty, but also the environment, multinational corporate responsibility, sometimes animal rights.
For this reason, I don’t accept those who focus purely on the more old-fashioned leftist policies advanced by Mr Corbyn (he is, according to The Economist, “in a time warp”). Forget rail nationalisation for the moment. Behind him can also be found those who know the damage the planet will face in 50, 100 years under our current system. With the scale of market failure we plausibly face growing steadily, free-market thought will have a long list to answer for.
Academic economists and policy makers – those with pail in hand, fighting the sinking ship – have an unenviable task. Whether or not the collective realisation required to shake off our uselessness will occur in time is rather unsavoury food for thought.