A common charge by environmentalists is that capitalism is bad for the environment. Indeed, Christiana Figueres, former secretary-general of the United Nations Framework Convention on Climate Change, opined that climate negotiations in Paris in late 2014 offered the world its best opportunity to replace the reigning global economic order (capitalism, or free markets) with another (socialism, or government-planned economies).
But is capitalism really bad for the environment? One of the Ten Commandments actually provides a starting point for figuring that out. The Eighth Commandment says, “You shall not steal.” This presupposes that people have a right to private property and to use it as they please so long as they don’t harm others’ property, health, or life.
In a chapter in the recently published Counting the Cost: Christian Perspectives on Capitalism, I presented compelling evidence that lack of private property rights is one of the chief reasons why the greatest environmental disasters (some of which I describe) have been in socialist and communist countries, not capitalist (free-market) countries. This article adapts one small part of that chapter.
An absence of property rights diminishes incentives to take care of land, air, and water—resulting in overconsumption (faster than nature renews) and under-protection (polluting excessively) of resources. When a resource is owned in common, everyone has an incentive to use it rapidly, for whatever he doesn’t use someone else does. When it is privately owned, the owner has an incentive to maintain it for long-term income.
Nonetheless, some environmentalists claim capitalism unjustly imposes costs on others. One British official, Nicholas Stern, primary author of a major report on global warming, called climate change “a result of the greatest market failure the world has seen.”
But Stern’s complaint rests on a concept economists call “externalities.” An externality exists when those undertaking an action don’t bear all its costs (negative) or reap all its benefits (positive), but impose some costs or bestow some benefits on others. Pollution is a “negative externality.” It is a cost of production, but, at least until some sort of government action, a cost not borne by either the business or its customers—it’s borne involuntarily by others. Capitalist businesses, so the environmentalist charge goes, fail to “internalize the externalities” and so must be forced to.
I agree wholeheartedly that businesses should have to internalize (pay for) their negative externalities—as when a solid waste incinerator installs a smokestack scrubber to reduce soot emissions. I have no objection to government’s forcing them if they don’t do it voluntarily. Businesses should bear the costs of pollution, not impose them on others. This means they will pass those costs on to their customers in the price of their products, which is only fair; the businesses wouldn’t make the products if no customers bought them.
But is it really capitalism—the free market—that encourages businesses not to internalize negative externalities? … That is, are externalities really a case of market failure? Or might something else be failing? The economist Murray Rothbard made a persuasive case that negative externalities are not a market failure but a government failure:
One difficulty often raised against a free society of individual property rights [i.e., capitalism] is that it ignores the problem of “external diseconomies” or “external costs” [what I’ve called “negative externalities”]. But cases of “external diseconomy” all turn out to be instances of failure of government—the enforcing agency—adequately to enforce individual property rights. The “blame,” therefore, rests not on the institution of private property, but on the failure of the government to enforce this property right against various subtle forms of invasion—the failure, e.g., to maintain a free society.
One instance of this failure is the case of smoke, as well as air pollution generally. In so far as the outpouring of smoke by factories pollutes the air and damages the persons and property of others, it is an invasive act. It is equivalent to an act of vandalism and in a truly free society would have been punished after court action brought by the victims. Air pollution, then, is not an example of a defect in a system of absolute property rights, but of failure on the part of the government to preserve property rights. Note that the remedy, in a free society, is not the creation of an administrative State bureau to prescribe regulations for smoke control. The remedy is judicial action to punish and proscribe pollution damage to the person and property of others.
A large body of literature argues that for many environmental concerns, judicial action under common law is more efficient than either legislation or regulation.
Critics who blame capitalism (an economic philosophy) for externalities make about as much sense as those who blame the Ten Commandments for the fact that Christians (who believe in them) sometimes break them.
Capitalism is an economic philosophy that affirms the right to private property, including the right to use and trade property freely so long as one doesn’t harm others. When a business owner—capitalist or not—imposes negative externalities on others, she’s breaking capitalism’s rules. In reality, externalities are a problem for any economic system.
One more point, and it’s a very important one though almost always ignored: Not all externalities are negative. Some—many—are positive. As economist Walter Block points out, even something as simple as a pair of socks has positive externalities. Wearing them not only spares others the irritation of bad foot odor (so long as you change them often enough!) but also reduces the risk of infected blisters, thus reducing demand for podiatrists’ treatment, and thus reducing the cost of such treatment to others.
A less trivial, indeed a tremendous example of positive externality that environmentalists ignore—and even try diligently to hide—is the common benefit from emitting carbon dioxide when burning fossil fuels. One positive externality from burning fossil fuels and emitting carbon dioxide has been measured. Thousands of observational studies—field studies and laboratory experiments—confirm that adding carbon dioxide to the atmosphere raises crop yields. Craig Idso surveyed many studies and found “that the annual total monetary value of this benefit grew from $18.5 billion in 1961 to over $140 billion by 2011, amounting to a total sum of $3.2 trillion over the 50-year period 1961–2011. Projecting the monetary value of this positive externality forward in time reveals it will likely bestow an additional $9.8 trillion on crop production between now and 2050.”
But that positive externality is almost certainly dwarfed by all the benefit other people get from the use of energy by those who pay for it. Neighbors benefit from your lighting your house, reducing neighborhood crime rates. People in developing countries benefit from employment-making exports purchased by developed countries made wealthy enough to afford them partly by the energy they use. The whole world benefits from the education children receive in rooms lit and heated or cooled by energy and using computers and the Internet, also powered by energy. There are many other such common benefits, and it probably would be impossible to calculate their total value.
In contrast, estimates of the “social cost of carbon” not only ignore its positive externalities (benefits) but also consistently depend not on observational evidence (like those thousands of empirical studies) but on computer climate modeling. Model output is not evidence but theory and must be tested by observation—and over 95 percent of the computer models used to forecast global warming grossly exaggerated temperature rise compared with observations over the last 38 years. That means they’re largely worthless for forecasting temperature decades or centuries from now. Since estimates of the “social cost of carbon” depend absolutely on the models’ accuracy (and the accuracy of models of the global economy’s future that are also highly controversial), those estimates are also largely worthless.
If environmentalists are going to criticize businesses for their negative externalities, they should at least also praise them for their positive ones. Have you ever seen them do that?