Why Government Isn’t The Answer To Climate Change
In response to a contribution on TODAY by Adam Smith Center Director Bryan Cheang on the recent climate rally in Singapore, one writer kindly offered a rebuttal of his own. According to his own bio, Bertrand Seah is a political science graduate in NUS and a member of local environmentalist group 350 SG.
Seah makes a myriad of claims that I fundamentally disagree with. Yet, I think his article is worthwhile responding to for the mere reason that it engages some scholarly evidence beyond the superficial mudslinging and obsession over funding sources that is typical in environmental policy discussions.
I will not attempt to address every point but only the salient ones for reasons of brevity.
Innovation by markets or the state?
The first thing that Seah questions is the idea that free market innovation can deliver entrepreneurial solutions to climate problems.
He cites the Italian-American economist Mariana Mazzucato favourably, who is famous for her book The Entrepreneurial State. In this book, the author advances a thesis that places a larger role for industrial policy i.e., state-led innovation. She makes the argument by surveying historical evidence of how government spending in R&D has manifested in groundbreaking innovations such as the Internet, life-saving drugs, the iPhone and nanotechnology.
Even on cursory scrutiny, this argument is saddled with problems. The historian Alberto Mingardi has offered a thorough critique of Mazzucato’s thesis, showing that it is held together by cherry-picked examples and selective historical evidence.
There is a glaring omission of the hundreds of billions of dollars that governments in the 20th-21st century have misspent in failed projects and misdirected investment while putting a spotlight on selective case studies that have ended up in positive outcomes.
Mazzucato also uses broad-ranging standards for what might be considered “evidence” of successful industrial policy. Much of the evidence that she marshals are not examples of governments pursuing a well-calculated investment plans to produce innovative inventions. Instead, the technological inventions she cites are at best accidental byproducts that have emerged as unintended consequences from state-funded projects, which then is capitalised on by private market entrepreneurs.
Arguably the biggest flaw in Mazzucato’s book is the lack of a coherent political-economic theory for how exactly governments can go about pursuing state-led innovation, granting the enormous assumption that they should in the first place. In other words, Mazzucato commits the fundamental is-ought fallacy that David Hume famously coined centuries ago.
More important however, is the complete absence in the book— beyond assertions that governmental actors are “more far-sighted” than private entrepreneurs—of an account of the mechanisms that could plausibly enable governmental actors to cope better than private actors with knowledge and incentive problems in choosing among infinite investment possibilities. On close inspection, every one of the innovations and growth industries Mazzucato highlights in the American context were accidental byproducts or unintended consequences of ad hoc public-spending projects, none of which seems to have had anything to do with the exercise of “directive intelligence” or “far-sightedness.” Neither is there any attempt to document the costs generated by the countless acts of public spending that did not accidentally generate productive spinoffs. Given that U.S. public spending increased from less than 10 percent of GDP in the late nineteenth century to nearly 40 percent after the Second World War, it would be remarkable if none of this expenditure had generated benefits—but unintended consequences do not an “industrial policy” make.
Finally, there is a constant conflation between state innovation and market innovation, as if they were the same types of processes but just carried out by a different set of actors.
They are not. Market innovation takes place within a discovery process of trial and error where numerous entrepreneurs compete against each other to achieve different ends. The price system, as Mises taught (see embedded video), serves to allocate scarce resources to its most valued and needed ends. Even acquiring capital to start a business is also subject to a competitive process, as those in the finance industry would know.
This is entirely different from how governments would pursue so-called “state-led innovation”, since taxpayers dollars would be shoveled toward one end. Such state-led projects would also lack a competitive process based on market prices, profit margins and private property rights like that of competition within market institutions. (To be sure, political institutions too have their own form of competition in the form of elections, but this is wholly different from market competition. For a concise breakdown of this comparative analysis, see this fantastic paper by Sam Decanio)
Profits =/= Greed
The second claim that Seah makes is that “profit-seeking” is to be blamed for bad environmental outcomes:
The environmentally destructive nature of capitalism can be boiled down to the imperative to accumulate profit. This is because the profit-seeking capitalist is compelled to maximise production while reducing and externalising its costs, including the environmental costs.
The first thing to note here is a distinction between profiteering and greed. Many progressives condemn the latter but fail to appreciate that the profit-loss calculus serves an essential economic mechanism for revealing errors in investment and reducing resource wastage.
In a free market system, an entrepreneur that fails to turn a positive profit margin receives an important signal that he is not doing something right. He might not be creating a product that consumers value (and therefore not buying), or that he is producing a product that consumers do value but undertaking a production process that is highly resource-inefficient. From a perspective of economic efficiency, the profit mechanism is useful because it helps guide entrepreneurs to make the necessary adjustments or go bust.
This is why free market economists are sceptical of state subsidies or funding for the reason that it distorts the valuable information the profit-loss calculus conveys. To put it simply, a teen that is simply spoonfed an allowance by his parents has a much smaller incentive to get off the couch and find a job, just as entrepreneurs would have a smaller incentive to be cost-efficient and serve consumers if their profit margins were held up artificially by subsidies and rent-seeking.
The lure of entrepreneurial profits also incentivises other actors to pursue the game of innovation. These are some of the reasons why free market economists believe in leaving the profit system alone, as they see it as one of many crucial elements in the market system that enables a dynamic process of market competition.
On the contrary, government projects that are funded by tax dollars and not beholden to a profit margin have far different types of incentives to take the necessary actions.
Free Market Solutions and Climate Change
Finally, Seah raises a valid point when he says that fossil fuel usage imposes externality costs on the public that are not internalised by energy producers. We learn this in Econ 101. Simple cases of pollution from my neighbour’s chimney into my home might be easily internalised by the assignment of private property rights and Coasean bargaining, or a Pigouvian tax.
Macro environmental problems on the other hand like climate change, do not have easy market-oriented solutions. This is because the atmosphere cannot be easily parceled up into private properties like we can with land.
Furthermore, wide-scale environmental problems like climate change are also said to suffer from collective action problems because any one given individual or business has an infinitesimally small incentive to be environmentally-conscious and reduce their carbon footprint.
These are all valid arguments. But the problem is that most progressive environmentalists leap from this premature diagnosis to the proposed cure that governments must step in and offer environmental policies as solutions. This type of thinking basks in a romantic vision of an enlightened state apparatus where:
- Policymakers are assumed to possess the knowledge to engineer adjustments to carbon emissions in the face of diverse income levels, preferences and risk attitudes
- Private lobby groups do not try to capture regulators
- Voters are informed and able to hold state actors accountable
In the real world, government regulations are subject to regulatory capture by private lobby interests. The unintended consequence of well-meaning regulations can result in inefficient policies that remain entrenched for years, even decades.
Furthermore, most voters are politically apathetic and not engaged in environmental activism, let alone possess the technical expertise (or interest after a long day’s of work) to assess long-length IPCC reports and academic papers. The economist Bryan Caplan showed us in Myth of the Rational Voter that voters are plagued with inherent biases and are very far from being the type of “enlightened and politically-active citizenry” that progressives invoke as a safeguard mechanism to “hold governments accountable”.
In light of this, there is very little reason to trust that political solutions – be it a carbon tax or intergovernmental arrangements like the Paris Accords – are a de facto solution to environmental problems.
Before progressives leap to the assumption that political solutions must be the answer to climate problems, they need to consider that political solutions are not without its own costs. This is revealed by doing a comparative institutional analysis between the market and political realms.
Political solutions are just as plagued with its own set of problems. Just as collective action problems exist in the market arena, so too do they exist in the political arena. The right solutions should not emerge from an analytical toolkit that keeps the black box of government closed and completely omits all its relevant problems.
This short blog post only scratches the surface of the many problems with Seah’s TODAY article. He makes a few other broad-sweeping claims about every progressive’s favourite punching bag: neoliberalism.
And of course, he also brandishes the typical trope about dark shadowy right-wing forces funding “climate change denial” (which can be paraphrased more aptly as remotely anything that questions the climate change agenda), even though he probably doesn’t realise the environmental Left is just as backed by corporate interests of its own.
I won’t attempt to address these here, as this article already tries to cover too much ground. But it is my hope that this piece moves the conversation forward in terms of policy education and in the spirit of rational discourse.
I have intentionally embedded many links within this article so that readers who might be interested to learn more about the free market side of the argument in environmental policy will be able to click through and read at their own pace.