Environment & the World

Sunday, November 26, 2006

Is “Command and Control” Really so Bad?

Filed under: Economics — Cathy @ 4:19 pm

I had a few more thoughts to continue our little discussion on environmental economics.  Having thought more about this issue over the past couple weeks and having just read the excellent article by Jonathan Rowe that Amir recommended in an earlier post, I am increasingly struck by the bizarre assumptions underlying the market economy.  Some of these notions – that all people make decisions based on complete knowledge of all economic information, that they base all of their decisions solely on personal economic gain, and that there is perfect competition between all companies – are so contrary to everyday experience that one really wonders how our society bought into this concept so heavily in the first place.
 

Moreover, for my generation that has grown up in the last couple decades in the United States, it is too easy to forget that there was a time in very recent US history where the market was not a god, and where it was perfectly acceptable and even desirable for the government to intervene in the market.  Indeed, most of our landmark environmental laws – the Clean Air Act, the Clean Water Act, and the National Environmental Policy Act – were passed as a result of citizen pressure demanding government action.  The “command and control” approach to environmental and social policy embodied in these laws is still much more acceptable in Europe, although there are signs (such as the EU carbon emissions trading scheme) that they are moving more towards market approaches to environmental problems. 
 

I see nothing wrong, in principle, with using market instruments for environmental policy.  In some cases they work remarkably well and at much less cost than regulatory approaches – the classic case study being the sulfur dioxide emissions reductions from US power plants in the 1990s as a result of a sulfur emissions trading scheme.  But the danger is to assume that market instruments are therefore the best solution to any problem.  My fear is that this is becoming the fashionable attitude among some environmentalist circles.  As we have discussed in previous posts, perhaps attempts to treat environmental problems as economic externalities and to develop ways to integrate them into the current capitalistic system are serving to prop up the very system that caused many of these problems to begin with. 
 

Fundamentally I do not think that environmental protection needs to be justified on the grounds of economic efficiency.  Indeed, to do so would imply the environmental and economic variables deserve equal weight.  Yet given that the economy cannot exist without a reasonably healthy environment (and the environment would exist just fine without an economy!), I cannot accept this argument.  Although attempts to quantify the economic damage of climate change (e.g. the Stern report), for example, can serve a useful purpose, we should recognize that the sole goal of government is not to promote economic efficiency.  In social policy, redistribution of wealth through social security and other programs has generally been accepted even though it reduces economic efficiency, because it is seen as a higher goal of society to care for citizens who are less well-off.  Similarly, I would argue that environmental groups should be less afraid to abandon the arguments of economics and be more willing to advocate for government regulation on the grounds of morality and inter-generational equity.

Advertisements

3 Comments »

  1. “Some of these notions – that all people make decisions based on complete knowledge of all economic information, that they base all of their decisions solely on personal economic gain, and that there is perfect competition between all companies – are so contrary to everyday experience that one really wonders how our society bought into this concept so heavily in the first place.”

    Notions such as “perfect competition” are not, and were never meant to be, descriptions of the real world. They are abstractions – theoretical “what ifs” that try to explain some of the underlying dynamics of the economy. But no-one who actually listened during Econ101 – or who went a little further with the courses – would think that it explained human behaviour very well. Indeed even in Econ 101 you spend a lot of time on cases which run contrary to the simplest notions such as the downward sloping demand curve (more is bought as the price falls). And the biggest assumption of all in economics is “ceteris paribus” – all other things stay the same, which of course they never, ever do.

    Comment by Stephen Rees — Thursday, November 30, 2006 @ 3:36 pm

  2. I absolutely agree that modeling a complex system like the economy requires making some simplifying assumptions. However, my concern is that in many real applications people sometimes forget that these underlying assumptions, as you say, “are not, and were never meant to be, descriptions of the real world.” For example, one sometimes hears arguments against subsidizing renewable energy based on the idea that renewable technologies should fend for themselves in the market, and that the market is best at picking winners and losers. If we did live in the perfect market where all of these non-realistic assumptions were true, this would be a very valid point. But in reality it completely ignores the fact that large energy companies have political power and influence that allows them to skew the market, and that investors do not act with perfect information (i.e. they may prefer to invest in familiar technologies rather than in perceived riskier renewable technologies).

    Comment by ckunkel — Friday, December 1, 2006 @ 4:27 pm

  3. […] that arise from it seem on the mark. In fact, much of it echoes the concerns we’ve already voiced in our threads about environmentalism and economics. Essentially, H&L argue that natural […]

    Pingback by Reading Group: Natural Capitalism, Ch. 1 « Environment & the World — Sunday, January 7, 2007 @ 1:19 am


RSS feed for comments on this post. TrackBack URI

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Blog at WordPress.com.

%d bloggers like this: