My last post traced how our connectedness with the natural order has been lost. I also noted that pollution increased dramatically form the late 19th Century until after the mid-twentieth century. I suggested this was due in part to ignorance of pollution’s effects and the exponential growth in pollution from industrialization. I also suspect that it was influenced by the fact that fewer and fewer had connection with the natural world and did not trouble themselves with such concerns. This combination of events led to a growing problem in what economists call externalities.
An externality happens when a decision by two parties has a significant impact (good or bad) on a third party who was not part of the transaction. Pollution is one of the most frequently cited examples of an externality. A factory emits pollution into the air through its smokestack. That pollution doesn’t just stay over the factories property. It disperses across everyone’s property in the region. Through free exchange, the factory and the factory’s customers have reached a financial exchange agreement but many others who were not a party to that agreement are compelled to bear part of the cost in the form of a polluted environment. Therefore, the some of the cost and benefits are allocated to those who are “external” to the market transaction.
The rise in pollution during the twentieth century has forced nations to develop new schemes for dealing with these externalities. One of the problems with the air pollution issue is that if one factory makes significant reductions in air pollution it creates two self-defeating problems. First, it spends money other factories do not spend which forces the factory to either reduce profits for its shareholders or raise prices to customers to cover the costs. Meanwhile, competitors get the benefit of the cleaner air and the ability to sell to customers at lower costs. There is no incentive for a factory to act on its own.
One strategy for addressing this issue is to have government sets standards for the maximum level of air pollution allowed in a certain geographic area. Pollution credits are issued to each factory based on several factors like capacity, technology used and past performance. Factories that choose not to upgrade to cleaner technologies must buy credits in order to cover their excess pollution. Factories that do upgrade to cleaner technologies will have a surplus of credits to sell to other factories thus off-setting much of the cost for upgrading. You can either pay more and pollute or pay more and upgrade. At some point it simply becomes cheaper to upgrade. An important feature of this arrangement is that rather then mandating technologies to be used it gives an incentive for factories to be innovative and possibly find pollution cutting methods that exceed existing technologies.
So as capitalism generated an enormous boom in economic prosperity it also created some unintended externalities as it relates to the environment. When we all worked in agriculture we were both producers and consumers. We could see direct connections more easily and the type externalities we face today did not exist. This need not spell disaster. As I noted in the previous post, since 1970 in the US, the Gross Domestic Product has risen 161%, vehicle miles traveled has risen 149%, energy consumption has increased 42%, the US population has increased 39%, but aggregate emissions of the six principle pollutants has declined by 25%. With increased prosperity has come increased technological knowledge and increased financial resources to address the pollution problems. We have seen this process repeated over and over. Barely a hundred years ago a demographer would have seen a world population of less than 2 billion people but realized it was growing rapidly, possibly tripling within the next century. How would we possibly deal with the number of horses needed for transportation and their need for food and water, not to mention the manure pollution problem? Enter the internal combustion engine and the automobile. We know now that these engines have created their own sets of problems but they are vast improvements over the problems we would have had had they not been invented.
There is a balance that needs to be struck between pessimistic static views of the world that simply project current behavior into the future (ex. In 1900, “We are going to need more horses.”) and a Pollyanna optimism that ignores the problems existing technologies create. The process of democratic capitalism created environmental externalities. Unfortunately, some have decided that democratic capitalism is evil because of this and human beings are looked at as environmental parasites rather than productive stewards of creation. There is a widely shared assumption by many who focus on environmental issues that the answer lies in developed nations reducing their production levels, thus increasing their costs of production. Yet it is the technology of the developed nations that produces the greatest quantity of goods for the least amount of pollution per unit produced. By overly increasing the cost of production for low level polluters it makes products made in nations (especially totalitarian ones like China) that are less concerned about the environment more competitive.
While we should always be looking for ways to eliminate waste and improve efficiency, I do not believe the answer lies in penalizing the economies of developed nations. The answer lies in ending poverty around the world. People who are poor don’t care about the environment and they are environmentally destructive. When you are struggling to find food for your family today you don’t have the time to worry about future impacts of your decisions. Even if you did care, you would not have the resources to address the problems. The destitute poor are not able to be stewards. Part of the answer to the problems of environmental degradation is the formation of more stewards. To understand why, we need to think of human societies dynamically not statically. One place to begin is by looking at what demographers call the “Demographic Transition.”