My last post traced how our connectedness with the natural order has been lost. I also noted that pollution increased dramatically from the late nineteenth century until after the mid-twentieth century. I suggested this was partly due 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 a connection with the natural world and did not trouble themselves with such concerns. This combination of events led to a growing problem with 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 externality. A factory emits pollution into the air through its smokestack. That pollution doesn't just stay over the factory's 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 party to that agreement are compelled to bear part of the cost in the form of a polluted environment. Therefore, some costs and benefits are allocated to those "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 significantly reduces 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 benefit from 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 the government set standards for the maximum level of air pollution allowed in a certain geographic area. Pollution credits are issued to each factory based on factors like capacity, technology, and past performance. Factories that choose not to upgrade to cleaner technologies must buy credits to cover their excess pollution. Factories that upgrade to cleaner technologies will have a surplus of credits to sell to other factories, thus offsetting much of the cost of 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 than mandating technologies to be used, it incentivizes factories to be innovative and find pollution-cutting methods that exceed existing technologies.
So as capitalism generated an enormous boom in economic prosperity, it also created some unintended externalities related 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 of 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 by 161%, vehicle miles traveled has risen by 149%, energy consumption has increased by 42%, and the US population has increased by 39%, but aggregate emissions of the six principle pollutants have declined by 25%. With increased prosperity comes increased technological knowledge and 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 fewer than two 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 if they had 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 considered 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 production costs. Yet the technology of the developed nations 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. Poor people don't care about the environment and are environmentally destructive. When you are struggling to find food for your family today, you don't have the time to worry about the 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. We must think of human societies dynamically, not statically, to understand why. One place to begin is by looking at what demographers call the "Demographic Transition."
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