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With strong enough libertarian priors, it doesn’t matter what the question is – more capitalism is always the solution. Such an extreme position is surprisingly hard to argue with: capitalism generates wealth for all and creates the very resources that spend-hungry politicians can later tax and redistribute; core tenets of capitalism such as more secure property rights and well-functioning financial systems support economic growth; the freer the economy, the higher GDP/capita; not to mention that moving towards capitalism in the last decades has lifted billions of people out of poverty. On the basis on these observations, the more capitalism our world experiences, the richer and better off we get.
Few people accept this. Even among those who spend their careers studying markets, this seems like wishy-washy utopianism. One of the first things a capitalist sceptic would raise is capitalism’s impact on the environment, as for example seen by the large majority of young people that endlessly worry about climate change.
In our minds, capitalism is synonymous with chopping down trees and exploiting the earth. Business, especially Big Business, is routinely “caricatured as rapacious predators of Earth’s bounty.” “We cannot have infinite growth on a finite planet,” reads a common objection and activist slogan. St Greta’s speech to the UN in September famously objected to world leaders and their “fairytales of eternal economic growth.” If capitalist growth is truly wrecking the planet, perhaps we should slow down the capitalism a little?
Thankfully, capitalism is not wrecking the planet. At least that’s the message in a brand-new book with the stunning title More From Less by Andrew McAfee, a researcher at the MIT Sloan School of Management and co-director of the MIT Initiative on the Digital Economy. His previous book, co-authored with Erik Brynjolfsson – The Second Machine Age – dealt comprehensively and optimistically with technological change, a topic that McAfee continues to investigate as it relates to environmental problems.
McAfee’s book is both timely and persuasive. In a year filled with teenage climate strikes and massive protests against the greenhouse emissions that activists fault the capitalist system for, a message that clearly shows capitalism’s beneficial impact on nature is much welcomed. While advocates like Alex Epstein objects to the anti-humanism of climate activists by elaborating the moral case for fossil fuels, McAfee accepts the activists’ goals. Yes, humans need to stop degrading our planet, we need to stop polluting the earth and start living more sustainably. The beautiful thing is, says McAfee, we don’t need to overhaul our current economic systems – we just need to do more of what we’re already doing! Right out of the gate, McAfee forcefully sums his argument:
“We’re now generally using less of most resources year after year, even as our economy and population continue to grow. What’s more, we’re also polluting the air and water less, emitting fewer greenhouse gases, and seeing population increases in many animals that had almost vanished. America, in short, is post-peak in its exploitation of the earth.” (p. 1)
You heard that right: Rather than being on the brink of the Sixth Mass Extinction, we are already employing the tools we need to solve climate change. How can that be?
I think of McAfee’s explanation as “1-4-4”, the “what” followed by “how” and “why.” One concept – Dematerialization – consisting of four “paths” – “slim, swap, optimize, and evaporate,” (p. 111) – and fueled by four trends, the “four horsemen of the optimist,” – Technological Progress, Capitalism, Public Awareness and Responsive Governments. 1-4-4.
First, the concept. Dematerialization simply means that we’re using less stuff. Not necessarily fewer items or fewer goods, but the material and energy used to produce them – what we take from the earth – is shrinking, even while the American economy and population has been rising. Since around the year 2000, total consumption by Americans of core raw materials such as stone, timber, cement, copper and aluminum has flatlined or fallen. Even while agricultural output has increased, the total use of water, fertilizers and farmland has dropped (pp. 79-83).
Over the decade since 2008, the U.S. economy has grown by about 45% and the population by about 8%, but the total energy used by Americans has fallen by 2% (p. 83). This decoupling completely overturns most people’s implicit assumption about voracious capitalist production: for the last twenty years, we have no longer needed more and more raw materials to fuel our so-called “fairytale.”
We have seen this tendency on a global scale as well, even though developing countries are still increasing their use of raw materials as they are growing: since 1990 we have managed to squeeze out more economic growth per unit of CO2 emission than before – energy use is gradually being decoupled from our economic activities; “economic growth is not the enemy of the environment.” (p. 261).
Second, the four paths – the “how” of McAfee’s story:
- Slimming is the common process of making things lighter and less material intensive. Soda cans are reduced in size as we figure out technology that uses less material. More powerful engines with better fuel efficiency are smaller and lighter than their predecessors. Almost every item you can think of has seen this tendency of reducing the amount of resources that go into producing it.
- Swap: plain old substitutability, as has always been a core economic argument for resource preservation; as we develop better technology, old and inefficient items become obsolete. Fracking reduced the price of natural gas, the burning of which released fewer emissions per unit of energy than coal. The consequent substitution reduced emissions by American households.
- Optimize: by having better knowledge of supply chains, we can reduce the time that capital sits idle. With better scheduling and loading practices, fewer total planes, trains and delivery vehicles can service the same amount of passenger load they used to. Think what Uber replacing private ownership of cars will do to raw materials going into total car production.
- Evaporate: how many (surprisingly energy-intensive) gadgets that Americans used to have, now fit into your smartphone? This one technology literally evaporated the use for dozens of other gizmos.
This is all well and good, Mr. McAfee, but haven’t the rich Westerners simply outsourced their emissions to the Global South? As Daniel Tenreiro asked at National Review, hasn’t globalization led to a transfer of emission-heavy industries from the West to predominantly China, where the emissions from Americans’ consumption now show up in China? Not so. The graphs are constructed on data from the Global Carbon Project, which “take into account the carbon from products that are produced outside the United States (in China and other countries), but consumed by Americans.” p. 83). What we see is a genuine reduction in material stuff; the American economy runs on a decreasing quantity of fuel (metals, energy, raw materials).
Third, the “Four Horsemen of the optimist” – the “why” of the story. The first pair – Technological progress and capitalist, profit-seeking competition – should not come as a surprise to an informed reader; technological development is what allows companies to engage in the four paths described, and capitalist competition is what forces and incentivizes them to do so. The author freely admits that this is not an easy sell: “this is not a universally popular conclusion. Ever since Marx, capitalism has been passionately opposed by many – and view with much skepticism by many more.” (p. 5).
Perhaps it should be 1-4-2: the benefits of ‘public awareness’ and ‘responsive governments’ are suspicious. As capitalism and markets allegedly can’t deal with externalities (p. 142), we need active consumers demanding sustainable capitalism, and vigilant governments regulating emissions through carbon taxes and cap-and-trade schemes. This is where the main dissonance of McAfee’s work reveals itself, as he joins the chorus of complaining that corporations don’t have the incentive to clean up spillover effects of their production.
Contained in one of his four paths to dematerialization are input costs; companies don’t “Slim” because they are kind, but because capitalist competition and profit-motives urge them, and technological progress allows them. As McAfee writes: “Since raw materials cost money, profit-maximizing companies are particularly keen to find ways to use fewer of them.” (p. 234) Energy use, the kind that produces the negative externality we are most concerned with – greenhouse gases such as CO2 – is emphatically also an input into production. Why are firms naturally incentivized to cut down on the use of raw materials to save cost, but unable to mitigate their own energy use? And why does McAfee not spot this obvious disconnect in his argument?
Had McAfee followed the logic of his excellent analysis of dematerialization, capitalism and technology into the topics of “market failures” he would have realized that markets already have the appropriate tools at their disposal. Interestingly enough, in chapter 15 McAfee shows private sector actors such as Google being the largest purchaser of renewable energy and transport companies like United and A.P. Møller-Maersk credibly aiming for carbon neutral operations. One may see these as simply profit-maximizing moves in a society where McAfee’s third horseman – public awareness – works; to consume its products, Google’s customers demand certain standards. That’s no different from normal capitalism and McAfee could probably merge this horseman with capitalism.
On p. 117, he properly puts “market failures” in quotation marks. In the world of textbook perfection, economists like to draw up so-called market failures. When – as public choice economists have repeatedly pointed out – we accept that governments suffer from precisely the same obstacles that private sector actors do in solving these “failures,” the market-failure charge is much less convincing. The same limit of enforcing intangible property rights and the transaction costs of pricing emissions also limit a government’s ability to correct such problems.
Analytical symmetry, as popularly shown by Jason Brennan or more recently by Peter Boettke reviewing John Quiggin’s Economics in Two Lessons – a work that makes the same mistake as McAfee’s – forces us to accept that suboptimal outcomes labelled “market failures” are even less likely to be solved by governments. Boettke writes
“much of the great advances in economic science during the 1960s-1990s was blowing up the mythology of market failure and the idea of government as a corrective.”
Even on McAfee’s own terms, the reliance of government makes little sense. In discussing the backlash against nuclear energy as well as the equally unfounded hostility towards GMOs and vaccination, a responsive government that listens to the illusions of its population would be disastrous for the environment. His worries about a disconnected society and rise of authoritarianism might be timely, but inconsistent with his argument. What makes you think that politicians elected on rejecting intelligent thought on the back of an authoritarian revival and populist uprising are going to be effective advocates for sensible environmental regulation?
Errors of Omission and Commission
In a few chapters towards the end, McAfee considers two other major social upheavals; income inequality and wealth concentration, and the disruption of traditional communities that came with it (not necessarily because of it). The topic is underanalyzed and fits uneasily with the rest of the thesis. I imagine that McAfee (or his editors) insisted on a more “balanced view” to his otherwise very rosy story; nobody would believe his main thesis unless he at least complained about something. Perhaps acceptable for PR reasons, but it serves to unnecessarily lengthen the book with superficially analyzed material that does not reflect McAfee’s expertise.
Instead, the book could have benefitted from a more serious consideration of common-pool resources, particularly the many thrilling projects in Sub-Saharan Africa. During his discussion of threatened animals and government laws to protect them, he briefly mentions a few countries that “are effectively managing their herds,” (p. 154), but he forgets the privatization efforts that underlie those efforts. South Africa, home to 70% of the remaining white rhinos recently legalized the trade in rhino horns. Not for capitalism to “eat”, as is McAfee’s dismal fear (p. 161), but for ranchers to finance breeding and protection of rhinos on their private lands.
Even the idea of making animals extinct through the voraciousness of capitalism is odd; most animals that capitalism “eats” are, evolutionarily speaking, quite successful – at least if success if counted in a species’ numbers and expansion. Cows, pigs, and chickens are not on the verge of extinction. Similarly, threatened animals put under capitalist stewardship saves them; South Africa’s experience with the white rhino is a case in point. By privatizing the animals and allocating ownership of them either to breeders for sale or to the native indigenous populations for eco-tourism, many developing countries with stunning wildlife have managed to control poaching. The animals are more valuable alive than dead, as the former poachers-turned-gorilla-guides in Uganda attest to. Curiously, a few chapters later, McAfee mentions this as a possible solution to common-pool resource problems, but finds it “odd” (p. 261) that fishermen and duck hunters whose livelihood and sport relies on killing animals are the prime source of their protection.
With a proper understanding of capitalism and property rights, it makes perfect sense.
If I may offer a final piece of criticism, it is directed at McAfee’s historical sketch. As pointing out mistakes in historical accounts is the burden of all historians, the story we are given of the Industrial Revolution is remarkably confused. Not only does he misdate its origin by around two centuries, McAfee seems to believe that the increase of fertilizers via bones, Chilean nitrate, and guano fueled the Agricultural Revolution, which allowed for the Industrial Revolution. According to McAfee, the transportation to Europe of these potent fertilizers was only made possible by steam engine-powered ships. At least three things are entirely off with this story:
- The Industrial Revolution, understood as the sustained upward trend in GDP/capita, is generally dated to the 16th century in Holland and the 17th century in England, centuries before Humboldt discovered the rich guano deposits on islands off the coast of Peru. The Industrial Revolution has much deeper roots than one would think after reading McAfee’s brief account.
- The “Agricultural Revolution,” while its contribution and relation to the Scientific and Industrial Revolutions is much disputed, is generally dated to the 1600s and 1700s. This is well before the discovery of Peruvian guano and large-scale importation of nitrate from Chilean deserts (1802) and much before its large-scale importation to the West (1840s). While crop rotations and nitrogen-fixing plants like turnips and clover were important features of the Agricultural Revolution and contributed to increased agricultural yields, they did so well before McAfee’s timeline and were not fueled by South American imports.
- The iconic steam engine was generally marginal to the Industrial Revolution as water power was the dominant source of energy for much of the relevant time period. Steam-engines made their contribution to the Industrial Revolution by carding in cotton-spinning, by drawing water from flooded mines and only occasionally contributing to factory production. Steamships were certainly not dominating maritime trade until the second half of the 19th century – much too late for the story – and did not bring guano and nitrate to Europe.
This historical limitation does not detract much from the author’s main case. He is, after all, not a historian and he’s not primarily making historical arguments. That he got his facts and historical causal mechanisms backwards is something we may overlook as his main case does not rest on that. While mistaken models of the world are harmful – indeed, correcting one such model is McAfee’s main achievement – this blunder is permissible as the informed reader knows that it’s mistaken, and the uninformed one is more likely to focus on McAfee’s main environmental argument than the historical escape from Malthusian traps.
As a skeptic of governments’ ability to do anything well, and a huge proponent of markets and voluntary bottom-up orders to satisfy human wants, my priors are stacked in favor of McAfee’s two first horsemen and against his latter two. Nevertheless, it’s an unusual and optimist take on environmental problems that is much welcomed.
In contrast to the revolution that modern environmentalists call for, the message of McAfee’s book is truly revolutionary: embrace technology, let innovation flourish and unleash capitalism – to which I would only add a missing skepticism of governments’ abilities. McAfee’s 1-4-4 show us that we don’t need to uproot our current societies. What we’re already doing is working, and McAfee deserves much praise for having brought it to our attention.
Joakim Book
Related Articles – Economic Education, Economic Growth
What Arthur Burns Broke, Paul Volcker Fixed
Paul Volcker, who served as chairman of the Federal Reserve from 1979 to 1987, passed away this week at the age of 92. He is widely credited with ushering in a new era in Federal Reserve policy making, where much more attention is given to controlling inflation.
When President Carter appointed Volcker to the Fed, inflation was approaching double digits for the second time in less than a decade. Arthur Burns, who began his tenure as Fed chair in 1970 when inflation was around 4.90 percent, saw inflation rise to 11.51 percent in 1974 Q4, fall to 5.13 percent by 1976 Q4, and begin climbing again thereafter. Inflation rose from around 6.43 to 8.52 percent during G. William Miller’s brief tenure from 1978 to 1979.
Before Volcker, Fed chairs occasionally denied their ability to control inflation. Arthur Burns referred to cost-push inflation (in contrast to the demand-pull inflation caused by faster money growth). “The rules of economics are not working in quite the same way as they used to,” he told Congress in 1971.
There were dissenting views, to be sure. But, for most of the 1970s, they were coming from outside the Fed. Milton Friedman, for example, called Burns out at the December 1971 American Economic Association annual meeting. It was not cost-push inflation, Friedman claimed, but “erratic and destabilizing monetary policy [that] has largely resulted from the acceptance of erroneous economic theories.”
Volker changed that. He acknowledged that the Fed could bring down inflation and then set a course to do just that. Moreover, he did so with great resolve.
Engineering a disinflation is a costly proposition. The central bank must cut the growth rate of money to bring down inflation. However, cutting the growth rate of money also tends to fool producers into thinking there has been a decrease in the relative demand for their products. As a result, they produce fewer goods and services — which often means laying off workers — until they realize the error and adjust their prices down accordingly.
The underproduction problem can be mitigated, to some extent, by credibly announcing the policy in advance. If producers reduce their inflation expectations in line with the policy, they will not be fooled into underproducing.
But that is easier said than done. It is difficult to credibly announce a policy in normal times. Most folks just don’t pay that much attention to — or understand — monetary policy. It is harder still when the central bank has failed to live up to expectations in the past, since even those who do pay attention and understand how monetary policy works are unlikely to believe the Fed will do what it says it will. Hence, even when such measures are called for, cutting the growth rate of money virtually guarantees a recession.
Volcker’s disinflation was no exception. Real GDP growth fell from 6.51 percent in 1979 Q1 to −1.62 percent in 1980 Q3 and remained low through 1983 Q1. Unemployment shot up, from 5.7 percent in 1979 Q2 to 7.7 percent in 1980 Q3; by 1982 Q4, it had reached 10.7 percent. Home builders around the country pleaded for cheap credit by sending two-by-fours to the Marriner Eccles building in D.C.
But Volcker didn’t relent. Inflation came down and stayed down. Indeed, the public came to believe the Fed chair was willing to do whatever it takes to keep inflation low and steady. For every ounce of institutional credibility Burns had lost, Volcker gained a pound.
William J. Luther
Related Articles – History
How To Stop the Proliferation of Municipal Bond Issues
It seems rather strange that in a putative democracy a handful of people can legally, if figuratively, reach into the pockets of their neighbors but it happens all the time all across America via municipal bond ballot measures.
The main problem is that the measures “pass” if the majority of those who actually vote are in favor, even if hardly anyone votes. That leads to abuses. We should change the rules and mandate that bond/tax measures must obtain the affirmative approval of over 50 percent of eligible voters, not just those with sufficient incentive, education, and information to vote.
In most areas of our lives, no means no in the sense that no decision defaults to no action. You do not have to actively dislike the advertisement of a stationary bike company to avoid buying one of its products, you can vote “no” by not taking steps to purchase one. Heck, you may even approve of its ad but that does not give the manufacturer the right to drop ship one of its high-tech torture machines to your house and dock your checking account in exchange.
The same goes for physical intimacy. A stranger does not get to lawfully have sex with you because you did not actively swipe left on his or her Tinder profile. And Tinder does not get to establish a Tinder profile for you because you did not explicitly tell it not to. Wells Fargo found that out the hard way (though arguably not hard enough).
The need to obtain explicit consent before taking somebody else’s money (or bodily fluids) is one of the key remaining features of liberty. Without it, life begins to look a lot like slavery or authoritarianism.
But the rules change when the compulsory monopoly we call government makes the rules. The original impetus behind municipal bond measures was the notion that voters need to explicitly accept the tax increases needed to service the bonds. No taxation without representation and all that. When most people voted, and where taxpayers and voters were roughly the same people, bond ballot measures approximated consent. (Why fifty percent is often considered the best threshold is another matter, but I will stipulate it here.)
Statewide bond measures pass about four out of five times. Local ones appear to pass at the same rate, even at the 55 percent threshold established in California. And issuers who fail to gain approval can try again year after year, unlike in corporate proxy resolutions where shareholders are banned from reintroducing resolutions that fail to garner sufficient votes. (The SEC, incidentally, wants to raise those thresholds.)
It is a minor miracle when voters in a town like Monument, Colorado repeatedly put the kibosh on bond measures because the issuer, often a school district, is a concentrated interest with the budget authority to hire consultants who appear to make scientific, objective cases for the “necessity” of the bond. Some of those consultants even conduct market research studies designed to help the issuer use words and arguments most likely to sway voters to click “yes” come election day. Opponents are typically individuals with jobs, families, and lives.
Unlike in the commercial sector, municipal bond issuers do not need to persuade people to their cause, they just need to create enough uncertainty, confusion, or complexity to induce most voters to abstain. While often rational in other contexts, inaction on bond measures often means tax increases because the denominator for passage, regardless of the threshold, is always the number of people who actually voted on the measure rather than the number of registered voters.
Issuers know that and use it to their advantage. A suburb of Sioux Falls, South Dakota recently passed a bond measure 1,085 to 129. That seems like a mandate except 14,700 people were eligible to vote on the measure, which went up for vote on 10 September, a time when most East River South Dakotans are busy settling their kids in school, hanging tree stands, and “gettin’ the beans in” (soybeans of course). In other words, only about 1 in 15 people explicitly approved of the bond measure but the outcome is somehow counted “democratic.” (I don’t live in that town, incidentally, and the measure did not raise taxes but merely did not lower them as a previous bond recently matured.)
Other issuers put their measures up in November but only in odd-numbered years, when voter turnout is even lower than during even-numbered years. Often, public discussion of bond measures is muted because debate might draw out voters, which issuers want to avoid because when turnouts are low measures can be won simply by mobilizing teachers and naive statists.
In response to those obvious problems, some have called for minor reforms, like mandating that all municipal bond measures come up for vote on regular election days in even-numbered years. While that would be an improvement, it misses the main point, that no (action) should always mean no (money or booty). In other words, passage of anything authorizing use of the coercive power of the state to take citizens’ money should require the assent of fifty percent plus of eligible voters, not those who turned out at the polls.
When I proposed this recently at a meeting of the South Dakota chapter of Americans For Prosperity, someone immediately objected “but then no bond measure would ever pass!” “Exactly,” was my response. But of course truly important bond measures would pass, after mature consideration and extensive public debate clarified the issues at stake.
Consider again Monument, which sits on the Front Range betwixt Denver and Colorado Springs. Traditionally, taxes and public spending there were low so it attracted childless singles and older couples. Recently, younger couples with children began moving in because it was relatively cheap and improvements on I-25 promise to reduce commute times to both metropoles. Once ensconced, though, those couples began demanding more and better schools, even though that would mean higher taxes and, ceteris paribus, lower real estate values via what economists call tax capitalization.
I do not live in Monument either and would not presume to tell its residents what type of community they should try to create. But I do believe that a nation that purports to be a democracy should encourage citizens to debate the merits of proposals openly and to have to gain explicit approval for taxes, not a bare majority of a few percent of eligible voters in an inconvenient, secretive ballot. Robust debates could raise awareness of charter schools or maybe signal to parents with young children that they should live elsewhere. Or maybe they would lead to even more financial support for public schools. At the very least, full public discussion might expose the exorbitant fees that many municipalities now pay to consultants and issuers. The point is that to win approval, issuers would have to make a case and not just slide in under the radar.
Yes, voters could turn out to defeat bond measures, as they sometimes do, but the burden of proof should fall on the issuer, especially when public school districts seek funding because they have, with few exceptions, failed to create the type of citizens who vote. NGOs like iCivics are trying to improve civics education but the real problem, especially when it comes to bond and tax issues, is the failure of public schools to teach the basic principles of economics and public finance.
Without that background, most people do not feel comfortable voting on complex bond issues. So, as behavioral finance theory predicts, many abstain and the issuers win.
Robert E. Wright
