For the past few semesters I have been telling my new students that their generation will face three critical problems: 1) Climate Change, 2) Growing Inequality, and 3) The Failure of Democracy. While my generation has spent much time talking about these issues, we have accomplished little in bringing them under control. Indeed, each of these concerns has only grown in importance over the past decade. Unfortunately for the younger generations, the time for talk has now come to an end. These problems must now be faced and they must now be solved. Failure to do so will mean cataclysmic change for Earth and for Human Society. Over the next several issues of Gurukula Network, I plan to discuss each of these issues. I hope to show some of the reasons why these problems have proven to be so intractable, why these concerns in fact are interrelated, and how this interrelated nature points to a possible path towards their solution. In this issue I begin with a discussion of climate change.
In one sense, climate change is the result of Capitalism’s success. Even Karl Marx praised Capitalism’s ability to greatly increase the supply of available goods (though greatly criticizing the exploitative nature of both the production and distribution of these goods). But the driving mechanism of Capitalism is the unceasing attempt to maximize profit and the concomitant drive towards ever greater rates of growth. As Capitalism has expanded the supply of goods, it has also required greater amounts of energy to fuel the growth process. Unfortunately, for much of the history of Capitalism, only fossil fuels have been able to supply the energy needs necessary for sustaining this growth. But as we now know, the expanding use of fossil fuels has also led to the release of greater and greater amounts of CO2 into the atmosphere, resulting in the climate change that the entire world is now experiencing.
There is nothing inherently wrong with growth. The goal of providing everyone with sufficient resources for leading a meaningful life is one we should all share. One of the essential discoveries of economists is that sustained growth is only possible with technological change. Since technology is nothing more than a body of ideas relating the use of resources to the production of output, technological change simply means acquiring new and better ideas for using a given amount of resources to produce more and better output. The search for new ideas thus provides two benefits: 1) living standards can be dramatically increased; and 2) a powerful outlet for humanity’s unceasing creative energies can be established.
Difficulties arise, however, when the dominant motive for growth is the acquisition of greater amounts of profit rather than the flourishing of human society. While profit-seeking has been a dominant characteristic of Capitalism’s history, this has become particularly true during the last 40 years as a result of the world-wide growth of an ideology known as Neoliberalism. Neoliberalism can most succinctly be described as the belief that unregulated markets can provide the answers to all problems. The increasing dominance of this belief is directly correlated with humanity’s inability to deal with the issue of climate change. For, as it turns out, climate change is definitely one problem that cannot be solved by unregulated markets, as I will now explain.
Capitalism is based upon the idea of individual private property. More precisely, Capitalism is a system wherein individuals possess property rights that are protected by the government. One of the important property rights that people possess is the ability to exclude others from using their property unless they are willing to a pay a price for its use. This price will reflect the various costs that are incurred when property is utilized. Thus, the costs that are counted by the market are those that arise from the power of a property owner to exclude others from the use of that property. But the atmosphere cannot be privately owned. (Even if it could be, would we want to live in a world where every person had to pay a price for each breath they took?) And because the atmosphere cannot be privately owned, there is no one who can exclude people from using the atmosphere unless they are willing to pay the price to cover the costs of such use. As a result, these costs are not counted by the market. In effect, the atmosphere is treated as a free good provided by nature and no limitations are placed on the exploitation of this resource. Thus, when industrial and agricultural processes, and vehicles powered by combustible engines, emit CO2 into the atmosphere, these emissions are not treated as costs even as the accumulating evidence demonstrates beyond all possible doubt that climate costs are growing exponentially.
But there is a second reason why markets are incapable of counting the costs associated with climate change. We have been emitting increasing amounts of CO2 since the process of industrialization began. And, we continue to do so at ever-increasing rates. But the problems such emission causes are only now beginning to be noticed. And the really serious problems that will occur will take place 10-30 years into the future. How should we evaluate these future costs? The problem that arises here can be illustrated with a simple example. Suppose I offer you the following two possibilities: 1) I will give you a brand-new car today, 2) I will give you an identical brand-new car one year from now. Which will you select? Well, if you are like most people, you will want to have the car today. This illustrates the fact that even though the car is identical at both points in time, you would prefer to have this car today rather than wait one year for it. The future car is worth less to you than the present car. This illustrates a psychological propensity that economists refer to as time preference. Put in other words, any future cost or benefit must be discounted to determine what its value would be today.
Now how do we figure out how to discount the future cost? Here we see one of the purposes of interest rates. Suppose that I tell you that I will lend you one euro today and that you can repay me one euro a year from now, i.e., I will not charge you any interest. Essentially what you are saying is that having a euro today or having a euro one year from now is of equal value to you. Suppose, instead, I tell you that I will lend you one euro today but that you must repay me two euros one year from now. In this case the interest rate would be 100%. But now what I am saying to you is that I would much prefer to have the euro today, and that I will only lend it to you if you pay me a high rate of interest. So the interest rate is a reflection of your time preference. And, the higher the rate of interest, the more you value having something today, which is the same thing as saying you value having something in the future less.
So what interest rate should we use to evaluate the future costs imposed by emitting CO2 into the atmosphere today, resulting in greater climate change tomorrow? There are hundreds, even thousands of interest rates in the market. Which one should we use?
The market cannot tell us this, for this is a political question, i.e., it is a question that we must answer as a society and not something we can leave to the market. This exact question arose over a report issued by the government of the United Kingdom back in 2006, a report known as the Stern report. Stern, himself, argued that we should use an interest rate equal to the rate of growth of output, which would be about 1.5%. William Nordhaus, last year’s winner of the Nobel Prize in Economics, argued that we should use a much higher interest rate of about 4%, meaning that he was counting future costs at a much lower rate. Stern argued that the future loss of well-being due to climate warming was so great that we should be willing to give up a good bit of current GDP to prevent this future loss. Nordhaus argued that future generations would be much wealthier than current generations, and so we should count the future costs of climate change at a much lower value, i.e., we should give up much less of our present GDP to prevent future climate change.
This is not the place to argue as to which view is correct. Rather, what I am indicating is that there are many viewpoints that can be reasonably argued for, and that we cannot find an answer to this question within the market itself. Human society will have to make a decision as to how we value the present as opposed to the future, and hence how much we are willing to sacrifice today to reign in the effects of future climate change.
But the dominance of the Neoliberal perspective will make it much more difficult for humanity to arrive at a united consensus. The adoption of the belief in unregulated markets has made possible the justification of extraordinarily high levels of income and wealth concentration, as well as an acceptance of an increasing degree of monopolization. In a future article I will discuss the economic effects of economic concentration. Here I simply wish to point out that the growth in economic power has also enabled the growth of political power. And, this growth of political power has enabled the world’s top 1% to effectively control the flow of information regarding climate change. Recent studies have revealed the fact that those in charge of the fossil fuel industry have known for decades that the increasing use of fossil fuels has accelerated the advance of climate change. Rather than seeking to mitigate these effects, the leaders of the fossil fuel industry have provided the funding to those seeking to deny that global change is even occurring. And this has immeasurably slowed humanity’s ability to slow the advance of climate change.
But the ability of Neoliberalism to foster climate change denialism is coming to an end. Unfortunately, this end is not being brought about as the result of an educated public coming to understand the true nature of what scientists are trying to tell us. Instead, it is being brought about by the increasing costs associated with climate change itself. Super storms that formerly would have occurred once in 500 years now seem to occur every year. Record-high planet temperatures now seem to occur regularly. Disease bearing insects that formerly were controlled by the change of seasons, such as the death of mosquitoes as fall and winter arrived, seem to be growing in numbers, bringing more sickness and death. Perhaps even more alarmingly, climate change is playing an increasingly important role in bringing about social tension, as illustrated by the role that a lack of water played in enabling the war in Syria, and in the role that water shortages are currently playing in fostering the growth of immigration from Latin and South America into the United States. So it is not enlightenment on the part of the public that is bringing an end to Neoliberal dominance. Rather, it is what people are seeing with their own eyes.
But the actual, lived experience of people perhaps provides an opening for the adoption of new, more liberating understandings of the nature of humanity and its relation to the environment. Many spiritual views have always understood the interconnected nature of people and the Earth. And this understanding has fostered an understanding that the Earth and all of its inhabitants must be loved and respected. Perhaps spirituality can provide a new moral foundation capable of reining in the unchecked growth of markets and climate change. But this is by no means a certainty. Those practicing these spiritual views will have to prove that they are capable of making spirituality something more than an abstract, philosophical view. The world’s fate waits in the balance.
Ed McKenna, Ph.D., is Professor of Economics at Connecticut College in New London, CT, USA. He specializes in macroeconomics and econometrics. His work lies at the intersection of economics and philosophy. He is particularly interested in the relationship between philosophical conceptions of justice and fairness and economic theories that explain the distribution of income.