A MASSIVE MARKET FAILURE

Lester R. Brown

When Nicholas Stern, former chief economist at the World Bank, released his ground-breaking study in late 2006 on the future costs of climate change, he talked about a massive market failure. He was referring to the failure of the market to incorporate the climate change costs of burning fossil fuels. The costs, he said, would be measured in the trillions of dollars. The difference between the market prices for fossil fuels and the prices that also incorporate their environmental costs to society are huge.

The roots of our current dilemma lie in the enormous growth of the human enterprise over the last century. Since 1900, the world economy has expanded 20-fold and world population has increased fourfold. Although there were places in 1900 where local demand exceeded the capacity of natural systems, this was not a global issue. There was some deforestation, but overpumping of water was virtually unheard of, overfishing was rare, and carbon emissions were so low that there was no serious effect on climate. The indirect costs of these early excesses were negligible.

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In the late 1990s Enron, a Texas-based energy trading corporation, may have appeared on the cover of more business magazines than any other U.S. company. It was spectacularly successful. The darling of Wall Street, it was the seventh most valuable corporation in the United States in early 2001. Unfortunately, when independent auditors began looking closely at Enron in late 2001 they discovered that the company had been leaving certain costs off the books. When these were included, Enron was worthless. Its stock, which had traded as high as $90 a share, was suddenly trading for pennies a share. Enron was bankrupt. The collapse was complete. It no longer exists.

We are doing today exactly what Enron did. We are leaving costs off the books, but on a far larger scale. We focus on key economic indicators like economic growth and the increase in international trade and investment, and the situation looks good. But if we incorporate all the indirect costs that the market omits when setting prices, a very different picture emerges. If we persist in leaving these costs off the books, we will face the same fate as Enron.

Today, more than ever before, we need political leaders who can see the big picture, who understand the relationship between the economy and its environmental support systems. And since the principal advisors to government are economists, we need economists who can think like ecologists. Unfortunately they are rare. Ray Anderson, founder and chairman of Atlanta-based Interface, a leading world manufacturer of industrial carpet, is especially critical of economics as it is taught in many universities: “We continue to teach economics students to trust the ‘invisible hand’ of the market, when the invisible hand is clearly blind to the externalities and treats massive subsidies, such as a war to protect oil for the oil companies, as if the subsidies were deserved. Can we really trust a blind invisible hand to allocate resources rationally?”

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