Conjuring Scarcity From Lenin's Commanding Heights

A response to Ed Dolan's "Why Hayek Would Endorse A Carbon Tax"

I thank Ed Dolan at the Niskanen Center for his kind and helpful comments. He is right that I am reluctant to see the problem of climate change in terms of scarcity. Instead, I attribute the problem to abundance — particularly, the abundance of cheap fossil fuels. Making clean energy — solar, wind, hydrogen, thermal, nuclear, etc. — equally cheap and abundant is the answer, and this is a problem for engineers, not economists.

To configure an engineering problem (cheap clean energy) as an economic problem (a scarcity issue), Dolan explains, “In this case, the scarce good is the capacity of the atmosphere to harmlessly absorb CO2.” On this view, too much pollution (pathogens, projectiles, and other airborne matter) is never the problem; the problem is that the atmosphere has too little capacity to absorb it. One could similarly argue that, because of photosynthesis, vegetation absorbs CO2, which is why people plant trees. However, these burn down or decay, so the effect is temporary. The atmosphere will hold as much CO2 as we put into it, so I am not sure what “absorb” means in this context.

The capacity of the atmosphere to harmlessly absorb CO2, if that is what is traded away, is long gone. Used up — kaput (or nearly so). We do not get more of it by putting a price on it. The problem is not to increase the absorptive capacity of the atmosphere (to make this scarce good more plentiful, as Dolan advises) but to decrease carbon emissions. This can be done as a practical matter only by the invention, discovery, and introduction of cheap clean sources of energy. The scarcity issue is a red herring that economists drag across the path of discovery and invention.

Engineers ask, “What is the cause of what?” They see dependence on fossil fuels as the principal cause of climate change; therefore, they seek to discover or design competitive sources of clean energy. They look for technical fixes which, as I invoked Hayek to argue, will likely be spontaneous, local, piecemeal, diverse, and responsive to knowledge and know-how that is spread out rather than concentrated in any single mind or planning commission.

Economists ask instead, “What is the cost of what?” According to Dolan, “The opportunity cost of more CO2 emissions now is a hotter and more miserable world in the future.” Economists then offer a theoretical fix; in this case, they urge planners to set a price for carbon to reflect those future costs. This theoretical fix offers a nostrum, the purpose of which is to hire a lot of economists and empower them to set prices or, more likely, to acquire the funding necessary to write even more academic articles and enter even more controversies on how this should be done.

In the paper to which Dolan responds, I had written, “To suppose that international negotiators could agree upon the amount of a tax and a way of collecting it and dividing the proceeds is truly to ‘assume the can opener’ in the jargon of economics.” I added, “There is no evidence that an emissions ‘cap’ or tax leads to clean energy technologies. Fiat prices get finagled. Regulations may be only as good as the last election or administration. Powerful industries may be less inclined to invest in new technologies than to wheedle exceptions or wrangle loopholes…. Firms may hire lobbyists before they hire engineers.”

Dolan counters, “A price for carbon even one set by government, rather than by supply and demand — would be a clear improvement.” Dolan does not say which government is to set prices: there are thousands of governments, and some countries, such as Russia, might benefit from climate change. Further, countries that set a carbon price create a competitive advantage for those countries that do not. To prevent “leakage,” a carbon cost must be imputed to every item in world trade, which would be a bureaucratic nightmare. The history of attempts to set a carbon price, such as the Kyoto Protocol, is a baneful one.

“Right now, we have markets without prices,” Dolan states. Without prices for what? Dolan may believe that fossil fuel prices are too low to reflect the opportunity cost of the absorptive capacity of the atmosphere. The idea that price ought to reflect opportunity cost or any other measure of utility, however, serves no purpose but to empower Neoclassical economists, by chanting “externality” or “market failure,” to try to occupy Lenin’s commanding heights.

My article on which Dolan comments states, “Hayek fulminated against Utilitarianism or welfarism, which had infected economists with the ‘fatal conceit’ that they could outsmart market players and get the prices ‘right.’ By chanting a ritual ‘market failure’ abracadabra over social problems, economists would replace a free-market economy with cost-benefit analysis, the better to achieve a figment of their mathematical imagination, i.e., welfare, being better-off, or utility, which they expect to be paid to measure.”

According to Dolan, a price for carbon — even one set by government — would incentivize both producers and consumers to green the economy. Producers and consumers, however, are not where the action is. Rather, the action lies in innovation, discovery, invention, experiment, trial-and-error, serendipity, or, more generally, Schumpeterian “creative destruction.” The incentives to create yet-unthought-of alternatives rather than just marginal improvements could not be greater. Every gazillionaire is eager to fund gee-whiz clean-energy technology. It is hard to imagine how more money could be thrown at it. As Jimmy Durante said in another context, “Everybody wants ta get inta da act!”

What we know about free markets is that they promote social prosperity and peace better than centralized economies: this is a historical fact. Neoclassical economists, however, appear to have no interest in macroeconomic concerns, like prosperity and peace, but only in microeconomic concerns, such as efficiency, which have no known relationship to prosperity or peace. Whether free markets have any connection with concepts that bedevil economists, such as welfare, utility, costs, and benefits, is completely conjectural if not trivial and tautological. The appeal to welfarism — setting prices to match putative social costs — implicit in Dolan’s commentary is inconsistent with a Hayekian sensibility.

Read Ed Dolan's previous piece in this debate here, or Sagoff's original essay here.