13:   The Political Economy of No Tomorrow

Dix Sandbeck

Distributing the Cost of Externalities

In the economically advanced nations, manufacturing, transportation, and an ever-increasing number of household functions are dependent on large energy inputs generated by fossil fuels, predominantly oil. This gives rise to a number of so-called externalities – costs that one person’s (or economic agent’s) activities causes others to bear. In the case of burning fossil fuels, the main externalities are air pollution, which can have serious health effects; and emission of green-house gases, which trap the sun’s rays and raise the Earth’s surface temperature with a major climate change as a possible outcome.

In an economic system where cost distribution is closely tied to private ownership and market exchanges, distributing the costs of externalities creates problems since they typically pass through a medium that nobody owns before their effects arise. Neoclassical market fundamentalists, unwilling to assign the public sector a role in any economic matters, have tried to solve the conundrum of distributing these costs with Coase’s Theorem.

According to this theorem, activities which harm other economic interests should be litigated away. This, the theorem claims, is possible even though no property rights exist for the intermediate medium, just as long a clear cause – effect can be proven. As usual in neoclassical contexts an assumption of perfect conditions is necessary, in this case that litigation costs are zero (or fully recoverable) and that all parties are in possession of the same full information.

Coase’s Theorem might look good in the university auditoriums, where fantasies are known to flourish. In the real world of modern business enterprise dominated by secretive corporations, well staffed with highly paid in-house counsel that know how to proactively knock unfriendly litigation off the board before it reaches serious stages, Coase’s Theorem has little practical merit. For Coase’s Theorem to work, market power must be symmetrically aligned and no market agents able to bend legal conditions to favour their interests.

But even if these unlikely conditions were fulfilled, Coase’s Theorem still has problems. It becomes ineffective if (A) the externality loss is created and/or borne by a large number of agents (as is the case with air pollution); and (B) if the time lag between cause and effect is protracted (as is the case with a potential climate change).

Continuity of Self-interests

The problem that arises when cause and effect are separated by a substantial time lag is not restricted to externalities, but common to economic activities in general. All projections about future outcomes are given probability weights by market participants, both with regards to whether or not the forecasts’ assumptions are realistic, and as to whether or not new technologies or other changes are likely to change a given market’s supply and demand.

Assigning probability weights lie fully within the scope of rational expectations theory. But there are other aspect of economic projections that neoclassical theory gives little weight to because they do not conform to its assumption of rationality and continuity. Economic continuity is the expectation that within firms, executing agents act in full continuity with the owners’ interests.

Continuity, as all other economic principles, is dependent upon a set of conditions specific to a given situation. One important aspect is the fact that an executing agent has what can be defined as an activity horizon. Within the activity horizon, value projection and estimations are connected to the agents’ direct self-interest and will therefore, by and large, follow patterns according to the neoclassical prescription. The threat of being fired or losing economic incentives ensures that executing agents will follow owners’ interests.

However, if the value formation that firm generates as a result of an agent’s executive activities falls outside of the agents activity horizon, it will not be connected to direct self-interest, and therefore will be assigned a much lower value. For example, if an employee’s actions are detrimental to the value formation of his firm, if that first becomes visible after he or she has left the firm, the employee might be relatively unconcerned about it.

The tendency of self-interested individuals and executing agents of firms to assign different value to outcomes of market events according to whether or not the value manifestation occur within their activity horizon multiply exponentially in the case of externalities, which, per definition, are not governed by individually assignable property rights. In most cases there is a continuity between owners and executing agents interests in disregarding externalities and not deal with them, because the costs they thereby dump on society has little chance of getting back to the firm.

In cases when an executing agent of a firm knows that activities he directs cause externalities that are sure to lead to a Coase litigation, the continuity principle should direct him to avoid causing externalities. However, if the externalities first become visible after he plans to leave the firm, it becomes his economic self-interest to disregard the externalities and maximize short-term profit. This strategy will enhance his remuneration while still at the firm and thus becomes the dominant self-interest, even when it is a certainty that the Coase litigation later on will re-impose the cost of not combating the externality on the firm.

A Public Role

With regards to externalities, when they arise from the actions of individuals as private citizens and not as agents of firms, neoclassical general market principles, including Coase litigation, is even more helpless. This is a function of the very large number of individuals both causing and being affected by such externalities.

In recognition of this, many governments in the economically advanced nations have recognized that only measures with a strong public role have any hope of dealing with these problems on the scale and commitment that is called for. A result of this realization is the Kyoto treaty – designed to reduce emissions of green house gasses on an international basis – which the majority of developed nations, including Canada, have signed on to.

At first, the American government under Clinton appeared to be on board. But the treaty had problems getting through Congress where it still was pending when Bush took office. Of course, it didn’t take Bush long to dump it.

The Bush administration basically is an alliance between the oil industry (directly represented by the Bush family and Cheney) and a powerful group of neoconservatives centered around the think-tank with the interesting name "The Project for the New American Century" (Cheney, Rumsfeld and Wolfowitz, all belong to this think-tank). In their view, environmental and energy policies should be left to the markets, which as we saw, inherently means short-term interests. And public bodies should stay out of such matters avoiding impeding these interests.

A problem for governments in the advanced nations is that the environmental file has become something of a wild card in elections that can move swing voters unpredictably, dependent upon what context they connect to it. On one side, people are concerned by the rising levels of pollution and congestion where they live. But on the other hand, many people fear that implementation of effective pollution controls, including international treaties such as the Kyoto, might restrain their ability to freely indulge in their high energy-consuming lifestyles. This creates a split-personality attitude toward these problems for many people.

A Day at the Races

"Gentlemen, start your engines." Clad in a black Nascar Jacket to fit the occasion, Bush in February 2004 was the starter of the Daytona 500 race, the highlight of the Nascar circuit.

But the president of the United States doesn’t pop up at such events just because he thinks it is fun. They are carefully selected events designed to send important political messages. At Daytona, the goal was to ensure that the environmental questions played to his advantage in the upcoming election by having the fear of restraints on the American life-style dominate in the voters’ minds.

Essentially, at Daytona, when Bush mingled with the players of this fuel-smelling macho world, he sent the message that on his watch, nobody would be allowed to mess with Americans God-given right to their energy-guzzling life style.

It has been said that America has become more conservative and many in this respect points to the surge in conservative Christian fundamentalism. However, this surge can be seen as a result of the fact that more and more people know that America’s way of life can not be sustained if it were the global norm. Therefore, its continuance demands a policy of political and economic dominance that, increasingly, embraces a readiness to take control of global resources by military means.

To justify the exploitative attitude the battered Christian faith is once again pulled out. On the individual level, it creates an escapist unreality. In this unreality, the unpleasant truth, that one’s political choices have become part of an exploitative system that enables one to live a materially comfortable life denied to the majority of people in the world, is shrouded in hymns and prayers to God. This leads to a fixation on political questions connected to religion, but which, in the big picture of the current worlds’ state, are of very little relevance.

On the other side, backward-looking Islamist fundamentalists use the anger of the denied peoples to launch their own power play, having successfully replaced formerly more secular oriented progressive political movements in the Islamic world. Since the world’s main oil reserves are located in the predominantly Islamic Middle East, this region of course has a crucial strategic importance.

As a result we seem headed for a new Thirty Years War over power and resource control centred in this region, the justification for which, like many past wars, is couched in religious terms on both sides.

In this scheme of things, the real global problems, such as climate change, global social justice, and developing meaningful and sustainable life quality patterns are lost in the smoke of the bombs.

Dix Sandbeck

--from Economic Reform, January 2005