This article concludes a trilogy on the production function. Loosely speaking, the two previous pieces dealt with the ghosts of capitalism past and present. Listen! Hear the rattle of chains? The sounds of disembodied wailing? Methinks the ghost of capitalism future is upon us.
The production function reminds us that under capitalist production output is divided into two "returns" – to labour and to the owners of capital. Those who agree with Francis Fukuyama that history has ended, in effect, proclaim the victory of the latter over the former after two centuries of strife. This may be so but the victory may well be Pyrrhic. Indeed, it is my contention that if capital has indeed triumphed over labour the eventual "triumph" of the silent partner – Nature – is all but a foregone conclusion.
Readers may recall that the "Classical" economists - Smith, Ricardo, Marshall, Mill, to name four, roughly spanning a century – identified three "factors" of production, i.e. labor, capital and – land. The dropping of land from the canons of economic orthodoxy represents one of what Galbraith has called economics' necessary accommodations to reality. Specifically, the decline of the political bargaining power of the hereditary landowner class meant that "land" no longer commanded a necessary claim on the fruits of production. Consequently, the textbooks stopped mentioning it. But the economic truth remained. Land is invariable in production and it does require a "return". Just as labor and "capital" need to reproduce themselves, so does land. Until about 1960, the size of the human economy relative to the Earth was small enough that the supply of land - and the ecosystems that cohabit with us - could be taken as limitless. We have now passed a threshold. Land - now in the guise of "environment" - demands its due. As a civilization, not as a species (it is hubris to think we can "destroy" Nature) we either pay now or pay later, in which case the wages of our collective "sin" against Nature will be death (of this Civilization).
Well this is pretty gloomy stuff. And haven't we heard this before? Well, maybe. On the bright side, I have no privileged understanding of the way the complex system called Earth works. So the curtain may get rung down in twenty years or two hundred and twenty. As Keynes said, in the long run we're all dead, so why stop the party now?
I don't have any knock 'em down, drag 'em out answers to these questions. Let me just emphasize two points before moving on to some ideas that might help to turn around the economic system, for those who may be interested. First, as noted, the sheer scale of human operations has grown enormously in two hundred years. Not just raw population but the per capita impact on the rest of Nature – as captured in the vogue idea of the "ecological footprint". A seminal study, which is unfortunately not widely known, was published in Bioscience over ten years ago by Vitousek et al. This study gave a rough calculation of the part of the Earth's annual production, from the Sun's incident energy, of "biomass" (i.e. plants and animals) that has been appropriated in one way another by humans. The estimate of the human share of "Net Natural Production" was 40% and while the authors did not pretend to any high degree of precision there has been little subsequent dispute that this is a credible number. Even if the estimate is three or four times too high, the message is the same: it is no longer possible to assume human activity is too small to affect planetary processes. Second, our admittedly rudimentary knowledge of "complex systems" is still enough for us to know that such systems undergo sudden and unpredictable shifts. Thus, it seems highly plausible that, somewhere along the line, the planetary processes governing climate and biotic composition (a fancy way of saying the number, type and distribution of living beings) will suddenly change. We are fairly sure from geology that there have been many such episodes in the past. What is new is the likelihood that this civilization's actions, rather than biogeological cycles, will trigger the next shift.
Of course, implicit in the above is the view that civilization-threatening changes will eventually occur in any event. I do not deny this. If it were the case that making changes to avoid catastrophe necessarily entail creating a dystopia, such as those in 1984 or Brave New World (or Blade Runner or Brazil), I would be the first to say, "party on dudes!" (quoting Lincoln's address to the San Dimo High class that graduated Ted Logan and Bill Preston). Instead, it seems to me that prudent actions to better integrate environment and economy (to move towards "sustainable development", to use the Orwellian phrase most often cited to capture this concept) could also lead to more democratic government, greater personal autonomy and greater equality while still supporting a high degree of material comfort. (The reader will be relieved to hear that the general human condition will remain as confused and dysfunctional as ever. Following Galbraith again, I cannot even guarantee heightened peristalsis.)
One of the claims I made at the outset is that maintaining the current economic path (of triumphalist capitalism) will hasten cataclysm. I will briefly explain why I think this is likely but, just as important, this path will also lead to a dark political future. I believe that a different approach to the relationships among the Big Three production factors (with land understood as environment) opens up the possibility of transforming capitalism into some more benign form.
The current economic path is headed for a collision with Nature because there is so little incentive for economic actors to take account of the impacts of economic decisions on the biosphere. Moreover, the conventional approaches to better integration of economic and environmental "needs" will do very little to bring the two systems into closer alignment. The first response of the modern industrial capitalist order to "environmental" problems - broadly pollution and resources depletion - was "command and control", i.e. legislated controls on the worst excesses. The problem with this approach is that, over time, the political support to increase controls and enforce existing controls has eroded. This erosion will likely continue as new approaches are proposed to give the appearance of action. These are "voluntary regulation" and "economic instruments". The former is modelled on the self-regulated professions, e.g. doctors, lawyers, mobsters etc.. While some firms have embraced "green" possibilities as more than a marketing opportunity, this will never amount to anything more than rhetoric for the great majority.
Economic instruments encompass a panoply of measures but are focused on what is known as "internalizing the externalities". In one sense, this is exactly correct. The problem is that environmental values are not reflected in money values. Alas, this is not what the economic gobbledygook means. Economics pretends to be a "science" and its theories allegedly deal with the "real economy". Economists really think that the environment is "external" rather than the actual site of all economic activity. This leads the profession to endorse the trading of pollution credits as a way to improve the environment. The intellectual underpinnings for these schemes are provided by an idea known as the "Coase Theorem", named after Ronald Coase, a recent Nobel laureate. There is a well-known joke about an economist stranded on a desert island who proposes that the solution to the problem of unopened canned food is to assume a can-opener. The Coase Theorem is reminiscent of this. The usual version is, "in the absence of transactions costs, a reassignment of property rights can solve the problem of externalities." The irony of this is heightened by the fact that the major part of Coase's work has been devoted to studying transactions costs in firms, in regard to which there is no other explanation in contemporary economics for the existence of large firms than the prevalence and size of transactions costs.
While the pollution trading schemes will do little or nothing to address environmental problems, real progress could be made through a variety of other "economic instruments". Proponents of these and of a package of "Green Tax Reform" point to a wide variety of such instruments that are already in use in the major industrial nations. These include effluent charges, taxes on energy use in various forms (e.g. on gasoline) and deposit-refund schemes. Unfortunately these are all either marginal or were brought in for entirely different reasons or both. While a true Green Tax Reform package would go a long way towards redirecting the economy, it is never likely to progress beyond the marginal stage for the same reason that Command and Control has stalled; viz., the political power of business will block any attempt to impose new costs on private firms in any guise.
The only way to address the environmental problems of modern industrial capitalism is to tackle at the same time the historical problem of the struggle between labor and capital. The root cause is the same. The power of organized capital to increase its share of economic output, which, in turn is used to reconfirm its political power, affects the economic shares and political power of labor and the reemergent factor of "environment". From where will come the political will to drive this change? The optimistic scenario is a joining of the two movements internationally. In the non-OECD world the struggle between labor and capital will remain foremost. The trick will be to find a way to build political support in the OECD around "green" issues and in such a way as to make common cause with the rest of the world. Of course, this is the very division the idea of "sustainable development" – the preferred label of the industrial elites for integration of environment and economy – tries to paper over. The difference is that the "sustainable development" agenda is simply to turn the keys over to business whereas I am suggesting we need to build coalitions to control unfettered business interests. This is where the environment as factor fits in – as an organizing principle.
This may seem highfalutin. What we need to understand is the power of ideas. Perhaps Keynes' most famous quote refers to the power of ideas of "defunct economist(s)" to permeate the thoughts of "practical men of business". Yet this does not go quite far enough. The entire modern world is the creation of the human mind. My knowledge of archaeology is admittedly spotty but I am sure that no evidence of K-Tel CD collections or Game Boy has shown up in the ruins of ancient Greece or Persia. (If it does, I may have to revise my views or call in Mulder and Scully.) The gods of those times had their virtues, no doubt, but compared to the god of the machine (i.e. the Universe as machine) they permitted a restricted range of technical accomplishment. If we believe human society should be merely a set of arrangements to allow for the smooth operation of a mechanical generalized market system then trading pollution rights makes sense. It makes a difference if we in the West think we are taking "green" actions to make markets work better or to bring them under rational control. We would then have a basis for a genuine union of "north-south" (i.e. Developed and Less-Developed nation) interests.
How then is this abstract construction "environment-as-production factor" any better than "internalizing the externalities"? How would it be brought into practice? Just as workers charge the productive enterprise for their "labour services", the "environment" would charge for its services, e.g., providing (relatively) clean water and air and physical space. (Note that this is distinct from "natural resources" which are specific inputs to the production of such outputs as, steel, lumber, diamonds, petroleum products, etc.. Environmental services are necessary for any economic activity whatever, just as for labour.) The obvious way to do this in practice would be to add the charge to the use of water. How much should be charged? This would be bargained. Who would play the part of unions? Anyone who would "speak for the trees" - including unions, should they wish to take on this mantle! In practice, all governments would need to do would be to set up (in laws) bodies that would set water fees incorporating an environmental service charge component, naming whoever are the "usual suspects" – interest groups – to the governing boards. In Ontario, for example, the Ontario Clean Water Agency could be given control over the price of water and a broad responsibility for spending the proceeds on a variety of measures for rehabilitating Mother Nature, with a Board composed of, oh, say, Conrad Black, John Fitzgerald, Buzz Hargrove, Bob Hunter, Mark Winfield (Research Director of the Canadian Institute for Environmental Law and Policy), etc.. Or some other group of persons. The point is that the creation of such a body would form a natural political focus for unions and environmental groups, since the investable revenues could be directed towards projects that could benefit their constituencies. I am not saying this would be easy but it would form the basis for a political coalition that is not possible under Command and Control or the "internalize the externalities" routine.
How would this fancy rationale for more expensive water do any good? Aside from the political benefits, which are crucial, and the ideological role of the idea in support of this, the benefits to both economy and environment are potentially enormous. The way to appreciate just how large these benefits could be is to reflect upon the fact that modern economies have been built upon the assumption that environmental services are free. Consequently, to a very large degree – despite Command and Control – our entire productive system has evolved with no regard to "economizing" on the use of environment. Again pursuing the analogy with labour, can you imagine an economy with "free" labour? It's not hard. It's been the dominant form of economy for most of human history. It's called slavery. Under slavery in all its guises there is no incentive to develop technology that saves labour: the overthrow of slavery, in the form of the feudal system, is what gave rise to what Marx called the "civilizing moment" of capitalism and the immense productivity of the capitalist system. It is the prospect of a similar advance in productivity from the incorporation of paid environmental services into productive technology that allows for a degree of optimism that this civilization can avoid decline and fall from environmental causes. (Which is not to say that other cause may not bring about this condition.) The specific practical evidence that the "win-win-win" possibilities of environmental technology is now abundant. There is a burgeoning literature documenting the success of those firms that, even with the very modest incentives now in place, have decided to simultaneously improve environmental performance, (money) cost control and profitability.
Into this optimism I must add a dash of pessimism. Neoconservatism certainly looks triumphant these days and until the expected economic "correction" arrives the task of developing the necessary political coalitions will not be easy. Indeed, I suspect that until the next economic recession (or worse) it will be difficult to get a hearing for ideas such these. Environmental calamities, too, will come along. Violent weather, which may or may not have a connection to "Global Warming", strange diseases, chemical spills, nuclear disasters – all are part of our future. Added to these, a new oil crisis will appear within the next ten years. The trick is to have non-authoritarian responses warming up in the wings. In this article I have advanced a broad economic concept around which such responses may be built, i.e. the idea of environment as a factor of production, implemented by a bargained "environmental service charge" levied on the cost of water. If I have piqued the reader's interest, this will have evoked many questions, some of which I will address in subsequent pieces.
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