The real threat to our environment

While I’m not very fond of the term, it occurs to me, that the concept of “social capital” can be usefully used when discussing the economics of the environment. 

One frequently sees phrases like “harm the environment,” “good for the planet,” etc. especially now after the US rejection of the Paris accords. These utterances betray a fundamental misunderstanding about the nature of productive resources, what we often call capital-goods. In a brilliant, but underappreciated article, Hayek considers the question of “The Maintenance of Capital” (1936). He asks the common-sense question, what does it mean to maintain capital intact? How should an entrepreneur act in order to conserve his capital? He points out that the objective is not to maintain capital in any physical sense. It is not a *physical quantity* of any capital item whose maintenance is the objective of the exercise. Rather it is the *value* of his capital that he wants to keep intact. This means arranging his productive resources in such a way that they remain capable of yielding the same (desired) value of revenue in the future – behaving in such a way as to ensure that the current level of revenue is sustainable. To do this he will probably have to devote a part of his current revenue to the purpose of making good any decrease in the *value* of the combination of production resources that has occurred in order to produce that revenue. This is known commonly as depreciation. Anything put aside in excess of this is intended to produce an increase in revenue available in the future and can be thought of as saving or investment.

Note that maintaining capital in this sense may have little to do with the physical deterioration of productive resources. Mostly, in our modern world, it has to do with economic obsolescence – the decrease in the value of a production-good because of a change in technology that makes it less valuable than some new, better substitute.

The same distinctions between depreciation and investment and physical deterioration and obsolescence apply when considering the environment. Physical quantities of various types of environmental resources should not be the ultimate objective in preserving the environment. When we speak of conserving resources we should not think ultimately in terms of the physical quantities of those resources – like oil, or coal. Rather, it is the capacity of resources in general to produce outcomes that make our lives better, that is rightly thought of as the objective of the conservation exercise. The value of any resource in the environment or in a business results from and only from its usefulness in producing valuable goods and services for human beings.

Understood in that way, there is absolutely no danger right now in the industrialized countries of the world of permanently “damaging the environment.” The capacity of our environment to yield valuable goods and services that improve the lives of human beings has never been greater for now and for the foreseeable future. The resources that exist on the planet, the material items, may be marginally less in one form or another over time as we use them, but, in value terms, because of our technological abilities to productively use them, they have never been in greater abundance.

On the other hand, government policies that discourage private saving at the expense of public spending *do* inhibit our capacity to sustain our standard of living, our capacity to produce valuable goods and services from our productive resources, because to productively use those resources, entrepreneurs need financial capital that if diverted by government spending will not be available to them and they will not be able to profitably organize and combine those resources to produce what we humans need and want to sustain our lives. That is the real threat to our “environment”.

The Common Sense Appraisal of Regulation

The way I see it there are only two possible justifications for regulation (aka interfering in other people's private decisions).

1. people are too stupid and/or uninformed to make their own decisions
2. peoples actions have effects (good or bad) on others (third parties) which they do not take into account in their decisions.

When I say "justifications" I do not mean that if they were true then interventions connected with them would be justified. In fact, particularly with 1. I do not see it as a justification at all. But, most people who support regulation fall back (when you boil it down) on either or both of these and nothing else. So it is worth examining them a bit more closely.

Let's consider 1. Is it true? Maybe in part, but not to the extent that most interventionists think. I think most people are more inclined and able to be informed if they are encouraged ("incentivized") to be so. But let's assume it’s true. So what? As most people reading this already know, there is no reason to presume that the regulators know any more than the people they are regulating do, or that, if they do, they can be trusted to do the right thing - the well-known knowledge and incentive problems. Further, there are strong reasons to believe that when acting in their own interests people will do better than regulators acting for them - because they know more about their own preferences and circumstances and because, in acting in their own interests (which includes the interests of those they care about), they have a greater incentive to get it right. The reward for doing so, and the cost of not doing so, is greater for them than for some disconnected regulator. I conclude that this is a bad justification after all - it is an elitist position better served to satisfy the ego and conscience of the elites than of the people they purport to help. 

Let's consider 2. The tired "externality/market failure" argument. Logically this is more resilient to criticism. If it is understood as essentially a question of the lack of property rights, and if it is not a simple matter to establish clear and enforceable property rights, (for example automobile emissions, global warming, protection from foreign invasion) then it might be persuasive to say that some kind of regulation is worth considering. But to be decisive a few questions have to answered affirmatively first. Is the external cost or benefit proven? Can the magnitude be estimated? And, most importantly, can it be decisively shown that regulation to deal with it will work and will be worth the cost in resources and loss of freedom? Every economist knows that to justify regulation it is not sufficient to identify an externality - though it may be considered necessary. In addition it has to be shown that the external effects of the intervention itself is justifiable. Those who support individual freedom and autonomy and distrust big-government initiatives, no matter how well-intentioned, will require a hefty burden of proof, one that can be seldom overcome. The knowledge and incentive problems apply just as much to this justification as to the previous one. 

The public sphere and the private sphere are not neatly compartmentalized spheres of action in which human's act wisely and benevolently in the former and not in the latter. Fallible human beings occupy both spheres. The reason the private sector is so much more successful than the public (government) sector is because it does not rely on the good judgment and good intentions of central administrators, but rather on the simple exercise of self-interest by simple people.