Why the Market Fails the Environment

Ray Pierrehumbert has a must-read article up at Slate about a particularly interesting AGU session (one which I also attended) on the limited sustainability of the present oil boom. I have to confess that Ray’s excellent summary is in many ways better than the one I only imagined writing.

More about this topic soon, as it apparently ties in with Obama’s address.

For now I wanted to re-share Ray’s quote from William Cronon’s amazing book Nature’s Metropolis, which puts the lie to libertarian fantasies about how a free market can protect the environment. This discusses the exploitation of Wisconsin lumber in the 19th century:

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The manufacturer’s acute seasonal need for short-term credit drove them to the one market where they knew they could get quick cash, even if it meant that they were forever selling lumber at lower prices than they liked. Under such circumstances, the only way they could keep up with costs was to cut more trees, contributing still further to the overproduction and saturated markets that had created low prices in the first place. Chicago thus became the focal point of a vicious circle: Undercapitalization caused overproduction, which in turn kept prices low and accelerated the destruction of the northern forest. The Lumberman summed up the problem by attributing it to “so many men … striving to carry on a larger business than their capital will warrant” and, as a result, having to turn natural capital into liquid capital merely to survive. “The only reasonable explanation of this paradoxical state of affairs,” the Lumberman’s editors wrote, “is that the mill men … are using up their capital, as it exists in the form of stumpage, for no other end than simply keep themselves in business.”

This somewhat oversimplifies matters, because as markets mature, they eventually capture the long-term value of a property, at least in terms of its potential economic yield in the future. But they do this at a discounted rate!

The further in the future the sustained value of an undisturbed or properly managed resource is, the less that value counts in an economic calculation. Further, both real growth and inflationary pressures contribute to that devaluation of the future. The result is comparable to that of the perhaps economically naive Wisconsin case – a systematic plundering of future value to support present-day production.

This is why market forces do not suffice to protect future generations, why purely market-driven decisions systematically damage natural capital, and why natural capital is increasingly scarce. It’s not clear that even a Pigouvian approach can fix this, though it can ameliorate it and is a good first step.  It still has the effect of moving the plunder ever deeper into the future, rather than restraining it. We need some aspect of our laws and cultures that advocates explicitly for the future and counters the pernicious aspects of discounting. Without it, the scale of our future regrets will be tragically immense.



  1. The aborigines in Queensland had some land which was 'taboo', at least for hunting. The same idea is being established in various marine reserves. And of course there are some lands set aside for so-called wilderness and as as various parks and monuments.

    The air, on the other hand, is truly a commons. It must be managed as such.

  2. this situation is a bit like in Finland where reindeer herders want to hunt the predators in national parks to let the reindeer eat there more. Some of the reindeer herds have been fed through severer winters since there aren't enough pastures for them.

  3. Pingback: Another Week of GW NEws, February 17, 2013 – A Few Things Ill Considered

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