by From Neva Goodwin Ecology teaches that everything is connected to everything else. Economics teaches that the market is a – some say the – great connector. Its specialty is to connect demand (what people want) to supply (what people produce), via prices. There are, of course, known problems in the use of prices as a society’s key connector. For one thing, those with more money have more of what is sometimes called “effective demand”; they can send louder, more effective signals to suppliers to produce the goods and services they want. Those with very little money can hardly get their needs and wants noticed. Aside from this translation of unequal purchasing power into unequal impact, the other most notable problem with markets as connectors is the presence of externalities, when
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from Neva Goodwin
Ecology teaches that everything is connected to everything else. Economics teaches that the market is a – some say the – great connector. Its specialty is to connect demand (what people want) to supply (what people produce), via prices.
There are, of course, known problems in the use of prices as a society’s key connector. For one thing, those with more money have more of what is sometimes called “effective demand”; they can send louder, more effective signals to suppliers to produce the goods and services they want. Those with very little money can hardly get their needs and wants noticed. Aside from this translation of unequal purchasing power into unequal impact, the other most notable problem with markets as connectors is the presence of externalities, when something that matters simply is not picked up in market signals.
Ecologists sometimes complain that economists dismiss such important issues as “just” externalities – implying that these issues are regarded as unworthy of consideration. Good economists do not do this: they recognize full well that where there are externalities (where an economic actor produces effects that do not translate as signals to other economic actors) there is a market failure. Unfortunately, in situations of significant market failures markets do not produce the optimal outcomes that are expected in standard economic theory. This does make mainstream economists squeamish about admitting to externalities, since the optimality of market outcomes is one of their main boasts, and they don’t have an alternative theory to pull out of the hat. Some economists who have positions of influence in academic or policy circles have begun to grapple with Stern’s famous remark that “Climate change is a result of the greatest market failure the world has seen”.[1] However, in the absence of a widely accepted alternative theory, the growing acceptance of climate change reality by economists simply creates cognitive dissonance without resolution.
The existing dominant system of economic theory is used to justify the current conformation of the economy of the United States, and of much of the world. It is becoming increasingly clear that it is producing very sub-optimal results for most of society, though benefitting the short-term gains of the rich and powerful. It has permitted and sometimes encouraged economic actors – especially powerful corporations and governments – to ignore the harms they impose on people and other parts of nature having little political/economic power. These harms are not trivial; they have included the murder of indigenous people for the value of their lands or of the minerals under their lands; toxic wastes dumped in oceans and in the neighbourhoods of poorer people; schemes to cover-up the harms of profitable products like tobacco and fossil fuels; and, over many decades, effective prevention of public education about the dangers of climate change, and of ways to avert it – until it is too late to prevent a future of ever more catastrophe.
In order for economic theory, teaching, and policy application to provide useful guidance in this time of great danger, it must change in many ways. The following is a brief summary of the most critical changes that are needed. http://www.paecon.net/PAEReview/issue87/Goodwin87.pdf
[1] Quoted by Alison Benjamin in the Guardian, London, 29 November 2007. “Stern: Climate change a ‘market failure'”.