Like any system, the free market works very well within certain bounds, but it breaks down when you try to use it outside of those constraints.
The free market works when all of the parties in the system are “intelligent agents”. For the purposes of definition, we’ll call them “adult humans”. An adult human is free to enter into transactions within the system with other adult humans. The system works because the only transactions that are permitted are ones in which both parties to the transaction benefit. So, a plumber can fix an electrician’s drain, and an electrician can fix the plumber’s wiring, and they both benefit from the transaction. The introduction of currency makes this work even better.
In fact, if one party in a transaction ends up with less, we usually make that transaction illegal. It usually falls into the category of coercion, extortion, or theft. Nobody can put a gun to another person’s head and demand money “in exchange for their life” because that person had their life before the transaction started.
Still, we find ways to hack the system. Debt is one obvious circumvention. Normally debt is a transaction involving you, someone else, and your future selves. If you take out a student loan, go to school, pay back the student loan, and get a better job, then everyone benefits, and it’s an example of “good debt”. Likewise, if you need a car loan to get a car to get a better job, it’s “good debt” (depending on how much you splurged on the car). Mortgages are similarly structured. Consumer debt (aka “bad debt”), on the other hand, is typically a circumvention of the free market. However, the person who gets screwed is your future self, so it’s morally ambiguous at worst.
The free market can also be hacked through the exploitation of common resources. For instance, if I started a business that sucked all the oxygen from the air, liquefied it, and then I sold it back to the general public for their personal use, I doubt I’d be in business very long. I might as well be building a giant laser on the moon. Similarly, the last few decades were filled with stories of large companies being sued in class action lawsuits for dumping toxic chemicals into streams, rivers or lakes and poisoning the local water supply. Using up a common resource for your own benefit is a kind of “free market hack”. If a third party can prove they were the targets of a “free market hack”, the courts have ruled that they are entitled to compensation.
Still, we hack the free market all the time. The latest credit scandal is just one example. The general public was out of pocket because of a transaction many of them weren’t a party to. It really is criminal.
A larger concern is the management of natural resources. This includes everything from fossil fuels, to timber, fresh water, fish stocks, and, most recently, the atmosphere. The latter opens a new set of problems. All of the other resources are (or can be) nationally managed. Canada, for instance, while it has allowed over-fishing to take place on the Grand Banks, has exercised systems that reduce the quotas in an attempt to manage the dwindling resource. This makes those resources more expensive, so the free market can adjust to the real cost of these resources. The atmosphere, on the other hand, is a globally shared resource with no global body capable of regulating it.
I don’t want to get into some climate change debate here, so let’s look at it from a higher level. Whenever we have a common resource we always over-exploit it until, as a society, we put regulations in place for managing it. In cases where we didn’t (Easter Island comes to mind), we use up the resource completely with catastrophic results.
I realize the atmosphere is vast, but it’s not limitless. While everyone’s very concerned with fossil fuel use, if it was only about dwindling reserves of fossil fuels, it wouldn’t be a problem. The free market would take care of making fossil fuels more expensive as they start to run out, and other energy sources would take their place. However, when we burn fossil fuels, the energy we get is coming from a reaction between the fuel and oxygen in the atmosphere. The simple model is that oxygen is converted into carbon dioxide. Some of the potential energy of the reaction comes from the atmosphere, not just the fuel. We need to run that carbon dioxide through plants again to get the energy (and oxygen) back. Of course, that would take much, much longer (and more work) to do than the energy that we actually get out of the reaction.
If climate scientists are right, then we’re also causing a serious amount of harm to the climate at the same time. This is a debt that will continue accruing interest long after we’re dead. I recognize the uncertainty of the future, but as any good risk manager knows, you shouldn’t gamble more than you can afford to lose.
This is a free market hack because we treat it like a perpetual motion machine, but we’re really just sapping energy from a big flywheel. Like debt, whether this is “good” or “bad” depends on whether we can turn that consumption into something even more valuable for the future. In general (but not every case), every generation before us left us a better world than the one they inhabited. Most of the value we have now is knowledge passed from generation to generation. It costs comparatively little to pass information forward than the value we gain from the access to that information. Therefore, even if our ancestors used up resources, they couldn’t do it on a scale big enough to offset the value of the knowledge they were passing forward. It’s ironic if that knowledge let us build a big enough lever to tip the scales.
It seems pretty certain that if we fail to leave the future generations more value than we’re taking from them, they’ll make us pay. They’ll turn on the companies and families that profited at their expense, and they’ll either sue for damages, or drag the bodies of the CEO’s through the streets behind camels, depending on which area of the world they live in.
Personally I’d prefer prevention over retribution. The problem is that if there really is a future cost to our actions, the market isn’t factoring that into the price. Even though companies are accruing the risk of a large future liability, they don’t have to account for this risk in their balance sheet. That’s because while future generations have a stake in this situation, they don’t have a voicenow. Nobody’s appointed to represent their interests. That’s why the free market continues to be hacked, at their expense.
How could you structure such a system? Should companies be forced to account for estimated future liabilities, so it shows up on their P&L statements? Do we allow them to account for true value that they’re passing forward, like new technologies they’ve developed, which can help to offset the liabilities they’re incurring? Obviously that’s impractical. Not only does it become a bureaucratic nightmare, but there’s still no international body to oversee the principles of the accounting system.
Could an appointed legal representative of future generations sue us for the present value of future damages we’re risking? Can they spend the proceeds of the lawsuits on restorative projects? (Investments with a big dividend but which don’t pay back for 100 years, like reforesting the Sahara.) I doubt a non-existent group of people can sue anybody, so I doubt that’s a workable solution either.
I’m afraid the solution lies in the hands of politicians, and that makes me sad. We need a global body that can manage natural resources, including the atmosphere. At this point, a political solution seems just as impossible.
I’m still looking for ideas and solutions. I want to contribute to a workable solution, but my compass isn’t working. If you know the way, I’m listening.
(Hint: the solution isn’t energy efficiency.)
To be honest, we could still be producing knowledge at such a huge rate that we’re still passing forward more value than we’re taking from future generations. But I don’t think anyone’s keeping track, and that’s pretty scary.
Anyway, Earth hour’s about to start. While it’s a really silly gesture to turn your lights out for an hour in “support” of a planet that we continue to rape and pillage the other 8759 hours of the year, I think I’ll give this stuff another hour of thought. It’s literally the least I can do.
Edit: I posted a follow-up to this article called What can I do about our global resource problems?