Sustainability: An Assault on Economics

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Mises Daily: Friday, December 04, 2009 by Tyler A. Watts

Ah, the greens. They're not just treehuggers anymore. They've been browbeating us to recycle, eat soy, save energy, drive less, ride the bus, and a thousand other ways to "act local" for many years now. Now they've even got a hip new huckster on the big screen: "No Impact Man," your conductor on a first-class guilt trip to ecoland. Despite the massive popularity of their cause, I don't think they're satisfied. They want to control us. If we don't watch out, these people hell-bent on saving the planet are going to end up micromanaging our daily lives.

The idea of sustainability itself sounds pretty benign — it merely implies that people ought to be forward thinking, prudent, and thrifty in their use of economic resources. And I'm OK with this basic idea — on the surface, it sounds like simple wisdom, in league with similarly bland and benevolent values like responsibility and generosity.

But deep down, there's something unsettling about the basic premise of sustainability. Sustainability advocates — let's call them "sustainists" — are damning in their fervor, poise, and rhetoric. Their ideology is pregnant with an accusation that the way things currently are is somehow unsustainable. There's an alarmism here which essentially claims, "there's a crisis, it's your fault for being ignorant, irrational, and greedy. You must do as we say to fix it, or we'll all die."

This alarmist crusade, which underlies the sustainability movement, should rankle people with an economic understanding of the world. A basic tenet of economics is that markets are self-correcting and orderly; prices indicate resource constraints and guide people in economizing on their use. Prices change as underlying supply and demand conditions change, inducing appropriate adjustments in consumption and production patterns. Prices channel the profit motive — a natural aspect of the human condition — into productive and innovative activities. In short, prices work.

Sustainists are either ignorant or in denial of this basic lesson. Either way, we economists have our work cut out for us.

The Sustainists' Lament

The gist of the problem, as the sustainists see it, is that people are using resources irresponsibly — either using them up too fast, using too much of them, or using them in a way that will have negative long-term ramifications. In brief, sustainists disapprove of other peoples' actions, and are taking steps to correct their wayward brethren.

Because these wasteful others, through either ignorance, laziness, or stubbornness, will not wake up and adopt sustainable practices on their own, sustainists see the need for a self-conscious effort — organized campaigns, eco–guilt trips, and yes, even laws — to correct this misuse of resources. We need to change our patterns of action; we need a motivating force beyond mere "economic self-interest" (i.e., the profit motive). Sustainability, then, has become a full-fledged crusade to "save the planet," and if you're not part of the solution, you're surely part of the problem.

Let's interpret this through the lens of economics. Sustainability arguments fall under one of two broad categories: (1) the nonrenewable resources argument that the supplies of certain important resources are shrinking; by the time people realize this it will be "too late" — resource shortages will strain the capitalist economies to the breaking point; (2) the climate-change argument that there are large, though delayed, negative externalities to current patterns of resource use.[1]

Whatever their type, sustainability arguments invoke market failure. Indeed, the very practices cited as unsustainable arise on the free market. Therefore some outside corrective, whether aggressive moral suasion or economic regulation, is needed to prevent the impending catastrophe of unsustainable resource use.

Are Prices Not Sufficient?

I don't want to dwell on the particulars of the sustainability movement. There are dozens of manifestations, from green building to organic farming to mandatory recycling to decarbonization — indeed, the sustainability bandwagon (which of course is painted green and powered by renewable energy) seems infinitely expandable to include every industry and interest group under the sun. Instead, I want to draw out the essential implications of the sustainability movement.

The sustainability movement is an assault on economics. It claims at its core that prices don't operate through time to direct consumption and production decisions in a sustainable way. A lesson in basic economics should suffice to defend against the sustainists' attack.

Prices arise in the market economy as a concomitant of mutually beneficial exchange. People want things that improve their lives — we call this value. Some valuable things are more scarce than others; take the classic case of water and diamonds. In absolute terms, water is more valuable than diamonds: you don't need diamonds to live.

Yet water is, pound for pound, far cheaper. Why? Although it's valuable, it is also relatively abundant; in many parts of the world, it literally does fall from the sky. The price of any good reflects this combination of value and scarcity. We're willing to pay more for valuable things as they become relatively scarce (e.g., oil); and we needn't pay as much for valuable things as they become more abundant (e.g., grain).

Likewise, as scarce things lose their value, people are no longer willing to pay for them (e.g., typewriters), and people must pay more for scarce things that suddenly become sought after (e.g., vintage Michael Jackson records). The awesome thing about prices is that they seamlessly convey this combination of facts about an item's value (demand) and it's scarcity (supply). Prices, of course, are subject to change — prices of certain goods fluctuate every day. But this is a good thing; discernable trends in prices over time indicate relative changes in the "market fundamentals" of supply and demand.

In this sense, prices reliably guide individuals, both consumers and producers, toward a rational use of resources. Savvy consumers listen to the prices; a rising price trend tells them to cut back on that particular item, and a falling price tells them to go ahead and use a little more of it. The same basic logic applies on the production side.

Entrepreneurs, driven by the profit motive, are like bloodhounds sniffing out these price trends in search of profit opportunities — chances to create value through exchange. If the price of a good trends strongly upwards over time (indicating it has become scarcer and/or more valuable), they rush to find cheaper substitutes. The cheaper the substitutes, the higher the profits to be had, especially if you're the first to market. If prices trend downwards over time (indicating that the resource is becoming more abundant relative to its usefulness), entrepreneurs devote their efforts elsewhere.

The general outcome of these economic processes is captured by the statement "prices coordinate."[2] In other words, the price system acts as an "invisible hand,"[3] guiding people — both consumers and producers — in their economic actions. The real beauty of this free-market price system is that it brings about its own kind of sustainability. This is not so much sustainability in the use of particular resources — for particular goods fall in and out of favor according to supply and demand factors — but sustainability of high economic growth and high standards of living in the economically developed, capitalist economies.

Take, as an example, the transition in the market for interior illumination: tallow candles were replaced by whale-oil lamps, which were replaced by kerosene lamps, which were replaced by incandescent bulbs powered by electricity. There was no social or political pressure needed to accomplish this evolution; there was no "peak whale oil" movement, no kerosene conservationists, no sustainability crusade of yore. All it took was a functional price system, combined with the ever-present entrepreneurial drive for profits under a competitive, free-market order.

Likewise, in our time as sustainists and other worrywarts fret about resource depletion, the price system remains functional, quietly yet assuredly guiding individuals to economize on resources, search out profitable substitutes, and anticipate future trends. All this happens without preaching, without crusades, and without activism.

Is the Sustainability Crusade Sustainable?

How long will sustainists be able to beat their drum, simultaneously trumpeting their greener-than-thou self-image and attempting, with varying degrees of coercion, to make the rest of us act "sustainable" too? With the global warming scare losing credibility by the day, the likelihood of sustainists being able to claim even a moral victory is fading.[4] Barring the earth melting down from a little bit of smoke, I'm not too worried about sustainists having much of a long-run impact.

Hardcore sustainists are asking for a radically disruptive change from the natural order of the free-market economy. They're asking us to forego wealth and embrace privation in the name of their cause.[5] Although citizens of the Western democracies have seemingly become easy marks for anything green, we will only go so far toward saving the planet, especially when it becomes apparent that sustainability requires a march toward poverty and a deeply regimented and regulated society (and that the planet's not really in peril, after all).

"A lesson in basic economics should suffice to defend against the sustainists' attack."

Also, and perhaps more importantly, people in developing countries will be increasingly turned off by the sustainists' demands for sacrifice. Having just arrived at the high living standards that long-term capitalist development yields, my sense is that they will turn a cold shoulder to the idea of ratcheting down their development.

The current resurgence of the classical-liberal tradition in economics will also reduce the appeal of sustainability. The idea of imposed or centrally planned sustainability will crumble under the realization that the spontaneous order wrought by the invisible hand of the free-market price system is amazingly sustainable in and of itself. Add to the mix the hardships of the current recession, and it won't be long before enough people, even sustainist crusaders come crawling back, box of chocolates in hand, to the free-market economy.

Tyler Watts is a PhD candidate in economics at George Mason University.