Today’s Wall Street Journal has a commentary from Al Gore and David Blood that asks the question: when will we start accounting for environmental costs?
Gore and Blood begin by invoking the concept of sustainability, and the relationship between capitalism and sustainability. Sadly, they do not bother to define what they mean by either term, and as “sustainability” is a very wooly concept, they can proceed to use it as they see fit to suit their argument. The Wikipedia entry on sustainability, which is extremely thorough, offers some insight into the breadth, and subjectivity, of the various definitions of sustainability.
I have always been quite skeptical about the definition and uses of the concept of sustainability, particularly when they start from a position of antagonism between long-run resource supplies and economic growth. This antagonism is implicit in Gore and Blood’s introduction to their commentary today, and reflects the widely-held belief in “the sustainability crowd” that resource preservation and economic growth are incompatible.
I reject that argument. Resource preservation and economic growth can be compatible. Under what conditions are they compatible? Under conditions in which information about relative resource scarcity can be communicated across time and place in a low-cost manner. In other words, clear price signals and complete capital markets are the fundamental foundations of aligned economic and environmental sustainability. Capital markets provide agents in the economy with ways to shift resource use through time depending on the intertemporal opportunity costs they see. As a resource becomes more scarce, its price rises. Instruments like futures contracts and financial derivatives enable agents to communicate information about expected future scarcity and opportunity costs into today’s resource use decisions.
But what do we need to have clear price signals and complete capital markets? In reality, completely clear price signals and full caital markets are impossible, but the way to get them as close to that benchmark as possible is to focus on reducing transaction costs and increasing the clarity of property rights definitions. When transaction costs are low and property rights are as well defined as is economical, then scarcity information flows across time and space.
Thus I think Gore and Blood come at the question of accounting for environmental costs from the wrong direction. Not surprisingly, they think top down, and want to see accounting costs reflected in national income accounts. Gore and Blood put too much trust in national income accounts, when they should instead be focusing on the fundamental economic and policy reasons why agents do not take into account the interdependence of their actions.
In other words, if Gore and Blood want, as they say in their commentary:
Not until we more broadly “price in” the external costs of investment decisions across all sectors will we have a sustainable economy and society.
then they should advocate policies that reduce transaction costs and create better opportunities for agents to trade off their decisions across time and space. That means better-defined property rights and using capital markets. This idea may currently be anathema to those who think that economic growth and resource preservation are incompatible, but if those people are really intellectually committed to resource preservation, then they should advocate this approach instead of the business-as-usual political, regulatory, top-down approach.
Messrs. Gore and Blood should think more bottom-up than top-down if they want to see that alignment happen.