Ceaseless market vigilance — How cheap a future — The myth of free
markets — Skewed markets mean lost capital — Fiddling with the switches
— An ordered arrangement of wastebaskets — "Satisficing" — When
regulation fails — Golden carrots — Plain vanilla motors — Making a
market in nega-resources — Alternative annual report
Churchill once remarked that democracy is the worst system of
government—except for all the rest. The same might be said of the market
economy. Markets are extremely good at what they do, harnessing such
potent motives as greed and envy—indeed, Lewis Mumford said, all the
Seven Deadly Sins except sloth. Markets are so successful that they are
often the vehicle for runaway, indiscriminate growth, including the
growth that degrades natural capital.
A common response to the misuse, abuse, or misdirection of market forces
is to call for a retreat from capitalism and a return to heavy-handed
regulation. But in addressing these problems, natural capitalism does
not aim to discard market economics, nor reject its valid and important
principles or its powerful mechanisms. It does suggest that we should
vigorously employ markets for their proper purpose as a tool for solving
the problems we face, while better understanding markets' boundaries and
Democracies require ceaseless political vigilance and informed
citizenship to prevent them from being subverted or distorted by those
who wish to turn them to other ends. Markets, too, demand a comparable
degree of responsible citizenship to keep them functioning properly
despite those who would benefit more from having them work improperly.
But the success of markets when they do work well is worth the effort.
Their ingenuity, their rapid feedback, and their diverse, dispersed,
resourceful, highly motivated agents give markets unrivaled
effectiveness. Many of the excesses of markets can be compensated for by
steering their immense forces in more creative and constructive
directions. What is required is diligence to understand when and where
markets are dysfunctional or misapplied, and to choose the correct
targeted actions to help them to operate better while retaining their
vigor and vitality.
This book has often argued that most of the earth's capital, which makes
life and economic activity possible, has not been accounted for by
conventional economics. The goal of natural capitalism is to extend the
sound principles of the market to all sources of material value, not
just to those that by accidents of history were first appropriated into
the market system. It also seeks to guarantee that all forms of capital
are as prudently stewarded as money is by the trustees of financial
The notion that much of the remedy for unsustainable market activities
is the adoption of sustainable market activities may offend both those
who deny that markets can be unsustainable and those who deny that
markets and profits can be moral. Yet worldwide experience confirms an
abundance of market-based tools whose outcomes can be environmentally,
economically, and ethically superior. These tools include institutional
innovations that can create new markets in avoided resource depletion
and abated pollution, maximize competition in saving resources, and
convert the cost of a sulfur tax or a carbon-trading price into profits
realized from the sale and use of efficient technologies.
Ensuring that markets fulfill their promise also requires us to remember
their true purpose. They allocate scarce resources efficiently over
the short term. That is a critical task, especially as the logic of
natural capitalism changes the list of which resources are genuinely
scarce. But the continuity of the human experiment depends on more than
just success in the short term, and efficiently allocating scarce
resources does not embrace everything people want or need to do.
For all their power and vitality, markets are only tools. They make a
good servant but a bad master and a worse religion. They can be used to
accomplish many important tasks, but they can't do everything, and it's
a dangerous delusion to begin to believe that they can—especially when
they threaten to replace ethics or politics. America may now be
discovering this, and has begun its retreat from the recent flirtation
with economic fundamentalism. That theology treats living things as
dead, nature as a nuisance, several billion years' design experience as
casually discardable, and the future as worthless. (At a 10 percent real
discount rate, nothing is worth much for long, and nobody should have
The 1980s extolled a selfish attitude that counted only what was
countable, not what really counted. It treated such values as life,
liberty, and the pursuit of happiness as if they could be bought, sold,
and banked at interest. Because neoclassical economics is concerned only
with efficiency, not with equity, it fostered an attitude that treated
social justice as a frill, fairness as passé, and the risks of creating
a permanent underclass as a market opportunity for security guards and
gated "communities." Its obsession with satisfying nonmaterial needs by
material means revealed the basic differences, even contradictions,
between the creation of wealth, the accumulation of money, and the
improvement of human beings.
Economic efficiency is an admirable means only so long as one remembers
it is not an end in itself. Markets are meant to be efficient, not
sufficient; aggressively competitive, not fair. Markets were never meant
to achieve community or integrity, beauty or justice, sustainability or
sacredness—and, by themselves, they don't. To fulfill the wider purpose
of being human, civilizations have invented politics, ethics, and
religion. Only they can reveal worthy goals for the tools of the
Some market theologians promote a fashionable conceit that governments
should have no responsibility for overseeing markets—for setting the
basic rules by which market actors play. Their attitude is, let's cut
budgets for meat inspection and get government off the backs of
abattoirs, and anyone who loses loved ones to toxic food can simply sue
the offenders. Let's deregulate financial markets, and self-interested
firms will police themselves. Let straightforward telephone, cable TV,
and airline competition replace obsolete regulatory commissions. Those
seduced by the purity of such theories forget that the austere brand of
market economics taught by academic theorists is only tenuously related
to how markets actually work. The latest illustrations of that principle
include the Wild West wreck now looming in Russia, mad-cow disease,
savings and loan fraud, phone scams, and crash-by-night airlines. By the
time textbook simplifications get filtered into political slogans, their
relationship to actual market behavior becomes remote. A dose of
empiricism is in order.
THE FREE MARKET AND OTHER FANTASIES
Remember the little section toward the beginning of your first-year
economics textbook where the authors listed the assumptions on which the
theory of a perfect free market depends? Even as abstract theories go,
those conditions are pretty unreasonable. The main ones are:
- All participants have
perfect information about the future.
- There is perfect
- Prices are absolutely
accurate and up-to-date.
- Price signals completely
reflect every cost to society: There are no externalities.
- There is no monopoly (sole
- There is no monopsony (sole
- No individual transaction
can move the market, affecting wider price patterns.
- No resource is unemployed
- There's absolutely nothing
that can't be readily bought and sold (no unmarketed assets)—not
even, as science-fiction author Robert Heinlein put it, "a Senator's
robes with the Senator inside."
- Any deal can be done
without "friction" (no transaction costs).
- All deals are instantaneous
(no transaction lags).
- No subsidies or other
- No barriers to market entry
or exit exist.
- There is no regulation.
- There is no taxation (or if
there is, it does not distort resource allocations in any way).
- All investments are
completely divisible and fungible—they can be traded and exchanged
in sufficiently uniform and standardized chunks.
- At the appropriate
risk-adjusted interest rate, unlimited capital is available to
- Everyone is motivated
solely by maximizing personal "utility," often measured by wealth or
Obviously the theoretical market
of the textbooks is not the sort of market in which any of us does
business. Actually, if there were such a place, it would be
pretty dull. No one could make more than routine profits, because all
the good ideas would already have been had, all the conceivable
opportunities exploited, and all the possible profits extracted—or, as
the economists put it, "arbitraged out." It's only because actual
markets are so imperfect that there are exceptional business
Just how imperfect are the markets in which we all actually live?
Let's run a quick check on that list of eighteen theoretical
- Perfect information about
the future? If anyone had it, he or she'd be barred from elections
and stock markets—and probably not given any credence by the rest of
- Competition is so imperfect
that exceptional profits are commonly earned by exploiting either
one's own oligopolistic power or others' oversights, omissions, and
- Markets know everything
about prices and nothing about costs.
- Most harm to natural
capital isn't priced, and the best things in life are priceless.
- No monopolies? Microsoft,
airlines' fortress hubs, and your managed-health- care provider come
- No monopsonies? Consider
your utility, the Peanut Marketing Board, and the Federal Aviation
- No market-movers? What
about Warren Buffet and the Hunt Brothers?
- Thirty percent of the
world's people have no work or too little work. (Economists justify
this by calling them "unemployable"—at least at the wages they
- Most of the natural capital
on which all life depends can be destroyed but neither bought nor
sold; many drugs are bought and sold in a pretty effective free
market, but doing either can jail you for life.
- The hassle factor is the
main reason that many things worth doing don't happen.
- Does your insurance company
always reimburse your medical bills promptly? Does your credit-card
company credit your payments immediately?
- Worldwide subsidies exceed
$1.5 trillion annually—for example, America's 1872 Mining Act sells
mineral-bearing public land for as little as $2.50 an acre and
charges no royalties.
- It's hard to start up the
next Microsoft, Boeing, or GM—or to get out of the tobacco business.
- The world's regulations,
put on a bookshelf, would extend for miles.
- The Internal Revenue Code
- You can't buy a single
grape at the supermarket, nor an old-fashioned front porch in most
- Many people are redlined,
must resort to loan sharks, or have no access to capital at any
- So why does anyone fall in
love, do good, or have kids, and why do three-fifths of Americans
attend weekly worship services?
Actually, the market works even
less perfectly than the above counter-examples suggest, for two reasons.
First, corporations that benefit from subsidies, externalizing their
costs, avoiding transparency, and monopolizing markets tend to ignore
market realities and lobby for making new rules, or overlooking old
ones, that will best achieve their private benefits. Second, people are
far too complex to be perfectly rational benefit/cost maximizers. They
are often irrational, sometimes devious, and clearly influenced by many
things besides price.
For example, suppose you put a group of individuals in hot, muggy
apartments with air conditioners and tell them that both the air
conditioners and the electricity are free. What would you expect them to
do? Won't they just turn it on when they feel hot and set it at a
temperature at which they feel comfortable? That's what economic theory
would predict; if cooling is a free good, people will use lots of it
whenever they want. But only about 25 to 35 percent of individuals
actually behave that way. Many others don't turn on the air conditioner
at all. Most do run it occasionally, but in ways that are essentially
unrelated to comfort. Instead, their usage depends largely on six other
factors: household schedules; folk theories about how air conditioners
work (many people think the thermostat is a valve that makes the cold
come out faster); general strategies for dealing with machines; complex
belief systems about health and physiology; noise aversion; and
(conversely) wanting white noise to mask outside sounds that might wake
Theoretical constructs are, after all, just models. The map is not the
territory. The economy that can be described in equations is not the
real economy. The world that conforms to eye-poppingly unreal
assumptions about how every economic transaction works is not the real
world. The sorts of economists who lie awake nights wondering whether
what works in practice can possibly work in theory are not the sorts who
should define your business opportunities.
Previous chapters have documented 100 to 200 percent annual returns on
investment in energy efficiency that haven't yet been captured, as
market theory presumes they must already have been. Previous chapters
documented improvements in U.S. vehicles, buildings, factories, and uses
of materials, fiber, and water that could probably save upward of a
trillion dollars per year. These efficiency gains are available and
highly profitable but haven't yet been captured. Chapter 3 even
suggested that waste, in a more broadly defined sense, in the U.S.
economy could amount to at least one-fourth of the GDP. Such prominent
examples of market failure suggest that the standard question of how to
make markets more perfect should be turned around: Are there ways to
address the imperfections in the marketplace that would enable
people to capture the profit potential inherent in those flaws? It's
time to identify the real-world obstacles to buying resource efficiency,
and determine how to turn each obstacle into a new business opportunity.
The attractive scope for doing this will be illustrated by examples
about energy and occasionally water, but most of the implementation
methods and opportunities described could be extended to saving any kind
(End of excerpt)