Tuesday, November 15, 2011

Prices Solve Problems

As I read Naomi Klein's Nation article about climate change, I am once again reminded how little she knows about economics. So little, it is almost not worth pointing why she's wrong. Almost.
The fact that the earth’s atmosphere cannot safely absorb the amount of carbon we are pumping into it is a symptom of a much larger crisis, one born of the central fiction on which our economic model is based: that nature is limitless, that we will always be able to find more of what we need, and that if something runs out it can be seamlessly replaced by another resource that we can endlessly extract.
This is both completely wrong--scarce resources is what defines economics--and deceptively correct--we do assume we will adapt to greater scarcity. We assume this because when prices are allowed to function, we adapt. And we're adapting now. Let prices work, and we'll adapt more quickly.

We do not need to "shred" economic thought. We just need to make pollution more expensive. Right now, it's too cheap. Skeptics say it's not that much cheaper (if at all) than it should be. Believers say it's way too cheap. But regardless where you land, the answer is the same: adjust the price and you'll get the answer you want.

Klein makes suggestions--more public transportation, more planning, fewer coal-burning power plants, produce less pollution, make less stuff--which will all occur if we get the price of pollution right. (Of course planning will occur regardless if prices are right or not, regardless if it centralized or decentralized...the question is planning for what.)

Look: I don't know much about the science of climate change but I know that there's a consensus among people who know more than I that we're a big problem for the environment. The know more than I do: I respect that a lot.

So please respect this consensus from economists: The right prices solve problems.

Monday, November 07, 2011

A Very Interesting Sentence

Greece and the United States are two of the very few countries in the world in which defense expenditures exceed 4 percent of GDP.
From Posner.