22 March 2011

Free Market Truth in Pricing

Some quick research turned up the following from Ch. 13 of World on the Edge: How to Prevent Environmental and Economic Collapse by Lester R. Brown:
"The failure of the market to reflect total costs can readily be seen with gasoline. The most detailed analysis available of gasoline’s indirect costs is by the International Center for Technology Assessment. When added together, the many indirect costs to society—including climate change, oil industry tax breaks, military protection of the oil supply, oil industry subsidies, oil spills, and treatment of auto exhaust-related respiratory illnesses—total roughly $12 per gallon. If this external cost is added to the roughly $3 per gallon price of gasoline in the United States, gas would cost $15 a gallon. These are real costs. Someone bears them. If not us, our children. n.2

If we can get the market to tell the truth, to have market prices that reflect the full cost of burning gasoline or coal, of deforestation, of overpumping aquifers, and of overfishing, then we can begin to create a rational economy. If we can create an honest market, then market forces will rapidly restructure the world energy economy. Phasing in full-cost pricing will quickly reduce oil and coal use. Suddenly wind, solar, and geothermal will become much cheaper than climate-disrupting fossil fuels.

We are economic decisionmakers, whether as corporate planners, government policymakers, investment bankers, or consumers. And we rely on the market for price signals to guide our behavior. But if the market gives us bad information, we make bad decisions, and that is exactly what has been happening.

We are being blindsided by a faulty accounting system, one that will lead to bankruptcy. As Øystein Dahle, former Vice President of Exxon for Norway and the North Sea, has observed: “Socialism collapsed because it did not allow the market to tell the economic truth. Capitalism may collapse because it does not allow the market to tell the ecological truth.” n.3 

If we leave costs off the books, we risk bankruptcy. A decade ago, a phenomenally successful company named Enron was frequently on the covers of business magazines. It was, at one point, the seventh most valuable corporation in the United States. But when some investors began raising questions, Enron’s books were audited by outside accountants. Their audit showed that Enron was bankrupt—worthless. Its stock that had been trading for over $90 a share was suddenly trading for pennies. n.4 

Enron had devised some ingenious techniques for leaving costs off the books. We are doing exactly the same thing, but on a global scale. If we continue with this practice, we too will face bankruptcy.


n.2. International Center for Technology Assessment (ICTA), The Real Cost of Gasoline: An Analysis of the Hidden External Costs Consumers Pay to Fuel Their Automobiles (Washington, DC: 1998); ICTA, Gasoline Cost Externalities Associated with Global Climate Change (Washington, DC: September 2004); ICTA, Gasoline Cost Externalities: Security and Protection Services (Washington, DC: January 2005); Terry Tamminen, Lives Per Gallon: The True Cost of Our Oil Addiction (Washington,  DC: IslandPress, 2006), p. 60, adjusted to 2007 dollars with Bureau of Economic Analysis, “Table 3—Price Indices for Gross Domestic Product and Gross Domestic Purchases,” GDP and Other Major Series, 1929–2007 (Washington, DC: August 2007); BP, BP Statistical Review of World Energy (London:  June 2007); U.S. Department of Energy (DOE), Energy Information Administration (EIA), “Total Crude Oil and Petroleum Products,” at tonto.eia.doe.gov/dnav/pet/pet_cons_psup_dc_nus_mbbl_a.htm, updated 26 November 2007; This Week in Petroleum (Washington, DC: various issues); DOE, EIA, “US Weekly Retail,” Retail Gasoline Historical Prices (Washington, DC: 4 October 2010).

3. Øystein Dahle, discussion with author, State of the World Conference, Aspen, CO, 22 July 2001. 

4. Eric Pfanner, “Failure Brings Call for Tougher Standards: Accounting for Enron: Global Ripple Effects,” International Herald Tribune, 17 January 2002; share price data from www.Marketocracy.com, viewed 9 August 2007."


Anonymous said...

Kinda simplistic. It would indeed help people make more informed decisions, if there were true costs, effects, impacts, etc. available for all measures one can apply in one's life.

However, as long as there are entities and people who wield disproportionate socio-economic power, and as long as we are a republic and not a full democracy, the free and open nature of a market makes no difference.

Fully free and open markets can make a society flourish only when the playing field is first levelled. And that's not likely to happen merely as a result of more honest information. Openness and honesty are essential to a free society, but on their own, they won't change a society from a plutocratic neo-police state into a libertarian valhalla.

This is the endpoint weakness of Paul pere et fils, and the Mises gang, where their worship of "free markets" is concerned.

Jim H. said...

If I were half as articulate as you, I could've written that last sentence myself. My only point is that this is the field of battle, and hopey-changey DFH idealism is not going to sway anyone in the big boy world. The arguments that change policy have to be real-world 'cause we're playing on their court, with their refs, etc.