Free Markets, Externalities, and A Question of Integrity

Preface: ClimateEthics has frequently examined ethical problems with many economic arguments made in opposition to climate change policies. See, for example, Ethical Issues Entailed By Economic Arguments Against Climate Change Policies. Also see, Ethical Problems With Cost Arguments Against Climate Change Policies: Increased Costs May Not Justify Human Rights Violations. Economic arguments against climate change policies often have been made by people and organizations that believe in “free market fundamentalism” or the idea that unfettered markets will solve virtually all social and environmental problems. This post by guest blogger Jeff Huggins examines the unstated assumption of many free market fundamentalists that laissez-faire markets are always free.

I. Introduction

One of the defining premises of any “free market” is that parties participate in transactions voluntarily.
Shoving, imposing, and force–not allowed.

Indeed, voluntary participation is a vital part of the justification–and defense–of free markets. Why are free markets supposedly “free”? Because people participate in transactions freely, voluntarily, as free human beings. Why are free markets considered beneficial? Because the outcomes are often beneficial to the participants and, often, to a broader community.

But what if the nature of a transaction forces you to take part? What if someone else’s so-called free market imposes costs or harmful consequences on you involuntarily? What if ambitious aliens from another solar system were to run their economy as a free market that utilized Earth as a cost-effective dumping ground–ignoring the concerns, rights and pleas of mere humans?

More concretely, what if someone’s free market forces harms–such as a destabilized climate and associated problems–upon someone else who wants nothing to do with those harms and hasn’t agreed to suffer them?

Ultimately, as I’ll explain, we arrive at this question: Can a free market retain any credibility, coherence, and integrity if it violates the deepest principles upon which its own existence is justified?

II. The Man and A Stream

The problem becomes obvious once you think about it carefully, but let’s begin by considering an interesting source.
In his book Capitalism and Freedom, Milton Friedman wrote about one of the principal limits of free markets that justify and sometimes necessitate government involvement. Here’s a passage:

“A second general class of cases in which strictly voluntary exchange is impossible arises when actions of individuals have effects on other individuals for which it is not feasible to charge or recompense them. This is the problem of ‘neighborhood effects’. An obvious example is the pollution of a stream. The man who pollutes a stream is in effect forcing others to exchange good water for bad.” (Friedman, 1962)

Friedman’s main focus here was on “neighborhood effects” that occur within a market system and that represent a limit, or failure, of the market. Most present-day economists use the term ‘externality’ to refer to such effects. Friedman’s ultimate point was that neighborhood effects often justify government regulation, the aim of which is either to prevent them (if they are unwanted) or to ensure that benefits and costs are borne fairly by the responsible parties. If participants in a market and others who are subject to the market’s consequences all fall under the auspices of a particular government or regulatory authority, that government or authority can–and often should–act to regulate such effects.

Let’s revisit, however, an obvious and consequential point in Friedman’s passage:

“The man who pollutes a stream is in effect forcing others to exchange good water for bad.”

Friedman’s observation here holds whether the “others” are within a nation’s border or beyond it, whether they’re participants in the market or not, and whether they accept the values of a particular type of market economy or not. In other words, just as a man who pollutes a stream in his own town forces others to exchange good water for bad, so also a market economy that undermines climate stability forces those consequences upon the entire world. Markets, of course, can fail people within them or outside of them.

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