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How capitalism holds the secret to addressing climate change

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Radwell is the author of “American Schism: How the Two Enlightenments Hold the Secret to Healing Our Nation” and serves on the Business Council for Business for America.

A colleague of mine recently put forth an interesting hypothesis about the sustainability of human life: Because the capitalist economic model relies on continuous growth, he argued, it conflicts with the reality that the Earth has finite resources.

There’s been no lack of criticism about capitalism over the course of history — that it’s exploitative and alienating, and it erodes human rights. Anti-capitalist ideas, movements and trends have been a mainstay on the world stage since the mid-19th century. Marxist schools of thought exploded in the early 20th century and, ever since, various forms of anti-capitalist ideology have constituted a major theme of the zeitgeist, often flying in the face of the globalist capitalist model that has simultaneously dominated the world economy. A 2019 poll found that 70 percent of U.S. millennials said they were likely to break from capitalist beliefs and vote for a socialist candidate, and some speculate that presidential candidate Elizabeth Warren torpedoed her 2020 campaign by her unwillingness to identify as a socialist.

One area that critics feel is the most negatively impacted by capitalism is the environment. In 1971, Marxist economist Ernest Mandel wrote that capitalism posed a “growing threat” for the environment ,and, consequently “the survival of humanity.”

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Despite a third of Americans denying that human-caused climate change exists, numerous reliable studies have proved otherwise. Far-left politicians like Sen. Bernie Sanders have proposed sweeping government programs that would pump money into mitigating climate change, and it seems inevitable that governments across the globe will need to step up to lead if we are to make meaningful progress.

Given a preponderance of this scientific evidence, it is hard to argue against the reality of human-caused climate change. However, the global capitalist model is not the problem. On the contrary, I would argue that only by leveraging the capitalist structure can we slow the effects of climate change. No other economic model could come close to the efficiency of capitalism’s ruthless competitiveness in finding effective solutions. It’s simple economics. Here’s how we do it:

Profits and growth

It is absolutely true that the key barometer in a capitalist economy is profit growth. Firms compete by increasing profits in order to survive, and firms that don’t grow profitability will ultimately perish.

But consider for a moment how the concept of profit gets interpreted. Any college economics textbook would define profit as the surplus that results from the value provided by goods and services as determined by the free market minus the costs to produce and deliver such goods and services. Of course, all costs must be accounted for to determine profits. A firm cannot choose which costs to include and which to exclude in its calculation if we are to have a standard of measurement.

Here’s where the wrinkle comes in. Firms routinely and transparently track their internal costs — things like raw materials, laborand utilities. But that same college economics textbook I mentioned above also discusses the role of the government in correcting for what are called externalities. If there are production costs that the firm is not including — essentially freeriding on the costs borne by others in society— the role of government is to develop a corrective mechanism to ensure those external costs are internalized for the firms in competition. In essence, the government must prevent firms from freeriding.

Economists almost universally agree that externalities are a form of market failure that the government is obligated to correct. (Yes, the capitalist model prescribes a specific set of roles that governments must play — despite what President Ronald Reagan told us.)

There are perhaps no more consequential externalities today than the costs of polluting the earth, especially the negative impacts of releasing carbon into the atmosphere as part of the value delivery system (sourcing, production and distribution). Moreover, because carbon emissions are measurable, there is a concrete way of calculating and assessing their costs related to climate change. I think we would all agree that carbon emissions qualify as an externality that all industrial firms have failed to account for in their definition of profit over the past 200 years. But imagine a world in which we could effectively internalize these costs through a universal governmental regulatory system such as a universal carbon tax.

When taking the externality of pollution into account, a firm’s profit can be defined by the following equation:

Firm’s profit = the entire surplus created and valued by consumers – all costs needed to generate such value [including the cost of carbon emissions]

All of a sudden, the requirement for capitalism to continually grow becomes a good thing. Why? Because all else being equal, the way to continually grow that profit is by reducing the costs of carbon emissions. In order to maximize profits, firms will innovate and compete ruthlessly to produce the same basket of goods and services with less carbon. The smaller a firm’s carbon footprint, the more it profits. The power of the capitalist model is now unleashed to lower carbon emissions.

A global solution

The thing about economics, of course, is that it works in theory – but putting it into practice is usually quite difficult. In this case, a robust solution would require a nearly unprecedented global agreement among nations in order to work.

But as I write in my book, “American Schism,” liberal economic principles stipulate unequivocally that government must assume an essential portfolio of activities for the proper functioning of a free-market economy. In simple terms, the government’s role is threefold:

  1. To correct for market failures of a capitalistic free-market economy such as externalities.
  2. To invest, build and ensure uniform access to public goods like public education, infrastructure, accurate information and job training.
  3. To achieve better equity across the strata of society through redistribution so that all can have access to liberty and freedom and enjoy a basic ability to pursue happiness.

The “free market” is not libertarian — it necessitates a regulatory structure. Yes, minimizing regulation should be a goal, but not at the expense of allowing market participants to avoid bearing the damaging costs for which they must be held accountable.

I fear that over time, capitalism has become a scapegoat for our societal woes. But rather than throwing the baby out with the capitalist bathwater, it is well within our power to harness the very thing that makes capitalism great and leverage it for a global good.

The fate of the human race depends on it.

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