[Part 2 of Values-based vs. Market-based Approaches to the Economy]
Last week, I argued that a values-based framework has two big advantages over a market-based framework in setting the agenda. We’re more likely to debate what really matters to us. And we’re more likely to debate who should get to decide — and in turn, that makes it harder for the wealthy and big corporations to hide what they’re fighting for.
In the next few posts, I’m going to try to show that a values-based framework is also better at actually delivering the goods. To understand why, first we need to be clear why smart folks like Krugman favor a market-based framework. Or as Krugman put it,
Textbook economics and real-world experience tell us that we should have policies to discourage activities that generate negative externalities and that it is generally best to rely on a market-based approach.
That said, Krugman isn’t arguing markets are the only game in town. Sometimes banning behavior outright make more sense.
When it comes to direct action, you can make the case that economists love markets not wisely but too well, that they are too ready to assume that changing people’s financial incentives fixes every problem. In particular, you can’t put a price on something unless you can measure it accurately, and that can be both difficult and expensive. So sometimes it’s better simply to lay down some basic rules about what people can and cannot do.
Consider auto emissions, for example. Could we or should we charge each car owner a fee proportional to the emissions from his or her tailpipe? Surely not. You would have to install expensive monitoring equipment on every car, and you would also have to worry about fraud. It’s almost certainly better to do what we actually do, which is impose emissions standards on all cars.
So why rely on markets wherever possible? First, he argues,
A market-based system would create decentralized incentives to do the right thing
And decentralized incentives are critical when you are dealing with an insanely complicated problem like greenhouse gases.
greenhouse gases are a direct or indirect byproduct of almost everything produced in a modern economy, from the houses we live in to the cars we drive. Reducing emissions of those gases will require getting people to change their behavior in many different ways, some of them impossible to identify until we have a much better grasp of green technology. So can we really make meaningful progress by telling people specifically what will or will not be permitted? Econ 101 tells us — probably correctly — that the only way to get people to change their behavior appropriately is to put a price on emissions so this cost in turn gets incorporated into everything else in a way that reflects ultimate environmental impacts.
The second reason to use markets:
But while the direct regulation of activities that cause pollution makes sense in some cases, it is seriously defective in others, because it does not offer any scope for flexibility and creativity
In short, a market-based framework allow for decentralized, flexible, creative solutions, “as opposed to a ‘command and control’ fix that issues specific instructions in the form of regulations.”
Up next: market-based theory meets European Union Cap and Trade reality
