In my previous roles as program manager for sustainability at ABN AMRO Bank I often had skeptical managers trying to argue that sustainability was a fad and contrary to sound economical behavior. I have since moved on but sustainability has trancended from a activist “use both sides of the toiletpaper” oddity to a permanent item on the board agenda.
Last Friday there was an interesting article on mises.org, the website of the Ludwig von Mises institute. For those of you unfamiliar with Ludwig von Mises; he was one of the forerunners of the Austrian school of economic thought. The main premise of the Austrian school is that human behavior is too complex to develop mathematical models of evolving markets. It is often seen as an extreme libertarian stream because Austrian economists largely reject government interventions but believe that the power of pricing organizes the market.
Although I am a long time follower of the Austrian economic school of thought, I refuse to let myself be swept away by “Austrianism”. Like socialism, it is a very tempting idea that works best if everyone follows the rules. Unlike socialism, Austrian economics stops working whenever politics come into play. Off course in practice politicians seldom stay out when money and electoral power are at stake.
Tyler A. Watts, a PhD candidate in economics at George Mason University takes a shot at what he calls “the sustainability movement”. Like any proponent of an idea he doesn’t fully understand but is against anyway, he starts out with labeling sustainability as an “-ism”. The same technique is used by religious zealots when they talk about the ideas of Darwin. It makes the attack easier because you can dismiss any rational argument with the counter-argument “it’s a belief, not a fact”. It also makes any attack more personal because you can group the “believers” into a homogenous category which makes for a larger target. Watch out! The sustainists are out to control us!
As Watts tries to make his readers believe, sustainability is all about control of the market. “(Sustainists) are damning in their fervor, poise, and rhetoric. Their ideology is pregnant with an accusation that the way things currently are is somehow unsustainable.”
The rant gets even more polarizing when Watts argues that: “The sustainability movement is an assault on economics. It claims at its core that prices don't operate through time to direct consumption and production decisions in a sustainable way. A lesson in basic economics should suffice to defend against the sustainists' attack.”
Apparently Wattsists know exactly what sustainability is all about and companies that operate in a sustainable way are a threat to the free market. Unfortunately for the not-ye- existing Wattsist movement, practice has shown that sustainable behavior in the market has nothing to do with intervention but everything with supply and demand.
One of the arguments that Watts brings to the table is that “prices arise in the market economy as a concomitant of mutually beneficial exchange. People want things that improve their lives — we call this value. (…)The price of any good reflects this combination of value and scarcity.”
Apart from the fact that diamonds are expensive not because of scarcity but because their price is tightly controlled, what is ignored or forgotten here is that “value” is not only determined by price and scarcity but by (perceived) quality as well. Apple products are more expensive, not because they are scarcer than comparable products but because they have a (perceived) higher quality.
High quality commodities can become so expensive that few can afford them. According to Watts, water is abundant and therefore sustainists (which my MS Word spellchecker suspiciously wants to change to “Satanists”) needlessly worry about depletion. If water becomes scarcer, prices will go up, consumers will use less and entrepreneurial scientists will invent substitutes. The market will control itself. What Watts is basically advising is to use resources as much as possible until they become too expensive and then find a substitute.
What will happen if we were to follow the Wattsist behavior? Empirical evidence can be found in countries like Ethiopia and Sudan. Clean water is scarce there and people are poor. The ratio of water price vs. average income is extremely high. The result is that people drink whatever is available. One out of three children dies of diarrhea.
Watts’ solution to the price dilemma is simple: “if the price of a good trends strongly upwards over time (indicating it has become scarcer and/or more valuable), they rush to find cheaper substitutes”. I wonder what substitute for clean water is being researched in the labs of George Mason University.
Watts argues that “prices reliably guide individuals, both consumers and producers, toward a rational use of resources.” Theoretically this is true. In practice however, humans tend to have an economical horizon, both in fore- and in hindsight. Managers rarely think more than 5 years ahead. An earned profit now is often better than a possible profit in the future. This is especially true if you expect to be promoted away from your responsibility anyway. Unsustainable use of resources may sound very attractive. It keeps prices down and margins and profits are higher. Who cares about the time when resources become expensive? Let my successor worry about that!
Free markets are a crucial part of a world where prosperity is divided in a fair and equal way. This doesn’t mean that one should blindly follow every idea that comes out of the Austrian camp. The most attractive and in my humble opinion most valid argument for Austrian economics, is Mises’ premise that every conscious action is intended to improve a person's satisfaction.
True sustainability isn’t about “going green” or intervention in healthy market behavior. It’s about long term true value that is not only determined by price and income but by our satisfaction with the way we live. Even from Watts’ own somewhat cynical point of view, sustainability makes sense. It has created a huge, multi billion dollar industry and isn’t that what free market is all about?
