Thursday, July 07, 2005

Regulation and Corporate Capitalism

Corporate Capitalism and Regulation

Frederic Christie

While some scientists saw the proverbial writing on the wall in some form early on regarding the ecology, broad public and scientific interest in the ecology really began in the sixties and seventies with the rise of the New Left. Amist the furor of reanalyzing traditional feminism, socialism, anti-imperialism, anarchism and anti-racism and the birth of anti-militarism and multiculturalism, the ecological left gained a class consciousness. Consistent ecologists often began to recognize that they were facing more than occasional callous or ignorant behavior but rather recurrent institutional patterns. Particularly, environmentalists found themselves being coopted, outgunned and opposed by business. Even successful regulations faced rollbacks and recalcitrance. Numerous ecological problems stem directly from economic institutions (namely, markets and corporations); barring revolutionary alteration, government regulation combined with NGO watchdog tactics can have a drastic impact, and possibly save the planet.

Economic Causes of the Problem
The two primary economic engines of enviromental destruction are externalities in the market and legalized profit requirements in business.
An externality is a cost that is not borne by the primary buyer or seller in an interaction. Externalities can take a variety of forms: Worker disabilities that are caused by the selling firm but which costs are paid by the workers (barring socialized insurance); pollution generated by either the production of or usage of the product, with costs borne by future generations; habitat destruction and loss of biodiversity necessitated by the broader production context, borne by habitat users, non-human organisms and future generations; enhanced tax cost to pay for regulation and bureaucratic solutions, with the bill footed by the taxpayer; and any number of other cases. This is recognized by mainstream economists to be a problem with markets.
In the market, a dollar is a vote. However, not everyone has the same amount of dollars (and therefore not the same voting power). Future generations and non-humans in particular get no votes.
However, externalities only become problematic assuming that there is an incentive to generate them. Advocates like David Korten point out that “mindful markets” (non-corporate markets of a rather distinctly anti-capitalist tone) would have no reason to externalize a cost; one would opt to produce the product in the safer way. This may or may not be true, but modern markets operate under the construction of the legalized corporation. A corporation is required by law to make the most profit possible for its investors. Human greed can be a problem in even the most basic and local of markets; see the bazaar or the flea market. But corporations go the next step and insure that those companies and executives that do not maximize greedy behavior are weeded out by the decisions of shareholders and by the pressures of the market. A corporation's incentives are to create the cheapest (usually worst) product, sell each unit for the highest cost the market will bear, artificially inflate the market through any means necessary, pay each worker progressively less and provide less benefits, keep hidden as much innovation as possible from competitors, and externalize as much as possible of their production costs.

Heuristic Cases
Deforestation, ozone layer depletion, global warming, atmospheric pollution... all of these seem to be easy shots given this theory. But the problem is that these problems have numerous facets, some natural, some economic (caused by economic actors), some caused by senseless private actors and some state influences. But two examples, overfishing and cruise ship pollution, are specific enough to place the blame squarely at the feet of markets and corporations.
To quote a UN article, “...Fishing is central to the livelihood and food security of 200 million people, especially in the developing world, while one of five people on this planet depends on fish as the primary source of protein. According to UN agencies, aquaculture... is growing more rapidly than all other animal food producing sectors... Global main marine fish stocks are in jeopardy, increasingly pressured by overfishing and environmental degradation.” Even if small fishing boats do most of the damage, the fact is that they are being pressured by markets to get in the largest haul possible. Slowing down even a little bit is denied by the need to maximize profit. Further, the rate of depetion of fisheries has increased fourfold over the last forty years, concurrent with the expansion of markets.
Cruise ships offer an even better example. Thanks to a loophole in the Clean Water Act, cruiseliners are exempt and thus can dump their photo cleaning solutions, unfiltered human and ship waste, and similar directly to everywhere they go. Despite being small, these ships wreak unique damage precisely because they visit the most beautiful areas in the world, teeming with bio-diversity. An asymmetric impact occurs: The cost of implementing proper filtration would cost less than a can of soda per passenger per day, yet coral reefs support a billion people in Asia. And a cruise ship has nothing to do with “primitive” economies or technology; its damage is entirely due to the decisions of corporations and the willingness of government to turn a blind eye.
And all of the bureaucratization that arises from the decisions of these companies to continue wreaking damage carries incredible costs. Harvard Professor Dani Rodrik, in his ground-breaking work on inequity, has demonstrated that a .1 rise in the Gini index of inequity lowers growth rates by about 1.2%. One of these reasons this is the case is that bureaucracies inevitably are formed to pick up for the failure of the private economy.

Regulatory Solutions
One of the best available alternatives is government regulation. Yet regulation has become politically costly, thanks to the prestige of business and the impact that deep pockets can have on media coverage.
Regulations undoubtedly work. The reason why cruise ships have aroused such a furor is precisely because the Clean Water Act's applicability to most other municipal and oceanic sources of pollution has drastically reduced water pollution. Perhaps the best way to measure the success of regulations is to look at the responses of the people required to comply with them. Thomas Lyon argues that corporate voluntary environmentalism produces more modest results but is used to deflect regulatory agencies and advocacy groups because such institutions don't want bruising fights that drain political capital. He even recommends shifting to a new technology precisely to make a regulatory agency loathe to perform another change. Marine protected areas have also been successful.
Clearly, problems such as regulatory capture (where regulatory agencies become 'bought' by the regulated market), rollback and flak (companies working hard to destroy environmental successes and attacking groups that foisted the changes), and similar can be substantial hurdles. Focusing on the potentials of such regulation can demonstrate how effective proper regulation is. Regulations can be cost-effective and even beneficial to the economy in a few key ways:
1) Creating positive externalities. Eric Pianin of the Washington Post argues, “The value of... improved air quality w[as] estimated between $120 billion and $193 billion from October 1992 to September 2002. By comparison, industry, states and municipalities spent an estimated $23 billion to $26 billion to retrofit plants and facilities and make other changes to comply with new clean-air standards....” This money does creep back into the economy and net raises GDP. Even assuming regulatory overhead, the costs listed by Pianin are not unusual and demonstrate conclusively that regulations positively impact the economy.
2) Long-term reduction of operation cost. If inefficient technology burns more fuel, forcing companies to comply can save money.
3) Market solutions such as the Kyoto Treaty's “carbon credits” can encourage poorer actors to comply by offering them a unique incentive and cause investors to put their money into regulatory-created future markets
4) Smaller businesses, given proper design, can benefit disproportionately because the investment curve for new technology is equalized across the industry, thus making more supple and competitive markets
Greg Palast notes that there is a myth of government regulators micro-managing bunk beds with rulers to make sure gaps are not too large. He then cites cases where bunk beds made out of code caused decapitation or crushed windpipes, and quotes a regulator who spends her days dealing with maimed bodies. Honest libertarians should be receptive to the idea that government is expanding unnecessarily, but they should not be led astray. It is the right of every being to be free of pollution; it is the right of developing economies to preserve their ecologies; it is the right of fishers to not have to change their livelihood because of the senselessness of corporations. Until a new economy can be created, it is the obligation of governments to protect the economy from itself.


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