Asking an Over-Burdened Capitalism to Save the World

My boss in my first job in journalism on the Daily Telegraph in London was a genius—a forgotten genius now, alas, because he was known in the trade as “the best editor the Daily Telegraph never had” and those kind of titles don’t pass down the generations. Colin Welch was both a clear-sighted anti-socialist with a sound grasp of economic theory and a wit perpetually fizzing with epigrams and ideas. In a debate in the magazine Encounter with Anthony Crosland, later Foreign Secretary but then Britain’s leading social democratic theoretician, Colin pointed out that the main intellectual flaw in moderate socialism was that it had far too much faith—indeed, unbounded faith—in capitalism.  

Whereas more orthodox leftists wanted to nationalize companies and plan their operations to make them more efficient and profitable, modern-minded social democrats like Crosland accepted that free market disciplines were simply better than state ownership at making companies efficient, profitable, and thus taxable.  

State-owned companies in Britain in the 1960s and 1970s had a distressing tendency to absorb more money in subsidies than they generated in profits and tax revenue. At one point it was estimated that the costs of subsidizing the UK’s coal, steel, and auto industries were equal to the total annual tax revenue from North Sea oil. That kind of thing discredited orthodox socialism and led to Margaret Thatcher’s program of mass privatization in the 1980s that was exported through the world. 

With the collapse of the Soviet Union in late 1991, socialists of all kind had to invent a new definition of socialism, and they came up with one like Crosland's that amounted in theory as well as practice to regulated capitalism.  

Nothing very dramatic there, you may think; capitalism has been regulated since the Victorians. But this kind of regulation went far beyond forbidding the emission of poisonous gases or punishing the man who watered the workers’ beer. Social democrats continued those regulations, of course; indeed, they generally made them heavier. But they also imposed novel regulations under two headings.  

The first were regulations designed to control every aspect of how industries would be allowed to operate—what forms of energy they could use, the composition of their workforce, the kind of finance they could raise, etc., etc.  The second regulations required companies to spend their own resources in achieving political objectives for which the government was reluctant to levy taxation.  I covered this use of regulations by governments more fully in my earlier piece Towards the Socialist Corporation.

As Welch had foreseen twenty years before, however, when socialists did this, they were taking for granted that companies would be able to factor in the costs of these impositions more or less indefinitely without collapsing or going bankrupt. They had infinite faith in capitalism and a belief that it would always deliver the goods for them. 

And now the bills are coming home to roost.   

In his consistently original, usually correct, and sometimes scary Wall Street advice column, "True Blue Will Never Stain," Martin Hutchinson looks at how the first set of regulations has obstructed the development of three large economic development projects—exactly the kind of project that are necessary if we are to keep our economy moving forward and delivering growth (even at today’s anemic rate of productivity.) 

He points out that the so-called Holy Roman Empire (i.e., broadly speaking, Germany before its unification in 1870) was about eighty years behind the Brits and the U.S. in developing its own industrial revolution because of two flaws: its feudal system of land tenure which was only one step up from serfdom, and its system of internal tariffs which obstructed trade and raised the prices of goods in all its subject principalities. There could be no creation of a large “single market” while these absurd economic institutions survived which they did until 1833, after which Germany began its successful catch-up. 

Charlemagne. King of the Franks and Emperor of the Romans.

Why did they survive so long in the light of the fact that they were holding the statelets of the Holy Roman Empire back in a fast-developing world? Hutchinson argues that they were so stitched into the Empire’s legal system and so into the thinking of its people that reforming them seemed inconceivable. Hutchinson then delivers his blow; that in the U.S. today a similar duo is holding back the American economy. It is the combination of aggressive environmentalists and over-powerful lawyers who between them exploit the opportunities that the government’s over-regulation gives to them to halt economic development and to win large legal settlements.  

Hutchinson gives three recent examples:  

  1. "A recent Supreme Court decision allowed the Atlantic Coast pipeline to run under the Appalachian Trail, a lawsuit that had held up the pipeline for years. However, this decision was essentially nullified when Dominion Energy, one of two companies that had been developing the $8 billion project, gave up and sold its remaining natural gas assets to Warren Buffett. Apparently, even with Supreme Court approval, the remaining environmental harassments and legal delays were sufficient to make the project uneconomic.
  2. "In a second case, the $4 billion Dakota Access oil pipeline, which has been opened with oil passing through it quietly for three years, was suddenly blocked by a Washington district court, and prevented from further operation, because of some alleged defect in the pipeline’s paperwork before it was opened. By this decision of a lower court 1,500 miles from the pipeline, the operation of a $4 billion asset will be prevented for an indefinite period, at least 13 months.
  3. "In the third case the Keystone XL pipeline, a major international project which was held up arbitrarily for the entire eight years of the Obama administration, and had slowly been working its way through the paperwork since 2017, was held up by the Supreme Court for yet another environmental review, thus dooming it if Joe Biden should win the November election. "

As Hutchinson concludes, not only are huge costs added to these projects by such delays but they are almost never completed on time, sometimes the delays become cancellations, and some projects are never started because the obstacles to them deter investment in the first place. 

There are three villains in this account, however, not just Hutchinson's two. They are the close-minded, single-issue environmentalists; the aggressive lawyers—as George Gilder has written, “Entrepreneurial lawyers are the cancer of capitalism” -- and the government that makes and sustains the regulations that enable the first two to play their obstructive roles.

What makes the obstructive role of governments so hard to understand is that they are enabling the failure of their signal policies. Both political parties are loudly committed to large infrastructure spending to revive the U.S. economy. But unless they reform the regulations that allow the other two to flourish, they will be spending billions of taxpayers’ money mainly on legal fees, cost over-runs, and abandoned projects.  

It seems so lunatic that it couldn’t possibly be true. Before you say that, however, consider this disturbing fact: governments around the world have steadfastly refused to publish the cost estimates of their promise to move towards carbon neutrality by 2050. Everybody knows that this policy (if it’s ever implemented) would be enormously expensive as well as reducing the standard of living of their populations. Still, it’s telling that governments are nervous about putting an actual figure on it -- as if the voters are so distracted by word inflation that they won't notice words such as horrendous or terrifying unless they're backed up by a statistic.  

So we can understand the reluctance of governments when we learn that one government has done so with results that would alarm a drunken sailor into fiscal sobriety. As the Danish economist and head of the Copenhagen Consensus, Bjorn Lomborg, points out in a New York Post oped, adapted from his new book, False Alarm: How Climate Change Panic Costs Us Trillions, Hurts the Poor, and Fails to Fix the Planet:

Only New Zealand has asked for an independent assessment of the cost of its climate policy. It will cost 16 percent of its GDP each and every year by 2050, making it more costly than the entire New Zealand public expenditures for education, health, environment, police, defense, social protection, etc. (My italics.) 

Lomborg comments reasonably “We need smarter solutions.” For that, however, we would need smarter governments and smarter politicians. What we have are people who think you can pile ever-larger burdens on capitalism, progressively starve it of real investment and opportunities, and then ask it to save the world.

Design for Living, Badly

Since the end of the Cold War, the world’s governments have been engaged in a vast collective enterprise under the aegis of the United Nations and with the guidance of the Intergovernmental Panel on Climate Change to reduce the rise in global temperature, aka global warming, aka climate change. That reduction has changed over time. Until 2010 the aim was to cut the rise to 2.0 degrees above . . . well, above what?  

The answer is an odd one: the target was to hold the rise to 2.0 degrees above the global temperatures prevailing before the world began to industrialize.  

But as Rupert Darwall points out in his new monograph, The Climate Noose: Business, Net Zero, and the IPCC’s Anti-Capitalism (Global Warming Policy Foundation, London), there didn’t seem to be any solid scientific foundation for choosing that target: early 20th-Century warming between 1910 and 1945 had occurred before anthropogenic carbon emissions could have had a major impact on global temperature. So why choose that starting point? 

Darwall concludes that the 2.0 degree target was prompted by what he calls “the foundational tenet of environmentalist ideology: that the Industrial Revolution constitutes the original sin of modern civilization.” And that suspicion is supported by other oddities that he uncovers during his summary of how global warming policy has developed since 1989.  

For instance, the UN Framework on Climate Change was signed in 1992 with the aim of reducing carbon emissions. In the twenty-two years from then to 2016, carbon emissions (from fossil fuel burning and cement manufacture) actually rose faster than before—namely, by 61 per cent compared to 50 per cent in the period 1970 to 1992.  Was this because the capitalist West was pumping out greenhouse gases? Everyone from the UN Secretary-General to the Pope would like you to think so. But that’s not remotely the case. Darwall is fond of unveiling inconvenient facts and here is one of his best: 

1981 was the last year when the West’s carbon dioxide emissions exceeded those of the rest of the world. By 1989 and the fall of the Berlin Wall, the West’s emissions were 46% of global emissions. Before the pandemic struck, they accounted for around 25%.

Developing countries now emit three times the emissions of the advanced West.  

Sky's the limit.

That shouldn’t surprise us too much because it’s a firm principle of climatist ideology, not to mention a firm policy commitment of Third World governments, that developing countries should not agree to be bound by any limits on their industrial development and use of carbon-based energies. When attempts were made to get the developing world to accept such limits at the 2010 Copenhagen conference, China, India, Brazil and others rebelled and the conference ended in obvious failure.  

The response of the IPCC, the European Union, and the Obama administration was to relaunch the international climate policy process in a way typical of global bodies. They adopted a far tougher target for carbon emissions reduction—namely, one of a 1.5 degree rise in temperature since industrialization—but left the task of meeting the targets to national governments while proposing a raft of  reforms to make it possible. The 2018 IPCC report described these reforms as “very ambitious, internationally cooperative policy environments that transform both supply and demand" or, more succinctly, as “intentional societal transformation.”  

And, of course, they reveal the dirty little secret of UN environmentalism—it's a program for economic redistribution from the West to the developing world almost as much as for climate change mitigation. Since foreign aid has been intellectually discredited in recent years, the climate change process now has to take up the slack. But the economic consequences of imposing these reforms—as coyly hinted at in the dead bureaucratic language of the IPCC reports—are so savage in their impact on the poor that no amount of capital transfers from the West would compensate for them.  

There were some very large and gaping loopholes in this strategy, as there always have been in IPCC reports, to enable governments to evade, postpone, and “forget” the commitments they accept in such agreements. Realistically, such loopholes have to be there—or the entire U.N. Framework would collapse. The developing world has never accepted that the 1.5 percent restraints apply to itself in the first place; the U.S. under Trump has rejected them (while actually achieving larger emissions cuts than any other country because it has permitted fracking); and the EU and most of its member states outside Central Europe have adopted them hypocritically in the knowledge that they can’t possibly be achieved without a global recession worse than any in history (including what might emerge from the coronavirus pandemic.)

Incredibly, some Western governments—notably, U.K. governments under Gordon Brown, David Cameron, Theresa May, and now Boris Johnson—have gone beyond the IPCC recommendations and committed themselves to net-zero emissions by 2050. Barring some amazing technological breakthrough that target cannot be achieved, but it can cause enormous economic damage in the course of failing and being abandoned.  

What then will happen? One of the academic architects of the 1.5 target initially said it was “incompatible with democracy” -- i.e., that the voters would never stand for it. His judgment is confirmed by the fact that whenever the voters in the U.S. or Australia have been given the chance to vote down carbon taxes, they have taken it enthusiastically. The sceptic was persuaded to amend his judgment to say that implementing the target would merely be “very hard” after a discussion with the headmaster, but his first thoughts were correct. Exactly how “hard” it would be to sell the IPCC formula is somewhat speculative because, tellingly, both the IPCC and sympathetic Western governments refuse to conduct cost-benefit analyses of the commitment.  

Mr. Darwall’s own attempts to construct one from the scattered information in the reports is devastating. Whatever the assumptions, it seems, the costs vastly outweigh the benefits, and the impact on everyone, especially the poor, will be to increase their energy and food costs, to reduce their standard of living overall, and to destroy any prospect of improvement in their lives 

Poor, but Green.

And because governments cannot promise credibly to deliver either the 1.5 or net zero targets if the voters stop them, the UN and Green campaigners have turned to another partner: namely business. Indeed, the recruitment of Wall Street and industry to the cause of promoting a carbon-free economy is the central and the most novel part of his argument. He shows how leading figures in Wall Street and central banks, such as Michael Bloomberg and Mark Carney, have suddenly discovered that capitalist corporations should abandon shareholder sovereignty and profitability as the main engines of their activity and instead seek wider social objectives, above all "saving the planet," in partnership with a wider range of stakeholders. Nor do they merely make this argument, they are designing financial incentives to penalize companies engaged in lawful and socially necessary activities such as mining or oil and gas exploration by obstructing their access to capital investment. And they seek changes in the law to encourage corporate giving to “Green” causes irrespective of its impact on shareholder value. 

I’ve written on this theme myself on The Pipeline here and here. It is becoming a cause for concern more broadly. Andrew Stuttaford, an old friend, recently wrote powerfully on the dangers of this misnamed corporate social responsibility on NRO. In effect, it gives corporate managers the power to tax their shareholders to spend that revenue on political causes of which the shareholders themselves might not approve.  

Taxing is rightly regarded as a government monopoly in democratic regimes, and we call those rulers who divert public money into their own bank accounts “kleptocrats.” We should be very wary of the idea that Michael Bloomberg is gifted with special insight into what the voters want, given that he recently spent half a billion dollars of his own money to get nothing whatever in the Democratic primaries. Who knows what he might not achieve with ours? Kleptocracies are not improved by being private rather than public.  

Unless the spread of corpocrats buying virtue with our cheque books is restrained, the victims will not only be their shareholders and people whose security rests on pensions invested with them. They will include capitalism itself. For, as Darwall argues brilliantly, in seeking to transform capitalist companies into charities that may also make a profit (with luck), the new green capitalists would unconsciously ensure that companies (and entrepreneurs) would no longer be moved by the constant incentive of profitability to innovate and compete. Indeed, it is that very incentive to innovate that the IPCC and the principal ideologists of environmentalism dislike so much. They want a stable, even a declining, world that consumes less and less. Their plans honestly include a series of restraints and obstacles to enterprise, innovation, and growth.

If they were also able to replace the animal spirits of capitalism with the protective mentality of the bureaucrat, they would make companies into agents of economic and social stagnation and in time decay. In short, what the Bloombergs, Carneys, and corporate responsibility hucksters want would lead to a result they almost certainly don’t want. They want capitalism to commit suicide in order to save the world from the growing pains of prosperity.  But we know that the world before capitalism, like the world outside capitalism before 1989, was one of stagnation, decay, poverty, tyrannies, limited horizons, zero net hope.  

The international implications of that I’ll return to next week.  Meanwhile, read on:

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