Thus far the typical libertarian response to the growing clamor has been to challenge the science behind it. Now it really is the scientific consensus that global warming occurred during the twentieth century. What is not so obvious is that (1) humans caused this warming and (2) this warming is necessarily bad.

Although it is interesting to explore the question of whether science has been perverted in the cause of environmentalism, there is a danger for libertarians in pinning their entire case on this strategy. After all, every serious student of science knows that when it comes to empirical claims, we never achieve certainty. For example, even if today one thinks that there are insurmountable problems facing the theory of manmade global warming, one still must accept the possibility that new evidence or theoretical advances could indicate that the environmentalists are perfectly right. Another possibility is that there is some other, similar disaster lurking unsuspected.

For these reasons, I believe it is crucial to accept provisionally, for the sake of argument, the scientific claims behind the case for manmade global warming. In the present article I will demonstrate that it still would not follow that the taxes and other regulations typically proposed by greens are the best way to address the problem. Just as the free market is still the optimal economic arrangement, regardless of how many citizens are angels or devils, so too does the free market outperform government intervention, regardless of the fragility of Earth’s ecosystems.

When trying to determine if the free market is to blame for possibly dangerous carbon emissions, a logical starting point is to list the numerous ways that government policies encourage the very activities that Al Gore and his friends want us to curtail.

The U.S. government has subsidized many activities that burn carbon: it has seized land through eminent domain to build highways, funded rural electrification projects, and fought wars to ensure Americans’ access to oil. After World War II it played a key role in the mass exodus of the middle class from urban centers to the suburbs, chiefly through encouraging mortgage lending.

Every American schoolchild has heard of the bold transcontinental railroad (finished with great ceremony at Promontory Summit, Utah) promoted by the federal government. Historian Burt Folsom explains that due to the construction contracts, the incentive was to lay as much track as possible between points A and B—hardly an approach to economize on carbon emissions from the wood- and coal-burning locomotives. For a more recent example, consider John F. Kennedy’s visionary moon shot. I’m no engineer, but I’ve seen the takeoffs of the Apollo spacecraft and think it’s quite likely that the free market’s use of those resources would have involved far lower CO2 emissions. While myriad government policies have thus encouraged carbon emissions, at the same time the government has restricted activities that would have reduced them. For example, there would probably be far more reliance on nuclear power were it not for the overblown regulations of this energy source. For a different example, imagine the reduction in emissions if the government would merely allow market-clearing pricing for the nation’s major roads, thereby eliminating traffic jams! The pollution from vehicles in major urban areas could be drastically cut overnight if the government set tolls to whatever the market could bear—or better yet, sold bridges and highways to private owners.

Of course, there is no way to determine just what the energy landscape in America would look like if these interventions had not occurred. Yet it is entirely possible that on net, with a freer market economy, in the past we would have burned less fossil fuel and today we would be more energy efficient.

Even if it were true that reliance on the free-enterprise system makes it difficult to curtail activities that contribute to global warming, still the undeniable advantages of unfettered markets would allow humans to deal with climate change more easily. For example, the financial industry, by creating new securities and derivative markets, could crystallize the “dispersed knowledge” that many different experts held in order to coordinate and mobilize mankind’s total response to global warming. For instance, weather futures can serve to spread the risk of bad weather beyond the local area affected. Perhaps there could arise a market betting on the areas most likely to be permanently flooded. That may seem ghoulish, but by betting on their own area, inhabitants could offset the cost of relocating should the flooding occur. Creative entrepreneurs, left free to innovate, will generate a wealth of alternative energy sources. (State intervention, of course, tends to stifle innovations that threaten the continued dominance of currently powerful special interests, such as oil companies—for example, the state of North Carolina recently fined Bob Teixeira for running his car on soybean oil.)

Private insurers have a strong incentive to assess the potential effects of global warming without bias in order to price their policies optimally—if they overestimate the risk, they will lose business to lower-priced rivals; if they are too sanguine about the dangers, they will lose money once the claims start rolling in. Individuals finding their homes or businesses threatened by rising sea levels will find it easier to relocate to the extent that unfettered markets have made them wealthier. Industrial manufacturers, as long as they are held liable for the negative environmental effects of their production processes—a traditional common-law liability from which state policies intended to “promote industry” have often sought to shield manufacturers—will strive to develop technologies that minimize the environmental impact of their activities without sacrificing efficiency. Government interventions and “five-year plans,” even when they are sincere attempts to protect the environment rather than disguised schemes to benefit some powerful lobby, lack the profit incentive and are protected from the competitive pressures that drive private actors to seek an optimal cost-benefit tradeoff.

If the situation truly becomes dire, it will be free-market capitalism that allows humans to develop techniques for sucking massive amounts of carbon out of the atmosphere, and to colonize the oceans and outer space. Beyond these futuristic possibilities, the obvious responses to global warming—such as more houses with AC, sturdier sea walls, and better equipment to evacuate flooded regions—are again only feasible when the free market is unleashed.

It is the poorest people and nations that stand to suffer the most if the worst-case scenario for global warming is realized, and the only reliable way to alleviate their poverty, and thus help protect them from those effects, is the free market.

Can the Market Meet the Threat Head-On?

In the first section I summarized some of the ways governments inadvertently contribute to the very activities that allegedly cause dangerous global warming; in the second I sketched some of the ways that free markets allow humans to better adapt to climate change. However, I haven’t really tackled the problem directly. Am I conceding that with a worldwide problem the market—which is just dandy for one-on-one interactions—can’t match the concerted “will of the people” working through their elected representatives for a common solution?

Of course not. Even when economic transactions generate so-called negative externalities (activities that shower harms on third parties), I still contend that the free market is the best institution for identifying and reducing the problems.

One way negative externalities can be addressed without turning to state coercion is public censure of individuals or groups widely perceived to be flouting core moral principles or trampling the common good, even if their actions are not technically illegal. Large, private companies and prominent, wealthy individuals are generally quite sensitive to public pressure campaigns.

To cite just one recent, significant example, Temple Grandin, a notable advocate for the humane treatment of livestock, asserts that McDonald’s is the world leader in improving slaughterhouse conditions. While many executives at the fast-food giant genuinely may be concerned with the welfare of cattle, pigs, and chickens, undoubtedly a strong element of self-interest is also at work here, as the company realizes that corporate image affects consumers’ buying decisions.

But that self-interest does not negate the laudable outcome of the pressure McDonald’s has applied to its suppliers to meet the stringent standards it has set for animal-handling facilities. Similarly, to the degree that the broad public regards manmade global warming as a serious problem, companies will strive to be seen as “good corporate citizens” that are addressing the matter. And this isn’t ivory-tower speculation on my part—I can see the “green friendly” ads already.

Critics of libertarianism sometimes denigrate it as a political program of “market fundamentalism” that, if put into practice, would reduce all human values to the price they can fetch as mere commodities. But that is a caricature of the social arrangements advocated by any sensible libertarian. The great figures of classical-liberal and libertarian thought have always recognized the vital contributions that nonmarket institutions, such as churches, families, charities, social clubs, communities of scholars and their students, art foundations, conservation groups, neighborhood associations, and youth athletic leagues, make to the healthy functioning of a free society. What libertarians offer as an alternative to statism is not a social order that judges every human interaction solely on a miserly calculation of profit or loss, but a society in which every desirable form of voluntary association is allowed to flourish, free from coercive interference by the state.

Customary Law

Besides the samples listed above, most libertarians recognize private or customary law as another important, nonmarket source of social order. A historical case in point is the Anglo-American common-law tradition in which legal norms evolved spontaneously from the customs of the people to whom it applied, rather than through legislation and state planning deliberately aimed at achieving some “public good.” The many centuries during which the common law sustained civic order in the face of inevitable divergences between individual citizens’ own interests demonstrate that a successful legal order does not inevitably require state sponsorship. The common law has shown itself to be fully capable of dealing with a number of issues that, while not exhibiting the worldwide scope of global warming, are still similar to our present concern in arising from the cumulative effects of many individual actions, each of which, regarded in isolation, appears to be unproblematic and not subject to legal sanction. For instance, the salmon-fishing streams of Scotland are a valuable natural resource, and the communities along them have developed quite successful institutions for ensuring the value of the streams is maintained, including private policing and legal penalties for overfishing and for polluting the water.

The many cases in which voluntary solutions to problems of collective choice have worked pose an empirical embarrassment for those who argue that “public goods” must be provided by the government. Most advocates of compulsory solutions to pollution abatement, for example, would assert that voluntary efforts will be vitiated by “free riding.” If individuals are not forced to contribute their fair share toward addressing these problems, this argument runs, each person rationally will hold back and hope others will pay for the proposed solution, since any free riders would gain the benefits (such as clean air) anyway. Since almost no one likes to be “the sucker,” it follows that the amount of resources devoted to the provision of the public good will fall woefully shy of the total that would be available if each person gave the amount he’d be willing to give if only he could count on everyone else pitching in equally. The sole solution that can be imagined is for the members of a society to create a “social contract” by which they are forced to pay for pollution abatement.

However, Anthony de Jasay notes in his book The State that this argument is severely flawed. If people cannot solve public-goods problems through voluntary cooperation, how can they rely on politicians’ promises to do so? There is no external authority to enforce those promises. There is only public opinion, the same thing that would enforce voluntary solutions. Moreover, government is itself a “public good” in the sense that free riders benefit from the efforts of those who try to get the government to produce public goods such as clean air.

Is Temperature a Public Good?

Another consideration is that the earth’s temperature isn’t such a public good after all. That is, certain people really do have more at stake, particularly if the warming is moderate. For example, if Manhattan became submerged because of rising sea levels, that calamity would not affect every human being equally. The residents of Manhattan and the owners of its skyscrapers would be hurt far more than people living in inland China. Because all the various potential dangers of global warming affect particular people more intensively than others, it is these groups that (in a free market) would have the incentive to reduce CO2 concentrations. For example, if rising sea levels would cause $10 trillion in damage to a comparatively small group of wealthy individuals, that’s a huge “pie” that the wealthy can offer others to motivate them to reduce emissions.

Despite my optimism about the potential to deal with environmental problems through voluntary means, I don’t wish to be misunderstood: If the official global-warming story is true, it presents a serious problem that humanity will find difficult to solve through voluntary means. But this isn’t a strike against voluntarism—of course a difficult problem will be difficult to solve! By the very same token, the government doesn’t do a terrible job at collecting stray dogs, because that’s a very simple task. When it comes to harder assignments, such as stopping terrorism or reducing teen pregnancy, the government’s record is quite a bit worse.

The very features of the official global-warming scenario that hamper purely private solutions would apply equally to government efforts. For example, even if the U.S. government passed draconian measures at home, that alone wouldn’t be enough if China and India don’t follow suit. And just as private companies in a free market may have an incentive to pollute if they can get away with it, so the state, under the influence of special-interest groups and run by leaders always tempted to ignore the public good in favor of increasing their own power and wealth, can have incentives to allow more pollution than is optimal. (It should be clear the “best” amount of pollution is not zero, because even using fire to cook generates some pollutants, and I doubt that anyone but the most misanthropic, fanatical nature worshippers want to reverse all of the last 40,000 years of human progress.)

As in all debates over public versus private choice, it’s inappropriate to measure a realistic free-market response to global warming against an idealized government program. We must try to envision what real people would do if their property rights were respected and compare that scenario with the probable outcome of actual politicians in today’s world being given a blank check in the name of saving the earth.

Government programs don’t ameliorate world poverty or sickness, and no libertarian would deny that these are serious problems. So even if manmade global warming is a real threat, why should we expect governments to get it right on this issue?

Politicians can enact policies from two general categories to achieve desirable outcomes, including the creation of high-paid jobs: 1) policies that work, but in ways that do not benefit politicians, and 2) policies that don’t work (and typically make matters worse), but which create the mirage of working in ways that do benefit politicians.

Under prevailing democratic arrangements, electoral survival demands that politicians appear to promote desirable social objectives with direct and decisive action that caters to organized interest groups. Even when such special-interest policies are socially harmful, as they invariably are, they still do more to promote the interests of politicians than policies that would promote broad social benefits indirectly by creating a setting in which people can pursue their various interests through productive interaction. The political problem with the indirect approach is twofold: 1) the benefits are created so gradually and spread so widely that few will notice them, and 2) even if the benefits are noticed, it will be difficult, if not impossible, for politicians to claim credit for them. As F. A. Hayek pointed out in volume three of Law, Legislation and Liberty, politicians “who hope to be reelected on the basis of what their party during the preceding three or four years has conferred in conspicuous special benefits on their voters are not in the sort of position which will make them pass the kind of general laws which would really be most in the public interest” (emphasis added).

When we look at policies aimed at creating high-paying jobs, we easily find examples where politicians preferred conspicuous “benefits” that actually harmed the public to inconspicuous benefits that really were good for the public.

Many policies would increase the number of high-paying jobs indirectly, and many would appear to increase the number directly but actually reduce those jobs and lower wages. The former policies all do the one thing necessary for higher wages and salaries—increase labor productivity—while the latter policies all reduce, or retard, labor productivity, and so reduce wages below what they would be otherwise. The political bias against effective policies is readily apparent from the following list and brief discussion. Consider first some policies that would increase wages.

Eliminate restrictions on imports: One of the most effective things the federal government could do to increase labor productivity and wages is eliminate tariffs and restrictions on imports. Reducing import restrictions increases real wages in two ways. First, it reduces the price workers have to pay for those goods and services that could be produced at less cost in other countries than they can be domestically. Second, it increases the competition domestic producers face from foreign producers, which directs workers into those employments in which they are most productive–in which they have a comparative advantage.

Increased productivity is both necessary and sufficient to increase wages, at least in general. No serious person can deny that there are costs associated with workers moving to more productive jobs, or that a few people will be unable to find new jobs that pay as much as the ones they lost. But no economy can prosper without open competition, which keeps all resources, including labor, moving from less-valued to more-valued employments (in the eyes of consumers) in response to constantly changing conditions. And even those who end up with lower wages because of the particular adjustments they are required to make still earn far higher wages than they would in an economy where they, and everyone else, are protected against having to make such adjustments.

End corporate welfare: Import restrictions are a form of corporate welfare, but unfortunately not the only form. Eliminating all forms of corporate welfare would increase high-wage jobs by reducing taxes and their distorting influence (see below), and allowing both domestic and foreign competition to direct labor and capital into their most productive uses, as determined by consumers, not by politicians catering to their special-interest clients.

Lower marginal tax rates: No matter how efficient a government is, it has to raise revenue to finance its activities, and that means imposing taxes. Unfortunately, all other taxes reduce economic productivity by 1) putting a wedge between the price suppliers receive and demanders pay, thus preventing mutually beneficial exchanges from occurring, and 2) motivating people to make decisions to avoid taxes rather than create wealth. These distortions are commonly called deadweight losses and are an inevitable cost of taxes over and above the opportunity cost of the money raised. Reducing the deadweight loss from taxation increases the effectiveness of exchanges between employers and employees at directing workers to where consumers would value them most, and increases the general level of productivity, both of which increase the real wages of workers. So an effective way of increasing the number of high-paying economy jobs is by lowering the marginal tax rate and expanding the tax base by eliminating loopholes, reducing the deadweight loss of taxes for a given amount of revenue raised. The lower the marginal tax rate the smaller is the wedge between what sellers receive and buyers pay, and the fewer the tax loopholes (along with a low marginal tax rate), the less the tax benefit from diverting resources from high-valued production to low-valued tax avoidance.

Avoid inflation: The federal government can do a lot to increase high-paying jobs by avoiding inflation. Inflation erodes labor productivity and lowers real wages, just as surely as it erodes the value of the dollar. The most destructive thing about inflation is that it distorts the information communicated by market prices, reducing the ability of market exchange to direct resources, including labor, into their most productive uses. Just as a yardstick ceases to be useful for measuring and comparing distances if its length is subject to sporadic change, so market prices are less useful for expressing and comparing values when the value of money is subject to sporadic changes. Also, inflationary distortions make it almost impossible to know what interest rate is appropriate when people borrow and lend money to finance long-term investments. So in an inflationary environment, many efficient capital investments that would increase the future productivity of labor—and increase future wages—never get made.

Avoid the Pork

Reduce pork-barrel spending: There can be no doubt that reducing pork-barrel spending would increase real wages by increasing the productivity of the economy. A major portion of federal spending is motivated by the ability of particular congressional districts or organized interest groups to capture benefits by spreading the costs over the entire taxpaying public. With those receiving most of the benefits paying only a small portion of the cost, the pressure is expand spending well beyond the socially efficient level. Resources are transferred from higher-valued uses to lower-valued uses (for consumers), reducing the real value of salaries and wages. Excess government spending is a negative externality, just like excess pollution, and the former is no less to erode real wages than the latter. If politicians worried about the negative externalities of pork-barrel spending as much as they claim to worry about those of excess pollution, the result would be less wasteful government spending and more high-paying jobs.

Eliminate the minimum wage: This would increase wages by increasing the human capital that, for many young people, is best acquired through on-the-job training. Minimum-wage legislation clearly creates unemployment among young people who, for a variety of reasons, including being trapped in dysfunctional public schools, don’t have skills worth the legally imposed minimum wage. The result is not just unemployment, which may be a short-term problem, but a reduction in the opportunities for many young people to acquire the skills and attitudes that will make them more productive over the long run. Even those who do get a job at the minimum wage are less likely to get one in which the employer invests in them by providing training opportunities at the cost of some immediate output. The minimum wage prevents many young people with little opportunity to continue their formal education to develop the skills necessary to earn a good income in the future by working at a low wage when they have few financial responsibilities. Eliminating the law would make it legal for our less-advantaged youth to have much the same opportunity for higher-paying future jobs as more fortunate youth get through college subsidies.

Reduce the power of labor unions: Eliminating some of the legislative privileges that empower labor unions would be an effective way to increase wages. Labor unions can, and do, increase the wages of some workers. But they do so by reducing the wages of others by enough to reduce wages in general. Because of legal privileges that unions receive, it is difficult (and sometimes impossible) for workers to qualify for some jobs without being members of a union. Thus unions can increase some wages by restricting entry into some occupations and rendering those workers less efficient with rigid work rules.

All these practices reduce the productivity of the general labor force. Restricting entry into some occupations increases the wages of union members who work in those occupations, but it increases the number of workers in other occupations where their skills are less valuable. This not only lowers their wages, but reduces the productivity and wages of workers in general by preventing them from moving into their highest-valued employments. By reducing the flexibility of employers to shift workers from one task to another in response to changing conditions, rigid work rules also reduce the productivity, and wages, of workers.

Industry-wide labor unions have also lowered general economic productivity through cartelization of workers. If the firms in an industry explicitly agreed to reduce their output to increase their prices, they would be in clear violation of antitrust law (from which unions are exempt) and subject to harsh penalties—including prison time for senior managers. On the other hand, the firms in an industry have little to worry about if output is reduced because of a strike by its union. So both industry profits and union wages can be increased by the inefficiencies of a cartel “agreement” that remains within the law only because it is brokered by a labor union. (I am not arguing for antitrust laws. Even if antitrust laws could be rendered immune to political considerations, which they have never been and never will be, they would still reduce the competitiveness of the economy because of the static textbook notion of perfect competition on which they are based.)

All these union-induced inefficiencies reduce output below competitive levels and therefore reduce real wages. These inefficiencies would be reduced and the real wages of workers would be increased by reducing the power of labor unions.

As I have noted, all the policies discussed have one thing in common—they would increase wages by increasing economic productivity. They also have another thing in common—they would increase wages broadly, indirectly, and gradually by establishing an environment in which people productively cooperate with one another through markets in ways that best serve their collective interest. This means that the better jobs and higher wages will not be readily noticed, and even when they are, they will not be seen as the result of can-do government actions for which politicians can easily take credit. So the effectiveness of these policies at creating the type of jobs that politicians are constantly promising to provide does not translate into much political support for them. Politicians would rather receive credit for appearing to create better jobs with counterproductive policies than not get credit for policies that actually allow better jobs to be created. We now consider some policies that are politically popular because they give the appearance of increasing high-wage jobs while actually reducing them.

Policies That Reduce Wages

Restrict imports: When politicians argue for increasing an import restriction or against reducing a restriction, they invariably claim that they want to protect high-paying jobs. An import restriction does protect some high-paying jobs, but at the cost of reducing the emergence of other, even higher paying, jobs, because of the general reduction in productivity that lowers average real wages. But the protected jobs are currently held by relatively few identifiable workers who are typically well represented politically and are fully aware of the benefits they receive from politicians who vote for a trade restriction protecting them from foreign competition. The resulting loss of even more productive jobs can be safely ignored by politicians since it is widely dispersed and not easily noticed—it is hard to miss what we never had. And even if the loss is noticed, the cause—the import restriction—is not easily seen.

Put corporations on the dole: Politicians oscillate between attacking business and praising it, depending on the political issue and climate. But they are constant in dispensing large quantities of corporate welfare that the general public pays for through higher taxes and lower economic productivity. The most common justification for this welfare is that it creates jobs. And indeed it does, but only by destroying the chance for more productive jobs that would have emerged if competition had not been restricted and consumers had been allowed to spend the money paid in taxes to buy what they valued most instead of paying for corporate welfare. Unfortunately, the jobs that are created are visible and easily seen to be the result of government policy, while the higher paying jobs that don’t emerge are invisible—it is difficult to miss what never was created.

Raise taxes: Politicians often call for higher taxes as the best way to promote economic growth and create more and better jobs. Supposedly higher taxes will reduce the budget deficit, which will reduce interest rates by reducing government borrowing. The popularity of raising taxes to increase good jobs seems to contradict the thesis of this article. It suggests that politicians are willing to take an unpopular action—raising taxes—to provide a general benefit—widespread economic growth and job creation. But raising taxes is not an effective way to increase economic growth and create jobs. Even if raising taxes did reduce the federal budget deficit, it is not likely to have much effect on interest rates. Interest rates are determined in a worldwide capital market, with rates often falling when the federal budget deficit is increasing and rising when it is decreasing. Second, increasing taxes seldom reduces the budget deficit, at least not for long. Even when higher taxes raise more tax revenue, the additional money is invariably used to expand government spending and pork-barrel programs, with spending growth typically outpacing revenue growth. The effect is to substitute public spending guided by political influences for private spending guided by economic considerations—a sure prescription for reducing productivity and lowering real wages. Also, with higher tax rates, special interests are willing to pay politicians more for tax loopholes, which introduce more productivity-reducing distortions in the allocation of spending and investments. The political cost of increasing taxes is more than offset by the political benefits from the plausible pretense that good jobs are being created while securing more of the national income to buy more electoral support.

Increase government spending: The list of benefits from more spending on highway construction, recycling, education, agricultural subsidies, parks, airport expansion, water-diversion products, and so on always includes additional jobs. But the jobs created are a major cost of these spending projects, not a benefit. The jobs necessary to build a road or recycle aluminum cans are filled by workers who are not producing value in other activities. Unless this cost is considered, the jobs created will be destroying wealth at the margin, since the value created by workers on government-funded projects will be less than the value (in terms of consumer preferences) they could be creating elsewhere. Political incentives make this misallocation of labor inevitable.

Regulate labor markets: Politicians can take credit for protecting and creating jobs by imposing a number of productivity-reducing restrictions on labor markets. To list two: affirmative-action enforcement pressures employers to hire workers on the basis of the racial mix of the communities in which they operate and increases the difficulty of dismissing unproductive workers; politically mandated employee benefits reduce the flexibility of employers to adjust compensation in ways that attract the best mix of workers to their firms at the least cost. (We’ve already discussed the minimum wage.)

The advantage of the policies that would create more high-paying jobs indirectly is that they do so by creating a positive-sum setting in which people interact in increasingly productive ways.The same increase in productivity that raises real incomes also increases the general level of wealth, enhancing our lives in a host of ways. For example, as wealth increases, infant mortality decreases, life expectancies (and the quality of life) increase at all age levels, poverty declines, the environment becomes cleaner, access to the arts increases, more leisure time becomes available, and jobs become safer, more pleasant and higher paying.

The problem with policies that try to create more high-paying jobs directly is that they do so with government transfers and protections that are negative-sum. Yet this negative-sum approach is politically compelling because politicians receive much of the credit for the benefits, while receiving little of the blame for the larger losses.

The likely answer will be, “To correct market failures.”

Economists have long understood that markets aren’t textbook perfect. Sometimes they fail, most notably when part of the cost of a person’s actions is shifted onto others who don’t consent to bearing this cost. Economists call such problems “negative externalities.” The term indicates that genuine problems arise whenever a decision-maker can foist at least some of the cost of his decision onto others who are external to it—onto unconsenting, peaceful adults.

Preventing such externalities is held to be the principal purpose of the state. Just as the state is duty-bound to prevent Jones from stealing Smith’s wallet, the state must also prevent Jones’s steel plant from pumping toxic chemicals into the air that Smith breathes, or at least compel Jones to get Smith’s permission before polluting.

While genuine externalities no doubt exist in markets, research shows that they are not so common as Economics 101 textbook authors and newspaper editorialists typically assume. For example, prior to the enactment of the Clean Water Act in 1970—which largely substituted bureaucratic regulation for the private property rights that previously governed uses of inland waters—the extent of water pollution in the United States was surprisingly modest and under control. American rivers and streams were emphatically not filthy dumping grounds.

A free people are remarkably creative in devising ways to peacefully “internalize” what would otherwise be externalities.

Government is certainly not the only feasible mechanism for dealing with such potential problems. As Professor Elinor Ostrom reports, “Extensive fieldwork has by now established that individuals in all walks of life and all parts of the world voluntarily organize themselves so as to gain the benefits of trade, to provide mutual protection against risk, and to create and enforce rules that protect natural resources.”

But even conceding that some externalities defy private, voluntary solutions, giving the state the power to deal with them by no means reduces their extent and severity.

First, merely giving government power is insufficient to ensure that this power will be used as intended. To believe that writing words on paper—“the Department of XYZ shall do such and such”—is all it takes to ensure that bureaucracies will carry out a task (and nothing but that task) is to believe in magic. Even if the tasks are not impossible, they are unlikely to be carried out unless government officials have the proper incentives, which they too often lack. One of the greatest follies of our age is the widespread gullible faith that words inscribed on paper following a particular type of ceremony performed in marble-domed buildings will automatically result in the outcomes described by those words.

Second, government by its very nature is itself a source of negative externalities. Even if it carried out every task assigned to it with great efficiency, reliability, and precision, it would unavoidably also create negative externalities—costs imposed on unconsenting, peaceful adults.

Sunday Sales

Consider a simple example: In some U.S. states people cannot buy alcohol on Sundays. As in many other instances, the majority here uses the state to bend the minority to its will without taking adequate account of the desires of the minority.

Imagine someone entering a voting booth to vote on a ballot initiative to outlaw Sunday alcohol sales. Perhaps this person has a genuine religious belief that no one should drink on Sundays. He votes for the initiative.

But what has this person done but unilaterally act to satisfy his own desires at the expense of others who wish to enjoy the option of buying alcohol on Sundays? Just like the factory owner who robs his neighbors of clean air, this voter robs his neighbors of something valuable. And the reason is that, when casting a vote, this person (just like the factory owner) doesn’t have to take the interests of his neighbors into account. He can costlessly impose his will on unconsenting third parties.

Careful readers might object, “No! Every adult citizen can vote. The voting process registers the preferences of both the proponents and the opponents of the ban. The losers in an election had their say. Their preferences just happen to conflict with those of the majority.”

This objection fails. The mere ability to express opposition to behavior that imposes costs on you does not alone protect your interests if those who wish to impose these costs remain free to do so. Suppose that you tell the owner of the polluting factory that you object to his stealing your clean air. Without an effective ability to prevent him from continuing to pollute, he will likely do so. That you spoke out against the pollution to the factory owner—that “your voice was heard”—doesn’t change the fact that the ongoing pollution imposes a negative externality on you.

It’s the same with bans on Sunday sales of alcohol. Each person who votes to ban these sales does so without having to take account of the preferences of others. By simply pulling a lever, each voter acts to inflict his moral views on peaceful others, making them worse off. The votes cast against the ban don’t stop its proponents from voting for it without taking account of the interests of others.

The greater the scope of government power, the greater the number of instances in which each of us, as a voter, can impose our preferences on others. Moreover, because the personal consequences to each voter of yanking this lever rather than that lever are nil, each voter is fundamentally irresponsible. Each can express his views about how others should live without in the least taking serious heed of the consequences to others. And whenever those who prefer to restrict the freedom of others are in the majority, the minority are obliged to obey.

A state that stands ready to coerce those with less political power to do the bidding of those with greater political power is a constant source of negative externalities to the losers. To promote the state as the solution to what few private externalities exist is a bizarre irony and a dangerous hoax.

Two recent, headline-making judicial decisions in civil cases offer striking reminders about why judges, juries, and legislators would benefit from instruction in basic economic principles. The decisions rendered in these cases involving personal relationship law turn economic (that is, common) sense on its head and are inconsistent with legal treatment of virtually identical circumstances under contract law.

In the first case, a young Texas man broke off his engagement to his fiancée, demanding that she return the engagement ring he had given her. When she refused, he sued. The judge ordered that she return the ring. It’s possible that the judge’s ruling in this case was colored by a personal engagement experience that went awry. Nonetheless, we cannot help wondering whether the judge who issued this ruling has ever sold a house.

The deposit, or earnest money, that the prospective home buyer offers to the seller when a contract is written serves as the buyer’s pledge of good faith. Earnest money is the would-be buyer’s pledge (in this case a formal contractual obligation) that he will work actively to fulfill the terms of the contract and bring the proposed sale to a successful conclusion. If the putative buyer backs out of the contract for reasons that are not within the control of the seller, the seller can legally claim the earnest money. We all know and appreciate the reason why this is so: unless specific provisions of the agreed-upon contract permit the seller to continue to market the property, it is understood by both parties that the seller will suspend such efforts and also work actively to conclude the sale.

In the absence of this legally binding pledge, moral hazard problems would make it much more difficult to buy and sell real estate. The person who had contracted to purchase a house would have no financial incentive to honor the contract, other than the fact that he hadn’t found another property more to his liking. Indeed, the hope of finding such a property might induce the prospective buyer to continue searching. If he found a property he liked more, he could walk away from the contract without penalty at any time prior to formal execution of the contract.

By the same token, the behavior of sellers also would be different. Knowing that the putative buyer might not honor the contract, the seller would have every incentive to continue to show the property to other prospective buyers. In the (normally unlikely) event that he could find another buyer willing to pay more than the first one, he would break the contract with the first and write one with the second. To forestall this possibility, which might indeed be damaging to the first buyer (who may have valued the property more than the contracted-for price), he induces the seller to stop looking for other buyers, by compensating him (via earnest money) for the implied costs that result from removing the house from the market. The seller, in turn, is protected from buyer opportunism by demanding sufficient earnest money to satisfy him, at the margin, in the event the buyer finds something better. Earnest money does not insure that real estate contracts are never broken. But it does imply that such contracts are only broken on good cause—that is, when the value to the prospective buyer of breaking the contract exceeds the lost earnest money. This market mechanism provides a remedy for contracts broken through bad faith, without the parties seeking resolution through the courts.

The Marriage Market

Earnest money contributes to efficient transacting in real estate markets. Engagement rings contribute to efficient relationship formation in what Nobel laureate Gary Becker refers to as the marriage market. The giver of such a ring pledges, explicitly or implicitly, to work toward achievement of a marriage between himself and his fiancée. By taking herself out of the general marriage market, the recipient of the ring puts herself at risk. Specifically, she risks that while she is off the market, so to speak, she will miss meeting someone else with whom she might have enjoyed a happy and fulfilling relationship. By accepting her fiancé’s ring, she gives up valuable opportunity, secure in the knowledge that if her fiancé dumps her, the value of the ring will compensate her for the costs implied by those lost opportunities.

Analytically, the fiancé’s pledge of good faith (purpose, incentives, and impact on behavior) is identical to that of a prospective house buyer. The judge’s recent decision with regard to the former is not only inconsistent with well-established contract law governing the latter, but also raises the costs of contracting between young people interested in developing long-term relationships with one another. We can only assume that if the prospective buyer of the judge’s house had backed out at the last minute, he would have been happy to return all of the earnest money pledged when the contract of sale first was written. It is precisely because individuals are not happy about returning earnest money that such money typically is held by a neutral third party.

Who’s Responsible for Seduction?

The second case, which was covered in major newspapers and several network television talk shows, centered on a married couple and the “other woman.” The husband’s affair led him to divorce his wife of 17 years and marry that other woman, who now, of course, is “the” woman. The other woman did not fall in love with the husband with specific intent to injure his wife. Nonetheless, the wife sued the interloper under a North Carolina law that can hold outsiders responsible for breaking up marriages. (The statute in question, which deals with alienation of affection, was abolished by the North Carolina Court of Appeals in 1985, but the state Supreme Court overturned that ruling.) A jury found that the other woman had seduced the husband away from his wife, and it awarded the jilted spouse $500,000 in compensatory damages and $500,000 in punitive damages.

This situation also has a marketplace analogy with well-developed contract law that makes economic sense. By way of illustration, consider what happens when Wal-Mart opens a new store. Via the heady allure of lower prices and a wide array of merchandise, Wal-Mart “seduces” customers away from the local Sears, which has been in operation for 30 years. The competition provided by Wal-Mart is welcomed by all of the local shoppers because they know that their lives will improve through lower prices, enhanced operating hours by both stores, a wider selection of merchandise, and so on. The owners of Sears likely will be unhappy at the prospect of losing customers, but they do not have legal recourse to collect damages from the “other company.”

In the language of legal and economics scholars, Wal-Mart has imposed a “negative externality” on Sears. That is, actions undertaken by Wal-Mart have made Sears worse off, even though there may have been no specific intent on the part of Wal-Mart management to do so. Their aim was to provide products that the public at large finds desirable, at prices that induce prospective customers to become paying customers. Legally, the fact that Sears is injured in this process is incidental, not deliberate. Negligence law does not apply either. Firms are not required to consider the possible adverse consequences of their actions for their competitors when setting prices or determining operating hours, the friendliness and appearance of their sales staff, the types and quality of merchandise carried, and so on.

There are hundreds of thousands of “other companies” in the business world. They “seduce” customers away from their competitors. It is this continuous process of widespread, intense seduction of consumers that forces firms that want to survive (either by forming long-term relationships with specific customers or by continuously attracting new customers) to constantly improve the quality of the goods and services they offer. The well-being of hundreds of millions of individuals, both in the United States and elsewhere in the world, is enhanced by these competitive seductions. Whether they actually induce individuals to walk away from a longstanding relationship or not is immaterial in this regard because consumers will benefit from improved quality and service from all firms, including ones they have patronized for years. Thankfully, these ubiquitous tempters and temptresses cannot be sued for building better mousetraps. If they could be, the capitalistic system that has made America the economic juggernaut of the twentieth century would collapse. The law in this regard has got it right in terms of making economic sense.

However, if a customer is obligated under the terms of a contract to purchase items from Sears and breaks that contract when Wal-Mart comes to town, Sears can collect damages for breach of contract. Note that Sears’s legal remedy is tied to the contractual breach—it can collect from the customers, not from Wal-Mart. If the courts did not enforce such a contract, it is uncertain whether Sears would have agreed even to locate in the town, as its financial well-being may hinge on fulfillment of long-term sales agreements with customers.

Similarly, the jilted wife in North Carolina should have been able to sue her ex-husband for breach of their marital contract. If the courts did not recognize and enforce the husband’s obligations to his wife, she arguably would be much less likely to have agreed to marry him in the first place. Fortunately, the adultery laws on the books in most states have this one right too. If the courts are not willing to support market mechanisms that facilitate development of long-term personal relationships, individuals will change their behavior, entering such relationships with greater trepidation and, accordingly, with increased use of formal legal provisions to hedge against entering a bad relationship. Such contracts would, for a variety of reasons, be very costly to write and enforce (not to mention unromantic), thereby increasing business for North Carolina lawyers and judges. This incentive notwithstanding, the people of North Carolina would be better served by having their state legislators and Supreme Court justices take a refresher course (or two) in economics, if not common sense.

As F. A. Hayek informed us in 1945, the advantage of the market is that it allows us to communicate with each other in a way that motivates each of us to consider the interests of others. We must look at the price system as . . . a mechanism for communicating information if we want to understand its real function. . . . The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. . . . It is more than a metaphor to describe the price system as . . . a system of telecommunication.^[2] So when people blame the market because baseball players earn more than teachers or because more is spent on bowling than on ballet (as if these were serious problems), they need to be told, the market didn’t do it. These critics are really blaming other people for having and communicating objectionable preferences. When people call for government to solve the problems caused by the market, they are commonly calling for government to censor those with whom they disagree.

Of course, the market often seems responsible for problems more serious than differences in preferences. The market is commonly blamed for layoffs and bankruptcies that shatter the hopes and disrupt the lives of diligent workers who play by the rules. But again, such problems result from people’s communicating with one another in ways that motivate a cooperative response. Layoffs and bankruptcies result when people are allowed to inform suppliers that the resources used to produce some products would create more value if used to produce other products. This information is communicated through prices, profits, and losses—forms of communication that get attention and motivate appropriate action.

Of course, no one enjoys being told that consumers would prefer that he or she go out of business or get a different job. Those who receive such market messages are understandably upset with what is easily seen as the ruthlessness of the market. But even they are better off living in an economy in which both good news and bad news can be transmitted through market communication. No matter how unpleasant the news, blaming it on the market is misguided. And using the bad news conveyed through the market as justification to impose political restrictions on markets is even worse.

Blaming the Messenger

If you got a call informing you that a good friend had died, you would not blame the telephone system for your friend’s death. And certainly no one would argue that the friend’s death could have been prevented if only restrictions had been imposed on telephone communication. But it makes as much sense to impose restrictions on telephone calls to prevent death as it does to impose restrictions on the market to prevent bankruptcy and unemployment.

Unfortunately, the market and the telephone system differ in ways that explain why people clamor for so many harmful restrictions on market communication. In the case of bad economic news communicated through the market, one group can use government to distort the message so as to deflect the bad news and improve its situation at the expense of others. For example, a firm about to go bankrupt can insulate itself against the negative communication of consumers by securing a government subsidy. Consumers, having less after-tax income to spend, now signal that other, more productive firms should lay off workers or go bankrupt. To continue the analogy, imagine that by imposing restrictions on telephone communication you could directly prevent the death of your friend (and receive all the credit that goes with such a noble accomplishment) by causing the deaths of two other people in such a way that no one would connect those two deaths with your actions.

Poverty is another item of bad news commonly blamed on the market. But this problem too would be worse than it is if it were not for the efficiency of market communication. People are poor not because of the market, but because they have little of value to communicate through the market. Blaming poverty on the market is analogous to blaming freedom of the press for the inability of some people to write well. No serious person would argue that the best way to help the inarticulate would be by discouraging people from communicating, or by restricting their ability to do so. Unfortunately, this approach is equivalent to what many government policies do in the name of helping the poor. Programs that provide transfers to people earning less than some specified income certainly discourage the type of market communication involved in developing and exercising productive skills. The minimum-wage law, union restrictions (sanctioned by government), and the Davis-Bacon Act prevent those lacking productive skills from communicating their desire to develop those skills by working at wages agreeable to both them and employers. The poor would be better served if we reduced the restrictions on market communication instead of blaming, and further restricting, the market for the message of poverty it allows the poor to deliver.

The Market and the Environment

Another common complaint against the market is that it causes excessive pollution. Again, the problem isn’t the market, but the lack of markets and the need for more market communication. Markets are said to cause excessive pollution because negative externalities are created by some market transactions. When I purchase gasoline, for example, I pay the oil company for the cost of obtaining, shipping, and refining the petroleum, and then distributing it to my local gas station. But I pay nothing for the cost I impose on those who are exposed to the pollution generated by my use of gasoline. Therefore, gasoline consumption and air pollution are excessive. Such externalities are used to justify government action to correct a market failure. In fact, most market failures are testimonials to the success of existing markets at giving a clear voice to people. The best policy approach would emphasize extending the benefits of market communication instead of distorting the communication occurring through existing, successful markets.

Pollution externalities result when people are effectively communicating the value they place on products through existing markets but, because we have no markets for the use of airsheds and waterways, cannot communicate the value they place on the environmental amenities lost as a consequence of producing and consuming those products. Unfortunately, government tries to correct excessive pollution by imposing restrictions on markets that are working well. The government approach to environmental protection has been to mute, or censor, market communication with bureaucratic restrictions on a host of business practices. Many of these restrictions are intended more to protect special interests than to protect the environment. These restrictions on market communication, even when they have reduced pollution, are one-size-fits-all mandates that insure pollution is reduced at far greater cost than necessary. A better approach is to expand the communication network by creating markets for the use of the environment with policies that emphasize property rights and such market-based approaches as transferable pollution permits.^[3] I acknowledge that some of these approaches create a less-than- ideal market and are subject to manipulation by organized political interests. But by enhancing communication, rather than stifling it, a market-based pollution control approach is superior to the existing command-and-control approach, which appeals to those who believe that the market causes pollution.

The market is the world’s most effective means for moderating the problems of scarcity by allowing people to communicate and cooperate with one another. Because it necessarily transmits a steady stream of information about scarcity, much market information will be seen as bad news. The temptation is to blame the communication system for bad news, and this temptation is exploited by interest groups constantly seeking justifications for manipulating information and censoring those with opposing views. So problems are worse than they need to be, because we restrict the market communication that is essential in responding appropriately to the inevitable consequences of scarcity. Until people understand that the market didn’t do it every time a problem is communicated through the marketplace, we will continue to be taken in by self-serving interest groups espousing policy recommendations harmful to the general public.

1.   James M. Buchanan, The Metamorphosis of John Gray, Constitutional Political Economy, Vol. 6, No. 3 (1995), pp. 293-95.

2.   Friedrich A. Hayek, The Use of Knowledge in Society, American Economic Review, Vol. 35, No. 4 (September 1945), pp. 519-30.

3.   See Terry L. Anderson and Donald R. Leal, Free Market Environmentalism (Boulder, Colo.: Westview Press, 1991) for an excellent discussion of ways to utilize market arrangements to protect the environment.

We operate under a free enterprise economic system that produces plastic milk jugs and redwood picnic tables. The market is therefore responsible for such environmental problems as too much plastic trash and too little conservation of forests. So goes a common belief, anyway. In fact, it is governmental failure to maintain and defend the institutions of a free market that is responsible for the environmental damage caused by private businesses.

In the case of solid-waste management, plastic companies and their customers escape from the cost of disposing of plastic after the consumer is finished with it.^[1] This is because most garbage collection is organized through the public sector. The cost of disposing of the plastic and the other waste is undertaken by the government, and a citizen is typically taxed without regard to the amount of trash he generates. Once the citizen pays his taxes, he has no incentive to choose environmentally sound goods because disposal costs are in effect free to him.

If, instead, there were complete privatization of the garbage disposal industry, those who generate trash would directly pay for disposal costs. The owner of a private dump tends to charge tipping fees that vary with different kinds of trash. The price will be significantly higher for material that creates toxic waste^[2] because the dump owner will be liable for any harmful leaks from his site. The hauling firm, which collects the garbage from the homeowner and must pay the tipping fee, will pass the price onto consumers. Consumers, knowing that they will have to pay more for the disposal of more plastic, will tend to substitute toward less costly, and thus more environmentally sound, containers. In the jargon of economists, the negative externality will disappear; the cost of trash disposal will be internalized, brought to bear on the responsible parties.

It is clear from this example that the negative externality currently related to solid-waste management is a governmental failure, rather than a market failure. By not allowing the free market to operate, the government pushes the costs of waste disposal onto the taxpayers. In a free market the price system accurately enables us to compare resources to determine which courses of actions are most economically and ecologically sound.^[3]

Critics argue that the market fails to consider environmental concerns. In Making Peace With the Planet, Barry Commoner insists that the free-market system conflicts with a social concern for environmental quality, and thus argues that ecologically sound production decisions must be implemented through planning.^[4] Commoner fails to realize that when we turn away from the market, we are unable to compare resources and their values. Nor does he realize that the incentive structure in the political sector fosters an economically unsound approach to the environment.

The distorted incentives that operate in the public sector are responsible for many of our forest removal and logging problems. The difficulty stems from the fact that 42 percent of all U.S. land is owned by government.^[5] The public forestry services do not operate by maximizing the value of their resources. Rather, they subsidize special interest groups who in turn support public ownership. For example, the U.S. Bureau of Land Management (BLM) uses a method known as chaining, which uproots trees, leaving holes and unsightly tracks, to remove trees from grazing lands. Although this costly method is seldom practiced in the private sector, the BLM has no incentive to minimize costs. It maximizes its budget by providing subsidized grazing rights for ranchers who in turn lobby for BLM expenditures.^[6] The U.S. Forestry Service subsidizes logging companies to cut down trees on public lands by building logging roads for them.^[7] The private firms thereby shift some of the costs of logging onto the public. Again, prices do not reflect the full costs of environmental destruction. Certainly if the business firms actually owned the land, they would better care for it because abusing it would reduce their prospects for future income.^[8]

Government ownership of so much land artificially encourages logging for another reason as well. Private firms with large landholdings are discouraged from using them for hunting or recreational purposes; the government provides parks for these purposes at a zero or nominal price. In the national forest surrounding Yellowstone National Park, the Forest Service charges no user fee for elk hunting. This reduces the value of elk resources on private land and discourages private firms from devoting their forests to hunting rather than logging. The low level of private development of recreational land is likewise due to the minimal prices the federal government charges for use of its recreational facilities.^[9]

Unfortunately, because the federal government owns the land, environmental groups generally have to work through the political sector. They lobby to persuade the government to preserve land, in conflict with the opposing special interests of logging, ranching, and extraction industries. If the demand for environmental amenities were instead channeled through the marketplace, tremendous progress would be possible.

Voluntary trade allows for creative deals in which all parties gain, or else the trade does not take place. If current leasing arrangements were changed, environmental groups could bid to purchase or lease public resources.^[10] On land that becomes their property, they can either preclude development entirely, or sublease the land for development on their own terms. When natural gas was discovered in the national Audubon Society’s Rainey Wildlife Sanctuary in Louisiana, for example, the group itself faced the tradeoff between strict preservation and drilling income, and struck a balance that allowed drilling under specified environmental conditions. The Audubon Society received royalties, which gave them the funding to purchase still more land for preservation.^[11] In this case both the Consolidated Oil and Gas Company and the Audubon Society gained. Economic efficiency and environmental interests were both served.

The key to environmental protection is a free market with defendable and transferable property rights.

1.   William Rathje, Rubbish, Atlantic, December 1989, pp. 99-109, calls this assumption into question.

2.   Walter Block, Resource Misallocation, Externalities, and Environmentalism: A U.S.-Canadian Analysis, Proceedings of the Twenty-Fourth Annual Pacific Northwest Regional Economic Conference, 1990, p. 93.

3.   Walter Block, Environmental Problems, Private Property Rights Solutions, in Block, ed., Economics and the Environment: A Reconciliation (Vancouver, B.C.: Fraser Institute, 1990), p. 287.

4.   Barry Commoner, Making Peace With the Planet (New York: The New Press, 1992), pp. 223, 227.

5.   Progressive Environmentalism Task Force Report, p. 27, National Center for Policy Analysis, Dallas, Tex., 1991.

6.   John Baden, Crimes Against Nature: Public Funding of Environmental Destruction, Policy Review, Winter 1987, p. 38, cited in Walter Block, Environmental Problems, Private Rights Solutions, pp. 296-297.

7.   Joseph L. Bast, Peter J. Hill, and Richard C. Rue, Eco-Sanity (Chicago: The Heartland Institute, 1994), p. 203.

8.   Terry L. Anderson and Donald Leal, Free Market Environmentalism (San Francisco: Pacific Research Institute for Public Policy Research, 1991), p. 71.

9.   Ibid., pp. 60, 62.

10.   Ibid., p. 93.

11.   Ibid., p. 90.