Mark Pennington: Green Leviathan or the Minimal State?

Continuing with excerpts from great books on environmental and energy issues (see last week’s posts here), below is an excerpt from Mark Pennington’s brilliant new book Robust Political Economy. “Robust” political institutions are, according to Pennington, those “institutions that perform best given that people 1) have limited knowledge and  2) are prone to self-interested behavior.” He argues the case that market institutions are better suited to deal with these realities than governments. In this passage, he applies these two criteria to environmental protection.

Robust Political Economy was released in 2011

Classical liberalism does not question the view that environmental problems arise when private actors are unaccountable for their actions. What it does question is the supposition that political intervention, whether of the ‘command and control’ or ‘price-based’ variety, is the best way of ‘internalising’ the relevant externalities. There are two dimensions to this account which reflect the focus on the conditions required for a robust political economy of institutions and decisions.

The first line of analysis draws on the Hayekian understanding of the knowledge problem. Seen from this perspective, neo-classical approaches to environmental policy repeat the socialist calculation error by assuming that the knowledge necessary to correct for ‘market failures’ is somehow ‘given’ to policy-makers. In an environmental context the assumption is that trade-offs between environmental and other objectives are known and fixed.

Viewed through the Hayekian lens both command and control and price-based policy mechanisms are variations of central planning and may be inappropriate because the primary environmental problem is typically not one of giving people the right incentives to act on the basis of known environmental values, but of discovering what the relevant values are. Knowledge of these values is fundamentally dispersed throughout society and evolves in light of the changing ideas of individuals and organisations as they interact with each other and the natural world.

Mark Pennington is a professor at the University of London

The costs and benefits associated with environmental externalities may only be discovered through the decisions that people make when confronted with a range of competing alternatives, and where there are profit and loss signals or equivalents to signal the content of the relevant choices. Just as the process of central economic planning is incapable of generating and accessing sufficient information to set other prices in the economy at a ‘socially optimal’ level, so environmental planners lack the capacity to set environmental taxes and subsidies at the appropriate rate or to choose the best balance between regulatory or price-based policy tools.

The second dimension of the classical liberal analysis turns to the question of incentives. While misaligned incentives that enable individuals and groups to externalise costs are an important source of ‘market failure’, it cannot be assumed that the policy process will result in the appropriate realignment of private and social costs. Indeed, from a public choice perspective the collective action problems that can lead to examples of market failure also occur within the political process where producer groups often find it easier to organise collectively and to overcome internal free-riding problems than the consumers and taxpayers who frequently pay the costs of the policies supported by organised ‘political interests.’

These processes may best account for widespread ‘democratic failures’ such as the persistence of environmentally damaging subsidies in agriculture, logging, coal mining and the construction of subsidised dams and roadways. From a classical liberal perspective, it is hard to see why policy-makers should be trusted to correct ‘market failures’ when the incentives they face often lead to the introduction of inappropriate regulations and to distortions in market prices which generate environmental costs.

(excerpted from Chapter 9, pages 228-230)