Capitalist theory clearly breaks down when it comes to the climate crisis – or many other forms of pollution.

Climate change is a result of the greatest market failure the world has seen. The evidence on the seriousness of the risks from inaction or delayed action is now overwhelming. We risk damages on a scale larger than the two world wars of the last century.

So said Sir Nicholas Stern (now Lord Stern), Head of the Government Economic Service and Adviser to the Government on the economics of climate change and development. That’s some pretty serious market failure we’re talking about. So why on Earth didn’t capitalism recognize the danger – and the opportunity – and go green? Why, in fact, is capitalism doing the opposite, and doing its best to obstruct self-preservation?

The green economy could have been capitalist, in theory. Let’s take a simple example: a business selling heating oil to houses. The current business model is simple: Sell oil, make profit. The more oil sold the more profit made. Immediately we see the inherent problem; it is in the oil supplier’s best interest that the customer be as inefficient and wasteful as possible. It is also in the supplier’s best interest to keep customers from switching off oil to something else, so the business invests money in persuading customers and legislators to stick with oil.

In theory, the business owner would recognize the long-term threats to his business: the oil will run out and it is causing global warming. In reality, business owners have proven very adept at ignoring problems, preferring to make as much money as possible now, and count on a bailout later if necessary. They know how to make money selling oil, and they plan to keep that racket going as long as possible.

A Better Business Model?

A better business model would be to sell comfort rather than heating oil or electricity. In this case, the supplier agrees to maintain a comfortable temperature inside a building, and is paid for doing so. This works for existing and new construction as follows: the supplier offers to provide a comfortable interior environment for a given price, and this creates an incentive to insulate, upgrade windows, add passive solar, and so on. The supplier pays for the upgrades because each increase in efficiency means more profit. This is a perfectly viable business – and clearly more efficient than the current one; why hasn’t it evolved?

Honest capitalists might say it’s because other business models are subsidised, and so the new model can’t compete. And that would be entirely true. So, if we cut the subsidies to Big Oil and coal, and put a tax on carbon pollution, will these other businesses have a chance? We’ll never know if we don’t try is the Libertarian motto, but there is another notable problem.

When businesses get large enough, they exert considerable influence on all levels of government. When large corporations form an ‘industry association,’ they act as a monopoly and their influence is enormous. One oil company would be difficult enough for any Member of Parliament to stand up to; the entire oil industry is overpowering.

Ah, the capitalists say, but if there were no government regulations, there would be no problem.

No government regulations are the most favourable ‘regulations’ possible! Corporations don’t behave well with less oversight and regulation; they’re much worse. Many of those sweatshops in Malaysia and the rest of the unregulated developing world are feeding giant corporations. The recent banking/economic crisis was the result of unregulated greed, as was the United States Savings and Loan crisis. Unions came about as a result of unregulated corporations abusing their employees. All the pollution in the world today is a direct result of us allowing it, meaning we could have but did not pass regulations against it.

It’s Our Fault

According to capitalist theory, the cause of the global disaster of climate change…is us. Not businesses, but consumers purchasing items that are bad for the environment. The problem is not the suppliers; they are mere innocents doing the bidding of the market. If only their customers would demand it, lament the businessmen, then business would be happy to provide it.

However, this conveniently overlooks the millions of dollars spent in advertising and in campaign donations to ensure that consumers don’t know about options or are confused about them, that potential, up-and-coming competitors never have a chance, that subsidies flow to the fossil industries, and so forth. There are many ways to prevent competition and to protect the status quo.

The problem is not government; some government will always be needed in civil society. The problem is that government has become corrupted: it is a source of power, and therefore will be appealing to the wrong types of people. Corporations are even worse because the accountability is lower. If politicians screw up badly enough, they’ll be tossed out. If a CEO screws up badly enough, the company he mucked up will get a bailout and he’ll get a massive golden parachute.

Unless, of course, there are government regulations prohibiting such things. The market does not and will not, because the market credo is Greed is Good. CEOs will not self-regulate; you can hardly ask an addict to refrain from heroin while throwing the stuff at him.

How to keep the government honest is another question for another day.

Why Does the ‘Market’ Not Respond?

But – why didn’t the market move into greener fields? Why, in fact, did the market resist this move, and is still resisting it, despite considerable evidence that many people are willing to go greener – and we must green the economy or die?

Momentum in a certain direction is one factor; many businesses large and small are set up to operate a certain way. Take the example above; if a company is making money selling heating oil, that company will resist changing to a new business model of providing comfort, even if it is a better business opportunity than selling oil in the long run. The real reason is not that ‘the company’ is on the oil-selling track, but that that’s how management makes their money.

Very few executives are entrepreneurs; they instead manage a business that somebody else built. The executives may be creative in narrow ways – certainly they have demonstrated how creative they can be when it comes to their pay packages – but they are not innovators. The executives want to keep doing what makes them money right now, and they will fight any attempt at change. They are highly risk averse to any threat to their paycheques.

This is a significant flaw in capitalism; the creative accountants are the ones getting to the top, not the innovators. And these wonder-kids with their MBAs are far more interested in innovative financial instruments for their personal financial gain than in running a real company.

Don’t Rely on the ‘Market’

The important lesson we take from this is that the ‘free market’ cannot be trusted. Unregulated markets favour mergers and acquisitions until there are only one or a few corporations in each niche. This is the case in Canada and the USA now to the point that the USA is considered a de facto oligarchy. At this point, competition is minimal, and there may be active collusion through ‘industry associations’ to operate in concert. This is part of the reason we’re currently experiencing inflation: oligopolistic corporations are making record profits but are not lowering prices to better compete. They are instead buying stock back, which boosts the stock price that executive bonuses and stock options are partly based upon. They are also, of course, paying fat bonuses to themselves and to shareholders. Further, such large corporations are able to exert excess influence on government, ensuring laws and taxes in their favour, and less oversight.

Capitalism degrades to crony capitalism the way communism degrades to dictatorship. Both are a way for the power-hungry to consolidate power, wealth, and position. We should expect this; it happened in the 1800s, too, with the Robber Barons.

The inevitable result under capitalism is crony capitalism, where a well-positioned few run the show. Unfortunately, this means the market is not free and is not adapting to changing realities like climate change. The solution is not deregulation, because this simply allows the boys at the top freer rein. The solutions are to re-establish a competitive market by breaking up large corporations, by creating publicly owned institutions that compete with corporations, and to eliminate corporate influence from government so that politicians serve their constituents, not corporations.

Until this is done, many large corporations will fight to preserve their current business model, no matter how outdated. From the RIAA suing their own customers to Big Oil funding climate change denial, we cannot expect corporations or their CEOs to behave rationally. They will fight to preserve their current business model because that’s what they know, and that’s where their power, profit, and prestige comes from.