Adam Smith Would Be Shaking His Head

Adam Smith proposed in his 1776 book, “An Inquiry into the Nature and Causes of the Wealth of Nations,” that if each individual in a society operates in his own best interest to maximize his economic gain, an “invisible hand” would guide his actions so that the best interests of the society at large will be served. Smith was a religious person, and he believed that the “invisible hand” was a benevolent god.

This essay will show that Smith’s notion, if it had any validity in the 18th century, is emphatically NOT valid in the 21st century, and was equally invalid for most of the preceding two.

In the early days of our country, with a vast, uninhabited and rich land, the emphasis was on settling the land and exploiting those riches as rapidly as possible. Fortunes were made in timber and gold with little thought given to environmental degradation, depletion of nonrenewable resources, etc. If you owned the land, you could do whatever you liked with it…even if the results affected surrounding areas. Neighbors were few and far between.

As the population density increased, it became clear that uncontrolled exploitation could not continue, and eventually laws were passed prohibiting hydraulic mining, for example, which devastated vast areas in California in the 19th century, destroying habitat for fish and other wildlife, clogging rivers with silt and poisoning the watershed with toxic runoff. If they had followed Adam Smith’s ideas, hydraulic miners might still be operating today. Apparently, it was a profitable venture for the owners.

What happened? It became clear that the costs of some actions are not necessarily borne by the people responsible for those actions. The destruction caused by the hydraulic mining operations was evident over a hundred miles away in San Francisco. Even then, over a century ago, people began to realize that one of the necessary functions of government was to protect society from harmful actions by individuals.
Today, with vastly increased population and tremendous pressures on our ecosphere from continued drawdown of nonrenewable resources and pollution and degradation of the environment, Adam Smith’s ideas are even less applicable. An industrial polluter can affect millions of people with a single accident that spills, for example, toxic effluent into a river or an aquifer and poisons the water supply of a city.

On a smaller scale, every driver of a vehicle that burns hydrocarbon fuel is consuming a nonrenewable resource and contributing to global warming and acid rain. In the U.S., there are other negative side-effects…contribution to the trade deficit and economic dependency on foreign nations in an unstable area of the world. The fact that oil revenues are probably used to fund terrorist activities directed against our nation is the final straw.

So what is the REAL cost of a gallon of gasoline that I put in my car? And isn’t that what I should be paying for the privilege of burning it? Or should I, like the hydraulic miner of the 19th century, be allowed to continue to do destructive things without any limit?
It would surely be in the best interests of our nation…and the rest of the world…if I limited my consumption of gasoline. Why doesn’t our government try to provide incentives to conserve petroleum-based products? In fact, it does the opposite. To keep prices low and encourage consumption, they give the oil producers incentives to produce more by offering oil depletion allowances. This keeps the price of crude oil and its derivative products artificially low. The oil depletion allowance reduces the tax bill of the oil companies, so it reduces federal tax revenues. Taxes not paid by oil companies must be made up elsewhere…in higher taxes on the rest of society, both corporate and personal, reduced services, and higher federal budget deficits. We the people are, in effect, paying that oil depletion allowance. In return, gasoline prices may be slightly lower. Surely oil company corporate profits are higher. But who pays the environmental cost of this fiscal trickery?

For the most part, nobody is paying it…yet. Many of the effects of fossil fuel burning are yet to be felt by the world population. Some northern hemisphere nations…Canada and the Scandinavian countries in particular…have had large-scale die-offs in their boreal forests caused by acid rain. The causes and effects of global warming…especially the human contribution to it…are subject to much debate, but the vast majority of scientific experts believe that human activities are causing a significant increase in average worldwide temperatures. The observable effects…melting of glaciers and polar icecaps, the resultant rising ocean levels, and increased violent storm activity caused by higher ocean temperatures…are only now beginning to be felt. Future generations will be the bill-payers for our current activities.
Which brings me back to Adam Smith. What he did not foresee is that our actions today will have consequences for future generations. What makes perfect economic sense for a corporation today may cause, or contribute to, an environmental catastrophe twenty, fifty or a hundred years from now. It seems abundantly clear that we cannot rely on the “invisible hand” to regulate human activity in today’s world. Government regulation on a global scale is essential to protect this planet for future, as well as current generations.

It must be emphasized that this is a global problem. Pollutants in the atmosphere, the oceans and in continental freshwater aquifers do not recognize national boundaries. Also, if businesses are going to be burdened with additional costs, these costs should not give unfair competitive advantage to anyone.

Many corporations view such regulation as meddling in their business affairs. They consider rules that limit pollution of the atmosphere or water supplies to be onerous burdens that affect their bottom line. There is an insidious tendency to stonewall and delay any attempt at regulation, often by lobbying the government to commission endless studies before any regulations are enacted. Currently, there is widespread denial of global warming in many industry-oriented groups because reduction of greenhouse gas emissions in many industrial processes would be costly. The lobbying effort in this case was so successful that the federal government actually withdrew from an international treaty (Kyoto Accord) that established voluntary limits on  greenhouse gas emissis by all developed nations. The US, with 5% of the world population, is responsible for 25% of the world greenhouse gas emissions. The restrictions placed on the US by the Kyoto Accord were drastic. Possibly they were too drastic. That could have been negotiated. But the industry-funded lobbyists and influence-peddlers wanted more, and they got it…complete withdrawal from the Accord. The loss of international goodwill from this act is incalculable. It contributes to our growing image as a rogue nation…starting wars, breaking treaties, bullying and intimidating other nations. This is a dangerous, possibly self-destructive path for our nation to take.

These actions may be in the best interests of some US corporations, but I think even Adam Smith would be shaking his head.

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