Capitalism

The nature of the capitalist economic system and its effects on the natural environment is a subject of much debate. This article begins by exploring the basic economic theory that explains why capitalism may result in patterns of production and consumption that ultimately lead to environmental degradation. Next, the article explicates two polar views on capitalism and the environment, first examining the steady state argument, which proposes that the economic freedom that forms the basis for capitalism is at the heart of the environmental crisis. The counterpoint view of the market apologists is then presented; this group of thinkers contends that economic growth and the technological innovation spurred by the market system will produce solutions that will ultimately reduce or even solve environmental problems. After exploring these polar views, this article concludes with thinking in microeconomic theory, which has proposed some ways to encourage environmental protection within the context of the market system.

As awareness of environmental issues grew in the 1970s in the United States, scholars began thinking about the possible systemic causes of environmental problems. One influential group of theorists argued that the very nature of the capitalist system itself was to blame for environmental problems. The basis for their argument was the so-called tragedy of the commons. That is, there are certain common resources (such as air, water, etc.) for which there are no property rights; therefore, in an unregulated market system there is no disincentive to overuse and exploit these common resources because there is little direct cost associated with their use (or abuse) to individual consumers or firms. One of the shortcomings of capitalism is the inability to extend property rights to common resources, which ultimately creates incentives to exploit the environment rather than to protect it.

Using the lens of negative externalities, we are able to get a slightly different view of the same underlying problem. Simply put, an externality is an effect resulting from some market transaction that affects a third party (or parties) who is not involved in the transaction. To take a simple example, consider the production of electricity using coal. In a totally unregulated market, the electric company would produce power by burning coal and sell the power to individual consumers or firms. There would be various costs associated with the electric company's production of power such as the cost of coal, wages for its workers, the cost of plant maintenance, and so on. But this market transaction would also produce externalities in the form of pollution; in the process of producing power, the plant [Page 48]would release emissions into the atmosphere, contributing to air pollution, global warming, and so on. This raises the dilemma of who should pay for this externality. In a completely unregulated market, no one would pay, at least directly, because there is no market for clean air. No one owns the air, so no one can charge the electric company for using (or polluting) it because air is a common resource owned by everyone.

The problem with capitalist production, then, can also be thought of as a problem of uncompensated externalities. Of course, there are countless activities other than power production that also produce negative environmental externalities. Examples include driving, land development, use of recreational and natural areas, and consumption of resource-intensive products; many of our day-to-day activities have environmental side effects that are hard to quantify in exact monetary costs.

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