Economic Tools: What Economic Policies Can We Find in Our Utility Belt?
11 minute read
Updated on: 29 May 2021
What economic tools are in our utility belt that could help us fix the problems caused by growth and capitalism? This chapter will look at how we can help make businesses and individuals be more socially and environmentally friendly.
How can we ‘adapt’ our current economic system?
Some economists have argued that we should move away from capitalism and design a new economic system. However, others argue that this would be more costly and could risk people’s wellbeing . We’ll go into all this in a later chapter. For now, let’s look at our options to improve capitalism instead .
Before we begin discussing different policy options, it is important to note that this chapter will focus on policies and “tools” that are dependent on the continuation of our capitalist system. They are designed with a practical mindset and are not radical transformations of our current economic system. We’ll look at more creative and transformative approaches in a later chapter.
For now, let’s focus on the middle ground between socialism and capitalism.
This chapter will focus on these solutions. Let’s begin with carbon labelling.
Carbon labelling tells people the quantity of greenhouse gases that were emitted as part of a product or service. People are then aware of the effects of what they buy, and can choose products with lower emissions . This then encourages businesses to reduce their emissions, so people choose their products .
Think about it like how food is labelled with the amount of salt and sugar it contains except, instead of salt and sugar, it’s greenhouse gases. Many countries have laws which means businesses have to label salt and sugar amounts; laws could make this the same for greenhouse gases.
One of the most important things to think about is whether there are any loopholes that businesses could take advantage of.
For example, companies could use carbon labels for greenwashing. This is when a company pretends to be more environmentally friendly than it actually is .
For example, a car company could claim their cars are all green due to buying carbon offsets, when in reality these offsets are only worth one year’s use of the car. Thankfully groups like ClientEarth work to stop greenwashing by companies putting up misleading ads .
Crunching the numbers and working out how much of each greenhouse gas was emitted per product is pretty complex too! Companies would need to pay people to work this out, which would be especially difficult for small businesses.
What people think when they’re deciding which product to buy is important too! If they don’t trust the labelling system, or think low-carbon products are more expensive, that could make this solution less effective.
But instead of leaving it to the consumer to choose sustainably, let’s look at the tools to force the companies themselves to be more sustainable.
We could try to make companies dematerialise. This means that they should try to use less material and produce fewer emissions while still making sure their product or service works.
Do you remember the last time you were able to successfully fix your broken phone, dishwasher or radio? No? Well, you’re not alone! Many companies actively try to make their products harder to repair so you either have to pay them to repair it or buy a new one.
Some products which used to have screws are now glued instead, making them more difficult to repair.
The right to repair movement has been fighting to make sure customers can easily repair their products, make the product last longer and therefore waste fewer resources.
On a similar note, have you ever noticed how some electronics seem to magically stop working after a while? Or how when you buy affordable clothes, they don’t seem to last as long ?
This isn’t an accident! Lots of companies deliberately design their products to break after a short amount of time, so you have to buy a new replacement and they make more money.
Subsidise green investment
A subsidy is government money (from taxes) given to an industry to make a product or service cheaper.
This is best explained with an example: say the government thinks it would be good if people bought electric cars. In order to encourage people to buy electric cars, the government will pay some of the cost of (i.e. subsidise) every electric car sold. People will be more likely to buy an electric car now because this subsidy makes them cheaper.
The same principle applies when the government wants to increase investment (when people put money into businesses expecting more in return) in sustainable businesses.
In other words, the same way the government can subsidise an electric car, it can also subsidise the investment in a business. This makes the decision to invest sustainably more appealing compared to other investments .
Alternatively, governments can make investments in unsustainable businesses unappealing. They could do this by putting rules on the industry which limit profits, as this would then make investments less worthwhile. If you are having some trouble understanding investments you can find out more about them in our next chapter!
Make businesses pay for their environmental impacts
In chapter one, we talked about negative externalities and how they are extra costs that are not directly involved in the transaction taking place. These negative externalities mean that there’s a difference in the price you pay for something and the costs of your purchase to society as a whole.
If governments forced a polluting business to pay for this cost difference, maybe they would reduce their pollution levels in order to save these costs and make more money.
However, there is a theorem that says government rules are not needed and that people should sort out the problem themselves. This would be through negotiations and paying money to benefit both groups involved.
This theorem, however, relies on knowing who owns each resource or place.
Why is that? Let’s have a look at another example to find out.
Picture a farmer who uses fertilizer on their crops so that they grow better. The fertilizer, however, goes into a nearby river and kills fish, which is bad for fishers. This killing of the fish is a negative externality, because it is a cost to society which is not paid for when people buy the farmer’s crops.
The farmer is the one causing the negative externality, but if no-one owns the river then it’s tricky to sort out the polluting fertilizer. The farmer and fisher will argue over whose responsibility it is and will fail to solve the problem.
Coase’s theorem says the solution is to make it clear who owns the river, and let the fisher and farmer decide how much should be paid to the river owner for a level of fertilizer use that both are happy with. For example:
If the farmer is paid enough to make up for having fewer crops due to using less fertilizer, then the externality is fixed and nobody loses out. (Although ideally, the farmer would adopt more sustainable farming methods so that their fertilizer needs were reduced anyway!).
This theorem, however, only works when property rights are able to be clearly defined, as is the case in the above example (either the farmer owns the river or the fisher does). Putting a monetary value on the right to pollute can also be problematic because, as long as they can pay for it, individuals or businesses can keep polluting no matter what harm it causes to the environment .
The most urgent and complex negative externalities we currently face are greenhouse gas emissions. It would be quite difficult, if not impossible, to give ownership of the atmosphere to someone and so the theorem does not work in this case.
The policies we talked about in this chapter are only a handful of what’s out there. We can clearly see that we have a lot of tools that can alter the current capitalist model to meet more of our social and planetary needs. However, they may need to be tailored (adjusted) to suit different countries depending on their history, resources and requirements.
Furthermore, we’ve seen how a lot of these policies can prove quite controversial and might not always work. This is why some think it might not be possible to save capitalism. For now, onwards to financial markets!Next Chapter