When Markets Fail

As Oscar Wilde once said, “The cynic knows the price of everything and the value of nothing.” Today, decades of market fundamentalism have bred a world of cynics.

It's been too long since my last post, but I've been working on some other things.

For those following my work on competition policy, I released a co-authored policy paper with the amazing Vass Bednar on how the province of Ontario in Canada (I'm Canadian!) can better incorporate competition policy concerns while reviewing and updating its Consumer Protection Act. We argue that giving more power to provinces to enforce or engage with competition policy would align Canada with the US and Europe, which both take a federalist approach to competition policy.

I also wrote an op-ed in Fortune: Corporations break themselves up all the time. So why shouldn’t regulators break up Big Tech? (As a caveat: I don't think breaking up firms solves everything, or even all that much at the end of the day, but I wanted to call out bad anti-breakup logic that we hear ad nauseam from tech companies and their networks of paid academics and advisors).

In a few weeks, I'll be speaking at the Canadian Competition Bureau's Green Growth Summit, and have been researching the intersection of the 'green economy' and competition issues. Should companies be allowed to cooperate (collude) if it serves global environmental goals like net zero? Send any tips / hot takes.

Oh – I also wrote some personal reflections about radiolaria and eternity.

Now onto today's post.

A feature of modern life is a kind of cynicism about the state of the world and its motivations – that the underlying algorithm of our systems, namely the pursuit of profit above all other public goods, is so ingrained as to be unchangeable. That almost everything can be bought and sold – including indigenous land in the Amazon rainforest via NFTs...

But it wasn't always this way. As Oscar Wilde once said, “The cynic knows the price of everything and the value of nothing.” I want to argue that today, decades of market fundamentalism have bred a world of cynics. And while markets have many unparalleled benefits, market logic – and its primacy in setting the terms of economic life – is failing and constraining us.

I just finished reading Michael Sandel's classic book, What Money Can't Buy: The Moral Limits of Markets. The book's central claim is that: "The reach of markets, and market-oriented thinking, into aspects of life traditionally governed by nonmarket norms is one of the most significant developments of our time."

In recent decades, a kind of religious, philosophical fervour took hold which granted markets a supernatural ability to solve mass coordination problems. The alternative – central planning – had proven misguided and disastrous, so markets became the ascendant savior. "The Market" became God-like in its omnipotence and omniscience – all powerful, and all knowing. Markets succeeded where human wisdom failed.

In this way, market triumphalism steadily – and perniciously – altered our collective mind's eye and the texture of our social fabric. Sandel claims that we "drifted from having a market economy to being a market society."

In truth, there is no one monolithic 'Market' – there are many simultaneous markets co-existing together all at once. Everything, everywhere, all at once. And each of these markets is constantly in flux, governed by various formal or informal rules, and each collapses or expands with a high degree of unpredictability. The idea that there is one, solid structure called "the market" is of course a figment of human imagination. But the preoccupation that markets are the best way of organizing human life is the market fundamentalism that I'm referring to.

Markets are important features of how we structure economic life, and they are effective in many regards – essential. But because market logic is so prevelant, we've forgotten that there are other effective ways of allocating goods like: queues or lines, merit, need, lottery, and gifting. Economists struggle most with gift or relational economies, despite them being the way that humans related to one another for most of human history (see: Debt: The First 5,000 Years by David Graeber).

Economists have tended to assume that markets are morally neutral (and indeed morally preferable!), because they allow each individual to maximize their own utility or preferences. But this ignores that markets can fundamentally alter the quality and nature of what is exchanged through them. Markets can even alter our views about those goods or services.

Economist Fred Hirsch called this “the commercialization effect” in which supplying a product or service on commercial terms "rather than on some other basis – such as informal exchange, mutual obligation, altruism or love, or feelings of service or obligation" changes it.

Market logic is now applied to huge swaths of public life, from healthcare and daycare to blood banks and naming rights for sports arenas. Should women sell their eggs? Should you buy an apology letter written by someone else? Pay a child for good grades?

There are no easy answers to these questions, but what is certain is that the introduction of market logic into domains previously untouched by them does alter how we think, feel, and act. And it may ultimately undermine our objectives.

A Market for Carbon

What about paying for carbon credits? Should we turn the race to decarbonize the planet over to the efficient process of marketization? Obviously we've already done this, for many decades and are continuing to do so. How well is it working? According to the IPCC, not nearly fast or effectively enough.

This week, I learned about a collective of six Canadian oil companies – who call themselves the Pathways Alliance – who are asking the federal government to backstop the price of carbon credits using a mechanism called "carbon contracts for differences." Under this scheme, the government guarantees a price for certain emissions reductions – it fixes the price of carbon offset credits. The oil companies argue that they need this incentive and assurance to invest in carbon capture, utilization, and storage (CCUS) technologies which will help them reach net zero targets.

They fear that too many carbon credits will be produced (i.e. we will decarbonize too quickly or too effectively – or perhaps that there will be fraud in how carbon credits are accounted and allocated), and that the credits will ultimately fall in value, making their investments uneconomical. This from The Logic: "As long as that market is liquid, so to speak, with enough buyers and sellers, then the system works perfectly, [and] the pricing incentive is maintained. It falls apart when the intensity benchmarks are so generous that everybody's getting credit and nobody's buying credits anymore." – Dale Beugin, VP of research and analysis at the Canadian Climate Institute.

This is striking. Keeping the market 'liquid' requires that there be enough polluters incentivized to continuing buying carbon credits. As a result, using markets as the sole mechanism for incentivizing carbon removal means that we've baked in an incentive to keep polluters and removers in a kind of economic steady-state. This means the system is incentivized to have many actors continue polluting.

Keep in mind, that this has been a year of record high profit margins for big oil companies. Canadian oil sands companies are having "a hell of a year" and are "flush with cash" after announcing record profits. The request to backstop carbon markets is in addition to the large federal subsidies the Canadian oil majors are already slated to receive through tax credits – 50% of capital expenses for most CCUS projects through 2030. It is strange that those so committed to market fundamentalism want to essentially price fix the carbon market – in a form of bid rigging against the taxpayer.

And, as we're learning, carbon markets (like other financial markets), end up fostering a lot of financial engineering and accounting tricks. Author Simon Lewis puts it this way "Net zero increasingly involves highly questionable carbon accounting. As a result, the new politics swirling around net zero targets is rapidly becoming a confusing and dangerous mix of pragmatism, self-delusion and weapons-grade greenwash."

Incentives

Another key takeaway of Sandel's book is that incentives are not always additive. Adding a financial incentive to other incentives (like civic duty or a desire for environmental justice) are not necessarily better than relying on the moral imperative alone. This is because the introduction of market logic can degrade or corrupt the very process it sought to bolster. This is something that ESG and win/win impact finance proponents have failed to appreciate, with the conflation of the moral and economic case for action.

Sandel points out that markets can crowd-out non-market values – values that don't revere personal utility or exchange value above all – like honor, sacrifice, civic duty, and many others. Fairness and corruption (or the crowding out of nonmarket values) form the basis of most moral objections to market logic. Despite our cynicism, there are still some things we hold sacred.

I've written previously about the pitfalls of using either the moral or the economic case for action (both can be tricky and ineffective). But the economic case is instrumentalist – it implies that if the economic incentive breaks down for any reason, the cause it ‘proved’ should be abandoned. For example, take the economic case for investing in women or racalized groups – that their funds, or their leadership helps companies outperform. The causal ties are already difficult to prove, but if a company or a fund begins to underperform, should inclusion efforts be abandoned? Of course not.

Ultimately, we need to recognize that economic incentives only get us so far. That market logic is not the only way of organizing civic life or catalyzing action. As more advocates seek to marketize nature – like using water markets or putting 'natural capital' on the balance sheet as a financial 'asset' we should first take pause. Is this the best approach?

I'll end with Sandel's final words:

"The era of market triumphalism has coincided with a time when public discourse has been largely empty of moral and spiritual substance. Our only hope of keeping markets in their place is to deliberate openly and publicly about the meaning of the goods and social practices we prize...And so, in the end, the question of markets is really a question about how we want to live together. Do we want a society where everything is up for sale? Or are there certain moral and civic goods that markets do not honor and money cannot buy?"