Saturday, May 16, 2009

Fair Value, Fair Costs-Tha Failure of Capitalism to Properly Price Social, Environmental, and Long-Term Goods.

In trying to understand processes of environmental degredation, concentration of dangerous industries in low-income areas, and the prevalence of low-cost, high impact products in modern society, I look again to the relationship between short-term costs and long-term impacts on society and the environment. Capitalism as an economic system excels in assigning costs based on the cost of production and the demand for the good. These costs are based on short-term calculus, and are liable to change relatively rapidly to respond to changes in the labor market, the demand, and raw material prices. What it does not consider are the long-term social and environmental costs that go along with the product.

The average plastic toy from China or McDonald's Happy Meal trinket is almost costless in the short term; however, I believe that a very different picture on the cost of such items would appear if additional liabilities arising from the future cost of environmental clean-up were factored in. Similarly, the social cost in addition to the environmental cost from locating polluting industries, or even building these industries, in low-income areas is based on a short-term calculation of how much resistence would be faced in one location over another. Right now at my work, I am helping to route a major transmission line across a state, and several rich, powerful people are able to get it moved, while other's with less influence just have to suffer. In these previous examples, the decision on where to locate or how to price are based on a calculation of cost versus profit. If the true burden to the social and environmental system was calculated, the picture would likely appear different.

I believe it should be a major role of regulatory agencies to examine products with high externalities in order to understand the longer-term social and environmental costs and adjust through taxation the costs of their actions. Failing to address these problems is like taking out a high interest loan, where short-term gratification becomes replaced by impossible debt in the future. The costs of cleaning up or rebuilding areas broken by pollution or other externalities from economic growth will far outweigh the short-term value we derive because we will pay "interest" in the form of higher environmental, health, and other costs in the future.

I mention the social and environmental costs, I also believe that a role exists in helping to moderate and determine value. The recent foreclosure crisis comes on the back of the internet bubble, before which was the savings and loan bubble, stretching back to when margin-purchased stocks helped tip the Great Depression. Regulation after the 1930s helped to prevent crisis like the one we are in now by moderating the boom tendencies of the market through preventing opaque business practices and impossibly large and complex companies (like AIG, which could not have done what it did had regulation on derivatives not been removed). I have been forced much to my dismay to listen repeatedly to people arguing how more financial regulation will increase credit costs for consumers. Good, I say. We have made borrowing too easy and too cheap, overestimating the value of short-term consumption and underestimating the long-term cost of high debt. Our focus on short-term policies, short-term credit, short-term prices are I believe central to our inability to understand value and to fairly price products and services, and will lead inevitably to greater, more damaging costs as time passes.

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