Capitalism and the curse of external effects

Abstract

The most celebrated pronouncement in economics – Adam Smith’s on the “invisible hand”: “By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it” (Smith, 1776) – today looks as outdated as the Commandment: “Thou shalt not bear false witness” (Matthew 19:16–19). Instead of a competitive market, where providers meet consumers’ demands, we have at the core of the economy a nexus of dominant firms, the activities of which bring more harm than good: abusers deeply indifferent to the welfare of the people, particularly of their health and the environment in which they live, rather than providers of goods and services meeting their needs. To maintain their dominance, they cover up the harmful effects of their activities, they manipulate the relevant information – scientific knowledge in particular. In democracies they marshal their outsized wealth and power to subvert representative and administrative institutions, the legitimacy of which they hollow out, hence still increasing their domination. In authoritarian regimes, under various forms of state or crony capitalism, firms and public authorities are tightly interwoven; only to the extent they deem it necessary to “keep them happy” – that is, quiet – do they worry about ordinary people. In “market capitalism”, it’s not market, it’s capitalism as it functions today that is the culprit (see, for instance, Philippon, 2019a, 2019b).1 Even worse are the Chinese version, the defunct Soviet one, and various forms of crony capitalism in developing countries. Mark Twain once said, when reporting about the “water wars” along the Colorado River: “Whiskey is for drinking, water is for fighting about”. In this chapter we illustrate – mainly with references to natural capital, climate in particular, and to public health – another dichot-