Tuesday, September 27, 2011

Is the term "markets" useful?

Interesting soapbox going on over at Ecosystem Commons... the proposal is that the term "markets" might be too limiting (or misleading? or incomplete?) to describe what is actually happening in ecosystem services policy.  I think the easy answer is "yes", but that doesn't get at why the term "markets" is so irresistible to policymakers.  My response below:

Agreed -- the concept of “market-based” policy is becoming applied with so broad a brush that it threatens to mean nothing, similar to the argument about “ecosystem services” themselves.  So you get the strict economists like Jim Boyd and Bob Costanza meaning very specific and measurable things when they talk about “services”, and then you get the Millennium Assessment accused of kitchen-sinkery by same.  I’ve always found it faintly absurd that programs like South Africa’s or Australia’s are trumpeted as “market-based!” when in fact they establish a government monopsony (single-buyer market) transacting only as many credits as the state-defined environmental goals called for.  If this isn’t Keynesian demand-management, I don’t know what is!  Even in the archetypal US wetland compensation example, supply and demand are entirely determined by the state: the Corps both certifies credits for sale, and requires their purchase on the part of permittees.

None of this is a surprise to the environmental economists who envisaged this – and most of their intellectual descendents protest vigorously that regulatory markets were never meant to be actual markets, and that state policy was always understood to be an imperfect surrogate for individual utility.  So the vernacular use of “market” seems to signify a policy arrangement that involves some element of negotiation over cost: either the Australian farmer negotiates a bid price for performing state-directed ecosystem mitigation, or the Clean Water Act 404 permittee negotiates a price with a wetland banker.  But these moments occur within an architecture of state-directed policy -- there is always a lack of "hunger" as Kelly Haggar says above. and this was foreseen by the inventors of the approach.

I’m actually ok with this vernacular.  The purist alternative is that there would be no such thing as a market-based environmental policy, and I don’t think that’s a useful position to hold.  A middle-ground might be to adopt something like a tripartite distinction between a) payments that are explicitly a form of subsidy or government aid, b) reverse auctions involving a government (or other) monopsony, and c) market-like situations where many buyers and sellers meet, albeit often under government compulsion.  There is no d) actual real live markets.  Esteve Corbera has written a ton of useful stuff on the PES/CES/MES distinction.

Very good point above by Kelly: the very unsettled debate about the boundaries/definition of the commodity itself prevents the kind of perfect-information conditions of the ideal market from existing.  The challenge of measurement is paramount, and I think paradoxical (I've written elsewhere that the more precise ecological measures we use, the greater the challenge of actual fungibility in an actual market).  Not to caricature Kelly's point, however, but I’m not sure a purist approach is best here (that is, “because the commodity isn’t transparently understood by all members of the transaction, true markets will not arise”).  Big macs and 747s are understood by many, but the existence of advertising has always suggested that information is never perfect.   My gut says Kelly is right, but the facts on the ground suggest that people have historically laid out substantial sums of money for very nebulous objects.   Derivatives, mortgage-backed securities, “land in Florida”, property in Second Life.  And carbon isn’t such a great counter-example in some ways – sure, end-of-stack measurements can be quantified easily, but sequestration in a reforestation CDM is as hard-to-measure and contingent as any ecosystem service.

I think there's always going to be a tension between professional and academic economists, on the one hand, and policymakers, on the other.  Economists are trained to use the term "market" (and all other terms of art) with precision, while policymakers will want to utilize the real political cachet of the term "market". This isn't really a productive debate: lack of adherence to strict economic principles will not keep the term from being used -- we can't herd the term back into its corseted textbook definition.  So yeah, I'd rather see a wider definition, yet one that stops short of "everything".

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