Double Blind

Knowledge Problem gets it right with their article on The Wooly Concept of Sustainability.

But what do we need to have clear price signals and complete capital markets? In reality, completely clear price signals and full capital markets are impossible, but the way to get them as close to that benchmark as possible is to focus on reducing transaction costs and increasing the clarity of property rights definitions. When transaction costs are low and property rights are as well defined as is economical, then scarcity information flows across time and space.

This is completely correct. Having liquid capital markets to indicate scarcity through price mechanisms and enforcing transactions on such markets is probably the only long-lasting tool that can do the job. The best example is oil – when there is too much demand or not enough supply, you can see this by the rising price. This forces an economy to look for cheaper alternatives to oil, whether it’s nuclear, solar, wind or hamster wheels.

The only time that such markets do not work is when you have a tragedy of the commons situation – thirty years ago we used to see really bad acid rain in the great lakes region of North America, but this was solved by the Canada-US acid rain treaty. The Kyoto protocol is an attempt to mirror this, but it will be doomed to failure because of the huge incentives member countries have to cheat in addition to the negligible effects compliance will have.

But for the most parts, capital markets have done the job that central planning will never be able to do – quantifying the supply and demand of an economic engine to a very fine precision.

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