Fantasy made real?

Albert Tercero in The Economist (May 23rd, 2020)

I recently allowed my subscription to ‘The Economist’ to lapse, which means that I’ve missed reading the articles in their 23rd of May edition that have prompted a lot of comment on social media. However, I gather from these comments and from the opening paragraphs that are not behind ‘The Economist”s paywall, that they are continuing to promote carbon pricing as they have for some time now.

That’s all very good but 2 things are irritating me.

Firstly, the glib ideological posturing.

Secondly, (and this is the one that really pisses me off) the fact that they will be proved right, thanks to technology.

If economists ruled the world, carbon prices would drive most of the action on climate change. Polluters would pay for the negative externality their emissions inflict on the planet. There might be differences on the method of payment—some might lean more towards taxes, others towards the permits used in “cap and trade” schemes. But the idea that some sort of price would help people find an efficient means of reducing emissions is a given.

‘The Economist’ May 23rd, 2020

This smug, facile statement in ‘The Economist’ article comes from a blind faith in the power of market forces to miraculously sort stuff out. In fact it’s this neoliberal deus ex machina that has prevented progress on climate change for decades.

Not even Margaret Thatcher bought into this as a response to climate change. Her scientific education meant that she was among the first world leaders to recognise that ‘The problem of global climate change is one that affects us all and action will only be effective if it is taken at an international level’ (her speech to the UN General Assembly in 1989). Sadly, this was something where it turned out that the lady was for turning. Although she once said that she was more proud to be the first British PM with a science degree than she was of being the first woman, she somehow came to the conclusion that Nigel Lawson knew better than the huge numbers of peer reviewed and validated studies that she was unique among politicians in being able to appreciate.

A third party

For the benefit of non-economists, ‘negative externalities’ are costs suffered by a third party as a consequence of somebody else’s economic transaction. In a transaction, the producer and consumer are the first and second parties. Third parties include anyone that is indirectly affected by that activity (usually negatively). Some externalities, like waste, arise from consumption while other externalities, like carbon emissions from factories, arise from production.

This faith in market forces to deal with ‘negative externalities’ has always been given intellectual credence by referring to the work of Nobel Prize winning economist Ronald Coase. In what became known as ‘Coase’s Theorum’ he challenged the assumption that only governments could set a price for externalities.

He argued that when a negative externality is recognised, it becomes possible to place a value on it and so trade in an externality becomes possible. Carbon pricing is a typical example. He went on to argue that if there are sufficiently low transaction costs, bargaining will lead to a Pareto efficient outcome.

In reality, Coase’s theorem has proved to be nothing more than that. Coase struggled to find any actual examples and complained that his work had been misapplied. The problems have always been:

  1. It’s practically impossible to achieve transaction costs low enough when dealing with an issue of this complexity
  2. Allocating ‘ownership’ to the parties involved is problematic
  3. Valuation agreement by parties is blocked by what psychologists call the endowment effect -an emotional bias that causes individuals to value an owned object higher, often irrationally, than its market value. So much for cold, rational economics

Points 2 & 3 mean that it’s very difficult to achieve what economists call ‘perfect information’ (a situation in which “all consumers and producers have perfect and instantaneous knowledge of all market prices, their own utility and own cost functions”) and without perfect information, a market that anyone trusts enough to actively engage in cannot happen. 

Tech rescues the dream

So, Coase’s theorem remained a neoliberal fantasy because there were no means of setting up a common structure in which things could be traded with near-zero transaction costs and perfect information. Until, that is, 2009 when the mysterious Satoshi Nakamoto launched the first Blockchain.

The emergence of Decentralised Autonomous Organisations (DAOs) like those based on Blockchain are redefining everything. Just as cooperatives have done for nearly 200 years, DAOs offer a not for profit model that still delivers value by aligning the interests of operators, shareholders and customers. Distributed Ledger Technologies (DLT) like Blockchain have created a means to make commons projects scalable, viable and can create clear paths to value creation – even liquidity.

The DAO IPCI (https://ipci.io) is already showing how it might be applied to carbon markets.

It occurs to me that another market in which the same DAO model could be applied is in materials within the circular economy.

Within the circular economy value chain, the allocation of property takes on an entirely new dynamic and the concept of valuing commons has to be modified and managed too. Circular economy business models with their emphasis on the sharing economy and product as a service, mean that the stakeholders in an asset change according to where it is in its lifecycle. The component materials, location, condition and availability of a product are no longer the sole concern of its current owner-user. Those with an interest in its future re-use or the potential value of its components also have a legitimate stake in that asset, and if they are unable to access that information then the resource efficiencies that the circular economy is predicated upon are lost. 

In the 2018 paper from the World Economic Forum – ‘Harnessing the Fourth Industrial Revolution for the Circular Economy’ – they propose a DAO called the ‘Internet of Materials’ – “a decentralized data system connecting data on different products and materials through standardized communication protocols. Data should be supplied by producers as products are sold, tying in data on material provenance and product design. Ensuring data confidentiality and anonymity are key here to avoid competitive and anti‐trust challenges.” During the product’s life, users can add to this data so that location, condition and availability can be shared as required too.

The Internet of Materials is vital and a Blockchain based DAO is the viable structure that can provide the level of transaction costs and data transparency needed. If you’re interested in technology companies that are currently focused upon what the platform for the IoM might look like, I suggest that you also take a look at Circularise.

So; does this mean that I have experienced an ideological conversion and look toward unfettered capitalism as our saviour? Not a chance. But I do see tech can mean that we ‘non-economists’ and long suffering 3rd parties can make the bargain more effectively.

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