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Getting the Market to Tell the TruthWe like to believe that what we see and hear is real, or at least a reflection of reality. But in fact, our perception is conditioned by what we already believe, and the language we have that lets us recognize the raw data that's coming in to our senses. For a vivid example of this phenomenon, walk out into a meadow, and watch how long it takes you to distinguish how many different types of grass you see. If you were a farmer, a rancher, or a botanist, you might quickly recognize oats, fescue, rye, and a variety of other grasses. As a city slicker, it will all blend into one, until you spend the time to look, slowly disambiguating all the different species that would jump out at you if you already had names for them. For another example, see my article Remaking the Peer to Peer Meme, which talks in part about how the name change from "free software" to "open source" was an exercise in meme engineering, reframing the boundaries of a subject that everyone thought was already well understood. Or for that matter, just look at What is Web 2.0? Changing the words changed what we were able to see. Names and concepts are tools that let us see and think, and new concepts help you see the world in new ways. In this light, I wanted to share Ethan Zuckerman's thought-provoking post over at Worldchanging.com about Lester Brown's argument about why conservation, not new energy sources, remains critical in the face of global warming. “The key to restructuring the global economy is to get the market to tell the truth.” The prices we’re paying now aren’t real prices - our gasoline prices don’t include climate change, respiratory injury and other consequences. If we included these costs, we’d be paying $10 a gallon, not $3. We need to restructure the tax system to lower income taxes and raise carbon taxes, as they’re doing in Sweden. I love the idea of "getting the market to tell the truth." Put that filter on, and you see a whole lot of things in a new light! This is a useful idea whether or not you're interested in the threat of global warming. It's a fabulous way to think about all kinds of markets. (For example, I used to argue that open source is science, not religion. We don't have to argue for particular positions or ideologies. We have to discover what is true about how software development works in the networked age. It was that discovery process, incidentally, that led me from Open Source to Web 2.0.) Telling the truth is not a moral concept in this sense, it's a scientific one. It's using our intelligence to understand things in a broader context, and to give ourselves a framework for thinking more clearly, a map that is more accurate, and thus helps us get where we really want to go.
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Comments: 11
Scott [22 October 2006 07:47 AM]
I think under capitalism the market does tell the truth: "most people don't believe the doomsayers."
And, predictably, the doomsayers don't like that.
Tim O'Reilly [22 October 2006 08:07 AM]
Actually, Scott, if you're looking to the market for an opinion one way or another, you'd have to take note of the fact that investment is now flowing hugely towards alternative power. Both major energy companies and venture capital firms are flocking to this area, so I think that your reading of the truth that the market is telling is out of date...
Paul Kedrosky [22 October 2006 08:08 AM]
"Markets that tell the truth" is a felicitous and apt rephrasing of externalities, a longstanding and important subject in economics. And the externalities -- non-market costs -- generated by automobiles and oil is a particularly active area in currently externality research.
If anyone has interest in taking things further, there was recently an excellent paper on the topic ("Automobile Externalities and Policies") from the Resources for the Future group. Definitely worth reading.
Tim O'Reilly [22 October 2006 08:15 AM]
Thanks for the link, Paul. I'm very familiar with the concept of externalities, but love the color and impact of "markets telling the truth." It helps us understand what economists mean by "externalities."
Speaking of energy externalities, one of my all time favorite pieces on the subject is a paper I read years ago in Co-Evolution Quarterly called "The Clothesline Paradox." It was an excerpt from Steve Baer's book Sunspots, in which he wrote:
"If you take down your clothesline and buy an electric clothes dryer, the electric consumption of the nation rises slightly. If you go in the other direction and remove the electric clothes dryer and install a clothesline, the consumption of electricity drops slightly, but there is no credit given anywhere on the charts and graphs to solar energy, which is now drying the clothes...."
There are lots of examples like this. Learning to see them is a good thing.
John Dowdell [22 October 2006 08:45 AM]
Is human-induced climate change measurable, and how does it compare to natural climate change?
I know there's great repetition of the idea, but I also know that we've been able to measure greater climate change across human history than what we've seen the past few decades.
How can we persuade Venezuela and China to not distort the full economics of oil and coal usage?
Tim Walker [22 October 2006 09:03 AM]
Excellent points, Tim. Working from my own bias, I think this is another example where too much of the wrong kind of government intervention has helped to "externalize" (is that good economist's word?) ecological factors -- or, to match your language -- has helped to "force markets to lie".
In some cases, the government has to act, because it's the only entity with appropriate scope to address a problem. Here I would cite the success of the Clean Air and Clean Water Acts (and their periodic bipartisan amendments, e.g. the 1990 amendments crafted by a Democratic Congress working with the first Pres. Bush). But in too many cases, subsidies - including farm subsidies as well as petroleum & internal-combustion subsidies - create the wrong sorts of incentives and force markets to lie. This is a key enabling mechanism by which we get $2.50 gasoline when we should have $10 gasoline.
Since you cited Zuckerman's piece from WorldChanging, I'm reminded of this recent piece about Tom Friedman, in which Friedman talks about how U.S. subsidies help fuel radicalism in the Middle East both with carrots (cash to the Saudis for oil) and with sticks (anticompetitive farm subsidies).
My summary take: the more artificial lie-enablers we remove, the better off we (and the global environment) will be.
Chris Hanson [22 October 2006 07:12 PM]
Another good example of trying to get the market to tell the truth is the book "Natural Capitalism" http://www.natcap.org/ - which is basically about how, if we stop treating the environment as an externality and start accounting for and paying the "replacement cost" of environmental factors (e.g. the cost of sequestering all carbon emitted by a factory, the cost of cleanup for SO2 emissions, etc.) the market itself will take care of making itself more ecologically sound.
The book's central thesis is that the market hasn't been working at this due to a tragedy of the commons; our shared air, water, etc. are treated as infinitely free and renewable when they really aren't. Treating them and their safe state as commodities with actual value (a value related to the cost of recovering/reverting them to their safe state) will cause the market to internalize the costs and adjust appropriately.
RNC [22 October 2006 08:07 PM]
Markets tend to tell the truth more frequently when the time proximity of consequences and private property come into play. Sadly, most talking heads have made a better case that gay marriages will cripple the country than the case for education, tax reform, environmental reform or healthcare reform.
Those issues are too long term. No one can get credit for it to get re-elected so why bother? Fundamentally, I think we need to fix the plumbing before we can tackle the issues. Perhaps this November, we can begin that process.
Steve [25 October 2006 09:06 PM]
The notion of getting the market to "tell the truth" assumes a systems model of the markets
and overlooks the intrinsic politics
of market players.
Markets are 'controlled' when they can be by
oligarchies, and players usually engineer populations into dependence. This is why there is a constant requirement for innovation. The redefinition of markets is a primary tactic to coerce entry back into the market, to restructure the game. The new game then, unfortunately and most commonly, is then under the new regime.
And the drama of human power recycles itself.
Duane Gran [30 October 2006 07:28 AM]
Tim,
The attribution for the quote about market and ecological truth is attributed to Oystein Dahle. I'm glad you are passing along this important gem to others, which I've written about as well:
http://duanegran.com/blog/?p=390
Rick Ringel [13 November 2006 07:24 AM]
Tim,
I too belive fresh perspectives bring fresh thought. For me, though, I think capitalist markets always 'tell the truth' about the aggregation of the influences that create them. The invisible hand knows nothing of truth, just forces: forces that are there to be discovered just as you discovered web 2.0 forces.
I think the market indicates that the economics of abundance work in both directions. Up until recently, the cost of carbon disposal was zero: a condition of abundance. We see that now the cost of carbon disposal is nonzero, and rising with every passing day. Our invisible hands have yet to react because we haven't monetized carbon disposal.
Is "debundance" a word/meme that provides a fresh perspective on the situation? Debundance: A market transformation caused when an input to costs of production moves from virtually zero cost to one of the most significant per-unit costs.
Perhaps the entertainment industry can reallocate their scarcity induction tools to address carbon disposal. ;)