This still pales in comparison to privatizing the benefits of our daily economic activities and saddling others with the pollution costs. A ton of coal and a barrel of oil consumption cause more damage to human health and the economy than the value they add to gross domestic product. That’s in stark violation of the “no free lunch” principle and leads economists of all stripes—from Paul Krugman to N. Gregory Mankiw—to call for polluters to pay. The difference lies in the degree of emphasis.
Mankiw’s popular introductory economics class at Harvard and his bestselling textbook talk about economic inequality and pollution, but both books take a while to get to the point. Any good macroeconomics class would feature the fundamental welfare theorems—why and how markets work—near the beginning of the semester. But these classes should also jump immediately to when and how markets fail—not as rare exceptions but as pervasive phenomena.
Market failures, by the way, should not be confused with moral failures, which can be rectified if we only do the right things as individuals. Your dedication to recycling won’t make the planet notice. The response needs to be collective, and it needs to be guided by someone outside the system looking in: economists.
Economists’ regulatory responses, by their very nature, will often stick closely to market principles. Shoppers don’t consider the full life-cycle implications when they get a free plastic bag at the checkout counter, nor should they. But the answer isn’t to ban disposable bags altogether. The answer is to charge a tiny “PlasTax,” which decreased plastic bag use in Ireland by over 90 percent or a billion bags a year. A similar fee is already doing wonders in Washington, DC. The same principle goes for reining in pollution from airplane travel or most anything else, for that matter: Don’t limit choice, enable consumers to make the right choices without even thinking about them.
But, just as there are pitfalls for business, there are traps for economists as well. Goldman Sachs has canceled campus recruiting events because of protests. That might have been a symbolic victory for student offshoots of Occupy Wall Street, but it has little to do with changing the system. Occupy Harvard’s organized walkout of Mankiw’s economics class is more consequential. I disagree with the method if not the sentiment. Economists ought to be more humble in what we know and how we teach it.
Still, “economics is organized common sense,” as Tom Sargent, this year’s winner of the Nobel Prize, remembers Jerry Kenley, the teaching assistant who inspired him to take up economics, saying. Kenley is right. If there is anything we need right now to guide our economy and the planet out of this dual malaise, it’s more common sense.