The Pope, Markets, and Volkswagen
Anticipating this week's visit by Pope Francis, different political factions and interests in the United States have been hoping to hear words from the popular pontiff that are consistent with their own agendas. They also are poised to spin, or if necessary dismiss, any papal statements that are not particularly consistent with those agendas. One set of issues sure to be subject to such treatment concerns the environment. Francis issued a powerful and cogent encyclical on that subject earlier this year, to which American political interests of the pro-pollution and climate-change-denying variety have already had to use their spinning and dismissing skills in response.
The pope's statements on the environment have elicited debate on what his true views are on free markets. Scott Tong of the public radio program Marketplace had a useful report on this question the other day. To get the perspective from one extreme end of the continuum of views about this, Tong went to what is for market capitalism what the Congregation for the Doctrine of the Faith is for Roman Catholicism—i.e., the economics department at the University of Chicago. An assistant professor there named Steve Cicala said about the pope's position on climate change and the role of markets, “It's sort of too far beyond the pale to even be engaged by serious people.” That is an unfair and closed-minded comment. A more accurate characterization of what the pope has said comes from Carolyn Woo, who besides being the chief executive of Catholic Relief Services is also a former business school dean. She observes that Francis is not anti-capitalism or anti-market but does see the need for regulation of markets, which is something that free market Western countries already do in numerous ways for numerous purposes.
As for the fundamental problem that underlies all this, included in Tong's report was the very plausible statement from Lord Nicholas Stern of the London School of Economics that climate change is “the greatest and widest-ranging market failure ever seen.” It is a simple matter of externalities; polluters do not have to pay for their use of the atmosphere as a dump, and thus there is not a market correction for the practice.
We should keep all of this in mind as we reflect on the outrageous conduct of executives at Volkswagen, who had diesel cars they have been selling in the United States and elsewhere intentionally programmed to cheat on emissions tests. Volkswagen almost got away with it. It took the combined efforts of U.S. government regulators and independent, non-profit testing groups to get the company to admit to the scheme. For decision-makers at the company, the market imposed no discipline at all. The market was demanding what they were delivering: vehicles that offered good performance on the highway while still getting their owners a “pass” sticker on the windshield when they took the car in for a required emissions test.
The market does not even offer a corrective for the cars already on the road with the cheating software installed, now that the scheme has been exposed. Of course there are some unhappy VW owners, such as the environmentally conscious man the New York Times found in Sacramento who had considered buying a Toyota Prius but opted instead for a Volkswagen Jetta because it was peppier and more fun to drive. But consider the incentives for most VW owners when deciding whether to bring their car in to the dealer once a recall notice finally is issued. Unlike most recalls, where bringing the vehicle in means correcting a safety defect, in this case bringing it in only offers to the car-owner—who does not pay for the externalities shooting out of his exhaust pipe—the prospect of a car that performs worse than it did before.
No, this does not call for a rejection of markets, by the pope or anyone else. Socialized manufacture of autos is not the answer—as demonstrated by the East German-made Trabant, which was not only one of the worst polluters ever put on the road with its two-stroke engine, but also one of the worst cars overall. The Volkswagen case demonstrates that Francis is right insofar as he is saying that there are some important things that markets simply cannot do, at least not without the regulation that only governments can provide. Following the most rigid and doctrinaire views of high priests of market capitalism will not enable us to prevent ruin of the planet.
Image: Flickr/Creative Commons.