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      The Road Leading to the India-China Standoff

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      The reason for the China-India standoff in the Galwan Valley may not be the oft-mentioned construction of the Darbuk-Shyok-Daulat Beg Oldie (DSDBO) road. The new thoroughfare improved Indian logistics in the Ladakh area, meaning that supplies and troops can be deployed with far greater speed. While the DSDBO might have irked China, Beijing has deeper …
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      Why Is Foreign Investment Flooding Into India?

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      For years, India suffered from what came to be called the “Hindu rate of growth” — a result of Jawaharlal Nehru’s policy choices. India’s first prime minister had a fascination for the Soviet Union and championed socialism. In India, this socialist economic model was incongruously implemented by a colonial bureaucracy with a penchant for red tape.

      Consequently, the license, quota and permit raj, a system in which bureaucrats commanded and controlled the Indian economy through byzantine regulations, throttled growth for decades. Once the Soviet model started collapsing in 1989, the Indian economy came under increasing pressure. A balance-of-payments crisis led to the 1991 economic reforms. Thereafter, India consistently grew at a rate of more than 5% per year until 2019.

      What Ails Corporate Governance in India?

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      During the COVID-19 pandemic, that growth has stalled. In the first quarter of India’s financial year that begins on April 1, the economy shrunk by a record 24%. Forecasts estimate that it will shrink further, although the rate of the contraction will decelerate considerably over the next two quarters. This contraction has left little elbow room for a government fixated on redistributive policies and fiscal restraint. This fixation is a hangover from the past.

      Historically, the Bharatiya Janata Party (BJP) has been more market-friendly than other political parties. In fact, the BJP broke new ground in the early 2000s by targeting and achieving a growth rate in excess of 8% when Atal Bihari Vajpayee was prime minister. Despite such high growth, the BJP lost the 2004 election. 

      Foreign Investment Hits Record Figures

      The BJP has not forgotten Vajpayee’s defeat. In particular, Prime Minister Narendra Modi has drawn a key lesson and focused on providing services to the masses. As a result, the government has focused on redistribution and taxation. It has put growth on a backburner. In 2018, the Modi government embarked upon what these authors termed Sanatan socialism, a policy that courts the poor with financial transfers and private provision of services. This strategy was vindicated by a resounding electoral victory in 2019.

      Today, COVID-19 is posing fresh challenges to the economy and to the Sanatan socialism policy. The growth slowdown in India is greater than in other emerging economies. The opposition has upped the ante and is blaming the government. Some business leaders are questioning the government’s lockdown strategy. This puts the BJP on the defensive regarding the economy.

      Yet even during such a growth shock, foreign direct investment (FDI) and foreign portfolio investment (FPI) have been pouring into India. Surprisingly, the FDI has hit record figures. In the first five months of this financial year, $35.7 billion has come into India. The FPI figures are also at an all-time high. In November, foreign investors plowed $6 billion into Indian capital markets, beating figures for Taiwan and South Korea. What is going on?

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      Three key facts explain this inflow. First, corporations from the US and the Gulf have bought big stakes in Reliance Industries, India’s biggest conglomerate. They are also buying shares in Indian companies. In effect, they are betting on future growth.

      Second, the Performance Linked Incentive (PLI) scheme has gained some traction. The purpose of the PLI is to boost electronic manufacturing in the country. So far, India has been too dependent on China. Current tensions along the border have led India to change tack and give financial incentives to companies who manufacture in-house. Players like Samsung, Pegatron, Foxconn, Wistron and AT&S have responded well to the PLI.

      Third, global corporations might be diversifying their supply chains to mitigate the risk of manufacturing exclusively or mainly in China. This strategy to tap alternative supply chains to China is widely known as China Plus One, and India might be benefiting from it.

      Modi has doubled down on an advantageous situation. Sovereign wealth funds, pension funds and organizations with over $6 trillion of assets under management attended a summit organized by the prime minister in the first week of November. In addition to Modi, India’s business leaders such as Mukesh Ambani of Reliance Industries Limited, Ratan Tata of the Tata Group and Deepak Parekh of Housing Development Finance Corporation pitched to these investors. More foreign investment might follow soon.

      What Lies Ahead?

      If investment is flowing in, what are its implications for the Indian economy? First, India will experience a growth spurt within three to four quarters from now. In recent years, private investment has been weak because of a banking crisis. Indian banks lent large sums to big borrowers who had no intention or ability to pay back their debts. This meant that they had no money or appetite to lend to bona fide businesses. A credit crunch ensued, investment suffered and so did growth. Increased FDI will reverse this trend and fuel growth by restoring investment.

      Second, India will experience job growth thanks to higher FDI. The entrance of new players and the revitalization of older ones will increase employment. The government has already instituted major labor market reforms to encourage manufacturing and other labor-intensive activities. 

      Third, increased employment could boost domestic demand, raising growth rates. These might materialize by the 2022-23 financial year, just in time for the next general election. The FDI flowing in right now might be boosting the BJP’s 2024 reelection chances.

      Finally, the record FDI is giving the Modi administration a leeway to achieve geopolitical goals. With cash coming in from friendly economies, the government is limiting economic engagement with nations hostile to India, especially in core sectors such as power, telecommunications and roads. Aimed largely at Chinese and probably Turkish entities, the move could benefit European, American and East Asian companies from Japan, South Korea and Taiwan.

      India’s new economic direction reflects the seismic shift in the global economy. The post-1991 era is over. As during the Cold War, countries are now mixing politics and business again.

      The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy. More

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      in US Politics

      Has political consensus become a pipe dream? | Letters

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      Perhaps the liberal democratic managed capitalism desired by Martin Kettle did exist in the 1950s, including the new welfare state in the UK (The toxic polarisation of our politics can be reversed, but it will take humility, 26 November). It didn’t prove robust – the Conservatives moved to the right and embraced free-market capitalism; regulation exists but is weak and largely captured by “experts” from the relevant market sectors.It is difficult to see how the idealised consensus can be created today, especially within one state. Multinational companies moving activities to poorly regulated locations and tax havens means that regulation must be multinational. The EU is attempting to regulate and tax tech and online firms, cooperation with which the UK has abandoned. The replacement of Donald Trump by Joe Biden doesn’t mean that economic nationalism will go out of fashion.Kettle is right that respect for the truth is indispensable. The problem is that honest conservatism has gone and, internationally, the right has adopted untruth as a weapon. This approach will continue as it has proved successful. Trump has lost the election, but the size of his vote and support for his untruths demonstrate just how successful.Talking – and listening – to each other in a truthful and respectful way is a good thing, but it needs that approach from all parts of the political spectrum. Kettle implies that such consensus-seeking would inhibit the left from offering radical solutions to our problems, because that may destroy any consensus. Is that how democracy works?Doug SimpsonTodmorden, West Yorkshire• Martin Kettle rightly highlights polarisation and the growth of the “I” society since the 1960s. Surely it is no coincidence that this coincided with a digital revolution that changed all our lives? Last year, I revisited California 50 years after doing an MBA at Stanford University. The wealthiest state in the world has failed to solve homelessness in the streets or congestion on the roads. Black people have been displaced by escalating house prices.All the talking and listening in the world will be of little value unless governments get control of the land and finance needed to build a fairer society. We should be using technology to map inequalities and invest in bridging the gaps rather than consoling ourselves with webinars and games.Dr Nicholas FalkExecutive director, The Urbed Trust• It is possible to share Martin Kettle’s hope for a less divided America without romanticising the 1950s. One need only recall those who left for Europe when “cooperation” was not shown to their differing political beliefs. The 50s also saw the enlargement of the attorney general’s list of subversive organisations. A loyalty oath was required by anyone wishing to enter a graduate programme or benefit from a scholarship, and the House Committee on Un-American Activities destroyed careers. Dwight Eisenhower was no Donald Trump, but neither was he a hero to those not in the political mainstream.Susan ZagorLondon• On reading how Labour’s general secretary has banned local parties from discussing the loss of the whip from Jeremy Corbyn (Report, 27 November), I was reminded of how Joseph Stalin tried to make Leon Trotsky a non-person in Russia. It is marvellous where the party leadership takes its inspiration from.Terry WardWickford, Essex More

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      What Ails Corporate Governance in India?

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      Most businesses perish not because of strong competition or adverse macroeconomic conditions but because of cracks within. One such failing is weak corporate governance. For publicly listed companies, this often translates to controlling shareholders or “promoters” pursuing policies and practices in their own interests at the expense of minority shareholders. It turns out that companies with such promoters are at greater risk of crises and near-death moments in bad economic cycles. Those companies with better governance, where promoters act responsibly in the interests of shareholders, tend to do better during adversity. In fact, savvy investors now treat good corporate governance as an intangible asset.

      This can be best seen in India’s banking sector. In general, private sector banks have practiced better governance than state-owned ones. Consequently, their financial and operating metrics also tell a story of profitable growth with less asset quality issues than their public sector peers. No wonder that private sector banks trade at a higher valuation than public sector ones.

      360˚ Context: The State of the Indian Republic

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      Higher valuation puts these banks into a virtuous growth cycle. They are able to raise capital cheaply with less dilution. This reinforces their already high return ratios, which in turn continue to support a higher valuation. This self-perpetuating cycle has led to long-term compounding of shareholder returns. State-owned peers have fared much worse.

      Despite a large number of state-owned banks, the majority of credit growth in India is led by private sector banks. In fact, state-owned banks are struggling and the government is forced to merge them to ensure their survival. The success of well-run private banks demonstrates how good governance can lower a company’s cost of capital. That is not all. The resulting higher valuation also gives such companies immense pricing power in corporate transactions and talent management, widening their economic moat. 

      Multiple Issues

      India boasts of the oldest stock exchange in Asia, which is also the region’s largest. However, corporate governance in India still lags behind many other places like Singapore or Taiwan. India must understand that good corporate governance is the foundation of a lasting business. It builds investor confidence and has other benefits. India is short of capital and needs to earn investors’ trust. Without an infusion of capital, the Indian economy will fail to thrive. 

      Embed from Getty Images

      There are multiple issues that plague corporate governance in India. First is the lack of accountability among controlling shareholders. For example, promoters get away with appointing their friends, ex-employees and business-school classmates as independent directors with no one raising an eyebrow. Often, statutory auditors are given only one-year extensions to pressurize them to “comply” with management demands. Compliant auditors tend to persist for too long, developing far-too-cozy relationships with the very people they are supposed to keep an eye on. With no strong checks and balances, promoters are in effect incentivized to take advantage of minority shareholders. 

      Second is the slow and selective enforcement by the Securities and Exchange Board of India (SEBI), the country’s market regulator. Cases against the management’s missteps take years to resolve. SEBI generally hands out warnings or mild punishments. This could be because SEBI does not have enough resources to deal with a large number of cases, or it could be a lack of authority or competence. In certain cases, promoters are extremely powerful and politically connected. Given that regulators are political appointees, it is far from easy for them to ignore pressure from politicians, remain impartial, punish the powerful and deliver justice.

      Third is the fact that markets do not punish poorly managed companies for their misdeeds. India needs deeper markets with broader participation for true price discovery. Stock markets must be treated as marketplaces, not as forums for votes of confidence on the government’s economic policies. Because governments place too much importance on market performance, they have an incentive to keep them inflated. Indian corporate bond markets are even worse than stock markets in terms of participation. They are really accessible to only a handful of companies. 

      Fourth is the lack of transparency and weak disclosure requirements. This further perpetuates weak governance. The most detailed yearly disclosures by Indian companies are annual reports, which are often colorful marketing decks instead of detailed, factful and insightful documents, like the 10-Ks in the US. The quarterly earnings report for many companies is just a one-pager. This discloses summary items only without any breakdown of details.

      Earlier, manufacturing companies were mandated to disclose operational details pertaining to capacity, production and inventory. A few years ago, this disclosure requirement was done away with. Now, the only time companies make adequate disclosures only during their initial public offerings, which is a mere one-time event instead of an annual exercise.

      Bringing Sense to the Madness

      The only way to bring some sense to the madness in India’s public markets is to give more independence, power and resources to SEBI. At the same time, India must seriously penalize auditors and boards of companies for overlooking management follies. In addition, the authorities must incentivize and protect whistleblowers in a similar manner to developed economies.

      Some argue that complying with higher disclosure requirements might be too costly for smaller companies. That is not true. Furthermore, even the top 100 Indian companies default frequently on mandatory disclosures. Instead of reducing requirements for disclosures, India should lower costs of disclosures and compliance by using more technology.

      Another way to improve the health of India’s public markets is to increase market participation and trading volumes. Then good corporate governance would be rewarded while poor corporate governance would be penalized. Making short-selling a smoother affair might make the market deeper and more liquid. To increase depth in corporate bond markets, India must make lasting banking reforms. This involves privatization and granting more powers to the banking regulator.

      An unintended consequence of banking reform might be the improvement of India’s infrastructure. Currently, many state-owned enterprises in infrastructure sectors such as power are mismanaged because their bosses are able to buy time by restructuring their bank loans. Banking reforms will make that impossible and will transform this sector too.

      A combination of disclosure, regulation and enforcement can improve corporate governance. Reforms can also reduce conflicts of interests as well as create the right incentives and disincentives for Indian companies. These would inevitably lead to some short-term backlash, but the substantial long-term benefits are too significant to be ignored.

      The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy. More

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      in US Politics

      The US is on ‘inequality autopilot’ – how can Biden's treasury pick help change course?

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      Teresa Marez has never heard of Janet Yellen, likely to be the next treasury secretary of the United States. But she and millions of other Americans have a lot riding on the decisions Yellen will make if and when she is confirmed next year.The coronavirus has upended Marez’s life. Her savings are almost exhausted and she is worried about her unemployment benefits, which run out next week. “It’s so hard. It’s just such a mess,” said the mother of two in San Antonio, Texas. “We just need Congress to make a decision,” Marez said. “As long as they are in limbo, we are in limbo.”Marez, 45, is one of the millions of Americans still suffering from the economic devastation wrought by the coronavirus pandemic and whose plight will be the top priority of incoming president Joe Biden and his treasury secretary pick.The situation is dire. About 20 million Americans are currently unemployed. For many hunger has become a major issue. Government figures show that the week before Thanksgiving – America’s biggest feast day – 5.6m households struggled to put enough food on the table. Huge, haunting lines have formed at food banks across the country and years of neglect and underfunding of the systems to help those in need have worsened their plight.Last week Marez spent three and a half hours on hold waiting to speak with someone at a Texas unemployment office to hear whether she would get a new form of unemployment when her existing funds expire. The answer was a noncommittal maybe. “Three and a half hours on hold in mid-morning just to get that answer,” she said.According to the Century Foundation, 12 million Americans will be cut off from their jobless benefits on 26 December. A disproportionate number of those people will be women and Latino, like Marez, or Black and young, the groups hardest hit by the economic downturn. More

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      in World Politics

      Land Reform Can Transform India’s Economy

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      According to the Centre for Monitoring Indian Economy, India faces a serious decline in employment due to the COVID-19 crisis. An estimated 122 million people lost their jobs during the first quarter of 2020. Streams of migrant workers returned to their villages — often the only fallback option for the millions working in urban informal sectors. Regardless of their vows to never come back to the cities, the majority of them will likely have to return in order to earn their livelihood. In the present state of affairs, agriculture, the mainstay of rural India, cannot offer them incomes comparable to industries and construction firms in cities.

      360˚ Context: The State of the Indian Republic

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      Despite its falling share in the economy, agriculture is India’s most important sector. Its contribution to the country’s GDP has decreased from 51.81% in 1950-51 to 15.87% in 2018-19, but it still employs about 42% of the country’s workforce. While increasing shares of secondary and tertiary sectors is a natural phenomenon of economic growth, in India, this has happened without maximizing the potential for growth in agriculture. Per-acre yields of rice and wheat in India are drastically lower than those of other BRICS nations.

      The shift in GDP share is the result of high growth rates in secondary and tertiary sectors despite relative stagnation in agriculture. The agricultural sector still has a massive scope to generate greater income and employment. However, this can be done only with the spirit of liberalization, similar to what other sectors of the economy have received since the 1990s.

      Overregulation and Underutilization

      Soon after independence, land reform laws were enacted throughout the country with the objective of distributing land equitably and increasing the efficiency of farm operations. This produced only partial success due to a variety of reasons. The ownership of only 4% of operated land could be transferred to cultivators, 97% of which lies in just seven states — Assam, Gujarat, Himachal Pradesh, Karnataka, Kerala, Maharashtra and West Bengal. Notwithstanding this uninspiring outcome, land reform laws foisted excessive restrictions on the tenancy of agricultural land.

      This has adversely affected the growth of agriculture in the country. Landowners are reluctant to lease out their land under formal tenancy due to their fear of losing it permanently. According to National Sample Survey Reports, about 15 million tenants cultivate 10 million hectares of land on an informal basis; 92% of these tenants are landless laborers or marginal farmers. They have no security of tenure or access to institutional credit, crop insurance and other benefits offered to farmers under government schemes. Due to legal restrictions on tenancy, many landowners who cannot cultivate themselves prefer to leave their land fallow. In 2015-16, 26.72 million hectares of land were left fallow across India.

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      These restrictions on access to cultivable land not only deprive poor people in rural areas of opportunities to enhance their incomes, but also have a detrimental effect on the growth of the entire agriculture sector. Simply formalizing tenancy and cultivating millions hectares of fallow land can be a game-changer for agriculture in India. Once tenants get security of tenure and access to institutional credit, they will have requisite incentives and funds to make long-term investments on their land.

      This can be achieved only with immediate and effective policy interventions by state governments. The National Institution for Transforming India, the premier policy think tank of the government of India, has set the ball rolling by publishing the Model Agricultural Land Leasing Act, 2016, to help the states enact new laws or make required changes to their existing laws on the tenancy. The Model Act seeks to formalize tenancy agreements, circumventing the restrictions imposed by the land-reform laws of the state. It aims to integrate the security of tenure along with the protection of ownership. However, until now, only a few states have gone ahead in this direction.

      Uttar Pradesh, Uttarakhand and Madhya Pradesh have amended their existing laws to allow the renting of agricultural land on liberal terms. The Maharashtra Agricultural Land Leasing Bill, 2017, now awaits the assent of the president of India. The Andhra Pradesh Land Licensed Cultivators Act, 2011, was enacted even before the Model Act of 2016 was framed. This special law has recently been replaced with the Andhra Pradesh Crop Cultivator Rights Act, 2019. The other states also need to implement this vital reform to transform agriculture in their states.

      Alternate Solutions

      The enactment or amendment of laws is only a first step in improving the access of the rural poor to the land. Even in states where these laws have been enacted, very few landowners and tenants have come forward to enter formal agreements. Landowners are still apprehensive of losing their land, and tenants are still afraid of getting ousted if they insist on formal agreements. Therefore, state governments also need to effectively communicate with tenants and landowners to allay their fears and convey the benefits of formal agreements to them.

      Until the time when requisite laws are enacted effectively, group loans can provide relief to informal tenants. In Kerala, where tenancy is illegal, about 250,000 informal tenants have organized themselves into joint liability groups. These groups receive crop loans from banks without requiring formal tenancy agreements. The guidelines of the Reserve Bank of India and the National Bank for Agriculture and Rural Development allow such agreements without requiring formal tenancy. Alternatively, Odisha has recently launched the Balaram scheme to provide agricultural credit to groups of landless laborers. Other states should also liaise with banks to provide credit to informal tenants until the time when legal provisions for allowing tenancy are put in place.

      Such reforms have enormous potential to revamp and develop Indian agriculture, especially during the ongoing economic turmoil. At the national level, the central government has shown the way forward by deregulating agricultural markets. Now it is time for states to act decisively.

      The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy. More

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      in US Politics

      Former Fed chair Janet Yellen set to become first female treasury secretary

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      Janet Yellen, the first woman to chair the US Federal Reserve, is set to achieve another first, becoming the country’s first female treasury secretary.
      The 74-year-old economist is expected to be named as President-elect Joe Biden’s choice on Tuesday.
      Yellen will take the job during one of the most trying economic times in modern history.
      US unemployment hit a postwar record in April, in the first wave of the coronavirus pandemic, and while the jobs situation has improved, the recovery has slowed in recent months as rates of infection have increased.
      Millions remain out of work, and women and people of color have been hit disproportionately hard by the downturn.
      Congress has struggled to reach agreement on a new round of economic spending, the US national debt is at record levels, and relations with the US’s major trading partners are frayed after the Trump administration’s trade wars.
      Donald Trump declined to reappoint Yellen to the Fed chair after his election in 2016, making her the first central bank chief not to serve two terms since the Carter administration. During his campaign Trump said Yellen should be “ashamed” of her policy actions and accused her of keeping interest rates low in order to bolster President Barack Obama’s legacy.
      Cautious and carefully spoken Yellen has made few comments about Trump although when asked last year if she thought Trump “had a grasp” of macroeconomic policy she said: “No I do not.”
      Yellen has recently advocated for more federal spending from Congress to tackle the economic devastation caused by the virus.
      “There is a huge amount of suffering out there. The economy needs the spending,” Yellen said in a September interview.
      Yellen, professor emeritus at the University of California at Berkeley, a former assistant professor at Harvard and a lecturer at the London School of Economics, is an expert in labor markets who has highlighted the economic impact of uneven growth in the jobs market.
      She is married to the Nobel-winning economist and frequent co-author George Akerlof.
      Progressives had been hoping Senator Elizabeth Warren, a staunch critic of Wall Street, might get the job. But with control of the Senate still in the balance, Yellen is a safer pick. After the news broke Warren called Yellen “an outstanding choice.”

      Elizabeth Warren
      (@SenWarren)
      Janet Yellen would be an outstanding choice for Treasury Secretary. She is smart, tough, and principled. As one of the most successful Fed Chairs ever, she has stood up to Wall Street banks, including holding Wells Fargo accountable for cheating working families.

      November 23, 2020

      Biden said last week that his Treasury nominee would be accepted by both the progressive and moderate wings of the Democrat party. Yellen has also in the past attracted bipartisan support, receiving 11 Republican votes for her 2014 confirmation as Fed chair, including the backing of three sitting Republican senators.
      She is also one of the best-connected economists in the world, leading the Fed from 2014 to 2018 after a long career in economic policymaking.
      If appointed, Yellen will not only be the first female Fed chair and treasury secretary, but the first person to have headed both organizations and the White House council of economic advisers. More

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      in US Politics

      The 'market' won't save us from climate disaster. We must rethink our system | Robert S Devine

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      The massive wildfires that have been rampaging across the American west this year are not purely natural disasters. They are partly products of the unnatural disaster of climate change – “unnatural”, in that the ultimate responsibility for global warming belongs not to physics but to our economic system. Nicholas Stern, the former chief economist of the World Bank, calls climate change the “greatest and widest-ranging market failure ever seen”. Sadly, climate change is only one – albeit a whopper – of the countless market failures that degrade our lives.
      Though it sounds like a generic phrase, “market failure” is actually a technical term. It doesn’t refer to scams like insider trading or corporate fraud. A failure occurs when the marketplace allocates resources in a way that does not optimally deliver wellbeing. We understandably focus a lot of attention on the depredations of greedy tycoons and corporations, but many of the most consequential market failures stem from innate characteristics of our current market system.
      Many of us probably already have a gut feeling that our current market system often fails. In order to build a more sustainable, just and prosperous economy, however, it’s vital that we better comprehend the shortcomings deep in the market’s DNA. Greater awareness would reduce blind faith in the market and enable people to see the market for what it is: a tool. It can be an excellent tool when used for the right job, but relying on the market to deal with something like climate change is like trying to pound nails with a saw.
      One major inherent flaw involves communication. In an ideal version of the market, continuous indirect communication between consumers and producers leads to the best allocation of society’s resources. Consumers make their desires known by the prices they’re willing to pay, and producers convey their costs by the prices they charge.
      However, producers only communicate a narrow range of costs. For example, an oil company will account for typical expenses, like payments to its employees, and then set its prices accordingly. Consumers will receive those price signals and decide whether to buy that company’s gasoline. But markets enable businesses to scrub most social and environmental costs from these signals, which garbles communication with consumers. For instance, the price of gas doesn’t reflect the cost of the revved-up wildfires we suffer due to the additional global warming caused by burning that oil company’s gasoline. Numerous studies estimate that the true cost of gas is two to four times higher than what we pay at the pump.
      Incomplete communication misleads us consumers into buying products laden with hidden costs. Countless goods and services bear the stains of harms such as pollution, habitat destruction, floods, child labor, extinctions and disease. When we fill up at the gas station the price we are charged doesn’t tell us that our purchase increases the odds that a wildfire will burn down our community. Making such partially informed choices is like buying a house having seen only the kitchen.
      Another characteristic of the market that leads to failure is its inability to provide incentives for businesses to produce or protect public goods, such as fire departments or city parks. Most important, the market doesn’t generate the public goods sometimes known as “ecosystem services”, such as nutrient cycling, soil formation, oxygen creation and a livable climate. Many of these essential services operate in the background; like plumbing and wiring, they go unnoticed and unappreciated unless they fail.
      Take the flooding that drowned parts of coastal Louisiana and Mississippi in 2005 when Hurricane Katrina thrashed the Gulf coast. More than 1,800 people died, cherished communities disintegrated, and the price tag swelled to more than $100bn. Much of the devastation occurred because oil and gas development had decimated the coastal marshes that previously had tamed storm surges. The protection those marshes provide is an extremely valuable ecosystem service, yet no entrepreneurs hustle to produce that protection.
      And why would they? The market doesn’t give private businesses a profit motive to produce public goods. For example, even if a company were to restore a marsh, they wouldn’t be able to sell that service because they couldn’t exclude anyone living on that coast from using that protection for free.
      Private restoration companies exist, of course, and some make a profit by rehabilitating marshes. But market forces didn’t spawn these outfits. At some point somebody recognized the value of the marshes and made a conscious choice to try to preserve or restore them. Most likely a number of somebodies made that choice and pressed their government to hire a restoration company. More broadly, environmental and social projects happen when a great many somebodies vote for candidates who support such efforts. Such purposeful collective action is the overarching solution to market failures. Instead of passively counting on supply and demand to provide everything we need, we sometimes need to exert our judgment.
      And there it is, the J-word: “judgment”. Free-enterprise disciples view most efforts to use our collective judgment to shape the economy as central planning that will foul the gears of the market. But banishing judgment about how to allocate our resources will result in a world with plenty of video game consoles and fashionable shoes and precious little biodiversity and climate stability – and, all too soon, biological poverty and climate chaos will also cripple the economy of stuff, and video game consoles and shoes will become scarce, as well.
      Citizens who scorn judgment should note that we’ve exercised some collective judgment to help guide the economy since the advent of government. The problem is that we’re not exercising it enough. In recent decades we’ve gotten out of balance and are leaning too far toward an unrestrained market even when it’s the wrong tool for the job.
      Consider your toaster. It’s loaded with hidden costs that the market doesn’t communicate and that individual consumers can’t be expected to discover. But government (well, good government that pays attention to science) has the expertise to evaluate your toaster. If we citizens decide that we want to address climate change and air pollution, then government can do our bidding by devising energy efficiency standards for our appliances.
      In fact, they did, decades ago. According to the American Council for an Energy-Efficient Economy, those regulations have saved more than $1tn to date and have reduced greenhouse gas emissions by the equivalent of the annual emissions of 800m cars. And we don’t even know the standards are there – hardly the heavy hand of government that haunts free-marketeers’ fever dreams.
      So let’s use our judgment to create an economy that better aligns with our values. Instead of surrendering our autonomy to the soulless mechanics of the market, we can freely choose to grow beyond being mere consumers and become forceful citizens.
      Robert S Devine is the author of Bush Versus the Environment and The Sustainable Economy: The Hidden Costs of Climate Change and the Path to a Prosperous Future More