An article by Nordhaus in the latest NYRB takes issue with the economic theories or thoughts rather that undergird pope Francis’ Laudato Si, and especially with its hostility to market-based cap-and-trade. He grants that profits have a distorting effect and consumerism is a danger but returns to Adam Smith’s fundamental idea that “the efficient performance of a market economy does not depend upon the ethics of individual behavior.” I think this idea has much older antecedents (Pascal for instance and other thinkers in the seventeenth century). Anyway, he quotes the famous phrase of Smith:

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.

Of course, this “interest” could integrate an ethical interest for the well-being of the society, as advocated by Nordhaus later in the article. Nordhaus speaks of impersonal forces of the market. Indeed. Still the “forces” at work have to do with unleashed desire and envy at the personal level which were kept bridled, at least for the masses, until the eighteenth century. Economists realize that market failures and inequalities were wrongly ignored by Smith. Nordhaus further agrees with Okun that there should be limits to what markets are allowed to do until such time when economic deprivation is ended and a truly competitive market may be authorized to play out.

But isn’t poverty rising (Atkinson, Piketty, Stiglitz) and as the encyclical repeatedly says? Nordhaus disputes two things in that respect. First, that degradation of resources and pollution are major causes of rising poverty. The more important reasons, at least in the US, are robotization, imports from low-wage areas, and distortions in the financial system. Secondly, for the rest of the world, trends are rather for the decrease of global inequality. This is where a Marxist or neo-marxist analysis is badly needed. Mais passons.

It remains that externalities, especially pollution, have long preoccupied economists also. Can’t we tinker with the piping and the valves of the glorified system? The problem is that Laudato si doesn’t propose solutions for the resorption of pollution, a major externality that affects many poor people and threatens to be a catastrophe for millions of them. Nordhaus appeals to the market, a corrected market, to reduce pollution:

Rather, environmental degradation is the result of distorted market signals that put too low a price on harmful environmental effects.

A few examples: natural goods like water are underpriced in places like California; use of airports and roads is underpriced. Carbon dioxide emission is essentially priced at zero and its price must be raised, “This can be done either by taxing emissions or by a system of cap-and-trade.”

The encyclical is right in much of its approach but wrong, Nordhaus continues, in condemning a market approach. In a cap-and-trade approach, countries would decide to limit their emissions and then auction off emission permits that would be owned and traded by firms. It encourages not only limits but also highest economic value per unit of carbon emission. A very high price (vs zero) for emissions would signal a serious attempt to cap. Taxing emissions is simpler, but Nordhaus says precious little about this solution.

Back to the pope’s criticism of the market in this particular case, misguided criticism, according to Nordhaus. Why would the financial instruments regarding capping emissions be more volatile and particularly targeted by speculators? Nordhaus feels that the encyclical, which had great potential in raising consciousness and inviting everyone to strong actions, missed an opportunity to endorse carbon-pricing.

Many lines in this article invite discussion. Just one comment on why Catholic doctrine tends to be hostile to the capitalist form of the market. The fundamental reason for the discrepancy between Catholic doctrine on these modern matters and economists like Nordhaus is the still powerful structuring influence of the way sin is conceived of. Desire and envy, as in the story of Cain and Abel, are to be contained and capped. That was and is the priority. It happens that royal officers of the sixteenth and seventeenth centuries began to recognize that personal envies and desires, no matter the Church-proclaimed, aristotelic, moral preaching, could be allowed to play their role in a sort of miraculous self-regulation. They are indeed at the center of market mechanisms, as Smith after many others saw so well, and cannot be easily put back into the bottle. Perhaps we need a new Francis, I mean, a new world in which envy and desire can be confronted directly at the personal level and capped in imaginative new ways. Nordhaus, on the other hand, still believes that the magic of “the impersonal market” and its servo-mechanisms may still work miracles. Not glorious miracles but day-to-day grunt miracles. It seems he is asking a genie to become less of a genie and work at restraining itself via an ultimate trick. I’m afraid he is calling for the kind of political strength and unity in nations and international organizations that the market has precisely been eroding.