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Adam Smith, the “Green Invisible Hand” & Carbon Markets (2/6)

Updated: Nov 1, 2022

In the climate-changed and climate-challenged 21st-century, could Adam Smith's 18th-century ‘invisible hand’ be transformed into a "green invisible hand"?

We’re ditching coal – an 18th-century way of generating electricity...

Smith’s invisible hand – an 18th-century economic concept also needs an update.

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Note: this video covers the same topic.

You’re probably familiar with the “invisible hand,” the founding principle of capitalism.

Originated in 1759 by Adam Smith, the Scottish father of modern economics, the “invisible hand” refers to the spontaneous, natural allocation and pricing of resources, goods and services, and labour within the economy, with as little government intervention as possible.

It’s based on a belief that the self-interest of an individual translates into – is a safeguard for – the best interest of society (which consists of self-interested individuals). If I act out of my self-interest, it’ll create conditions and circumstances for interactions with other individuals who also act out of their self-interest, then others, and so on. And where our self-interests converge, the “magic happens,” meaning the best possible option presents itself to me, the other individual/s, the economy, and thus, the whole society.

It’s a bottom-up concept

Example A:

The owner of a shoe-making factory will attract (and pay) good shoemakers making quality shoes; the owner and workers will both earn money, the state will benefit from taxes, and the society will benefit from quality shoes, affiliated industries, shoe factory café, peripheral employment in retail and distribution, etc.

We have converging, mushrooming self-interests in sync

Example B:

A large banana grower in Queensland will charge a supermarket chain $1/kg for his bananas, which is enough to keep him in business (paying utility bills, labour, tractors, fertilizer, and earning a profit). The supermarket chain will add a mark-up to cover their cost (distribution, storage), plus a margin.

When Amy does her Tuesday morning shopping, she’ll pay $2.35/kg at her local Woollies. This price reflects everything that had gone one before, from the moment the Queensland grower planted the first banana cutting, to the moment Amy picks her bunch at Woolworths Metro Fitzroy on Tuesday. The whole banana chain must make economic sense for the grower (price not too low), the supermarket chain, and Amy (price not too high).

There is an element of predictability – the farmer, the banana picker, the truck driver, the warehouse worker, the supermarket procurement officer, Amy who expects bananas on the shelf, and many others can plan ahead, keeping the long chain of banana biz going; they know the “sweet spot” of $2.35 at the store, and that this price will predictably keep selling the bananas.

The market determines the price

The unique feature of the invisible hand is its spontaneity and natural allocation of the “sweet spot,” e.g. a price of shoes that’s high enough to make economic sense to produce but not too high to be prohibitive for most people. It's related to supply and demand.

So far so good – ingenious efficiency without regulations!

Unfortunately, our dominant economic theory (neoclassical economics) has been myopic – ignoring energy use, resources, the environment, natural capital, and pollution (called ‘externality’). These services are not priced.

And this efficient myopia, this blind invisible hand has been automatically acting in a way that’s been causing environmental degradation, pollution, and overuse of resources …

Simply because it never factored in nature, on which everything else depends

The notion that nature is ‘priceless’ is a cruel paradox, because ‘priceless’ in economic terms means WORTHLESS - having no price, therefore, not accounted for, as pointed out by Tim Cronin from WWF-Australia.

The belief that our society as a whole is better off as a result of individuals acting out of self-interest has holes. Environmental degradation and climate change, I believe, are a symptom of this “me and my self-interest first” attitude.

Notwithstanding, the invisible hand concept is ingenious and efficient, so…

Can we have a GREEN invisible hand?

Can we continue Adam Smith’s brilliant and efficient model – the one we’re running on right now, and update it from the 18th to the 21st century … for our climate-changed and climate-challenged planet?

Before we get to what this looks like in the real world …

Let’s see what the green invisible hand is

It’s the traditional, Adam Smith’s invisible hand but in a green glove; it shapes markets and the economic landscape in a sustainable way …

That is to say, it shapes market behaviour in a way that reduces planet-warming greenhouse gas emissions (GHGs).

Sure, there are many other environmental issues – such as ocean plastic pollution, deforestation, and loss of biodiversity – but the one singular objective for most countries, 200 signatories of the Paris Agreement, has been the reduction of GHGs.

And by putting a high enough price on carbon, we create a universal green lever, a green invisible hand that shapes markets in a way that facilitates low-carbon economic activity.

This carbon pricing mechanism then acts as Adam Smith’s invisible hand, keeping the spontaneity and freedom, but adding a green glove to the self-interest, so that society as a whole – plus the environment – benefits…

(At least that’s the idea, we’re just beginning)

This creates market conditions that automatically, naturally embed GHG-reducing efforts into all market-based activities, by making low-carbon products and services affordable and high-carbon products and services unaffordable, even prohibitive, thus pricing them out of the market. The point is that the markets do the selecting, in line with Adam Smith’s concept.

As Ross Garnaut writes in his 2019 book ‘Superpower,’ “comprehensive carbon pricing is the centrepiece of any environmentally and economically efficient program to reduce emissions” … and “reliance on regulatory approaches and direct action for reducing carbon emissions is likely to be immensely more expensive than a market approach.”

We live in a globalized market-based economy, so we need market-based approaches to tackling climate change

Can this work?

It already does

In the previous article, we looked at New Zealand farmers who are now earning five times more from planting carbon-sucking and carbon-storing trees than what they were earning by breeding methane-releasing sheep on their farms. They benefit from a high enough carbon price. If the price for carbon was lower than profits from sheep grazing, they would’ve never replaced sheep with trees.

Similarly, Carbon Farming Australia lists five examples of how farmers can earn carbon credits (or ACCUs which is the same thing) by changing their farming practices:

1. By storing carbon in their soils

2. By planting natives

3. By managing stock to allow native forest to regrow

4. By reducing methane in their cattle herd

5. By reducing nitrous oxide emissions from irrigated cotton


There is more to it than replacing sheep with trees

Credits can also be earned by avoided land clearing … and farmers can plant green corridors along, through, and between their farms thus balancing grazing with revegetation and earning carbon credits.

On a slightly different – but not too different – note, farmers can (and do) cover a portion of their farm with solar panels. While this may not earn them carbon credits unlike these^ activities, they can (and do) earn money from leasing their land to renewable energy companies. This video shows a farmer in NSW who switched from a full sheep farm to a half sheep half solar farm.

We’re ditching coal – an 18th-century way of generating electricity.

Smith’s invisible hand – an 18th-century way of “doing economy” needs a green update.

Today, we’ve looked at the positives, at the potential of greening up Adam Smith’s invisible hand.

Will this work long-term?

Instead of quick profit and self-interest of the traditional invisible hand, can it future-proof us and our planet by factoring in the environment – having a long-term focus?

It’s too early to tell. Let’s stay alert, curious, and vigilant. It’s easy to succumb to the green hype everywhere, and booming carbon markets.

Next time, we’ll look at some of the worrying attributes of the green invisible hand. It can destroy native forests and primary rainforests - ON ENVIRONMENTAL grounds!

I’ll see you then.


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