Using Market Information to Optimize Economic and Ecological Outcomes
J.W. Sher
January 14, 2025
In recent discussions I’ve had, I’ve noticed a couple of misconceptions about Free Market Ecology that I’d like to clear up by comparing Free Market Ecology to several other economic systems, including our current system of capitalism, and show how Free Market Ecology improves on all of these by extending economic calculation from capital creation to environmental protection, and in doing so, enhances environmental protection at the same time as it preserves the benefits of a market economy. In this article, I’ll explore how Free Market Ecology can improve and expand existing market-based environmental protection systems, focusing on Nutrient Credit trading for waterway pollution management. This case study will demonstrate how current Nutrient Credit markets could evolve to achieve their full potential within a Free Market Ecology framework.
The Pure Command Economic System
The Pure Command Economic System is an economic arrangement with no shopping and no free choice of work. The state central planners provide all material goods without choice; all capital is created at the direction of the state central planners in a centralized way or imported from somewhere else; the state central planners direct all work, and environmental protection is the sole job of the state central planners. Examples of this on the state level are rare but include the rather historically awful example of Khmer Rouge Cambodia, one of the few governments in history where the authorities eliminated the use of money.
However, it is also the setup more conventionally in some small closed environments, such as during deployment on a nuclear sub, on the international space station, or even on a future Mars colony. In these environments, a sailor or astronaut cannot stop working for the military or NASA, start a business, and engage in commerce on the submarine or space station. They must act at the direction of command. The military or space planners plan for all needs. There is no shopping or commerce. Since the state handles all these matters, the capital creation, goods and jobs chosen for the workers, and environmental protection are manageable as long as the scope is minimal and heavily subsidized from outside. When it gets to a larger scale, like a state, the coordination often breaks down, resulting in catastrophic results.
The Soviet Style Communist Economic System
In the Communist state, people may receive wages and shop. They may also have some limited choice in their profession, but primarily, the state still assigns them. All capital is created and owned by the state central planners, and all environmental protection is the responsibility of the state central planners. Since the state central planners create capital and protect the environment but do not receive market price signals, the quality of these processes suffers. Examples of countries using this economic system include Cuba and North Korea.
The Capitalist Economic System
In the Capitalist state, people receive wages and shop. They have a choice as to their profession. The private sector creates capital in a market process. Environmental protection, however, is the responsibility of state central planners. Since the private sector creates capital, entrepreneurs can build it efficiently because it uses market price information. Since the state central planners do environmental protection, planners perform the work without real-time market information that would inform economics trade-offs, much like communism creates capital without properly evaluating all trade-offs in the use of factors of production using real-time market information. Examples of capitalist states include Western democracies.
The Free Market Ecology Economic System
In a Free Market Ecology Economic System, people receive wages and shop. They have the choice of their profession. The private sector creates capital in a market process. Economic actors also engage in environmental protection in a market process. Since entrepreneurs create capital in the private sector and environmental protection is also done by the private sector, it optimizes the trade-off between the use of different factors of production using real-time market information. No economy operates in this way currently, but with Nutrient Credits and, to some extent, carbon credits, we are starting to see small pieces of this economic system and the accompanying system of government oversight come together. Nutrient Credit trading is a small, essential piece of Free Market Ecology wherein polluters own their pollution and must mitigate it. As I will show, Free Market Ecology is more capitalist and market-oriented than our current capitalist system because it moves environmental protection to the market sector and makes it the focus of entrepreneurs instead of leaving it to state central planners.
Free Market Ecology: The Nutrient Credit Example
The economic actors in the Nutrient Credit Market are as follows:
- Point-Source Polluter. Examples include livestock farms, agricultural runoff-producing farms, or water treatment plants that produce phosphorous or nitrogen that enters a protected waterway.
- Nutrient Credit Provider. A Nutrient Credit Provider is a private entity that places oysters into the water downstream to mitigate the pollution that enters the waterway.
In the Free Market Ecology process, the emission of the Point-Source Polluter goes on to the ecological balance sheet of the Point-Source Polluter at the time of emission. It leaves it when a Nutrient Credit Provider mitigates it, at which point the Point-Source Polluter has the pollution removed from their ecological balance sheet and can emit more. The new emissions, in turn, add to their ecological balance sheet. The way regulators have currently organized Nutrient Credits is that the Point-Source Polluter purchases a Nutrient Credit from the Nutrient Credit Provider in advance to pay for the oyster deployment by the Nutrient Credit Provider to mitigate their pollution in compliance with regulations.
Adopters should note that this is much more efficient than the traditional capitalist model, where the government must manage environmental pollution in a bureaucratic process. For example, the government might tax the Point-Source Polluters and then subsidize Nutrient Credit Providers, but this would have a bureaucratic layer that would not result in efficient environmental protection because the bureaucrats would have to manage the whole process manually and would have to estimate how much to tax and subsidize in a non-market process.
In a full Free Market Ecology process, the people buying the goods from all Point-Source Polluters would have to, in purchasing the goods, be subject to a mutual externality quota, whereby the externality of the Point-Source Pollution transfers to the goods or services customers buy and waterway affecting businesses can export that pollution up to a maximum quota monitored and set by government environmental officials. If several Point-Source Polluters shut down, the other companies may use the leftover quota or quota allocations may even be sold by Point-Source Polluters who shut down their operations. Buying Nutrient Credits would transfer this externality off the balance sheet of the Point-Source Polluters to the Nutrient Credit Provider, allowing the goods and services to have less or no externalities attached to the goods they sold to consumers and allowing them to sell more while staying below their share of the waterway’s quota limits. Furthermore, the distribution of the remaining externality from the goods and services of the Point-Source Polluters could then be tracked and managed throughout the economy.
The system incentivizes Point-Source Polluters to reduce pollution so their goods carry lower externalities than they would without process improvements, which would require fewer payments to a Nutrient Credit Provider to mitigate it. The system will inform consumers about the remaining externalities in their purchases, and the system will incentivize Nutrient Credit Providers to offer their mitigation services at a reasonable cost to encourage the growth of the business of the Point-Source Polluters by providing economic mitigation services that keep their products and services affordable.
Even without the quota, just tracking the externality of Point-Source Pollution would provide valuable information about where environmentally intensive consumption appears in the economy. As the Free Market Ecology economic system develops, the system’s implementers will add tracking for more externalities, and a vastly more honest and informative understanding of the environmental externalities of consumption will be available to many different information consumers.
Under the Free Market Ecology incentive structure, Point-Source Polluters will find ways to reduce the externalities they create through more ecologically efficient methods and capital creation. Consumers of end products and services will understand and be able to choose among products to lessen their environmental externalities efficiently. Environmentally conscious companies will be able to make their supply chain more efficient regarding ecological externalities by having a full accounting of these externalities. Environmental economists will be better able to understand the sectors of the economy dependent on environmental externalities, and regulators will have a way to easily and transparently adjust the amount of allowed unmitigated externalities.
Conclusion
Without Free Market Ecology, many environmental externalities are mostly invisible to businesses and consumers. The government may work to control them, but without the help of market processes and information provided by Free Market Ecology infrastructure, the job is inefficient and “whack-a-mole.” As the economy becomes more efficient and less constrained because of AI and robotics, efficient environmental externality and resource use tracking and monitoring will become even more crucial. Free Market Ecology will be a useful system and set of concepts to address those future needs.