Earth Day and the Crisis of Markets

Since its founding 39 years ago by John McConnell, the plastics pioneer and peace activist who first proposed a holiday to honor the Earth at a UNESCO conference in San Francisco, Earth Day has grown in into a global holiday observed by billions. But the idea espoused by McConnell of stewardship of our beloved planet has taken on a new urgency, with the outbreak of multiple crises, the ongoing threat of global warming, sky high oil prices and now soaring food prices and shortages. Indeed the crises are so many and so great that some are proclaiming a neo-Malthusian crisis in a world that has outstretched its resources. Whether one believes as Paul Krugman wrote yesterday—that lack of inventories suggest the world is truly in the grip of a crisis of supply--or like George Soros and many traders that we in the midst of the mother of all commodity price bubbles—it is clear that we are in a crisis.

My view is that human ingenuity is more than equal to the task of sustaining society but that something has gone awry. And what has gone awry is the functioning of markets. Whether one looks at turmoil in the credit markets, volatility in the currency markets where the dollar has undergone a freefall, the seizure of food markets that is exacerbating the food crisis or the hard-to-explain global surge in commodity markets across the board, it is clear that the market system undergirding the global economy is under stress.

In part, the problem is that as markets have grown rapidly in the last fifteen years due to globalization, they have outgrown market structures. Certainly in the area of management of derivatives and bank supervision, market governance has failed to keep up with technology. However, it also appears that markets are failing in agriculture and oil. And more broadly, the global trading system itself is experiencing a seizure as the impulse for free trade that has powered the last 60 years of global growth has stalled—in Doha and recently, in the case of a Colombian agreement, in the US Congress.

When markets seize up—as they do from time to time and did disastrously in the 1930s—the result is a regression to earlier forms of allocation of goods. Anthropologists have shown that markets are a relatively late development in the million year history of human. Allocation based on command and control, is far more basic and when markets seize up, this is what happens. We are seeing this currently in food markets as countries ban exports and hoard grains in the anticipation of riots and political unrest.

Markets are a far better way to allocate goods and essential to today's wealthy societies but they depend critically on confidence. Confidence, in turn, depends largely on transparency and comprehensibility. When economic historians assign a cause to the current recession in the United States, they may place the blame on a technology shock in the financial markets that has created securities that no one can possibly reliably value.

It is no good to repeat the nostrum that we need to let markets resolve the crisis when the crisis is in the markets themselves. Nor are the one-off activities of the Federal Reserve sufficient in the long term. While the Fed seems to have been successful in injecting liquidity into the system, its unprecedented actions are at best an emergency response and do not provide the predictability and stability needed to promote long term growth. Instead, we now have to undertake the painful process of reforming financial, agricultural and energy markets. However, this won’t be easy.

One critical element of the spirit of Earth Day is that people need to work together. When one country goes it alone, the result is mistrust, a decline in confidence and ultimately a downward economic spiral. This was the easily foreseen--but recklessly ignored--consequence of the unilateralist policies pursued by the Bush Administration in rejecting Kyoto, a variety of multilateral initiatives inherited from the Clinton years, and of course in Iraq and foreign policy in general.

The way out of the current crisis is to resume multilateral approaches to creating functioning markets that will replace fear and mistrust with cooperation and confidence. But for that we may have to wait at least until the next Earth Day, after the next Presidential Election.