Its one thing to confidently mark the end of a economic and political philosophy like conservatism. The harder part is to show a way forward that takes the best of the market signaling mechanisms of capitalism and modifies them for an age of limited resources like Peak Oil. The economist Robert Frank makes a very cogent argument this morning that the Invisible Hand of Adam Smith needs some guidance.
The production and consumption of many other goods, however, generate costs or benefits that fall on people besides buyers and sellers. Producing an extra gallon of gasoline, for example, generates not just additional costs to producers, but also pollution costs that fall on others. As before, market forces cause production to expand until the seller’s direct cost for the last unit sold is exactly the value of that unit to the buyer. But because each gallon of gasoline also generates external pollution costs, the total cost of that last gallon produced is higher than its value to consumers.
The upshot is that gasoline consumption is inefficiently high.
The obvious solution to this problem is to tax gasoline so that the “externalized costs” of pollution are figured into the costs at the pump. This is what most developed countries do (gas in the U.K. cost $8.50 per gallon). The tax would lower gas consumption and the revenue could help fund the R & D for alternative fuels. But because the inefficient Detroit automakers and the oil companies have had so much clout in the Republican Party (and some Democrats as well), this never happens. Unless we change this next year, we are headed for disaster.