It’s all about inequality
Blogging about the new Elizabeth Kolbert article in the New Yorker, David writes:
But then, there’s the nagging thought. Lovins can always talk and explain and persuade better than we can — he’s a friggin’ genius — but the intuitive question keeps returning: if there were so many errors, and so much benefit to be gained by correcting them, and it’s all so easy … why isn’t it happening? Something doesn’t fit.
Roberts quotes Kolbert expressing similar thoughts:
Lovins’s promise that apparently intractable problems — oil dependence, global warming, nuclear proliferation — can be profitably resolved is both the great appeal of his approach and its biggest liability. Much of what he recommends sounds just too good to be true, the econometric version of “Shed pounds by eating chocolate!”
This is a good question, and one of my early posts on this blog partially answered it. Energy demand has low long-term price elasticity (PDF). (That’s economic jargon for, “people tend to overlook a lot of profitable opportunities to save energy.”) That, in turn, implies that Amory Lovins has spotted something real. We have overlooked, over a period of decades, profitable opportunities at market prices — opportunities that were profitable even without carbon taxes or emissions caps. “Market failure” is not a strong enough term for a system that could consistently go so wrong.
The post I linked included partial explanations:
Split incentives: These include obvious split incentives, like insulation in rental homes, but also differential access to capital. Consumers and various industrial sectors pay differing prices for capital, but they also have varying alternative uses for it. For example, even if you offer a homeowner a low-interest loan for insulation or solar upgrades, she still may want to avoid using up so much of her credit in case she needs it for emergencies or job loss.
Still more split incentives: You can’t overlook split incentives in firms. Cost accounting evolved under circumstances in which direct labor was the overwhelming cost driver. As other costs play an ever-increasing role in industry the trend is toward ABC accounting, which seeks more appropriate drivers than labor to allocate these costs. However, flow costs — energy, water, in some cases even raw materials — are often allocated in proportion to labor or departmental drivers. That means the person in a position to make decisions that save energy will often see the savings allocated to other departments or divisions.
Noise: When we talk about “markets setting prices” we are making a necessary simplification. You have to remember that there is a price giver and a price taker. That is, someone offers a good or service at a price they think the market will bear, and someone else decides whether to pay the price. Other factors in a purchase will affect a decision more than energy efficiency.
Think about buying a home. Good insulation is better than poor insulation. But if you are selecting between two otherwise good houses, are you going to select the one with a poor location but good insulation over the one with a good location but poor insulation? What if the problem is layout rather than location? Seldom are two homes identical, and most factors that distinguish them will outweigh insulation.
Now, this is not completely true. Builders can get a “green building” premium on the upper end. But you will note that most green homes (excluding owner-built) are in one of two sectors: upper-end or subsidized. You don’t see a lot of ordinary, unsubsidized, middle-class housing with extensive green features. Home builders aren’t confident they can recover the price of such changes in a mass market, even though there’s little doubt such features would pay for themselves over the life of a 15-30 year mortgage
I could list micro-causes of this sort for another 30,000 words. But the ones already mentioned show a common factor — inequality. Think of rental housing. In a situation where landlords and tenants bargained on more equal terms, tenants could be fussier, insisting on all the features they want and insulation besides. Also, in a situation of more equal bargaining power, there’s more trust between landlords and tenants in existing units needing insulation; they can make deals where the landlord pays for part of the insulation because it increases the value of her property, and the tenant pays for part because it lowers her costs.
The same argument applies even more strongly to unequal access to capital. Businesses that divide income more equally between labor and capital, and pay more equal salaries, also tend to build more sense of ownership among managers and workers. Where people feel that the firm is our firm, not their firm, there is much less tendency for the “not my department” syndrome to take hold.
And that is the ultimate explanation for “why we are not doing it now.” On a business level, the kind of changes needed to stop overlooking profitable opportunities requires either near-genius CEOs like Ray Anderson of Interface Carpets (not common), or a level of economic equality, shared control, and shared information among employees in a firm that runs contrary to how we structure our economy.
As Amory Lovins notes, “optimization of components in isolation from one another results in pessimization of the system as a whole.” In the absence of geniuses running the place, you need to tap the knowledge and creativity of almost everybody in the company. You need to get people talking to one another, understanding the unexpected ways they affect one another. For that to happen, you have to eliminate the fear that if management understands too much about your job, someday they will use that knowledge to eliminate it, or de-skill it and lower your wages. (That is not an unwarranted fear.)
So while various sorts of “team building” schemes can work in the short run, in the long run you need real powersharing — the kind that gives people some guarantee that sharing knowledge and skills is not a form of economic suicide. As long as you have the three-way tug of conflicting interests between owners, managers, and workers, profitable opportunities will be overlooked.