Ingenuity and incentives

Do your children like scary stories? It seems that most of us preserve some taste for them when we grow up (for instance, I love Stephen King). The media knows that an apocalyptic prophesy sells better than any good news. When a solution "doesn't lay right before our eyes, it is easy to assume that no solution exists," point out economist Steven D. Levitt and journalist Stephen J. Dubner in Super Freakonomics. Hence scary, fatalistic, neo-Malthusian theories are always popular.

Last week I made an observation that economic hardships create market incentives that tend to generate technological innovations solving even the most intractable problems. This is especially true for the period since the rise of modern capitalism. The follow-up to the bestselling book Freakonomics tells two fascinating stories. It explains how negative externalities from pollution almost destroyed the major cities on earth and how the "tragedy of the commons" almost led to the extinction of the largest animal on the planet. It also shows how entrepreneurial pursuit of profit worked better than altruistic government intervention to solve both problems.

Super Freakonomics notes how with the growth of New York City, transportation problems multiplied: traffic jams and fatalities, insurance costs, air pollutants endangering the health of the residents. In addition to that, it diverted farmland to growing crops for fuel, raising prices for food. No, that's not the story of the rise of the automobile, the problem was the horse. A hundred years ago, the city had 200,000 horses. They claimed the lives of 200 residents annually, a fatality rate almost twice as high as the one caused by cars today. The horses were also producing 5 million pounds of manure per day, lining the streets and seeping into basements during rain, attracting billions of flies and rats, and stinking to the heavens (not to mention methane and global warming).

While horses were multiplying and drowning the big cities in manure, the whales were disappearing from the oceans. Whaling was the fifth largest industry in America, turning thousands of those magnificent creatures into lamp fuel every year. The common resource was overused, oil prices spiked, and the economy faltered. Did the mayor of New York find a solution for the city's smelly problem? Did the U.S. government pass legislation protecting an industry that was "too big to fail" with its 70,000 employees? Did the environmentalist movement save the whale through a global "endangered species act"? No, no, and no. It was accomplished through the rise of the oil and auto industries. Ingenuity and incentives have always delivered the goods and there is no rational reason to expect them to fail today.