The benevolence of the butcher, the brewer, and the baker

There are growing reports of fissures in the U.S. business community over the issue of carbon pricing. For many years, U.S. businesses - manufacturers in particular - have fought tooth and nail against carbon emissions restrictions, which would drive up their costs. But American manufacturers are starting to come around:

When the President asked [Caterpillar CEO James] Owens if he saw a “competitive disadvantage” as a “big manufacturer” in dealing with energy reform, Owens said placing a cap on carbon would actually spur innovation:

OWENS: I agree with Jeff. I think we have the technology, we have the smarts here, and the product technologies, the economic incents of what’s needed. And that’s why I think of us in industry support a clarity around a carbon price, because that’s going to drive a lot of innovation and a lot of efficiency and will get with the program of reducing carbon emissions.

Owens continued laying out his support of clean energy legislation, noting most of Caterpillar’s renewable energy related products are currently sold “outside the United States…partly because of the way we regulate emissions site-specific, as opposed to looking at combined emissions and energy efficiency.” He also emphasized that giving the markets a price for carbon would “help our country be more competitive using the technologies that are out there.”

Businesses have not suddenly developed an idealistic concern for the Earth's environment. This is all about costs. When competing against companies in nations without carbon restrictions, American businesses would be hamstrung by the higher costs imposed by a carbon tax or cap-and-trade system. But now that countries all over the world have woken up to the reality and the seriousness of global warming, carbon restrictions are sure to multiply. This makes it possible for U.S. companies to reduce their emissions without going out of business.

Not only possible; profitable. As a rich country with lots of R&D spending and a high-skilled workforce (but also lots of regulation, since we demand high quality of life), America is at a huge advantage when companies compete on the basis of innovation and high technology. When we compete on the basis of price, we're basically screwed. High-end manufacturing powerhouses like Germany, Japan, and Korea will typically eat our lunch in terms of quality, and low-end workshops like China will always undersell us. But no large country is as good as innovation as the U.S.; when the game is who can come out with newer better stuff faster, American companies typically have the edge.

It's a shame, of course, that U.S. companies didn't see this earlier. If we had been one of the leaders in restricting carbon, instead of a follower, our companies might have had even more of an edge. It's my guess that ideology - the conservatives' dogmatic conviction that all regulation is bad, and the liberals' suspicion of business in general - made it difficult for companies to push for carbon restrictions before now. Fortunately, liberals are coming around quickly in the Obama Era.

This situation is another powerful example of the value of economics in understanding politics. "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their self-love, and [we should] never talk to them of our own necessities but of their advantages," Adam Smith wrote, and it is so. Railing at businesses to care about anything other than money will never, ever, ever work, ever. But reshaping our institutions - our regulations, our market structure, our industrial policy - to align the common good with businesses' bottom lines is an approach that will continue to bear fruit for all concerned. That is the future of liberal economic policy.