Capitalism is good for the environment
Every year, the Heritage Foundation ranks countries around the world based on economic freedom in a kind of capitalism index. Analysis has shown that the world’s most economically “free” countries also registered the highest scores on Yale University’s EPI environmental index, averaging 76.1 (on a scale from 0 to 100), while the “mostly free” countries averaged 70.2. These two groups have a significant lead over the “moderately free” countries, which received much lower ratings (59.6 points) for their environmental performance. The countries rated by the Heritage Foundation as either “mostly unfree” or “repressed” received by far the worst Environmental Performance Index scores (46.7 and 50.3, respectively).
Researchers at Yale University found that there is not only a correlation between the Heritage Foundation’s index and their own EPI, but also between the EPI and the “Ease of Doing Business Index” which is published each year as part of the World Bank’s Doing Business Report and is generally regarded as the world’s most comprehensive and reliable gauge of the ease of doing business, with higher ratings indicating better, usually simpler, regulations for businesses and stronger protections of property rights. According to the researchers at Yale University, the correlation between the “Ease of Doing Business Index,” which they refer to as a measure of “economic liberalism” (i.e., an indicator of how capitalist an economy is), and the EPI is 0.72.
In 2016, researchers published a study in the journal Sustainability that included an evaluation of the correlation between the EPI and the “Open Market Index” (OMI) compiled by the International Chamber of Commerce (ICC). The OMI measures a country’s openness to free trade and is thus an important indicator of economic freedom. The researchers found a high degree of overlap between the OMI index and the EPI: 19 of the OMI’s 27 highest-scoring countries also appear in the top 27 of the EPI. The survey covered a total of 75 countries, including all G20 and EU members. Together, these countries account for more than 90 percent of international trade and investment. The researchers conclude: “It is evident that there is a strong connection between OMI and EPI scores, supporting our hypothesis that countries with an open economy score higher in environmental performance. Overall, our evidence shows that the level of the openness of an economy is associated with a country’s environmental protection.”
Another study, “Is Free Trade Good for the Environment?” by Antweiler, Copeland and Taylor, uses sophisticated mathematical modeling to explore the correlation between free trade – a key feature of capitalism – and environmental pollution. The study finds: “Our estimates of the scale and technique elasticities indicate that if openness to international markets raises both output and income by 1%, pollution concentrations fall by approximately 1%. Putting this calculation together with our earlier evidence on composition effects yields a somewhat surprising conclusion: freer trade is good for the environment.”
Of course, it can be argued that capitalism leads to stronger economic growth, which in turn leads to an increase in resource consumption. However, the analyses show that, at an early stage of a country’s economic growth, a high level of environmental degradation is observed, while, after a critical point of economic growth, a gradual decline in environmental degradation is reported.
In addition, there are two real-world observations that also disprove the argument that stronger economic growth automatically leads to greater environmental pollution:
- In non-capitalist countries, environmental degradation has been a far more serious problem than in capitalist countries.
- The correlation between economic growth and increasing resource consumption is becoming ever weaker in the age of dematerialization.
On the basis of numerous data series, Andrew McAfee has shown how economic growth has decoupled from the consumption of raw materials. Data for the USA show that of 72 raw materials, only six have not yet reached their consumption maximum. Although the US economy has grown strongly in recent years, consumption of many commodities is actually in decline. And the results of all these studies point in the same direction: capitalism is not the problem, it is the solution – both economically and environmentally.
Dr Rainer Zitelmann is a historian, sociologist, and author of the book The Power of Capitalism.