Myths of the Market

According to the International Energy Agency (IEA), in order to achieve carbon neutrality, we need a radical transformation of the global energy system, which will require a substantial increase in investment. Policymakers have chosen the financial markets as the main tool to coordinate this energy transition, in line with the neoliberal ideology that remains hegemonic in our world.

Trying to discern what may happen in the future has always been central to capital accumulation, so the financial system has equipped itself with a set of technologies for calculation that transforms future risks and expectations into wealth. According to neoliberal doctrine, as market players negotiate costs, prices, and interest rates, they collectively bring to light the information that is needed to evaluate future projects.

From this perspective, since capital markets synthesize the perceptions of various investment opportunities held by those players, they will also bring about the most efficient allocation of resources possible, with an optimal trade-off between levels of risk and return. Like the needle of a compass caught between opposing magnetic forces that show us which way to go, market prices will give us the knowledge we need to navigate the uncharted waters of climate change and will thus be far superior as a guide to any conscious, purposeful socioeconomic plan.

The Austrian economist Friedrich von Hayek was the most influential proponent of this view of markets as information processors — a kind of artificial neural network that we can deploy for every informational task. It is the theoretical foundation for the idea of “sustainable finance” that prominent figures such as Mark Carney, former governor of the Bank of England, have put forward over the last decade.

Climate Change and Financial Stability

According to Carney, climate change will generate winners and losers, prompting a systemic adjustment of the entire financial system. In particular, he warns, the disorderly accumulation of so-called stranded assets — like carbon-intensive stocks in fossil fuel production — by financial institutions that are too big to fail will have a domino effect.

In a high-profile 2015 speech, Carney suggested that this might lead to an apocalyptic disruption of the system as a whole: “Once climate change becomes a defining issue for financial stability, it may already be too late.” But he insisted that there was a market-based solution to this problem available to us:

Our role can be in developing the frameworks that help the market itself to adjust efficiently. Any efficient market reaction to climate change risks as well as the technologies and policies to address them must be founded on transparency of information.

If there was “consistent, comparable, reliable and clear disclosure around the carbon intensity of different assets,” Carney believed, the market could aggregate this information and potentially “pull forward adjustment.”

Carney has continued to argue that we must translate the impact of climate change into the language of financial risk with its various forms of measurement and calculation. The development of new policies and regulations has accelerated across the world, with states, central banks, and private economic actors all working to formulate requirements for climate-related financial disclosure. It is increasingly becoming mandatory for companies to reveal data that the financial markets previously ignored, such as their carbon footprint.

This approach transforms the failure of the market to deal with environmental problems, which people like Carney have only recently acknowledged, into a simple matter of inadequate information. If only the market knew about the individual impact of each firm on the planet — for example, its carbon emissions — it would be able to bring together this data and reach an optimal point of collective equilibrium, imposing the necessary discipline on corporations. By encoding such data in the form of “Key Performance Indicators,” we can establish the “risk profile” of various investments.

A Concealed Form of Planning

But is it really the market that coordinates green finance? When you start digging, it is striking how little the main economic actors in this field rely on the supposed marvel of the self-governing market. Instead, they base their decisions on data, models, and scenarios that are produced from outside of the market. Without acknowledging it, they are engaging in a form of economic planning.

Asset managers, for example, obtain “market intelligence” through Net Zero Scenario calculations, especially the ones provided by the IEA. These calculations are based on integrated assessment models (IAMs) that quantify the socioeconomic consequences of climate change through algorithmic calculations. The central banks grouped together in the influential Network for Greening the Financial System (NGFS), including the European Central Bank and the People’s Bank of China, use these models to perform so-called climate stress tests.

This means that they assess data related to millions of individual firms to investigate the future impact of climate change across a wide range of macroeconomic variables. IAMs also provide guidelines for assessing the environmental performance of financial instruments, such as the growing industry for green bonds, and these scenarios guide investors as they assemble “sustainable portfolios.”

Investment scenarios translate hypothetical worlds into a set of metrics and calculate what we need to do to make those worlds real. The much-discussed Net Zero Scenario, for example, projects a carbon-neutral world in the year 2050 and then calculates the optimal path toward achieving it.

It quantifies priorities and costs, providing a consistent, coordinated image of the future economy. In doing so, it zooms in on every geographical area and economic sector — transport, agriculture, construction, etc. — revealing their interconnections and dependencies.

How must our economy evolve? How will our energy production be distributed among various renewable sources? What will be the role of new technologies? What will our transport system look like? By addressing such fundamental questions, these scenarios represent a quintessential example of socioeconomic planning.

At present, the scope of such planning remains within narrow limits. Many commentators praise scenarios for helping us pick up on trade-offs that other forms of calculation might otherwise missed: by doing so, they argue, scenarios open up choices and opportunities while revealing the full consequences of any decision. In practice, however, financial actors mostly rely on a limited range of scenarios which make similar basic assumptions, such as those provided by the IEA or the NGFS. Their lack of diversity is very striking.

Allende’s Revenge

Intriguingly, IAMs use models and equations that have their roots in the early twentieth century, when thinkers like the Italian economist Enrico Barone discussed how to direct the economy without relying on markets. Barone published a seminal article in 1908 titled “The Ministry of Production in a Collectivist State.” He proposed a set of algorithms that we might consider the ancestors of the ones that are currently in use.

Barone’s article opened up a fierce, wide-ranging controversy known as the socialist calculation debate. Hayek and the Polish Marxist Oskar Lange, among others, contributed to this landmark discussion. In its early years, it unfolded primarily on a theoretical level, since the models and equations proposed by the advocates of socialist planning were in practice unsolvable without the aid of computers. The vast infrastructure needed to collect and process all the necessary data was also lacking.

However, Salvador Allende’s socialist government in Chile later implemented some of these ideas before the country’s military seized power in 1973, although Allende’s administration used very different technologies from those on which the current IAMs are based. With help from the British intellectual Stafford Beer, the Chilean “cybernetic revolutionaries” successfully showed how data and algorithms could be deployed in order to manage the economy.

Nearly half a century after Augusto Pinochet’s coup brought this short-lived, futuristic experiment to a premature halt, neoliberalism is still the dominant ideology of our time. But neoliberal luminaries like Carney who once dismissed the idea of planning are now deploying its tools in the face of climate change and the clear threat it poses even to their own survival.

In practice, they recognize that the market, left to its own devices, cannot prevent climate catastrophe. Yet in theory, they continue to promote the idea of the market as a neutral, self-governing mechanism. In order to prevent an algorithmically empowered financial elite from exploiting the needs of the energy transition for their own advantage, we need to bring the real state of affairs into clear sight.

We should be calling for a democratically driven form of economic planning, with the availability of data and algorithmic calculations used to provide new tools for participatory, decentralized decision-making in order to redistribute wealth while bringing about a fair energy transition. This will be no easy task, but by putting it on the agenda, we can arm the Left with a new critical perspective. Planning is already a reality: we need to take control of it as a tool with which to socialize and democratize finance and point it in the directions we want to pursue.