Liberalism and market economies have proven to be a powerful combination in fostering human ingenuity and economic and social development. Adam Smith’s famous invisible hand and Milton Friedman’s assertion that the social responsibility of business is to maximize profits are cornerstones of that development. These principles ensure that resources, particularly capital, are allocated in the most productively efficient way possible. Indeed, more than two centuries after the beginning of this experiment, humanity enjoys an unprecedented level of material abundance.
In this sense, laissez-faire economics has interesting parallels in the natural sciences. In an efficient economy, a promising business opportunity quickly attracts capital. Similarly, any financial asset trading below its intrinsic value is promptly purchased, with capital flowing in to eliminate that temporary imbalance. This constant flow of capital helps maintain a system in “equilibrium,” where equilibrium is once again defined as the efficient use of productive resources. In the natural sciences, the principle of gradients explores this same phenomenon of equilibrium, particularly through the Second Law of Thermodynamics: energy flows spontaneously along a gradient from a warm body to a colder one until temperatures equalize and equilibrium is restored. The same occurs, for example, with water flows such as rivers, which accelerate where elevation differences are steeper, taking advantage of a greater gradient. Capital behaves in much the same way: it flows rapidly toward the most profitable opportunity.
The parallel between natural and economic laws should stop here. One is an exact science; the other is a social science. One deals with physical relationships; the other with people. The invisible hand must operate according to purposes defined by people and for people, not according to nameless gradients. Economists, including the most market-oriented thinkers such as Friedman, have long recognized this reality, particularly through the concept of externalities. Proper regulation of externalities is an essential and intrinsic component of any market economy.
Climate change and the relentless depletion of natural resources and biodiversity have long been clear examples of externalities. We have been inattentive because this consumption appeared relatively harmless, with consequences that seemed manageable. That is no longer the case. There is little point in pretending otherwise. Climate change is happening. Its economic and social consequences are evident, especially for the most vulnerable. Biodiversity and our natural systems are in crisis, and with them a significant part of the world’s economies and populations. We need to stop pretending we do not see it.
As a liberal myself, I am disappointed to see others advancing arguments that I consider weak. Arguments such as claiming that climate change is merely cyclical, not caused by human activity, irrelevant, or a left-wing fabrication; or that it is simply a pretext for higher taxes and greater government intervention, and that human ingenuity will eventually solve the problem; or that we cannot address it because we would lose competitiveness, and that the conversation was interesting but now it is time for pragmatism and “adults in the room”, an argument I consider deeply reactionary; or the more demagogic argument that appeals to narratives of cancellation or a lack of pluralism in the debate.
All these arguments are fundamentally illiberal because they will ultimately contribute to the exhaustion of this economic model rather than support its evolution through all available tools, including the regulation of externalities and the implementation of relevant public policies.
Let us be clear: the dominant position, and the one most represented in the political and economic choices of the world’s major blocs, is still that of the invisible hand, of the nameless gradient. A gradient that, in the name of nothing, is nevertheless driving us relentlessly toward a point of no return on this unique planet Earth, our “common Home,” which is in desperate need of care and attention.
It is true that government policies in Europe, for example, have often been excessively bureaucratic and at times even counterproductive. It is true that the lack of global cooperation makes solving the problem significantly more difficult. But fortunately, many people, including many liberals, are committed to finding and implementing solutions. The energy transition is underway because it is a sound economic decision. Discussions about the need to adapt to climate change are only beginning to gain momentum, but they are absolutely necessary for the effective management of social, economic, and environmental risks. Market-based solutions and mechanisms for regulating externalities remain far behind where they should be, but they are being developed and increasingly supported. Efforts are being made to give the gradient a name: human development.
The time has come to roll up our sleeves and work diligently to build the mechanisms for more sustainable development. That is precisely what we aim to do at Lisbon Sustainability Week, taking place from June 30 to July 2. Would you like to join the discussion? Let’s Build Sustainability Together.
António Baldaque da Silva, Diretor Executivo do Center for Sustainable Finance da Católica Lisbon School of Business & Economics