ESG and Carbon Pricing La La Lands

Elite groupthink in the planetary impasse

In the Anthropocene, catastrophes—including the meta-catastrophe of runaway global heating—are man-made. Specifically, they are caused by an incongruence between elite discourse and ground realities. Put simply, elites think the world is a certain way but it is not, and that is what causes the catastrophe. The history of the modern era is a history of catastrophes with their origins in elite groupthink.

In 1914-1918, an entire generation of German, French and British men was slaughtered because military leaders did not appreciate the revolution in military affairs ushered in by developments in firearms that Ivan Bloch had foretold more than a decade earlier. It was not until the spring of 1918 that the central problem of modern warfare—how to conduct meaningful military operations in the face of radical firepower—was solved.

After the world struggle, pressure to expand the franchise and deepen democracy generated a panic among elites. How was high policy to be sheltered from ‘the bewildered herd’? One solution was the management of public opinion through propaganda, pioneered by Bernays. But that was not nearly enough. Fortifications had to be built against public meddling in high policy. The main fortification was the Gold Standard, which, as one clever scribe put it, was ‘knave proof’. With labor-influenced governments on the horizon, elites doubled down on the Gold Standard in particular and economic orthodoxy in general as the solution to the threat posed by democracy to elite autonomy. The bloodletting was most extreme in Britain, where elites committed the declining world power to go back to gold at prewar par of $4.86 by 1925. While the United States led the world in a postwar boom, Britain suffered an economic catastrophe. And that was just the first of a long series of catastrophes that had their origins in economic ideology.

After the bankers plunged the world economy into the greatest economic catastrophe of the modern era, elite ideological commitment to economic orthodoxy deepened the world crisis and prolonged the misery. Eventually, forces from below would be marshaled by political leaders to break with the economic orthodoxy and end the self-inflicted catastrophe. It was not a coincidence that Stalinism was delivering ten percent growth rates as the capitalist world economy plunged ever deeper into depression. In the capitalist world, the break came first in Germany, where Nazi mobilization from 1933 onwards ended the depression immediately. In the Anglo-Saxon countries, progress was held back by the entrenched power of the elites and the stronger hold of economic ideology on their minds. Opposition to Keynes’ ideas and FDR’s concrete programs was fierce. Eventually, mobilization for war would end the depression in the United States in 1940.

The catastrophe of the Fall of France itself was due to the mental rigidities in the French high command. The Maginot Line ideology was very real. And so was under-appreciation of the revolution in military affairs ushered in by the introduction of the internal combustion engine to the battlefield. The French and their Anglo-Saxon allies, as indeed the Germans themselves, failed to foresee the return of maneuver—they were all expecting the deadlock of the Western front. When Guderian articulated the new solution, crossed the Meuse and made straight for the Channel, he did so in defiance of the German high command, and to the complete surprise of Western military observers. Because elites were in the grip of high racialism, the return of operational maneuver was immediately coded as ‘the German way of war.’

Obsession with technology in general and the air weapon in particular had been growing for decades. After the Fall of France and the British humiliation at Dunkirk, Anglo-Saxon elites doubled down on the ideology of ‘a decision from the air’. This was pure la la land. No decision was ever possible from the air—not in Germany, not in Vietnam, not in Iraq, and not even in Afghanistan, where ground-force partners were crucial to the rapid fall of the Taliban in 2002. But Anglo-Saxon elites were convinced otherwise.

Caught up as they were in the ideology of high racialism, when Germany attacked the Soviet Union in June 1940, they all, without a single exception, expected the Soviets to capitulate in a matter of months if not weeks: ‘the Slav could not put up a fight with the Teuton’. But if the Soviet Union actually fell, they had no solution at hand to contest German control of the continent. They didn’t have the right military instrument because they had poured all their resources into building the wrong one. In the event, they turned out to be catastrophically wrong about Soviet strength. This is what saved the world from a thousand year Reich. British dithering on the cross-channel attack meant that, in the final analysis, it was Stalinism that defeated Nazism. The world struggle was essentially decided on the Soviet-German front, long-standing Anglo-Saxon fantasies notwithstanding.

The forces of social democracy had been empowered again by the midcentury struggle. This ushered in a period of unprecedented prosperity in the history of the modern world economy. This brief interlude was only possible because of the containment of elite antidemocratic ideologies. In the United States, this took the form of the containment of New England elites by a Jacksonian coalition of Southerners, Westerners, and racialized ethnic whites.

Social democracy was not brought down by some external economic shock in the 1970s. It was the catastrophe of the Vietnam War, authored by American social democracy, than undermined to legitimacy of the social democratic cold war state. The Vietnam war itself emerged from the intellectual revolution in military affairs triggered by unbounded growth in the means of destruction, as I explained in my Kennedy escalation paper:

We argue that the origins of the catastrophe of the Sixties must be traced to the diagnostic and policy innovations of the Kennedy administration. We show how these diagnostic innovations originated in the military-intellectual revolution of 1954-1960. The military intellectuals who grappled with the dilemmas and confusions of the thermonuclear age would come to power in 1961 with a very specific diagnosis that, through their direct influence on policy and on the response functions of principals in the Kennedy-Johnson administrations, drove escalations in both preparations for war and extraordinary overseas commitments for counterinsurgency. Many scholars have written on the military policy innovations of the Kennedy administration. Intellectual historians have examined how ‘defense intellectuals’ grappled with the tension between democracy and security. But the logic of the Kennedy escalation that came to grief in 1968 has not been elaborated — the story of the intellectual origins of the Vietnam War has not been told. We tell that story for the first time.

Farooqui, Anusar (2019). The Logic of the Kennedy Escalation, 1954-1968.

The power and authority of midcentury social democracy, already undermined by the catastrophe of the Vietnam War, was then utterly wrecked by stagflation crisis of the 1970s. The crisis unleashed a great revival of anti-democratic elite ideology. This now took the form of worship of the technocracy—politicians could no longer be trusted with economic affairs, their power was handed over to technocratic elites.

The stagflation crises of the 1970s was blamed above all on the political economy of Keynesian macroeconomic stabilization. In what came to be the received wisdom, an excess of democracy was held to be responsible for the onset of macroeconomic instability. Management of the macroeconomy, it was felt in elite circles, could not be left to the politicians, whose short-term horizons threatened price stability. Insulated from democratic pressures, better-informed and disinterested technocrats would shepherd the economy instead. By the mid-1990s, politicians across the West had almost completely relinquished their power over economic affairs and yielded their authority to unelected technocrats.

Policy Tensor, The Making of the Mother of All Economic Booms.

The return of elite economic ideology set the stage for the secular downturn foreseen by Braudel in the late-1970s. In the cockpit were prestige-schooled elite economists, whose mental rigidities would be responsible for the slow-moving catastrophe of high neoliberalism. While it was necessary to tame inflation expectations to arrest the expectations-inflation spiral that caused the stagflation crisis of the 1970s, that logic vanished once inflation expectations were anchored on target by the early-1990s. But economists held onto defunct ideas about the economy long after they were no longer applicable. Specifically, they simply refused to let go of their model of the inflation process long after the death of the Phillips curve. As Oliver Blanchard put it most crisply, “The notion that a tight labor market will lead to inflation is impossible to contradict.”

With this wrong model of the inflation process in their minds, Fed technocrats unnecessarily fought tight labor markets in 1994-2018. This was a slow-moving catastrophe for working-class fortunes and a key structural feature of the neoliberal regime that undermined the reproduction of the working class family and generated the countermovement that put Trump in the White House—to the shock and dismay of professional class elites.

The catastrophe of the Iraq War also had its origins in elite ideology. Specifically, the United States spent the 1990s containing Iraq, and then attacked it in 2003 in the permissive political conditions of the post-9/11 years, ultimately because of the elite ideology of the rogue states doctrine.

The origins of the banking crisis of 2008 were endogenous to high neoliberal global financial intermediation—not Bernanke’s savings glut but Shin’s banking glut explains what happened to housing finance during the mid-2000s. The bankers were trying to manufacture collateral for the wholesale funding market where demand for safe assets was booming because of the rise of large financial intermediaries living at both ends of the risk curve. In 2003, JP Morgan solved the problem of manufacturing safe assets at scale from residential mortgages. This solution worked as long as the ratings were reliable, so that credit risk could be kept away of the rehypothecation flywheel at the heart of the global financial system.

As the financial boom got underway, ratings got decoupled from the actual credit quality of the millions of mortgages that were used as raw material to manufacture safe collateral at scale for the wholesale funding market. The bankers’ house of cards collapsed as credit risk made its way to rehypothecation flywheel.

Policy Tensor, Seeing Like BlackRock: The View From E 52nd St.

So, the global financial crisis was not caused by elite ideology per se. However, the fallout was made dramatically worse by the economic ideology of technocratic and policymaking elites. The decision to led Lehman fail was straight-up neoliberal ideology—the alternative was thought to lead to moral hazard, that persistent obsession of “Law and Economics,” aka economics as ideology. Allowing Lehman the declare bankruptcy turned what could’ve been a containable financial crisis into the greatest global economic catastrophe since the 1930s. But Western elites were hardly done with driving the car into the ditch. They were just getting started.

American elites were quick to embrace ‘the financial Powell doctrine’. A global financial crisis was a Schmittian emergency—one had to use overwhelming force to quell the panic, whatever the cost. The European technocrats were considerably slower to catch up to this basic logic of the necessity of discretion during emergencies. It was not until July 2012 that Draghi would say the magic words that would end the eurozone crisis. But European technocrats were hardly done with shooting themselves in the foot.

The full depth of the elite groupthink-driven catastrophe was revealed when European and Anglo-Saxon elites embraced austerity in the midst of the worst economic recession since the 1930s. The bloodletting in Europe rivaled those of British elites in the early-1920s when they committed economic suicide to achieve the politico-ideological goal of going back to gold at prewar par. A posse of northern European powers conspired to transform the banking crisis into a sovereign debt crisis. Northern banks’ fuck-up was hung on the neck of southern sovereigns under the pretense that fiscal profligacy of the racialized Mediterranean states was responsible for the crisis instead of the northern European banking glut. The economic pain inflicted on the people of peripheral Europe is squarely the responsibility of European technocratic elites.


Given this history of catastrophes driven by the groupthink of elite technocrats, it is hardly reassuring when Adam Tooze tells us, approvingly, that ‘The solution favored by the majority of economists—including critical voices like economist Joseph Stiglitz—is carbon pricing.’ Nor is Tooze, the favorite intellectual of global elites, alone in thinking of carbon pricing as the master solution to the planetary impasse. In his review of Tariq Fancy’s polemic warning against the ESG non-solution, the otherwise very serious commentator, Robert Armstrong explicitly states that, while ESG is bullshit, carbon pricing is a real solution to the climate crisis:

From what I understand, it’s clear we need, for example, a whopping big carbon tax, and soon, or we’re cooked.

Robert Armstrong, “The ESG Investing Industry is Dangerous.Financial Times.

Tariq Fancy is no exception himself.

To bend down the greenhouse gas emissions curve, governments should immediately adjust system-wide market incentives, such as replacing fossil fuel subsidies with a price on carbon, and institute new performance standards to guide industry, such as vehicle emissions limits and energy efficiency standards for buildings.

Tariq Fancy, “The Secret Diary of a ‘Sustainable Investor’.

Indeed, Fancy quotes no less than the most dangerous technocrat on the planet—Nordhaus himself.

Economics points to one inconvenient truth about climate change policy. And that is that in order to be effective, the policies have to raise the price of carbon, or CO2, and in doing that correct the externality of the marketplace. … We have to get billions of people, now and in the future. Millions of firms. Thousands of governments… to take steps to move in the direction we want. And the only way you’re going to do that effectively is to increase the price of carbon.

William Nordhaus, quoted in Fancy, “The Secret Diary of a ‘Sustainable Investor’.

The logic of a price on carbon is purely economic: people, firms and other economic actors respond automatically to price signals; so, if you get the price signals aligned with planetary survival, all economic actors will be incentivized to do the right thing, like switch to EVs and fly less to reduce their carbon footprints. The solution sounds right to anyone with any training in economics. But it is politically-challenged, and irredeemably so. Here’s why.

Price signals work through market discipline. In order to work at all, a price or tax on carbon would have to be very large and very painful. If you want to be well on your way to get off the hockey-stick of doom by 2030, which may turn out to be a precondition for the survival of advanced human civilization, then you have to make it really, really painful for people and institutions to dump carbon into the atmosphere. What makes you think that you can create a political coalition for such unprecedented social masochism? It’s just not going to happen in a world where there are political coalitions that can prevail against the professional class.

Carbon pricing is a neat technocratic solution only in the simple world of economic models where agents are purely economic actors with regular utility functions. The fact that actual people in the world are also political actors is assumed away in all economic models. But they are irredeemably political actors. More precisely, social class formations are political actors. And political opposition to carbon pricing outside the confines of the professional class is formidable. The Yellow Vest movement was just a taste of things to come. As European elites push through this harebrained scheme on the continent, they’re going to find pushback from the working and middle classes. In the United States, no politician is even going to touch carbon pricing at the pump with a pole. At best, you can get some sort of carbon trading in industry. But that’s hardly a solution.

What makes the elite groupthink about carbon pricing so infuriating is that there is a clear alternative that evades all these political constraints. Instead of using market discipline, directly fund and implement the energy transition, taking care that the costs imposed on different strata of society are bearable enough to get buy-in for the world-remaking project. In order to transition to a low carbon economy, we cannot rely on the false promise of market discipline, we need laws and regulations, finance and operational task forces. Instead of chasing the chimera of carbon pricing, we need something closer to a war plan. This is a question of grand-strategy. It cannot and should not be handed off to the technocrats, including and especially Fed technocrats known for their alleged “super-competence”—who have repeated driven the car into the ditch.

There’s not much time to dilly-dally in technocratic fantasies. It’s time to come up with a serious plan for the United States to transition to a low carbon economy. Step two would be for the Europeans to follow the US lead, as they always do with a lag. Step three would be to get the rest of the world on board. All of which needs a grand-strategy—a concrete plan of action, not a Hail Mary. Stop wasting our time with harebrained schemes which have no chance in hell of meeting political economy constraints.


Postscript. Just wanted to add a few points.

  1. The history of the modern era seen through the lens of elite ideology-driven catastrophism is homologous to catastrophic thinking in other fields of inquiry. Specifically, what I had in mind was macroevolution and punctuated equilibrium (as opposed to Darwinian gradualism), which reframes evolutionary history as a history of catastrophes; climate catastrophism itself; the population history of our species which has been marked by catastrophic mass population pulses, invasions, expulsions, marginalization, and extinctions; geological catastrophism and so on. So, what I have tried to do is to reframe modern history through the lens of historical catastrophism.

  2. Once we make this intellectual move, we have to identify the major large-scale catastrophes that structured modern history. Once we have identified them (and my selection is by no means neutral—it is driven by my interests and knowledge) what we need to do is pin down the etiology of said catastrophes. What I have argued above is that historical catastrophes have almost always been caused by the gap between elite discourse and reality. Elites are convinced the world works in a certain way. When the world does not, in fact, work that way, that is the general recipe for a catastrophe.

  3. The frame here is not Fergusonian—the model of political economy whose actors are powerful moneyed interests contesting state policy—even though it is indeed an excellent frame of analysis. This is what Adam Tooze means by political economy. This is what the FT newsletter, Swamp Notes, is about. This is the Wall Street view of the world explicitly offered by Fancy: “In finance, there’s a saying that “everyone talks their book,” meaning they promote what’s in their financial interests…. The reason everyone in finance says it is that it’s generally true: read people’s incentives and you’ll understand their behavior.”

  4. The frame offered here is not that elites act in their own self-interest and against the larger societal interest and that is the recipe for catastrophe. The frame offered here is that elites are hold on to a formal, idealistic, simplified picture of the world that is incongruent with reality, and they do so because they think it is right and proper and just. An earlier version of this article was titled The Idealistic Morphology of the Planetary Impasse (after German Idealistic Morphology, the framework of biological thought associated with Richard Owen that set the stage for the Darwinian breakthrough). In other words, the argument offered here is that they are trying to do the right thing—with ESG, with carbon pricing, with fiscal discipline, with shareholder value, with the Gold Standard and so on—given their picture of the world. But their picture of the world turns out to be wrong. Often because elites share blindspots, particularly with respect to class. And they often mistake the map for the territory.

  5. Technocratic elites misunderstand the nature of the planetary impasse. Carbon pricing works in a world of egotistic agents who respond only economically to price signals—it cannot work in a world where they also form political coalitions to oppose idealistic elite schemes that impose great costs on them. And these coalitions can already be seen, even before the price of carbon on the continent has begun to bite. So, it’s a non-solution because you simply cannot build the political coalition to see it through. Moreover, it is utterly unnecessary because there are alternatives that evade these constraints, such as directly financing the transition to a low carbon economy. Furthermore, because it threatens to marshal socio-political forces committed to confront the transition agenda, it threatens to derail the entire project in toto. So, it’s a terrible idea on many grounds and needs to be abandoned. If Adam Tooze won’t tell the European idealists so, others should.