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Can We All Stop Trusting the Market Now?

GameStop is a great example of why we shouldn’t let the Invisible Hand tackle climate change.

People enter a GameStop store in Alhambra, California.

A GameStop in a New Jersey mall was the first place I participated in a market. I’d beg my dad to drive me there so I could swap out old GameBoy cartridges for new ones, fetching whatever the going price for Tony Hawk’s Pro Skater 2 was in store credit and hoping it was high. After all, I’d have to make up the rest of the cost of the new game with my allowance or whatever I could shake down from him. The trade-in credit wasn’t real money. I couldn’t go next door to spend it at Bath and Body Works. But I could spend it on another game, which, at the time, was all that really mattered.

This week, a group of Reddit day traders decided to inflate GameStop’s stock price for fun and profit and at the expense of some hedge funders. There isn’t really a clear hero in this story, whose characters run the gamut from irony-poisoned posters to unseemly apps to opportunistic bankers. It’s made some very wealthy people very mad, in part for exposing the stock market as the reckless game it frequently is—made all the more reckless by decades of deregulation.

The terrain they’re all playing on is pretty rotten. The stock market allegedly reflects publicly traded companies’ productive capacities in their stock price, pointing investors toward valuable firms. In reality, it’s mostly just good at making a handful of people very wealthy.

GameStop hasn’t become a more attractive business since hedge funders first decided to short it—essentially, betting its stock price would fall—and Redditors decided to mess with them. The collective wisdom of the market isn’t reflecting some underlying value so much as the whims of people with time and cash to throw around. That doesn’t mean stock prices are fake, exactly, even if they’re less tangible than me picking up a used copy of Castlevania: There are underlying dynamics being reflected in GameStop’s stock price. But they should make people question capitalist markets’ ability to deliver positive outcomes for society.

“I prefer capitalists self-regulate,” Blackrock chief Larry Fink said this week in response to a reporter’s question about whether regulators should step in to stop his sector from fueling climate destruction. The asset manager has a long history of translating that preference into reality, notably through aggressive lobbying to avoid being designated a systemically important financial institution, like Goldman Sachs. Over the last few years, Blackrock has dedicated particular energy to portraying itself as the good guy on Wall Street, interested in harnessing the power of the $8.7 trillion in assets it manages to save the planet.

In his fawned-overletter to CEOs” this year (a now annual, quasi-philosophical P.R.-laced dispatch to top executives), Fink urged firms—in many of which Blackrock owns the largest stake—to disclose their emissions, vulnerabilities to rising tides, and plans to reach net-zero emissions by 2050. Fink waxed poetic about the heroism of his fellow businessmen. Amid these trying times, he wrote, “companies have worked to serve their stakeholders with courage and conviction.” The past year, he added, has only confirmed his view that “as markets started to price climate risk into the value of securities, it would spark a fundamental reallocation of capital.”

The implications behind all this messaging are clear: Markets and the saintly companies and individuals that steward them along can be trusted to do the right thing. Government doesn’t need to forbid Wall Street from investing in fossil fuels and other planet-warming industries. The Invisible Hand still delivers, and it’s got a green thumb.

For years, economists have described climate change as a market failure. The costs of polluting, they have argued, are not being properly accounted for in the final price of a product like coal or oil. By correcting that bad information—whether through more comprehensive disclosures or some kind of carbon price—the market will come together and fix the error, as rational economic actors absorb that new data and adjust their behavior accordingly. Davos men have even started to get excited about turning more parts of nature into tradable commodities so as more accurately to reflect their value on trading floors and, somehow, protect them.

The underlying logic here is more philosophical than empirical: that markets are the only force capable of corralling this mass of data to deliver the most efficient possible outcome for humanity—and are thus far better equipped than any disconnected government bureaucrat to allocate society’s vast resources. What if that’s wrong? What if it’s in the rational self-interest of investors and executives to keep financing destructive stuff that will make them rich? And what if they simply don’t give a shit about the consequences?

Fink correctly points out in his letter that sustainable investing is becoming a big and profitable business. In the grand scheme of things, that’s great. But more people investing in Tesla doesn’t necessarily mean fewer people investing in coal, oil, and gas. Take Blackrock itself: While it’s increased the number of sustainable investment products it offers, it remains the world’s top investor in climate destruction—in large part through the money it makes on passive investment products not subject to its internal sustainable investing rules. By its own admission, Blackrock will invest where it can make the most money for its clients until the government says it can’t. It’s not going to meaningfully divest from fossil fuels until fossil fuels stop generating big returns. That’s not a moral failure on the part of Fink or any other executive profiting from planetary destruction; companies don’t have morals, just clients and shareholders to be satisfied.

A gargantuan asset manager encouraging companies to write their own smoke-and-mirrors paths to net-zero is no substitute for regulators stemming the flow of investor cash to polluters, or phasing out extraction at its source. And climate risk disclosures don’t alter destructive behavior on their own. States already structure the world in which Redditors and hedge funders operate, just as GameStop structured my ability to buy a new game. Governments can either keep deferring to these supposedly rational economic actors to allocate resources in the best interest of society, or they can constrain their ability to destroy it.