Another Take on Free Market Environmentalism

PERC's Conference for Journalists
Emigrant, Montana
October 4, 2003

Friendly  Critique

By David Roodman

Thank you. In this morning's program, Rick and I are set up to take opposite views on a fundamental philosophical question. Despite that, I think both of us will acknowledge that neither extreme view is tenable. Free-market environmentalism is neither perfectly efficacious nor perfectly useless. We will agree then that in general, the best approach depends on circumstances, and would even agree in a lot of cases about which approach would be best, or what the best combination of policies is. Yet somehow we see the world differently.

I'm in a funny position here today, in the ideological minority. This has caused me to think a lot since I got here about the sources and consequences of ideology. As a matter of human cognition, ideology is one of the brain's many ways to filter out the vast amount of available information about the world, which it simply cannot process. It allows us to make rapid conclusions despite quite incomplete understanding of any problem or problematique. I'm sure it had survival value, and maybe still does. The result is what one of my colleagues calls the Rorschach phenomenon. Two people can look at the situation and reach opposite conclusions. Often, we see what we want to see.

There are a lot of smart people in this room, and good number of them, it appears to me, are pretty sure they've got things figured out. Maybe they include me. I assume there are a lot of people like that on the Left too, but they are not in this room. I think, though I cannot be sure, that I am more of a centrist. As evidence of that, I would point to the fact that I am talking to you right now. In things I have written, I have agreed with a lot of what PERCies say, about the horrors of the subsidies embedded in federal land management, about need for permit trading, and about the power of markets to help solve environmental problems. But I also have a different world view, and I think that's what makes me intriguing to PERC. For example, I do support environmental taxes. I hasten to emphasize that I very much appreciate the spirit of genuine debate in which Jane invited me here today.

I understand free-market environmentalism to compromise two things:

1) Pointing out the virtues of private actors operating in a market setting. Private property ownership creates incentives to steward. When interests collide, such as between grazers and environmentalists, the parties can strike bargains that may involve transfers of money, changes in behavior on either side, investments in solutions such as fencing. In cases of dispute, they can turn to the courts to interpret the ancient doctrines of common law, so much of which did arise from conflicts between resource owners. In general, parties will seek solutions that maximize collective benefit, including for the environment.

2) The other part of free-market environmentalism is criticism of government action. People in government have strong incentives to do the wrong thing and weak ones to do the right thing. Politicians want to raise money and curry favor with special interests. So they will build special provisions into law that favor special over collective interests, such as requiring catalytic converters, rather than letting businesses find the cheapest technologies to reduce pollution. They will hold on tightly to those purse strings. For their part, bureaucrats want to maximize the budgets they control, which can play out in a lot of ways. They will seek to extend their responsibilities and control, and complexify rules and regulations to make them more expensive to administer. Meanwhile, government, especially central government, isn't completely accountable to the governed. Did your vote really make a difference in the last Presidential election, the last Senate election? Do your concerns about the burdens those complex rules place on you get the same weight as the benefits of complexity for the bureaucrats?

I think one can make opposing points about the limits of private action to solve environmental problems, and the virtues of public action.

Let me start my critique by examining more closely the dichotomy I have set up here between private action and public action. I think most people would agree in principle with the following things, which can be said about just about all dichotomies in the social sphere (as opposed to many of the hard sciences, where things really can be neat and black and white). I think most of this is common sense, but it is easily forgotten in the heat of debate:

1) Neither view implied here, as I said, is really tenable in its most extreme form. Private action is not always the whole answer, nor is public action.

2) That means that the right mix of public and private action will vary depending on the circumstances.

3) Governments and markets are not inherently opposed. Governments do all sorts of things to support markets. They create and enforce private property rights, create institutions that allow them to be transferred, and provide a stable currency, all of which are necessary for markets. So pro-government is not automatically anti-market. Far from it. Incentives matter. Governments can change incentives. Indeed carbon taxes seem entirely consistent to me with the dictum, "incentives matter."

4) There is actually more of a spectrum between private and public action than a dichotomy.

Let me explain that last point. One classic argument for government intervention is the tragedy of the commons, advanced by Garrett Hardin in the late 1960s. He envisioned the commons as a field where all the villagers could graze their cattle. The management challenge is that if the commons is overgrazed, it will turn to mud, and no one will be able to graze cattle there anymore. The problem is that each individual has an incentive to overgraze since she gets all the benefits of that while most of the harm accrues to others. The incentive is to graze that grass while the grazing is good. The result: free actors left to their own devices will destroy the commons and all will end up worse off than need be. Ergo, government is needed to either divide up the commons and privatize it, or regulate it. I'm sure our hosts prefer the first option. If we "enclose" the commons—cut it up and give everyone a piece, then each land owner will have an incentive to steward her land. And if one landowner wants to graze cattle on another's land, that can be arranged through a mutually acceptable contract, with both parties taking the long view.

My impression is that if you survey traditional societies, at least ones that have not been disrupted by modernization influences, you will generally find that the tragedy of the commons hasn't occurred. (Of course, maybe it has often occurred, and the societies in which it did were eliminated through a Darwinian process. I can't be too sanguine about the apparent absence of Tragedy.) Moreover, I believe that traditional societies adopted a huge variety of approaches to prevent the Tragedy. One society privatized. Another developed customs governing which families can graze where and when. I remember reading about a village in a dry part of Spain, called Valencia, that, starting five hundred years ago, evolved a system for trading rights to irrigated water. As I recall, complex rules somewhat limited the scope for trades, but there nevertheless was a trading element.

In northern Vietnam water passes from rice field to rice field along very gradual slopes, controlled by the opening and closing of gaps in raised mud walls that also serve as walkways and property lines. I imagine the social arrangements that govern those transfers are quite complex, and encoded in tradition. Indeed, I believe that the whole East Asian concern about "saving face" arises in no small part from the tremendous interdependence of people in rice-growing villages, where open social disharmony could mean loss of water and food, and death. Thus the societal solution to managing resources in this case is more than a regulatory system. It permeates the culture.

I think free market environmentalists generally support such resource management and sharing arrangements, voluntarily arranged by private parties. Indeed, there's a chapter about them in Terry's book, Free-Market Environmentalism. But I would ask, are such arrangements not government? How voluntary are they, really? In traditional northern Vietnam, and I want to emphasize that I do not generalize lightly, a person was judged much more by how well she understood and fulfilled her role in family and society, as child, sibling, parent, mother-in-law, and neighbor—and much less by her individual achievements—much less, for certain, than in our own society. The pressure to fulfill roles, to take care of the kids and respect the elders, was intense. I believe it was that way out of necessity. Moreover whatever systems were in place to manage water were most likely quite difficult for a single individual to change, passed down from generation to generation. And leaving the village was not easy at all. In fact individual villages in northern Vietnam had a very corporate, even oppressive character. I would suggest that to view these resource-management arrangements as purely voluntary is to misunderstand one culture by viewing it through the prism of another.

Consider another example. According to a very interesting book I read by Bruce Benson, quite a libertarian, what we now call contract law, the law that governs enforcement of contracts, was in the Middle Ages something quite different. Instead of being the superstructure within which contracts are made, it arose from contracts struck in the absence of law. Europe at the time was fragmented into many and shifting principalities, but as trade flourished, the need grew for regionally uniform ways to reach and enforce purchase and delivery contracts. There was international trade, but a vacuum of international governance. In a sort of entrepreneurial fashion, arbitrators arose to resolve disputes at major market towns, functioning much the way private arbitrators work today. They had an incentive to make decisions seen as systematic and fair in order to draw future business. Disputants had an incentive to comply lest they be excommunicated from the community of commerce. Over time a body of precedent cohered—what was called the law merchant—and became universally adopted across much of Europe. It is from this body of precedent that modern contract law, as distinct from common law, arose. Kings who tried to impose their own systems of commercial law were invariably shrugged off by the merchants, who needed an internationally uniform system. Government only succeeded in taking over commercial law administration when they accepted it as is, and declared it the king's law too. Actually, common law had similar origins. It originated in local custom but was taken over by the King as a source of revenue. If you stole my pig, you violated the "king's peace" and had to pay him a fine.

My point is this: there is actually a spectrum from private action to public action. The more people private action involves the more permanent and binding in becomes on a community, even on those who do not really favor it, and the more it takes on the character of public action.

So the broad question at hand is not whether public action is good or bad; it is often necessary. It's what kind of public action, and how many people it should involve. I think we can all agree in principle that solutions to environmental issues should be arrived at in ways that are as voluntary as possible, and arise from institutions that are as accountable as possible to those concerned, which means local institutions when possible. One problem, though, is what to do when the most local level of government fails to handle the problem well. Another key area of controversy, is over exactly who are the interested parties, especially when federal lands are concerned. In that case, does the entire population of the United States have standing, making a local solution inappropriate? After all, it was the federal government, acting on behalf of all American citizens, who stole that land fair and square from the Indians.

I digress. One other point I want to make is that while incentives matter, they are not all that matters. As I mentioned before, a key point that free-market environmentalists make is that legislators and bureaucrats have strong incentives to do the wrong thing and weak incentives to do the right thing, by which I mean that they are only weakly accountably to citizens. That's true, and the result is horrible mismanagement of our rivers, of public grazing lands, of forests. On the other hand, I feel compelled to point out that it is not the whole story. I think our lunch time speaker yesterday, Tracey Mehan of the EPA's water office, is one counterexample. He, like us, is driven by principle too. The same can be said for the forest managers Holly described yesterday, who struggle with the bad incentives, yes, but also take professional pride in their work, and pursue a vision of the healthy forest that has been quite influenced by the rise of environmentalism over the last 40 years. Sometimes laws do get passed that reflect and serve broad public concerns, such as about air and water pollution—of course, far from perfectly, but history is never optimal.

OK, I've talked some about the assumptions underlying free-market environmentalism now. I will turn now to the prescriptions it offers. As I understand free-market environmentalism, the ideal solution to problems works like this: accept and strengthen private property rights; then allow private parties to work together to find reasonable solutions. I'll call that the two-part recipe. I think there is much to be said for this, but I guess my job today is to dwell on the problems.

To the first step in the recipe, which is to create and allocate property rights. In practice this often means not actually creating the property rights, since that was done a century or more ago, but accept that it has already been done, to take the allocation of property rights as given.

Property rights can take a dizzying variety of forms. They can be as concrete as rights in land—which really means the right to do certain things on a piece of land and to prevent others from doing certain things on it—or as abstract as the right to emit electromagnetic radiation of certain frequencies in certain places. TV stations and cell phone companies need that sort of property right. Or there can even be property rights over ideas and pictures. That's what patents and copyrights are, what we call intellectual property. Nevertheless, the image we all have of property is, I think, of property in land. It's important to be aware of this implicit analogy, because it is can be misleading. The picture is that you can draw thin lines across the landscape and slice it up with a super sharp knife that is really the draftsman's pen down at the surveyor's office. That's yours on that side of this Euclidian line. This is mine. You do what you want on your land. I do what I want on mine. We are next to each other, yet severed from one another.

The problem with this picture as a metaphor for the legal reality of property rights is that we are not severable from each other. Even in a world where we've privatized everything in sight—and everything we can't see—we are still parts of communities. If I run a tannery on my land that dumps chemicals into a stream that flows onto your land, there is conflict. If you build a giant hotel on your lot, you block my air and view. If you start your car, you'll damage my lungs. If the wolves are restored for the sake of a perceived public interest, they may maraud my sheep. If you graze cattle on your land and I grow corn on mine, then your cattle will inevitably wander onto my lot, damaging my crops. (Of course, we could fence, but then the conflict would revolve around who is responsible for paying for it.)

That last example I take from a classic paper by Ronald Coase published in 1960, reportedly the most cited paper in economics. It was one of two papers that the Nobel committee cited in giving him the prize. Coase's genius, in part, was to point out that in all such conflicts over exactly where your property rights start and mine end, the conflict is jointly generated by the parties involved. If I cease to breathe there is no problem with your car. If you cease to drive, there is no problem with my lungs. And it's not so easy as it might seem at first to determine whose rights to productive enjoyment of property should take precedence. In the case of the giant hotel, one can imagine a community norm that said that views take precedence over bigger buildings. This might be a vital matter of economic development, making a place attractive to tourists and new settlers, and generating jobs. "If you want to build big, go elsewhere." That might be Nantucket. Or one can imagine the opposite norm: if you want a guaranteed view, go elsewhere. Getting your view obstructed is a risk you take when you acquire property here, and property ownership is about taking risk. That might be New York City. In fact, the line between your property rights and mine is quite fuzzy and a legitimate subject for a debate that often boils down to irreconcilable differences in values and vision.

As an economist, Coase pointed out that as long as the community and legal norms about which rights take precedence are clearly defined one way or another, it actually doesn't matter much what the norms are, from the point of view of maximizing total economic welfare assuming that markets work perfectly. Suppose your cattle are straying onto my cornfield and doing $200 of harm, but are earning you $100. From the collective point of view, this activity is economically destructive, doing more harm than good. It should stop. Suppose further that the community norm is that your cattle are my problem. You're doing nothing wrong by letting them stray into my field. That's just how things work around here. Then it would make sense for me to pay you $150 to reduce your herd so it won't bother my corn. I'd pay $150 but save $200 in crop damage. You'd lose $100 in cattle earnings but get $150. Good deal. We'd ride off into the sunset together, our individual utilities maximized, our natural resources efficiently used.

Now suppose instead that the community norm is that my corn is your problem. If you want to develop a herd in a way that would make grazing on my land likely, you have to get my permission. In fact, you'd have to pay me at least $200 for the permission, to compensate me for the crop damage. But the opportunity to have your herd would only raise your income $100. So you wouldn't do it. End of story. In either version of this story, your cows would stop grazing on my land, the "optimal solution." So however a community resolves the conflict between property rights, the same amount and kinds of economic activity occur.

That's pretty radical, ingenious in fact. But if you're like me, something feels funny about this argument. Indeed, it's not the whole picture, and Coase acknowledged this. In the first variant of the story, I ended up $150 poorer because I had to pay you to not bother me. In the other I didn't. I care a lot about that difference. Thus the initial allocation of property rights—the community norm about which comes first, the cows or the corn—does matter a lot from the point of view of distribution of wealth, more generally, justice. From my point of view, the $150 I had to pay in the first version of the story was simply unjust. But maybe from your point of view, my power in the second version to restrain your herding seems equally unjust. Cows are more important than corn. They made the West.

A lot of environmental problems can be seen as conflicts over how to draw the lines between property rights. Do water polluters get precedence over those would recreate and fish in clean water bodies, or vice versa, or do you strike some pragmatic compromise? That means solving environmental problems is not as simple as it might seem in the free-market environmentalist vision. Fine, I own my car. And you own your lungs. Property rights are allocated, seemingly. So now can we reach happy agreement about how to resolve the conflict? Fat chance. More likely, thousands of drivers and breathers will end up suing each other and then the problem will end up in lap of the court, which would have to decide precisely where the right to free enjoyment of one's car stops and the right to free enjoyment of one's lungs starts.

Resolving conflicts between property rights is a matter of justice. Since people's values and the realities of a society change over time, how the boundaries are drawn between property rights, how these conflicts are resolved, must be allowed to evolve over time too. Simply taking the existing norms as given is truly conservative, protecting established interests. Special interests had a big hand in the current property rights regime—they were the people who abetted the holocaust of the first Americans, stole their land, exploited railroad monopolies, and so on. To say then that we are playing with fire if we try to modify the property rules—just opening the doors to special interests to distort how the rules get written—is half the story. The doors were opened long ago and a lot of horses are already out of the barn. If we revisit the rules, we might let a few more horses out and might get a few of the old ones back in. Once in this country the right to pollute your neighbors' lungs by driving was completely unbridled. The situation grew increasingly unmanageable as society changed, and so legislatures stepped in to strike a new compromise between the rights of car owners and lung owners, by passing a variety of environmental laws. I believe this was fundamentally a good thing.

Now how is a modern community to revise the legal norms that govern conflicts between property rights? I see two main mechanisms. One is that as unwritten community norms evolve and circumstances change—as parts of the West go from empty to full, say, or as environmentalism becomes prevalent—courts take this into account as they apply the common law to specific disputes. So in one generation, a court might rule that the scenic view takes precedence over the tall building. But a generation later, bowing to unstoppable urban growth, the same court might rule in favor of the tall building.

There is a lot to be said for this mechanism since it is adaptable, not too rule-bound, local. At the same time, it has its limits. It has an inherently conservative bias, with the emphasis on precedent, and given the interlinkages among the economic and politically well-off in any society. Indeed, if judges stray to far from precedent and current norms, some conservatives decry that as judicial activism. Judges tend to come from the elite, and to protect established interests more than undermine them. Judges did not free the slaves; in fact, they tightened the bondage. The Supreme Court justices who made that shameful Dred Scott ruling in 1854 had much stronger ties to the enslaving class than to the enslaved class. Chief justice Roger B. Taney came from a wealthy slave-owning family. I guess you could say he applied the principles of pragmatic free-market environmentalism: he took the existing allocation and delimitation of property rights as given; the slave and slave owner were free to strike a deal whereby the slave bought his freedom.

And if the courts are always reactionary, they are reactive, as we learned the night before last from Representative Joseph Neal of South Carolina. The citizens of lower Richland had no recourse to the courts because they had not been harmed yet.

Courts did not strengthen the property rights we all have to our own bodies by cleaning the air and water in this country over the last 30 years. The legislature did that. And that is the other major mechanism I see for revising the boundaries between competing property rights. As Churchill said, democracy is the worst form of government except for all the other forms that have been tried. Democratic mechanisms are important because people will always disagree about which comes first, the wolves or the sheep, the cows or the corn, the cars or the lungs; the best one can hope for is a process for making the calls that is widely seen as legitimate.

All that is to say that I think there is a real place for the legislative and executive branches in solving environmental problems. Democratic government is often needed to resolve the conflicts in the interests of justice and stability, make revisions to keep up with the times. When property rights systems are too widely seen as illegitimate, they cease to become effective, cease, really, to exist. Democracy can bestow legitimacy, although that is not automatic. To say something has virtues is not to say it is perfect. But to repeat, we've had some major environmental successes in this country, and those have come about through the legislature, often the federal legislature. Yes the rules have all sorts of problems, not least of which, as PERC has rightly pointed out, the failure to appreciate that incentives matter. But it is always easy to criticize what was done against the benchmark of perfection. One should criticize, but it would be a mistake to conclude that strong government intervention is therefore always counterproductive.

To recap, there are problems in always taking the existing system of property rights as given and suggesting that no further governmental intervention is needed to revise them. It is too conservative in a changing world, liable at times to perpetuate injustice. That is my critique of the first part of the free-market environmentalism recipe.

Now to the second step in the recipe: allowing free actors to strike mutually amenable deals. Here the critique is much more straightforward. It's often just not practical. When you're talking about acid rain, smog, global warming, it's inconceivable that all the parties concerned could gather together to strike a bargain about automotive technology, land use planning, payments of compensation, etc. Or rather, the only practical way they could do that would be to send representatives empowered to make binding decisions, which sounds a lot like government, and is. This gets back to my point about there being a spectrum between private and public action. If you adhere too extremely to one ideal, that spectrum becomes a slippery slope. Last year at this conference, I spoke about how many code red days we had during the summer in Washington, DC, which were caused by the combination of heat and air pollution. I take the problem very personally since I live in the middle of that city, along a popular morning rush-hour route, and I have two little boys, one of whom already has asthma. I tell you, my best hope for solving this problem lies in pressing local and federal government to act. I don't see how free market environmentalism can solve my problem.

I will close with a few questions for my hosts. First, what is your opinion of takings laws like the one Mr. Neal said he had put to the South Carolina legislature, which would require the government to compensate property owners whenever it acts in ways that reduce the value of their property. I think such sweeping rules are dangerous because it is legitimate for representative bodies and agencies to which they delegate rulemaking power to change from time to time the social conventions that Coase highlighted. Property derives its value from what you can do with it and since we are all intertwined in society, sometimes government needs to limit our freedom. Compensation is often in order, maybe in the majority of cases, but should not be automatic. I don't think the federal rules that phased lead out of gas should be seen as a taking, even though they reduced the value of certain refinery investments and restrained the freedom of gasoline retailers. Did slave owners deserve compensation for emancipation? Revising the boundaries between property rights, it seems to me, is compatible with the PERC vision: property rights are still defined, and private actors can take it from there.

My second question is, would you support the creation of strong global governance institutions to deal with problems such as global warming? This seems to me to be the flipside of advocating local institutions for local problems. When we 5% of the world's population emit 25% of the greenhouse gases we are threatening the property rights of millions, if not billions of people—the Africans whose farmland would lose value, the Bangladeshis who would see their homes and rice fields submerged, the people who would be caught by the spread of malaria. One could argue that it's not clear that the benefits of cutting greenhouse gases and protecting those property rights would outweigh the costs. But that begs my final question: are property rights a matter of convenience, or a matter of right?

Thank you.

David Roodman is a research fellow with the Center for Global Development and formerly a WorldWatch Institute staff member.

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David Roodman is a research fellow with the Center for Global Development and author of The Natural Wealth of Nations: Harnessing the Market for the Environment (W. W. Norton). This is an excerpt from a longer talk he gave at PERC's 2003 conference for journalists. It is available at www.perc.org.
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