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Terry Anderson Explains Free Market Environmentalism

By Candice Jackson Mayhugh
Stanford Review


REVIEW: According to the Hoover Institution, your appointment as senior fellow represents the first time that Hoover has directed attention to environmental issues. What do you think about this, and what are some of the projects you are planning to begin when you arrive at Hoover?

ANDERSON: I think that the attention that Hoover is giving to environmental issues is related to the realization that, for many conservatives, environmentalism has always been an Achilles’ heel; in other words, it is commonly believed that to be a conservative means that you must be in favor of destroying the environment to raise incomes. But what I think is that in reality, the tradition of conservationism is actually a conservative one. We need to get the incentives right, by using property rights and markets to achieve what we want. The same reforms that we have used in education and welfare reform recently can be applied to the environment, by reducing government involvement and improving incentive structures.

As far as my research agenda goes, I am working on a project about water rights and water markets. I am also planning a book for the Hoover Institution on the politics of environmentalism, and the strange bedfellows it can create. For example, I discovered that the Weyerhaeuser Company [a timber company in Oregon and Washington] hired biologists to seek out spotted owl habitats on public lands, because finding spotted owls on public land would decrease logging on those lands, driving up the price of private timber. This is an example of the twisted incentive system set up by environmental legislation.

My other big project is a book based on articles I’ve written that trace the evolution of property rights, entitled "The Not So Wild Wild West." It will look at how government got to be such a large land holder, and how things might have tuned out differently if we had let western history evolve without such extensive government influence.

REVIEW: What do you mean by "free market environmentalism"? [FME from here on]

ANDERSON: Most people think that "free market environmentalism" is an oxymoron – and that I’m the moron writing about it. But the first premise of FME is that "wealthier is healthier"–meaning that markets generate the wealth that gives us the wherewithal to solve environmental problems. Although many people mistakenly think that markets can only generate consumerism and other gunk, in reality it is markets that produce wealth, and thus help the environment.

The second major premise of FME is that "incentives matter." Positive incentives can turn the environment from a liability to an asset for a resource owner. If we own our own water and land, we have the incentive to manage and conserve it properly.

REVIEW: Explain, if you will, what the New Resource Economics paradigm is, that you began to develop and advocate to the economics profession in the early 1980s?

ANDERSON: Basically, the New Resource Economics paradigm that I worked on then is just a more academic view of free market environmentalism. I incorporated three elements of mainstream economics into a more realistic way of looking at resource economics: those elements are property rights that generate proper incentives, Austrian economics that contributes the idea of entrepreneurship, and public choice economics that criticizes government solutions to market failures. The evolution from talking about New Resource Economics and Free Market Environmentalism has been to increase the subject’s layman appeal.

REVIEW: What are some examples of the successes of FME? How has it been accepted in the fields of economics and environmentalism?

ANDERSON: Such things as user fees on public lands and water markets have demonstrated the success so far of FME. One example of how the rhetoric in resource management has shifted because of the influence of FME is that years ago I was invited to speak in front of the Bureau of Reclamation of the Department of the Interior. The Commissioner of the Bureau burst out "I’ve enough of you kiddy-car economists telling me what to do!" He was afraid to even discuss the possibility of markets working. But recently, I was invited back to the Bureau to discuss how the Department of the Interior might actually privatize water projects, which shows how the debate has shifted in favor of market solutions. The environmental community in general has really embraced market approaches–from as far away as Africa, almost everybody is at least considering market solutions.

In the economics profession, there has not been a very open reception to FME, probably because a lot of people have a stake in the old natural resource economics paradigm. But there is a growing favorable perception. The growing warmth to FME has taken a long time because old ideas don’t die easily. However, we aren’t even really throwing out the old paradigm as much as we are taking the existing one and applying it in new, innovative ways.

REVIEW: Free market environmentalism (FME) somewhat redefines what a market failure is, and how one should be redressed. What do you think is a fair description of an authentic "market failure"?

ANDERSON: What most people mean by market failure is a case where, for one reason or another, people either aren’t bearing the full costs of their actions, or aren’t receiving the full benefits of them. This is the accepted definition. But the question should then be–how bad is this?

Probably the most incontrovertible example of market failure is air pollution. It is hard to come up with a market solution because market solutions depend on definitions of property rights, which in regards to air pollution are tough to define. There are ways to improve, however, even in this difficult case. For example, we can at the very least decide to use tradable permits–at least this is better than the arbitrary regulation that now takes place.

The other way of helping in these tough cases is to better understand how the common law might have helped solve such problems. Me suing you to collect for damages you inflict on my air space with your power plant might take care of many of the problems we have with things like air pollution without the government regulation we now have. I just finished a book called Environmental Federalism, in which I claim that in cases of real market failure, we should at least devolve responsibility for solving them to the lowest level. If it’s a local or county problem, there’s no reason for the state government to interfere.

REVIEW: What are some of the most common arguments against FME?

ANDERSON: "You don’t care about equity, or about poor people and how they would lose under a market system." My answer to this is that we ought not to solve poverty with environmental policy–we ought to solve poverty with poverty policy. A market system is the most effective way to reduce poverty, because it creates wealth.

The other common argument I hear is "Markets can’t solve everything." Granted, but that doesn’t mean we should prevent markets from solving what they can.

REVIEW: If you could change or repeal one piece of U.S. environmental law, what would you pick on?

ANDERSON: Well, I could say "get rid of the World Bank", because they’ve done more to hurt the world’s environment than anybody. But if I can’t have that, then I’d choose the target that is most vulnerable right now to FME–the Endangered Species Act. This Act creates perverse incentives by penalizing people who oversee resources. I’d start by scrapping the approach that’s there and implementing new ones. First, by encouraging private environmental groups to contract with land owners, and second, by using-financial resources (from user fees on public land, for example) to compensate land owners for preservation procedures. [The Endangered Species Act] is up for renewal, and it’s a chance for FME advocates to have an input.

REVIEW: What do you think the major contribution of Austrian economics has been to free market environmentalism?

ANDERSON: First, Austrian economists have made all economists, not just natural resource economists, more aware of the role that individuals play in collecting and acting on information. Friedrich Hayek’s insight that there are special circumstances of time and place that govern how we act has been invaluable. In fact, his essay "The Use of Knowledge in Society" is one of the most revolutionary pieces of economic literature of this century.

Second, the Austrian economists’ emphasis on entrepreneurship–seeing the unseen and acting on it–has been very valuable. In resource economics, we can now see that a negative externality is really only an uncaptured benefit–in other words, an entrepreneur can capture the benefits from what would otherwise have been a tragedy of the commons. Thomas Sowell, of course, is the hero of all this in modern times.

REVIEW: Do you believe that global warming is a serious threat?

ANDERSON: I think that global warming is a threat to our economic well-being but not to our physical wellbeing. What I mean by that, is that as a scientifically-proven problem it is basically a myth. It is not a threat to the human species. I think that the theories alone aren’t very sound, and the data to back them up is worse.

The reason I say it’s a threat to our economic well-being is because politically is it perceived as such a threat that drastic measures are being taken that will adversely affect our economy. Take the upcoming Kyoto Summit, for example, where those insane treaties will raise U.S. costs of production and make the U.S. much less productive, while exempting most other nations.

REVIEW: One of the "crises" that environmental groups worry about is overpopulation. What kind of approach to this problem does FME offer?

ANDERSON: My general approach is that it’s not really a problem. I’m a Julian Simon fan on this one, and he said "With every mouth comes two hands and a mind.” If it is a problem that the more people there are, the more resources they’ll consume, it isn’t showing up in economic data.

There are problems of lack of resources, but these stem from tyrannical dictators who don’t allow ownership of land in their country and prevent their people from having access to development and food. But this is a political problem, not a market failure.

If overpopulation is a problem, then the solution is greater wealth, since it is documented that wealthier nations produce fewer children.

REVIEW: For some reason, the majority of groups who claim to be concerned about the environment are politically left-of-center, and they advocate further government regulation as a solution. What is the key idea that these groups are not understanding?

ANDERSON: First of all, I think that what most of them do is commit the "nirvana fallacy," meaning they assume that wherever there’s a problem, government can solve it. They fail to see that many times when government attempts to solve something, we often get perverse solutions. What I try to do to combat this is to produce concrete examples of markets that work and do good for the environment.

REVIEW: Do you consider yourself to be an optimist or a pessimist about the future of environmentalism?

ANDERSON:I’m definitely an optimist about the future of the environment, and of free market environmentalism, because the evidence is on our side. We’re demonstrating more and more that markets can help the environment, and that political solutions often give the antithesis of what we need.

I find that students and other people are generally receptive to my approach. It’s mostly the bureaucrats in Washington who are resisting the market approach.

Terry Anderson joins Hoover in January 1998. He has recently edited one book of environmental essays and will continue to study environmental affairs while at the Institution.

This article appeared in the Stanford Review, October 21, 1997.

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