Government's Efforts Aggravate Problems
Mr. Georgia is a Research and Development Analyst at the Competitive Enterprise Institute and a Ph.D. candidate in economics at George Mason University.
One of the most fascinating intellectual debates since the calculation debate over socialism in the 1930s is now raging in the environmental arena. The debate is over the most effective means of protecting the environment: government control or private stewardship. I call this debate the stewardship debate.
The arguments that Ludwig von Mises and F. A. Hayek used in the calculation debate are an important part of the current stewardship debate. The issues they raised—the knowledge problem and the role of market prices and private ownership—are an integral part of the intellectual arsenal used by advocates of ecological privatization.
Indeed, the dynamics of the stewardship debate mirror in many ways the calculation debate. Until Ludwig von Mises fired the first shot, socialists shrewdly avoided the economic feasibility of socialism by merely asserting the superiority of socialism over capitalism. To them it was sufficient to show the weaknesses of capitalism and, having done so, proclaim that socialism was the logical and inevitable outcome. Because markets failed to produce utopian results, socialism was declared the appropriate path to societal betterment.
Mises, however, argued that without the signals that market prices provide, economic calculation is impossible—that is, producers cannot know what to produce, how much to produce, and how to produce it efficiently. Under socialism, producers would be blind to the wants of consumers because socialism lacked prices. Without market prices we are left with a system of “groping about in the dark.”[1]
The socialists eventually conceded that prices mattered, but they still claimed that markets and private property were not necessary. They argued that central planners could overcome the problem of calculation by simulating market prices through mathematical and statistical models.
Hayek ultimately defeated this “market socialist” argument by pointing out that arriving at realistic prices would require an enormous amount of information, and the knowledge necessary for such an undertaking is dispersed and fragmentary, frustrating any attempt at consolidation.[2] Israel Kirzner later stated that not only would the planners lack the necessary information but that they would be ignorant of their own ignorance.[3] No mind or group of minds could possibly contain the necessary information needed for such a task.[4]
The stewardship debate has followed a similar progression. Private property advocates have made powerful theoretical and empirical arguments to show the superiority of private stewardship and markets over government-directed environmental protection. Many environmentalists have essentially conceded this point. They have agreed (in word if not in deed) that markets and private property create powerful incentives which lead to more effective and efficient environmental protection.
However, they say, this is only true in areas where property rights are easily defined and exchanged. In other areas, defining property rights appears to be nearly impossible. For example, Robert Stavins, an environmental economist, promotes “economic-incentive mechanisms” that allow trades of pollution rights, but only after the pollution goals have been established politically. These mechanisms, Stavins says, encourage efficiency but “avoid the impracticalities of the pure, private-property approach.” He asks scornfully: “Does anybody really believe that acid rain can be efficiently controlled by assigning property rights for the U.S. airshed and then effecting negotiations among all affected parties?”[5]
Unfortunately, many who advocate market solutions fail to address this question. They acquiesce under the daunting task of defining property rights in such areas as airsheds, groundwater, and oceans.[6] But it is important that free market environmentalists take on these more difficult issues.
Defining Property Rights
Critics of free market environmentalism advance three major arguments. The first is that it is impossible to assign property rights to—or “fence”—the atmosphere, groundwater, or the oceans.
Indeed, “fencing” the airshed, groundwater, or oceans appears difficult, but so did the fencing of the Western frontier of the United States in the nineteenth century. At first, land was plentiful and there was no need to clearly define property rights. However, over time land became more scarce and therefore more valuable. The higher value spurred greater efforts to fence the frontier and to more clearly define property rights.
But wood was scarce in the arid West and the distances to be fenced were enormous. Such obstacles made the construction of visible boundaries very expensive. Various solutions evolved, as Terry Anderson and P.J. Hill have shown. For example, camp lines were used to keep cattle herds separate; these “human fences” were effective but the costs of such methods were high. Eventually, the invention of a simple technology—barbed wire—greatly reduced the costs of delineating and protecting property rights.[7]
This example shows that property rights solutions do evolve to meet the unique challenges that arise with each situation. However, framing the issue in such terms as “fencing the airshed” is misleading. It is not necessary to fence and assign property rights to the atmosphere to reduce pollution. What is necessary is the existence of clearly defined and binding property rights to pollution-causing activities, as well as to the properties that are affected by the pollution. In a system of clearly defined and effectively protected property rights, the value of clean air and other environmental amenities will be revealed.
Before discussing how these preferences will emerge, an important distinction must be made between pollution and emissions or waste. Waste is simply a by-product of human action. Every productive and useful human action creates waste. However, waste is not by definition pollution. Only when waste is dumped where it is not wanted (i.e., on another’s property) does it become pollution. Property owners have the right to restrict the dumping of waste on their property, whether it is in their airspace or on the property itself.
In a society based on property rights, individuals will have the ability to sue for redress when their rights are trespassed. If the property owner is successful, then the polluter must find ways to keep the emissions from traveling onto another’s land or airspace. However, if a polluter wishes to continue to pollute, and property rights are clearly defined, it can purchase the right to do so from the property owner. By allowing property owners to negotiate among themselves, the value of clean air can emerge through the revealed prices, and the optimal amount of pollution will be achieved.[8] Moreover, private ownership creates incentives to develop more effective means of protecting property rights through technological advances.
Transaction Costs
At this point, environmentalists bring up their second argument, the problem of transaction costs. Even if rights are clearly defined, it is too costly, they say, for thousands of people affected by automobile pollution to get together with thousands of car drivers and negotiate a mutually satisfying agreement that would allow some pollution but not too much. The enormous amount of time needed just to reach a consensus among such a large number of individuals is one of the prohibitive costs involved in such an undertaking.
However, just as technology solved the fencing problem in the American West, it may do so for pollution. Technology developed at the University of Denver allows the measurement of automobile emissions as a car travels in a way similar to the way that radar measures speed. Stationary emission checkpoints along the highway can measure the amount of exhaust an automobile discharges as it travels. If the car exceeds the maximum limit, a photograph of the license plate is taken and the person pays a fine.
Most people see this technology as a more efficient means for the government to control pollution by catching those who drive the dirtiest automobiles.[9] But to those who think more deeply, this new technology provides a means of reducing the transaction costs while expanding freedom.
Highways—not just airsheds—could be privatized. Those who wish to negotiate for cleaner air then would only have to deal with one entity, the highway owner. Instead of thousands of homeowners attempting to negotiate with thousands of automobile users, there would be an owner of a segment of highway. This owner could negotiate with perhaps ten, twenty-five, or fifty homeowner associations. (Such associations could address these types of environmental concerns just as they have addressed crime and a whole range of other common landowner interests.)
The highway owner, using the new emission detection device, could charge user fees or fines, or prohibit highway use to automobiles that pollute excessively and expose the highway owner to potential liability.
As the costs of such negotiations decrease, the amount of pollution will approach a level that everyone will be happy with. If homeowner associations are the recognized owners of the airspace in which they reside, the highway owner could pay them to be allowed to pollute. If the highway owner exceeded the stipulated amount, the home associations could sue for damages. In this way an optimal amount of pollution is more nearly approached.[10] In an environment free from government interference, private institutions can evolve (perhaps slowly), leading to optimal solutions. Technology acts as a catalyst through which the costs of enforcing property rights are greatly reduced.
This system also allows time- and place-appropriate solutions. In Los Angeles, clean air is scarce. In Idaho it is plentiful. Although transaction costs and the costs of defining property rights over previously unowned resources may be the same in both places, Los Angeles will be more likely—in the absence of government interference—than Idaho to undertake the necessary market transactions because Los Angelenos will value additional clean air more. Under centralized control, Idahoans would pay the same for clean air as those in Los Angeles even though they don’t value it as much.
Thus, markets overcome transaction costs in two ways; first, new technologies can greatly reduce transaction costs, and second, the value of clean air may be high enough to exceed the transaction costs of negotiating a solution.[11]
Of course, people may not want a cleaner environment so much that they are willing to pay for the necessary technology or the transaction costs. Those who weren’t satisfied with the amount of clean air achieved through the market might well go to the government to force the rest of us to pay more for clean air than we want to. That is probably what has happened today under political management of the environment. The costs of politically managed clean air are hidden; we may be getting more clean air than people would want if they were free to negotiate for it.[12]
The Inevitability Defense
The environmentalist’s last line of defense is the inevitability defense, just as the socialists ultimately resorted to the argument that socialism is an historical inevitability and therefore not subject to intellectual debate. Environmentalists bring up apocalyptic scenarios that demand coercive responses. Global warming and ozone depletion are examples. The potential costs are so high—the end of human civilization, more or less—that Apocalyptic environmentalists argue that we can’t wait for market solutions to evolve. Government must impose restrictions immediately at any cost to preserve life on the planet.
Science is showing that global warming and ozone depletion may not be any more inevitable than socialism, but, even so, environmentalists argue that we should act: “Where public health may be adversely affected, or environmental damage may be serious or irreversible, prudent action is required even in the face of scientific uncertainty.”[13] But given scientific uncertainty, how do you define “prudent action”? It must be determined politically. We can expect a lot of imprudent, unneeded, and costly policies if politics determines the action to be taken.
Many are uneasy with the evolutionary market model. They feel that they are being asked to accept on faith the spontaneous and unpredictable forces of the market. They feel more comfortable with the proposition that we should, as a society, consciously plan our future in order to arrive at the desired ends. But such planning, we realize now, cannot achieve the desired ends. Of such planning Hayek once asked, “Is there a greater tragedy imaginable than that, in our endeavor consciously to shape our future in accordance with high ideals, we should in fact unwittingly produce the very opposite of what we have been striving for?”[14]
A survey of U.S. government policy in the last sixty years makes it painfully clear that the government’s efforts have often aggravated the problems it was trying to solve. The track record of free societies and free institutions in satisfying human needs is far better than the track record of governments. Because of this, faith in the market is not blind, and relying on government, in light of its past performance, seems foolhardy. []
1. Ludwig von Mises, Human Action: A Treatise on Economics, 3rd rev. ed. (Chicago: Henry Regnery Co., 1966), p. 700.
2. Friedrich A. Hayek, “The Use of Knowledge in Society,” American Economic Review, September 1945, pp. 519-530.
3. Israel M. Kirzner, “Economic Planning and the Knowledge Problem,” The Cato Journal, Fall 1984, pp. 407-418.
4. For a comprehensive survey of the calculation debate, see Trygve J.B. Hoff, Economic Calculation in the Socialist Society (Indianapolis: Liberty Press, 1981).
5. Quoted from the letters to the editor in which there was exchange between Fred L. Smith Jr. and Robert Stavins, “Let’s Pretend Markets,” Policy Review, Summer 1989, pp. 94-96.
6. See Michael Kellogg, “After Environmentalism: Three Approaches to Managing Environmental Regulation,” Regulation, 1994, Number 1, pp. 25-34.
7. Terry L. Anderson and P.J. Hill, “The Evolution of Property Rights: A Study of the American West,” Journal of Law and Economics, 12, 1975, pp. 163-179.
8. See Ronald H. Coase, “The Problem of Social Cost,” The Journal of Law and Economics, October 1960, pp. 1-44.
9. See Jonathan Adler, Reforming Arizona’s Air Pollution Policy (Phoenix: Goldwater Institute, January 1993), pp. 9-10.
10. The private highway approach was suggested by Terry L. Anderson and Donald R. Leal in Free Market Environmentalism (Boulder, Colo.: Westview Press, 1991), p. 165.
11. Harold Demsetz, “Toward a Theory of Property Rights,” American Economic Review, May 1967, pp. 347-60.
12. Of course, other political factors may lead to less clean air than demanded. Because it is impossible for bureaucrats to know how much clean air people demand they may set the maximum level too high. This effectively creates a legally permissible amount of pollution giving firms the right to pollute, while depriving property owners the ability to sue for damages.
13. President’s Council on Sustainable Development, Vision Statement and Principles of Sustainable Development (Washington, D.C., Spring 1994).
14. Friedrich A. Hayek, The Road to Serfdom (Chicago: The University of Chicago Press, 1944), p. 5.
