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Thursday, March 8, 2012

The Economics of The Lorax

Where are the property rights?

The release of the movie version of Dr. Seuss’s The Lorax has already generated some commentary about the economics of the land of the Truffula Trees. Having used the book in my introductory economics classes for over a decade to teach students how to apply the economic way of thinking to environmental issues, I will add a few more words.

For those who don’t know the story, the Once-ler comes to the land of the Truffula Trees and discovers they can be chopped down and made into Thneeds, an article of clothing that “everyone needs.” He begins to cut the trees to make Thneeds, slowly at first, but as demand grows he begins to cut more and more and adds a factory that spews pollutants into the air and water, destroying the flora and fauna of the forest. The Lorax is a forest dweller who warns the Once-ler of his evil ways and how he will destroy the whole forest to satisfy his greed, but the Once-ler pays him no mind. Eventually the trees are clear-cut and the animals and plants are severely harmed, with only one Truffula seed left to protect.

Dr. Seuss clearly portrays greed and profit-seeking as antithetical to environmental health. Is he right? Must profit-seeking always end in environmental disaster? The answer from economics is a definite no. The key, as is almost always the case in these matters, is property rights.

The problem in The Lorax is that Dr. Seuss never clearly indicates who has the property rights over the trees. If the animals of the forest do, then the Once-ler clearly violates their rights by cutting down the trees, not to mention the pollution he creates. However, if the Once-ler has the rights, then he may cut down the trees, though the pollution he creates might still be a violation of the rights of the animals.

Clear-Cut Irrationality

If the Once-ler does have the right to cut down the trees, would we imagine that he would clear-cut the forest?  Assuming he believes he will have those rights into the indefinite future, his own self-interest should prevent him from clear-cutting. We know from the end of the book – spoiler alert! – that the trees are a renewable resource – they can be replanted. Why would the Once-ler throw away years and years of profits he could obtain by replanting just to make a few dollars now? The future stream of profits is so large as to make clear-cutting a really bad choice, which is why lumber companies cut only a portion of their forests and replant where they do cut. And even if the trees were not a renewable resource, clear-cutting only makes sense as a profit-maximizing strategy under the most unusual of circumstances.

In the case of a nonrenewable resource, “greedy” producers still have reason not to extract the full quantity. Owners of oil wells do not suck out every last drop once they start extracting. Why not? They face a tradeoff: They can extract a lot, or even all, and sell it at the market price and invest the proceeds to earn interest, or they can leave much or all of it in the ground and wait for the price to rise, earning higher profits in the future. The interest rate along with their own patience or impatience about the future will determine just how much they will extract now. Only under very strange assumptions, such as a very high interest rate today and little expectation that the resource will be more valuable in the future, will firms extract everything, or clear-cut a forest. The Lorax gives us no reason to think that either is the case, so the Once-ler’s decision to clear cut the trees makes no sense, assuming he had the right to them.

Tenuous Rights

Then why do we see clear-cutting or its equivalent in the real world? Usually it’s because the property rights of the owner are tenuous, substantially reducing the expectation of future profits and making it more rational to extract all the value now. This normally happens when governments threaten to nationalize resources or where the property claims are uncertain and one party wishes to grab all the value before another party enters the competition.

If property rights are stable, clearly defined, and well-enforced, the self-interest of owners of natural resources will lead them to extract something far less than the full quantity. It will also encourage responsible use of renewable resources, such as replanting to replace cut trees. Despite the message of The Lorax, there is no conflict between profit-seeking and responsible resource management. The key, as always, is that such activity takes place in an environment where property rights are clear and respected. That Dr. Seuss’s book never even asks whether property rights matter is why we should not treat it as serious commentary on the environment, no matter how important we think it is to speak for the trees.

  • Steven Horwitz was the Distinguished Professor of Free Enterprise in the Department of Economics at Ball State University, where he was also Director of the Institute for the Study of Political Economy. He is the author of Austrian Economics: An Introduction.