Free Market Environmentalism

For many people, markets are the cause of environmental problems, not the solution. The very notion of free market environmentalism is to their mind something of an oxymoron. Even some of those who normally support free enterprise and free trade may find themselves uncomfortable with the idea of letting unfettered markets determine how and when natural resources are used. "Markets may work fine to produce shoes or software, but the environment is somehow different" and is felt to somehow be too "precious" to be "put on the market".

This book by Terry L. Anderson and Donald R. Leal-originally published in 1991 and in this revised edition in 2001-challenges the perception that free market environmentalism is an oxymoron and argues to the contrary that "if we are to continue improving environmental quality in the twenty-first century, we must harness market forces". The authors go on to show how this could be done (and to various degrees is being done) applied to pollution, waste, fishing, water, energy, nature reserves, and more. In general, free market environmentalism "emphasizes the positive incentives associated with prices, profits, and entrepreneurship, as opposed to political environmentalism, which emphasizes negative incentives associated with regulation and taxes". At the heart of free market environmentalism is private ownership of natural resources and decentralized decision-making.

The most interesting chapters of the book are chapters one and two: "Visions of the Environment" and "Rethinking the Way We Think". Here the authors contrast free market environmentalism with "traditional" environmentalism on a number of key issues. I will comment on some of these.

Human nature

Anderson and Leal write that "free market environmentalism views man as self-interested". As they would probably agree, however, and as becomes clearer later in the book, it would perhaps be better to say that humans are only partly egoists and partly self-referential altruists. That is, we naturally care much more about ourselves and those who are close to us than we care about those who are strangers to us or about mankind in general. The authors rightly point out that to assume differently "requires heroic assumptions about Homo sapiens vis-á-vis other species". People can of course, as Anderson and Leal agree, be "conditioned by moral principles", but developing an environmental ethic, though desirable, "is unlikely to change basic human nature". The basic point here is that free market environmentalism is based on realistic and empirically based assumptions about human nature as opposed to some normative ideals.

While they do not say so explicitly, I think they would agree that any ethical doctrine that requires individuals and groups to care equally about all sentient beings in the universe or about the entire ecosystem of the planet is flatly inconsistent with human nature and our basic motivations and should therefore be dismissed as utopian.

An important insight of free market environmentalism (and free market thinking in general) is that good intentions are not enough to produce good results: "Instead of intentions, good resource stewardship depends on how well social institutions harness self-interest through individual incentives."    

Knowledge

In addition to the right incentives, good resource stewardship depends on the information available to the individuals who make decisions about the recourse in question. Free market environmentalism views the information necessary for good management as varying significantly from time to time and from place to place. Knowledge, by its very nature, cannot be gathered in a single mind or a small group of minds. Indeed, "a giant leap of faith is necessary if humans are to be able to accumulate and assimilate the necessary knowledge to manage the economy or the environment." Empirical evidence from the socialist countries of Eastern Europe and the Soviet Union supports this insight. The environmental damage caused by central planning in these economies prior to their collapse is considerable (the book contains some data on this). The authors hold that "given government's less than stellar record at protecting the environment it is hard to put faith in proposals that call for more government regulation to ensure environmental quality."

Process, not fixed solutions

The two points above "combine to make free market environmentalism a study of process rather than a prescription for solutions". There are no easy and fixed solutions to environmental problems. Basically self-interested individuals with diffuse knowledge tend to generate (if allowed to do so) "a multitude of solutions conditioned by the costs and benefits faced by individual decision makers". Private ownership and market processes "generates many entrepreneurial experiments; and those that are successful will be copied, while those that are failures will not." Anderson and Leal give many real-world examples of how such bottom-up processes have mitigated many environmental evils past and present - and how political regulation has very often exacerbated them.

If man could rise above his fundamental motivations and if all relevant knowledge could be concentrated into a single central institution, then solutions through political control might have been feasible. But given human nature, the nature of knowledge, and the complexity of ecosystems, "decentralized management guided by the incentives of private ownership becomes an alternative to centralized political control".  

Value

Anderson and Leal seem to be (like myself) subjectivists about the nature of value. They say that psychology can tell us about how our values are "formed and influenced by peers, parents, advertising, genetics, and so on, but ultimately they are subjective to each individual". The authors emphasize that each of us places different value on environmental amenities: "Some see a rain forest as a jungle that, when cleared, can grow crops, while others see it as a source of biodiversity." In the absence of any objective values, there is no single right way in which tradeoffs between different uses of a resource ought to be made. But "once individuals undertake market trades to achieve their desires, their bids provide an objective measure of these subjective values because bidders must give up one thing of value to obtain another". Market prices "provide an objective measure of subjective preferences and are therefore an important source of information about subjective values". 

It might be insisted that the environment possesses a value over and above what anyone happens to place on it. Anderson and Leal anticipates this objection (which anyway begs the question by assuming objectivism). 

We emphasize from the outset that [free market environmentalism] assumes that the environment's only value derives from human perceptions. Under this anthropocentric conception, the environment itself has no [objective] intrinsic value. [...] As long as humans have the power to alter the environment, they will do so based on human values - the only values that are ascertainable.  

Markets vs. politics

There are systematic differences in the way information about subjective values are communicated in markets and in politics respectively. While information costs are positive in both processes, "prices offer a low-cost mechanism for articulating subjective values, and connect the person paying the price with the actual cost". In a democratic political process, the main counterpart to prices is voting. As the authors point out, "voting is a signal that, at best, communicates the subjective values of the median voter".

The incentive structure in the political sector is less likely to tend toward efficiency because voters are rationally ignorant, because benefits can be concentrated and costs diffused, and because individual voters seldom (probably never) influence the outcome of elections. For these reasons, it is unlikely that elections will link political decisions to efficiency in the same way that private ownership does in the market process.

To this, it should be added that voters have systematically biased beliefs about economics.

Property rights and technology

It is a commonplace that you take better care of what is yours. As has already been mentioned, rights to private ownership of natural resources are an important part of the free market approach. The authors stress that "free market environmentalism does not assume that these property rights exist or that they are costless to create". To the contrary, "the property rights approach to natural resources recognizes that property rights evolve depending on the benefits and costs associated with defining and enforcing rights". Property rights are not static, but "evolve through the social arrangements, laws, and customs that govern asset ownership and allocation". An important factor in this evolutionary process is technology.

Technological advances or lower resource prices, which reduce the opportunity costs of definition and enforcement, will increase property rights activity. As open access created conflicts in the American West, individual efforts were channeled toward solving the problems of ownership to land, livestock, and water. These examples teach us that we should not be too quick to conclude that market-based, property rights solutions will not work for natural resources. Before the invention of barbed wire, fencing vast tracts of land on the Great Plains seemed impossible. For much of the last century, technology for fencing bison, whales, or grizzly bears seemed equally impossible. But as asset values change, so do incentives. Tradable rights in whale stock, for example, are highly plausible today, thanks to the global positioning system (GPS), DNA testing, and radio and acoustical tagging of species. 

Economy and ecology

One of the most interesting aspects of the book for me is the analogies that the authors make between economy and ecology. They write that "comparing free market environmentalism with ecosystems serves to emphasize how market processes can be compatible with good resource stewardship and environmental quality."

When a niche in an ecosystem is left open, a species will profit from filling that niche and will set in motion a multitude of other adjustments. If an elk herd grows because there is abundant forage, there will be additional food for predator species such as bears and wolves. Their numbers will expand as they take advantage of this profit opportunity. Individual elk will suffer from predation as elk numbers will be controlled. Plant species will survive and other vertebrates such as beavers will be able to survive. This is a process that no central planner could replicate because their is no best solution for filling niches and because each species is reacting to time- and place-specific information.  

As survival rewards species that successfully fill a niche, increased wealth rewards owners who efficiently manage their resources. Profits link self-interest with good resource management by attracting entrepreneurs to open niches. If bad decisions are being made, then a niche will be open. Whether an entrepreneur sees the opportunity and acts on it will depend on his or her ability to assess unique information and act of the assessment. As with an ecosystem, however, the diffuse nature of this information makes it impossible for a central planner to determine which niches are open and how they should be filled.

Resource scarcity

The feeling that markets and the environment do not mix well is "buttressed by the perception that resource exploitation and environmental degradation are inextricably linked to economic growth". This view, in turn, builds on fears that we are running out of resources; as populations grow, consumption must eventually run into the wall of finite resources. This theory, first articulated by Thomas Malthus, is based on a fallacy and such Malthusian predictions have been proven wrong many times. "The reason that Malthusian hypotheses are continually refuted is that they fail to take into account how human ingenuity stimulated by market forces finds ways to cope with natural resource constraints."

As Anderson and Leal point out, when resources do begin to become scarce, their prices naturally rise. And when prices increase, entrepreneurs seek economically expedient ways of conserving them; either by improving technologies so that less of the scarce resource in question is needed to produce the same output, or by finding alternative resources that can do the same job for a lower price. Anderson and Leal list many historical examples of this phenomenon. As pointed out by (among others) Steven Pinker in The Blank Slate, the reason that people still commit the Malthusian fallacy is rooted in a cognitive bias inherent in human psychology (we tend to focus on what is seen and ignore what is not seen).

In his excellent paper "Natural Resources, Sustainability, and the Central Committee" (available in the volume Respecting Persons in Theory and Practice), Jan Narveson offers a lucid philosophical analysis of the concept of 'resources'. Narveson points out that technology does not only change how much of a given resource is needed to produce the same output, and which alternative resource can be used to do the same job, but it also changes which "jobs" people will want to be done. Future technology might be driven by entirely different types of resources than current technology is, and there is no way for us to predict the future beyond a very limited time horizon.  

In conclusion, Free Market Environmentalism contains many valuable insights into how voluntary exchanges can promote cooperation, compromise, and harmony between different interests and how economic growth can be sustained while environmental quality is enhanced.