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The Independent Institute
Research Article

Property Rights vs. Environmental Ruin


Recurrent and widespread dissatisfaction with government management of natural resources is extensively shared among ranchers as well as environmentalists, recreationists, oil and gas developers, loggers, and farmers alike. Despite considerable differences in perspective, all recognize that natural resources are administered in an inefficient and/or inequitable manner. But with the complexity of natural resource systems, understanding has been limited, creating a fertile breeding ground for popular fallacies and myths over the formulation of environmental policy.

As a result, the rush to cope with natural resource problems almost exclusively through government political and bureaucratic control has overlooked their true causes and available solutions. Indeed, the increasingly politicized “commons” status of rangelands, forestlands, lakes and rivers, and other environmental domains, including endangered species, assures continuing and in most instances, deepening problems.

Environmental Ruin from the “Tragedy of the Commons:”

Notwithstanding this popular perspective, natural resource and environmental problems in the United States and elsewhere around the world have indeed arisen out of the political and bureaucratic, rather than private and market, means of using resources. Whether the issue is toxic waste management, air and water pollution, development of fossil fuels, nuclear and alternative energy sources, wildlife sanctuaries, forestland management, or fishing and ocean resource development, the evidence overwhelmingly demonstrates the superiority of the twin institutions of private property and market exchange over government control.

In the 18th and 19th centuries for example, when the supply of game became less than the demand, many American Indian tribes assigned private property hunting rights within specified geographic boundaries to individuals. The resulting incentives to husband the game and implement efficient harvesting rates eliminated game shortages. This was especially effective with smaller game animals involved in the growing fur trade, and was also effective with the buffalo. Buffalo nearly became extinct in the nineteenth century largely because subsequent white men refused to honor existing Indian property rights arrangements and failed to implement property rights to buffalo among themselves.

And so it has been throughout history: whenever a resource has been held “in common,” whether land, water, air, plants and animals, etc., that resource has been degraded. For instance, in many parts of the world, natural resources, such as a village’s hillside land used for grazing, would be held or owned “in common.” No individuals had any property rights in the hillside; everyone in the village instead owned the resource together or “collectively.” However, since all human endeavor is necessarily action taken by individuals on what are physically limited resources, de facto property rights in resources arise only as individual human beings pursue their own ends. No “collectives” exist in reality, and no “commons” can produce wealth or protect a resource from abuse.

In the case of the hillside, since the land was owned by everyone “in common” (i.e., unowned), no returns from its use could be capitalized into the land itself. The only individual property rights that could exists were those for the grass eaten by the sheep of each respective herder. Only when the grass became a part of the sheep, did it become a resource owned and to the benefit of the sheep herder. As a result, each herder would benefit most from maximizing the consumption of grass by his/her sheep before the grass was consumed by another herder’s sheep. And, this competition to consume grass was driven irrespective of how the hillside itself was treated, since no one was accountable for how it was used. Because no one owned the land, no one had the incentive to replant or selectively graze the hillside to preserve it as a resource for future use. For if anyone did, the benefits from such efforts would also be captured by other herders who had not taken the time or resources to make such improvements. Any herder who took pains to steward the hillside would quickly lose out to others who had not.

This competition to graze and not husband the land itself would produce an over-grazing of the hillside and the destruction of the soil for grow purposes. In response, the herders would then move to the next available hillside until that too was overgrazed, and then another and another, until, as with all physical resources, they ran out of hillsides to graze.

The competition at this point would then escalate into armed conflict and war over who had the right to use the resources. Some scholars have in fact stated that all human conflicts are actually conflicts over property: who should own what, when and how. Indeed, the history of mankind is a staggering chronicle of the recurring wars and enslavement by one group over another as they fight to impose their notion of the proper “commons" ownership system over others.

Once in control and because of the inevitable conflicts arising from the “tragedy of the commons” to manage such systems, bureaucratic agencies to regulate the use of the land or other resources would be established politically by the rulers, kings, warlords, or other assorted tyrants. These bureaucracies would dictate the rules, and the citizenry would be compelled to comply for fear of a brutal punishment. What once was a system in which the hillside or other resources were owned “in common” was transformed into one whose property rights were confiscated by the rulers and administered by their bureaucratic agents. And, the citizenry would subsequently be forcibly worked to advance the ends of the rulers.

This historic political/bureaucratic response to the “tragedy of the commons,” however, remained severely handicapped economically since the bureaucracy only served to institutionalize the inability to function in an efficient manner. Firstly, since their revenues were extracted from the citizenry by force through taxation, the agency’s managers had no way of telling whether they were administrating the resources in ways beneficial to the public or not. They in effect received their revenues each year regardless of how they performed their duties. Where in a market economy, disenchanted consumers are free to shop elsewhere, no such opportunity existed under the domain of the bureaucracy. In fact, even if the managers were angels with perfect ambitions to do only good, the dilemma of their ignorance would prevent them from acting in ways to protect and enhance the resources.

Furthermore, the incentives facing such managers in advancing themselves individually were perverse: they could not benefit from the sale of more goods or services since no such sales took place, and they could not realize more equity in the resources they manage since no such equity for them existed. Instead, their only path for advancement was found internally through the acquisition of more bureaucratic power, larger budgets, bigger salaries, and larger staffs. But to do so required the political existence of a sufficient number of on-going conflicts and other problems in the management of the resources. Otherwise, their very purpose and their status politically would disappear, and the rulers could better employ their resources for more pleasurable pursuits.

Hence, the political/bureaucratic managers possessed both an utter ignorance of how to properly manage the resources plus the direct incentives to mismanage them. As a result, the history of bureaucratically managed natural resources is a steady series of environmental abuses until at long last, as with the original hillside commons, the resources are devastated. The reign of the ruler itself would then collapse.

However, historically, there has also been a very different tradition. In many parts of the world, to rectify this environmental “tragedy of the commons,” many people realized that the problems of overgrazing resulted from the simple failure to recognize the existence of property rights in the land produced by those individuals who had transformed it for human use. This recognition produced one of the greatest of all inventions of mankind—agriculture—or simply, the establishment of individual property rights to the land itself. With such rights, no one would any longer be allowed to invade or rob the cultivator of the land of the fruits of his/her labor, such as sending one’s sheep through a hillside, cornfield, or other resource area maintained by another.

In so doing, the property owner is protected form physical harms (e.g., the trespass of pollution, etc.) caused by others and can obtain damages from such invasive acts. Likewise, faced with the knowledge that he/she would be held fully accountable for any damages caused to other property is incented to manage the property so as to prevent such harms. Hence, a proprietary/market system of resource management minimizes environmental damages at ever turn.

The Political Economy of Environmental Management:

Today, the political/bureaucratic tradition to manage land and other resources continues throughout government natural resource and environmental programs in the U.S. and countries around the world. All government agencies manage resources through the same imposition of bureaucratic edicts enforced by the coercive threat of government for those who do not comply. In its purest form, as was the case in the former Soviet Bloc, we can see the most horrendous of environmental devastations as entire regions of land, water, and air have been systematically poisoned, and the people used as laboratory animals for biochemical and nuclear testing and other horrors.

But, the economic dynamics producing the “tragedy of the commons” exist wherever resources are held “in common” and individual property rights are prohibited. It is hence no accident that the most serious and recurring environmental problems are found on government-owned roads, parks, land, lakes and waterways, the air, etc. If human beings can control a resource, it becomes property, and if it is not recognized as such, its use will be abused.

In private markets, where human interaction is based on the voluntary exchange of private property rights, resources are directed away from lower-valued uses to higher-valued uses. This optimizing allocation of resources is achieved through the pricing mechanism. For example, in rural Kansas the supply of land relative to its demand is high, reflected in the lower cost of this land. This and other input prices make farming an optimal use for land in Kansas. In San Francisco, however, the supply of land relative to demand is low, so land prices are high. Thus one does not find large-tract farms in San Francisco—the land is instead directed to those uses which pay the landowner more than he or she would receive if it were used alternatively. The greater numbers of people desiring to live in San Francisco versus rural Kansas therefore find the higher-density housing necessary to satisfy their demand.

What most fail to understand is that all resources are ultimately what economists term "scarce" (i.e., limited in supply); that is, there is no commodity of which there would not be a shortage if it were priced artificially low. It is therefore only through a system of freely floating prices communicating the competing demands for those resources that rational decisions can be made—decisions far more likely to result in the long term conservation of those resources. All the magnitudes and intensities of competing human wants are thus communicated via voluntary exchange offers, couched in terms of prices, which can be either accepted or rejected. Private resource owners best weigh competing present, as well as future, uses of their resources when making exchange plans because their own wealth is at stake. They know that it is they who are accountable for their decisions—they will be the ones to benefit or lose from their decisions.

As with the historic political/bureaucratic resource managers, when bureaucratic means of resource allocation are employed today, resources cannot be directed toward more highly valued uses, because no prices exist to communicate what these might be, and where. As in the past, lacking private rights to the resources, politicians and bureaucrats cannot enhance their own wealth by carefully considering where resources are most urgently wanted and most effectively deployed. Tax revenues are received regardless of whether government officials produce environmentally sound resource management or not. In fact, the more environmental problems that occur, the more control government agencies should allegedly be given. Instead, government decision makers respond to the real source of their wealth and power—those bureaucratic and private special interests that will keep them in office.

Politicians know they can safely ignore the diffused, general public interest on most issues as long as they serve those special-interest constituencies who stand to benefit most directly from government programs. Since no individual taxpayer’s share of the cost of a single program is high enough to make it worth his/her while to protest, the benefits of government bureaucracy accrue to small groups, while the costs are borne by all. Human enterprise through market means serve the interests of the general public while the political/bureaucratic means serve the interests of special interests to the detriment of society.

Energy:

As an example of how the political/bureaucratic means has operated in the U.S., let’s consider government energy policy. In the 1950s, the “drain America first” policy of petroleum import restrictions and government-enforced pro-rationing in Texas and Louisiana expanded earlier government-energy involvement. In addition, in 1954, the Federal Power Commission began regulating the wellhead price of natural gas in interstate shipments, resulting in the unprofitability of all but the most easily accessible gas deposits. The relative price of natural gas decreased, producing sharp increases in its usage. Then, beginning in the late 1960s, the federal government imposed direct and universal pollution emission standards that greatly reduced the mileage rating of automobiles. Furthermore, refineries were, in the name of environmental improvement, unable to obtain new construction permits for capacity expansions. And the stage was thus set by government bureaucratic mismanagement of energy for OPEC to plunder American consumers and businesses.

In response to OPEC, the federal government created the Federal Energy Administration, which later became the Department of Energy and imposed elaborate new price and performance regulations that worsened the impact of OPEC on American consumers and businesses. When wage and price controls were imposed during the Nixon era, the resulting gasoline-station lines are now legend.

Similarly, the Rural Electrification Administration (REA), established by executive order in the 1930’s to subsidize power delivery to people in rural areas, undermined the development of alternative energy industries. For example, prior to the REA, there existed a thriving windmill and wind generator industry that was moving to meet the demand for electricity in rural areas. The REA subsidy of electrical rates from far away conventional sources quashed the wind generation alternative. Similarly after World War II, the solar water heating industry was stunted by the cheap subsidized electric rates afforded through the REA.

Along the same lines, in the 1980s the federal government’s Synthetic Fuels Corporation (SFC) misdirected investment toward inefficient petroleum substitutes and synthetic natural gas. For example, one widely touted “solution” to the then-alleged petroleum shortage was gasohol, where grain alcohol is added to gasoline to extend the supply of gasoline. Although the SFC was properly discontinued years later, today the corn products lobby and other interest groups have succeeded in resurrecting gasohol by having its use mandated through the Clean Air Act. However, the costs of manufacturing gasohol are such that its production makes as much sense as grinding up tenderloin steak to mix with ground beef to stretch out the supply of hamburger.

Water Rights:

Over the last several years, more and more people have come to believe that the United States will soon face serious and perhaps debilitating shortages of water, especially in the West. Despite the extent of these views, no unavoidable long-term shortages of water need occur.

For example, the use of groundwater in the West has primarily been determined by political/bureaucratic, rather than market, means. For example, the California Constitution has been interpreted as saying that people who desire to transfer a currently-held water right are conceding that the water must not presently be put to the beneficial use, and thus, the water right may be taken away by the government. Such policies of course can only waste water by preventing its allocation to higher value uses.

Because the price of water has been held artificially low through government water projects and other subsidies, land use has been misdirected to highly water-intensive crop production, resident developments with extensive and water-intensive landscaping, etc. Were the true supply relative to demand for water allowed to be accurately communicated via market prices with freely tradable water rights, these property owners would be incented to instead produce less water-intensive crops, decorate with low water-consuming plantings, etc.

For decades, water shortages in the West, which have been the result of government ownership restrictions, were met by expanding government supply networks (aqueducts, canals, and dams) with seemingly little regard for economic or environmental costs. “Pork barrel” projects at the behest of special-interest constituents, as in the case of the California Aqueduct, have been funded by the federal government with no regard whether the projects could pay for themselves. And with each successive new water supplies made available, so long as prices were held below market values, misuse and bureaucratically-created shortages only grew worse.

Similarly, the depletion of watershed, lakes (e.g., Mono Lake), rivers and ground aquifers has resulted from the absence of marketable property rights in these water resources. In contrast, where such property rights to water have been recognized, owners invest judiciously to manage the resources over time to maximize the long-term value of the resource and protect them from abuse.

Air Pollution:

Through its regulatory statutes, the Environmental Protection Agency sets standards which must be applied uniformly to all emitters in any class no matter what the resulting costs of pollution reduction. When property rights, including air rights, are not fully enforced, pollution is an undesirable by-product of the production of many of the goods and services that people value. When the air is held as “commons,” polluting is essentially free, that is, without cost to the polluter. If the emitters of pollution were instead liable for the tort damages to those whose air has been polluted (trespassed), individual emitters would have economic reason to seek out ways of controlling pollution. Incentives to develop pollution-free processing would then be borne by those that pollute.

However, bureaucrats at the EPA have steadfastly resisted suggestions to deal with pollution through property rights/market-based reforms, in part because EPA jobs and budgets might well be at stake. Instead, in response to a growing outcry against its oppressive and costly standards, the EPA has begun adopting air shed systems for major metropolitan areas such as southern California, in which a government agency proscribes the allowable levels of tradable pollution emissions for the area. Firms would be allocated tradable “pollution rights” within the area. Although the use of such quasi-market rights is a step forward, since the system operates within the political dynamics and at the discretion of government bureaucracy, the special-interest dynamics producing environmental harm will still operate.

Another example of inefficient allocation of resources due to federal governmental involvement are the Clean Air Amendments of 1977, which require stack-gas scrubbers for all new coal-fire plants. The scrubbers, which are designed to reduced sulfur dioxide emissions, must be installed on all plants, even on those that burn low sulfur coal. Not surprisingly, research indicates that this rule was based again entirely on political considerations. Where Western U. S. coal is low in sulfur, much of the coal found in the Midwest and Appalachia is high in sulfur. If low sulfur-burning plants did not have to have the scrubbers, Western coal would become more attractive relative to Midwestern and Appalachian coal.

Not coincidentally, when this legislation was passed, the chairmen of both authorizing congressional committees for the EPA plus the Senate Majority Leader were from West Virginia. The White House and Congress were also well aware that only eastern coal workers were affiliated with the United Mine Workers, a highly organized special-interest group with high vote-generating potential.

Western Lands:

The federal government owns approximately one third of the land in the United States, and most of this land of course is located in the West. Federal land policy in the West has led to the steady deterioration of the land. Unfortunately, the Sagebrush Rebellion of the late 1970s was merely a political move to turn federal lands over to state control in response to the policies of the Carter administration. However, state government management of these lands fails to correct the inherent “commons” problems despite the more localized nature of the bureaucracy in control.

Alternatively, privatization would have produced complete resolution of the problems of land mismanagement found with BLM, USDA, and other federal agency involvement. The enormous contrasts between the quality of management observed on private lands and that observed on non-private lands—whether federal or state—proves the point. There are no clear-cutting, depletion, or soil erosion problems in Boise Cascade or other private forests. Similarly, there are precious few overgrazing problems on private ranches.

Privatization of western lands would also solve a seldom mentioned but very real problem—the United States’ dependence on unreliable foreign sources of essential minerals such as columbite, strontium, titanium, manganese, chromite, and cobalt. An extremely high percentage of mineral-rich land is in the public domain and effectively locked away from exploration and development. In private hands, sudden needs would be reflected in market prices signaling demand for production of vital minerals.

Forestlands:

Of the more than 100,000,000 acres of government owned forestlands in the U.S., there is an inevitable conflict between the competing groups of “timber beasts” (those who harvest trees for lumber) and “tree huggers” (environmentalists), both of whom have differing views of how to manage this “commons” system. Since market processes are not allowed to work, the relative values of the competing uses of timber cannot be fully discovered and brought to bear on decision making. Rather, decisions are made solely on the basis of those most skilled at political manipulation of the government agencies managing the lands. Since adeptness at playing the political game of bureaucratic resource allocation is unequally distributed compared to that found in a free market, special private interests (e.g., ranging from private firms to wealthy environmentalists) are able to enlist government in the preservation of their ambitions at public expense.

Here again, privatization could resolve these conflicts. The wants of “timber beasts” (or rather, the wants of the customers the timber beasts serve) and the wants of the “tree huggers” would be balanced according to the relative values revealed in market bid and asked prices. Furthermore, if federal forestlands were sold to the highest bidder, hundreds of billions of dollars at the least could be raised which could be used to pay off existing Social Security claims or other government debt.

Natural Resource Privatization:

Environmentalists, preservationists, and wilderness buffs need not fear privatization. Private owners of land devote every acre to the use that is most valuable. Some land would pay more as a wilderness area than as a source of timber. Some land would pay more as a recreation area than as a mining site. The relative values placed by people on competing uses of land would become apparent through the bid and offer prices generated via the market process. And all people could participate in the process, not just those skilled at political manipulation.

Private land management is necessarily less costly than public land management because the knowledge necessary for efficient management is local, man-on-the-scene knowledge. Moreover and as has been discussed above, private owners have greater incentive to manage well while political/bureaucratic decision makers do not.

The quality of land management that could reasonably be expected under privatization is well illustrated by hundreds of private preserves operated in the U.S. and around the world. For example, the Audubon Society’s Rainey Wildlife Sanctuary in Vermilion Parish, Louisiana, owns and carefully manages the land for both wildlife and for oil production. In order to maximize its value, the Audubon Society carefully investigates and weighs the use of its land and has discovered that there is no necessary conflict between the pursuit of both economic and environmental goals when privately managed under a rule of law in which the property of all is protected.

The Nature Conservancy, another environmental group, similarly uses privatization to accomplish many of its ends very effectively. The group buys and manages ecologically sensitive areas. For example, at the Mile Hi-Ramsey Canyon Preservation in Arizona, the Nature Conservancy pays for the maintenance of its property by providing lodging, pet boarding, and tours—all for a price.

The many available case studies of privatization of land demonstrate what could be accomplished by selling off governmental lands to private hands (including to environment groups) who would then have every reason to manage them efficiently and avoid the inevitable environmental problems produced by political/bureaucratic control.

Free Market Environmentalism:

Conventional wisdom holds that the market process necessarily involves interpersonal conflict and the degradation of the natural environment. Government, it is alleged, must step in to establish rational and cooperative uses of scares resources. However, it is only with private property and voluntary exchange under a universal rule of law that conflicts have historically and today can be resolved, giving each person the opportunity to carefully consider resource use alternatives. The future depends upon people employing their personal wealth and that of their heirs toward efficient management of resources, and only private property and free market-based institutions enable us to do so.

In utter contrast, the decision-making of politicians and bureaucrats cannot be made accountable. Decisions are short-run based, made with only the next election or budget cycle in mind, and as we know from the “tragedy of the commons,” can only produce environmental ruin. Special-interest groups, who want to dictate the uses to which other people’s property will be put, compete for political favors rather than for satisfied customers. And with the shift of political power from landowners and producers to those environmentalists and their allies who are championing the expansion of political/bureaucratic means, it is more timely than ever to recognize that the political/bureaucratic arena needs to be abandoned for a system of clearly defined and enforced private property rights.

With the political/bureaucratic means of resource allocation, one person’s gain is another person’s loss. With the market means, because of the cooperation made necessary by voluntary exchange, all participants, and the environment itself, gain and are firmly protected.


David J. Theroux is the Founder, President and Chief Executive Officer of The Independent Institute.