Mises on fixing externalities: progress along the Kuznets curve is not magic, but the result of institution-building
“Not all externalities are crimes, and as long as CO2 does not make clear victims, it should be left as an externality for people to adapt to ….”
In response to this statement on a recent thread (http://blog.mises.org/archives/007152.asp#comments), I observed, in the context of the impact of man’s activities on the climate, that:
But Mises, Yandle and others speak of transition points, that are reached when demand pressure grows as a result of social changes (including new forms of organization) or technological advances (which might also enable greater protection), when open-access resources fall first under common property regimes and then later under private property rights.
I think we are at one of those points now. (emphasis added)
When another remarked that a transition might seem to involve “mob rule”, I noted that Mises had expressly acknowledged the need for transitions and implied that the state could be used to address them, and briefly quoted Mises. I take this opportunity quote more extensively Mises’ view on externalities, evolving property rights and the state (emphasis added):
“Property rights as they are circumscribed by laws and protected by courts and the police, are the outgrowth of an age-long evolution. … The legal concepts of property do not fully take account of the social function of private property. There are certain inadequacies and incongruities which are reflected in the determination of the market phenomena.
“Carried through consistently, the right of property would entitle the proprietor to claim all the advantages which the good’s employment may generate on the one hand and would burden him with all the disadvantages resulting from its employment on the other hand. Then the proprietor alone would be fully responsible for the outcome. In dealing with his property he would take into account all the expected results of his action, those considered favorable as well as those considered unfavorable. But if some of the consequences of his action are outside of the sphere of the benefits he is entitled to reap and of the drawbacks that are put to his debit, he will not bother in his planning about all the effects of his action. He will disregard those benefits which do not increase his own satisfaction and those costs which do not burden him. His conduct will deviate from the line which it would have followed if the laws were better adjusted to the economic objectives of private ownership. He will embark upon certain projects only because the laws release him from responsibility for some of the costs incurred. He will abstain from other projects merely because the laws prevent him from harvesting all the advantages derivable.
“The laws concerning liability and indemnification for damages caused were and still are in some respects deficient. By and large the principle is accepted that everybody is liable to damages which his actions have inflicted upon other people. But there were loopholes left which the legislators were slow to fill. In some cases this tardiness was intentional because the imperfections agreed with the plans of the authorities. When in the past in many countries the owners of factories and railroads were not held liable for the damages which the conduct of their enterprises inflicted on the property and health of neighbors, patrons, employees, and other people through smoke, soot, noise, water pollution, and accidents caused by defective or inappropriate equipment, the idea was that one should not undermine the progress of industrialization and the development of transportation facilities. The same doctrines which prompted and still are prompting many governments to encourage investment in factories and railroads through subsidies, tax exemption, tariffs, and cheap credit were at work in the emergence of a legal state of affairs in which the liability of such enterprises was either formally or practically abated.”
“Whether the proprietor’s relief from responsibility for some of the disadvantages resulting from his conduct of affairs is the outcome of a deliberate policy on the part of governments and legislators or whether it is an unintentional effect of the traditional working of laws, it is at any rate a datum which the actors must take into account. They are faced with the problem of external costs. Then some people choose certain modes of want-satisfaction merely on account of the fact that a part of the costs incurred are debited not to them but to other people.
“The extreme instance is provided by the case of no-man’s property referred to above. If land is not owned by anybody, although legal formalism may call it public property, it is utilized without any regard to the disadvantages resulting. Those who are in a position to appropriate to themselves the returns–lumber and game of the forests, fish of the water areas, and mineral deposits of the subsoil–do not bother about the later effects of their mode of exploitation. For them the erosion of the soil, the depletion of the exhaustible resources and other impairments of the future utilization are external costs not entering into their calculation of input and output. They cut down the trees without any regard for fresh shoots or reforestation. In hunting and fishing they do not shrink from methods preventing the repopulation of the hunting and fishing grounds. In the early days of human civilization, when soil of a quality not inferior to that of the utilized pieces was still abundant, people did not find any fault with such predatory methods. When their effects appeared in a decrease in the net returns, the ploughman abandoned his farm and moved to another place. It was only when a country was more densely settled and unoccupied first class land was no longer available for appropriation, that people began to consider such predatory methods wasteful. At that time they consolidated the institution of private property in land. They started with arable land and then, step by step, included pastures, forests, and fisheries. The newly settled colonial countries overseas, especially the vast spaces of the United States, whose marvelous agricultural potentialities were almost untouched when the first colonists from Europe arrived, passed through the same stages. Until the last decades of the nineteenth century there was always a geographic zone open to newcomers–the frontier. Neither the existence of the frontier nor its passing was peculiar to America. What characterizes American conditions is the fact that at the time the frontier disappeared ideological and institutional factors impeded the adjustment of the methods of land utilization to the change in the data. …
“It is true that where a considerable part of the costs incurred are external costs from the point of view of the acting individuals or firms, the economic calculation established by them is manifestly defective and their results deceptive. But this is not the outcome of alleged deficiencies inherent in the system of private ownership of the means of production. It is on the contrary a consequence of loopholes left in this system. It could be removed by a reform of the laws concerning liability for damages inflicted and by rescinding the institutional barriers preventing the full operation of private ownership.”
http://mises.org/humanaction/chap23sec6.asp
Ludwig von Mises, Part IV (Das Handeln in der Marktwirtschaft), Chapter 10 (Kapitel: Die Daten der Marktlage), Sec. VI (Die Grenzen des Sondereigentums und das Problem der external costs und external economies), Nationalökonomie: Theorie des Handelns und Wirtschaftens (Geneva: Editions Union, 1940). The quote provided is from Mises’s expanded English translation, Chapter XXIII: “The Data of the Market,” Sec. 6: “The Limits of Property Rights and the Problems of External Costs and External Economies,” Human Action: A Treatise on Economics (New Haven: Yale University Press, 1949).
By the way, it has has elsewhere been noted on LvMI that with this essay, Mises explained how environmental problems arise from the lack of clear, appropriate and enforceable property rights some decades before bioethicist Garrett Hardin in his famous 1968 essay, “The Tragedy of the Commons”. http://mises.org/daily/1373. But we should not ignore that Mises pointed not only at the problem of externalities, but also at the transitions that societies make, deliberately or through changes in customs, to reduce externalities.
There are just a few small problems – even within the developed world (and very clearly outside of it), there are many important resources that are unowned and thus not fully priced in the “market” economy.
Unowned resources include almost all of Nature. Primary productivity (the amount of vegetation produced from photosynthesis) has changed little, so as we use technology and our organizational abilities to divert more and more of it to feed us, this is an inevitable cost to other species, either directly or in the form of altered environments that support less life (and less diversity of life).
In altering our environments to suit us, we are of course no different from other life forms that compete for resources to live and propagate, but with our technical and organizational abilities, mankind has clearly triumphed over the rest of nature (except perhaps evolving microbes, to whom we represent an increasingly large and relatively untapped food source). But at what cost?
Through the centuries we have wiped out many wild systems of food and other resources – because they were never owned, and because our improving technology enabled us to race each other to take the resources before others (or from others, in the case of many native peoples). Not only Jared Diamond`s “guns, germs and steel”, but also forms of social organization have played deciding roles in the competition between human societies for survival, growth and dominance. In this regard, societies that recognize and protect property rights internally and utilize free markets have proven clearly superior in the competition with other societies to obtain and utilize available resources.
But our struggle has been not only to capture resources and to use them before others do, but also to manage and protect them effectively. Evolving ownership systems have been a key means of limiting wasteful “tragedy of the commons” struggles (see Yandle; von Mises), but even where ownership systems have been implemented, we have generally replaced complex natural systems with simpler systems designed solely to feed us (and particularly so where, due to higher consumptive demand, we have replaced common property systems with private property systems (Ostrom)).
Meanwhile, virtually all of the natural world – the world’s oceans, atmosphere, tropical reefs, tropical forests and other great commons – remain unowned and thus unmanaged and unregulated (or indigenous occupants have been forced aside). For example, the great cod fishery off of the Grand Banks that fed Europe for centuries has now disappeared, and other fishery stocks worldwide are crashing – to be “replaced” by “farmed” fish that are fed to a substantial degree by catching and grinding up fish stocks that humans prefer not to consume directly, and in part by fish firms that are established by destroying the mangroves that are estuaries to various fisheries. The same is true of the replacement of vast tracts of tropical forests with soybeans or oil palm plantations, with the rapid increase in atmospheric CO2 (and attendant risks to climate) and with the correspondly geolologically rapid increases in ocean acidification (and threats to plankton, corals and shellfish).
While populations in the developed economies are now relatively stable, demand from our markets (as well as the burgeoning developing markets) continues to strip out unowned (or mismanaged “public”) resources from the oceans or undeveloped countries, aided by kleptocratic elites who are happy to steal from the peoples they supposedly represent in order to line their own pockets.
As Dan points out, property rights failures in poorer nations contribute to population growth there by delaying the demographic transitions that we have experienced. Developed economies face similar problems with respect to “public”, state-owned lands, for which rent-seeking by and sweet deals to insiders are enduring problems and sources of politcal conflict (as markets cannot work to allocate resources).
Dan states that the stunningly rapid growth of human populations from the Renaissance to the present (6+ billion now expected to nearly double again soon) “actually represents the rise of capitalism and capital development … [and] shows … the stunning capacity of freedom to provide for the whole world.” While partly correct, this misses completely the question of our massive impact, within a very short period of geological time, on the environment in which we evolved over millions of years, the fact this has occurred because clear and enforceable property rights have not been created in many of the resources that have been consumed, and the corollary fact that we continue to lack the ability to manage our impact on our endowment of natural resources.
The market clearly does NOT send accurate pricing signals with respect to goods that are unowned or ineffectively owned; these goods are either unpriced or underpriced, so the effect is overconsumption until the point that the resource is greatly degraded, at which point attention is turned to the next unowned resource. Thus, human populations are responding to rather imperfect market signals. And where resources are unowned, individuals and groups with differing values and desires cannot adjust or realize those desires by means of private, market transactions. As a result, we are seeing a recourse to the public and political arenas – and the inevitable discordant debates – as various parties seek to use either moral suasion or the levers of government (locally, nationally and internationally) to advance what they consider to be their own interests. (Of course, in a “tragedy of the commons” situation, all resource users share an interest is the future availability of a resource; the difficulty is in the prisoners’ dilemma negotiations at the primary user level about how to allocate short-term pain in the interest of long-term gains, compounded in the case of multinational resources by rent-seeking with each national participant.)
A cynic may say that our ongoing assault on nature is only “natural”, presents no moral or philosophical issues and that we hardly owe any responsibilities to “nature” or even “future generations” – so let’s just all keep on partying, consuming for today, and patting ourselves on the back at how marvelous our market systems are. And that we should keep on hurling invective at those evil “enviros” who want to crash the party and drag us all back to the Stone Age.
Perhaps I suffer from a want of sufficient cynicism.
TT