TT's Lost in Tokyo — by TokyoTom

1. I noted in November 2007 Gene Callahan’s interesting post, entitled “How a Free Society Could Solve Global Warming“, in the October 2007 issue of The Freeman: Ideas on Liberty, at the website of The Foundation for Economic Education (FEE). To reprise briefly, one of Callahan`s chief arguments is that public moral pressure is a perfectly appropriate way by which concerned citizens, acting in the market of public opinion, can influence behavior that generates externalities:

Even when economic transactions generate so-called negative externalities (activities that shower harms on third parties), I still contend that the free market is the best institution for identifying and reducing the problems.

One way negative externalities can be addressed without turning to state coercion is public censure of individuals or groups widely perceived to be flouting core moral principles or trampling the common good, even if their actions are not technically illegal. Large, private companies and prominent, wealthy individuals are generally quite sensitive to public pressure campaigns.

2. Sheldon Richman (editor of The Freeman and TheFreemanOnline.org, and author of Tethered Citizens) has now joined Callahan in offering to libertarians the argument that coordinated, mass moral suasion is a viable, efficacious alternative to the use of the state to address global warming. I excerpt below portions of Sheldon’s argument in “Fixing Global Warming for Fun If Not Profit; Free-rider problem overcome” (June 04, 2010)(emphasis added):

[Some] free-market advocates … in effect throw up their arms and say there is no way voluntary efforts could address catastrophic global warming. It’s the standard case regarding public goods: Free riders and prisoner’s dilemmas would thwart voluntary remedial efforts. Each individual would rationally calculate that he can let others make the sacrifices necessary to bringing about the improvement while continuing to do what he has been doing. That way he’ll get the benefits for free. The problem is that if everyone, or most everyone, follows this strategy the public good is never produced.

To be specific, if we stipulate that catastrophic (but reversible) global warming is happening, why would anyone voluntarily change his behavior to mitigate it? One person’s effort would make no difference anyway, so why be the chump? Let the others do it.

We’re doomed.

Unless there’s something wrong with the public-goods argument, as I and others think there is. (See, for example, Gene Callahan’s Freeman article “How a Free Society Could Solve Global Warming.”)

What About Government Failure?

It’s really odd to hear a free-market advocate resign himself to a government solution to the supposed global-warming “market failure.” In every other area where government is proffered as the fix for market failure, free-market advocates immediately fire back that government is itself riddled with free-rider problems. There’s a growing if belated literature on government failure. How can government be the answer to a public-goods problem when it suffers the same defect that allegedly plagues the thing to which it is supposed to be superior? How can government solve the public-goods problem when it itself is a public “good.” (I mean that strictly in the technical sense, of course.)

All the goods that government in theory is said to produce are public in nature; they would benefit most everyone. But that means the benefits would redound not only to those who contribute to their production but also to those who don’t, the free riders. Therefore, special interests should never fail to trump the general interest, since smaller groups are less affected by the free-rider problem than larger groups.

Income-tax rate cuts, for example, would benefit everyone, even people who did nothing to help achieve them, say, by contributing money to taxpayer organizations. In theory, then, income-tax cuts should be virtually impossible to achieve.

But income-tax cuts have been enacted in the past. In fact, far bigger things that should have been fatally plagued by the free-rider problem have happened, such as revolutions. They should have been impossible according to the theory. Everyone should have been hanging back waiting for everyone else to overthrow the oppressor. It’s a great way to gain freedom without taking any risks—except if everyone thought that way, no revolution would have occurred. But revolutions have occurred.

So in the political realm the free-rider problem can be overcome. We know it. It’s in the history books. But if it can be overcome in that realm, why not in others? It seems hasty to say it can’t happen. In fact, it has, for example in the effort to end the slave trade, which required a change in public sentiment. So global warming might be amenable to purely voluntary remedies, perhaps not via the traditional for-profit business plan but rather through a voluntary social movement that promoted an ethic encouraging and pressuring people and firms to cease their destructive activities.

The key is ideology, the set of explicit or implicit beliefs that motivates people to act one way or another in public matters even though individually they may reap minimal if any concrete benefits from their own marginal efforts. People are capable of acting to achieve things other than personal monetary profits. Homo economicus is an inadequate picture of the human race, a gross and misleading oversimplification.

“Ideology therefore becomes the wild card that accounts for public spirited mass movements that overcome the free-rider problem…, for ideology can motivate people to do more to effect social change than the material rewards to each individual would justify,” Jeffrey Rogers Hummel wrote (pdf) in another context.

Obviously there’s much more to say on the matter, but for now be aware that serious global warming would be no reason to abandon economic (or other) freedom. We can have our scientific objectivity and our liberty too.

3. In response, let me make the following observations:

3.1  Callahan and Richman want MORE moral outrage and arm-twisting from the enviros that Austrians and other lovers of so-called “free markets” seem to love to hate? Sure, I can see all the libertarians and right-wingers signing up in droves, to lead enviro-fascists in a holy war against fossil fuels!

But even if were libertarians WERE to wish to lead such a voluntary movement, how likely is it, given the long hostility that libertarians have expressed towards enviros, that enviros would put any credence in what such libertarians have to say?

3.2  Given what we know (from Elinor Ostrom’s research, etc.) regarding the conditions for voluntary coordinated action, even though it is very clear that we see attempts at moral suasion at play in local, state, federal and international climate-change-directed regulatory efforts, it seems very unlikely that moral suasion alone can be expected to prove efficacious at an international or global scale. Far too many communities, nations and economic interests are involved.

3.3  Moral pressure via an ideology is likely to be blunt.  As Silas Barta noted on a comment thread,

public boycott/suasion campaigns will only give a very noisy signal to corporations of how damaging their activities are to the environment, and it will be skewed toward more visible ones.

You’ve seen environmentalists (like the “Green Lantern” on Slate) try to calculate which activity is “truly” more damaging to the environment.  It manifests in, for example, the debates over whether shipping organic food a long distance is worse than shipping factory farm food over a short distance.

The fact is, even for very basic calculations, it gets complicated, and environmentalists will almost certainly have biased calculations and use them for non-climate purposes when wielding their power — that’s what they already do.

3.4  I think that Callahan and Richman are very right that societies can and do address public goods/commons without using formal legal mechanisms. In this, both echo Nobel-Prizewinner commons-expert Elinor Ostrom, This is a point that Bruce Yandle (a “free-market environmentalist” who is dean emeritus and Distinguished Professor of Economics Emeritus at Clemson University, Distinguished Adjunct Professor of Economics at the Mercatus Center, a faculty member with George Mason University’s Capitol Hill Campus, and a Senior Fellow at PERC – the Property and Environment Research Center) made earlier and that I noted:

People can build institutions that take the edge off frantic commons behavior. People have unwritten and written constitutions that help to establish social order. People can and do accumulate wealth. People communicate, invent lines of kinship, and develop customs, traditions, and rules of law that limit anti-social behavior. People define, enforce, and trade property rights. People can and do avoid the tragedy of the commons. Indeed, instead of living with tragedies, people triumph over the commons. But the triumphs are never perfect or complete. There is always another commons to manage.

I wish to put forward the notion that encounters with the commons form the fundamental stimulus that yields, instead of tragedy, what we today call civilization. The ascent of man from a primitive existence with no wealth accumulation to life as we know it is fundamentally a story about triumph over, not tragedy of, the commons. Let me explain.

Our very existence as human beings is defined by evolved institutions for avoiding tragedies. We have names, which serve the economic purpose of identifying us as parties to contracts and agreements. Those names, first and last, form webs of communication that reduce the social cost of assigning responsibilities and liabilities. They enhance truth-telling and promise-keeping; they raise the cost of engaging in anti-social behavior. They limit a tragedy of the commons.

We have abstract symbols of ownership—deeds, titles, and contracts—that define spheres of autonomous behavior. We speak of our homes, our cars, our clothes, our families, and our pasture. Even language has evolved to provide a possessive form that accommodates triumph over the commons.

We write and observe contracts, wills, and marriage agreements that define relationships, identify turf, and conserve wealth. We accept evolved bodies of law and law-enforcement activities to assure the integrity of our agreements. We carry papers that enable us to acquire property, extinguish debt, cross borders, drive vehicles, and communicate effectively with strangers. And we have locks, keys, walls, fences, brands, and encryption devices, all this in an effort to avoid a tragedy of the commons.

Property rights define who we are and what we have. Property rights guard others from our unwanted advances and prevent us from contributing to a tragedy of their commons.

Avoiding a tragedy of the commons is costly. The benefits must be large. …

The tragedy is found where for reasons having to do with power, intolerance, or cost, human beings have not yet defined private property rights. Or, as we shall see, where evolving property rights encouraged by man the institution builder have been destroyed. What was once a triumph can become a tragedy. …

[At] very low levels of income, what might be called stage one, human beings cannot afford to do much about property-rights enforcement and the commons. They live in a world where custom and tradition sustain them. As incomes rise and losses from the commons expand, stage two is entered. Fences go up, and rules are set for protecting the commons. Finally, in stage three, markets evolve along with rules of law that define spheres of private and public action. Private rights replace public control, and the triumph replaces the tragedy of the commons.

3.5  What about statist corporations? What Callahan, Richman and Yandle all miss is that the current status quo is very much NOT a libertarian one, but one in there are powerful vested interests that profit from using government to shift risks to the rest of society. This is very visible in our financial crisis, Wall Street profiteering and bailouts, the elites running public companies, fights over publicly-controlled natural resources (such as oil) and the messes mineral extraction activities leave behind, and in the damages and risks created by the use of fossil fuels.

Very noticeably, all of these commenters are silent as to how likely any of the people who profit from the use of government – and who are both relatively faceless and face incentives peculiar to corporate ownership, management or employment (and not simply the same incentives that face our personal and extended local, state, national or global communities) – are going to worry very much about public opinion, as opposed to continuing to work actively to mold and assuage it.

For lack of a better place I left the following note on the moribund comment thread at Lew Rockwell’s May 5 “Feel Sorry for BP?” post:

TokyoTom June 16, 2010 at 2:41 am

Another BP post!

As I noted yesterday, liberal blogger Matt Yglesias has a useful blog post up – “Agency Problems and Corporate Misconduct” – in response to Scott Sumner; unfortunately his comment thread has fallen into blind, clear-sighted partisan bickering.

 The post itself is short and worth a read; I left the following comment:

Another BP post!

Both of Kevin Carson’s most recent posts at Center for a Stateless Society are worth a read.

BP’s Fate in a Free Market, Part Two

How’s All That Progressive Regulatory Stuff Workin’ Out For Ya?

In particular, Kevin’s “Part 2” post – and the comments to it and posts by others whom he references – are quite thoughtful. Below are some points that I think deserve particular attention (emphasis mine):

Shawn Wilbur, a leading scholar in the history of the individualist/mutualist tradition in addition to being an anarchist himself, agrees that oil companies like BP would be far less able to externalize costs on the public in a free market order, absent such privileges as caps on liability.  But he goes on to raise the issue of the “many kinds of value and interest” that are not adequately represented by markets:

“After all, sea turtles and brown pelicans don’t get any more of a vote in the market than they do in elections or campaign contributions. Private property conventions tend to establish a separation of interests not reflected in, or respected by, the circulatory systems of the biosphere …”

Gary Chartier, a market anarchist professor at La Sierra University, commented that since sea turtles lack any means of effectively asserting or defending rights on their own behalf, their interests in any system — whether under statism, market anarchy, or any other kind of anarchy — depend entirely on the existence of human beings who identify those interests with their own.

I would add that the present system includes many structural barriers that prevent humans who value the interests of other species or of the ecosystem from expressing that valuation in the marketplace.  For example, federal lease auctions allow only companies from the relevant industry (lumber, mining, etc.) to bid on access to federal land.  That means conservationists who value holding land out of use are banned from the bidding process, that the winning bid is hence lower than it likely would otherwise have been, and that resource extraction is artificially profitable.  Federal preemption of vacant land means, likewise, that the privileged access granted by the federal government is uncontested by other previous claimants.

Were vacant land not preempted by the state and then granted on a privileged basis, then the oil, mining and lumber companies could establish legitimate homestead rights only over the land that they were capable of effectively developing and fully prepared to economically exploit at any given time.  In the meantime, other groups might have homesteaded significant parcels of land with the intention of conserving  it.  As Wilbur himself states in the comments under his post, “active conservation” — like “a wildlife corridor, or critical wetland, or scenic area” — is “pretty obviously a use.”  In a free market regime with open homesteading, lumber and other extractive industries would have to buy out such competition at whatever price the latter demanded, if they were willing to sell at all.

As I mentioned in another post, one reason the ecosystem in West Virginia has had so little protection against mountaintop removal, is that the property rights of small owners had so little protection against expropriation, and the surrounding communities had been robbed of so much of their common law protection against tortious action by the mining companies against their air and water.  As chronicled in the movie “Matewan,” the first white homesteaders in West Virginia — who mostly lacked formal title to their land, having settled when government was still quite irregular — were later expropriated by the mining companies, who could afford to buy both good lawyers and bad legislators.

I would observe that Austrians at LvMI routinely discount – if are not actively hostile to – the preferences that non-industrial users (and destested “enviros”) have regarding common or publicly-owned resources. This is clearly inconsistent with Austrian principles. Further, Austrians also generally – and wrongly – treat with scorn even the notion that there are commons assets – such as “ecosystems”  that are important and valuable. Austrians are wrong to have their thumb on the scale in the way that they do when determining how government favor should be bestowed; this tendency amounts to fairly consistent support for/defense of statist corporations.

Kevin is entirely correct that “the present system includes many structural barriers that prevent humans who value the interests of other species or of the ecosystem from expressing that valuation in the marketplace.” So let me connect a link that somehow Kevin has overlooked in the context of the BP oilwell blowout and spill: the chief structural barrier here is the US government, which “owns” and “manages” the Gulf out to the 200 mile limit (there is moderate state control out a few miles), and which prevents indigenous and commercial fishermen, oystermen, shrimpers and conservationists from actually owning or directly managing any of the resources or ecosytems on which their livelihoods depend or that they otherwise value, and which is favors and is financially beholden to the oil industry.

See, for example:

http://mises.org/Community/blogs/tokyotom/archive/2009/01/14/for-crashing-fisheries-coalition-of-mainline-us-enviro-groups-calls-for-property-rights.aspx

http://twitter.com/Tokyo_Tom/status/15689063688
http://twitter.com/Tokyo_Tom/status/15689222932

I think Kevin that is also correct about mountaintop removal, which involves a frequently flagrantly corrupt use of the state to subvert common-law protections, as I have commented a number of times.

I also highly recommend the post by Shawn Wilbur that Kevin references; I may comment separately on it.

And the following comment on the state grant of limited liability to corporate shareholders is consistent with points I have made any number of times:

Brian Cantin on Jun 7, 2010, 9:53 pm: [I hope Brian does not object]

Without the government, a limited liability corporation would not have the protections they enjoy today. The corporation could gain limited liability if it is obtained via contract. Why anyone would sign a contract allowing a corporation limited liability is another question.

However, in the case of a tort, the owners of offending corporation would not only be possibly liable for the all of the assets of the corporation, they could also be personally liable down to their last farthing.

Strict liability is a great inducement to careful practices.

Another BP post!

I copy below some comments I left on the above-entitled post by Kevin Carson (slightly tweaked, with emphasis & links added):

TokyoTom on Jun 9, 2010, 1:39 am:

Kevin, good post. I imagine that the $75 million liability cap affected decion-making by BP managers in any number of ways, but let me note that the cap doesn’t apply (1) to claims by state and local governments and (2) if BP is determined to have been grossly negligent (since this cannot be determined in advance of final judical decision, a potentially much larger sword was hanging over BP’s head, even if it was discounted to zero by BP). Still, I agree with you about oversight by insurers, but one wonders whether BP actually insured any of its risk here. They certainly have been more likely to do so if there was no liability cap whatsoever.

You fail to note some other, more basic government interventions, particularly the grant of zero liability to shareholders, which perversely both (i) incentivizes shareolders to look the other way at corporate activities that profitably shift risks to third parties and (ii) generates agency problems which leave shareholders vulnerable to poor decision-making by executives.

Finally, you and celocelo1 miss another way for society to force oil cos like BP to internalize more of their costs – expand and formalize “catch rights” programs that empower fishermen and other resource users (including when and where oil/gas is developed), and would give direct rights to sue polluters, and end the current system, where fishermen are both trapped in a tragedy of the commons and beholden to government for protection of the resources and for some recompense in the case of damages suffered. I discuss catch rights over at my blog.

Regards,

Tom

Another BP post!

1. Over on his The Money Illusion blog, Chicago-school economist Scott Sumner has a curiously uninsightful post up on the BP oil spill: “Stuff Happens“. Perhaps some of my friendly enviro-hater readers here might like it, but I didn’t. I left the following comments (still pending approval as I copy them here) (emphasis added):

Scott, what you’re rather glaringly missing with your cost-benefit analysis – which blithely ignores the real face of “externalities” – is the institutional setting, which can be summed up as a tragedy of the government-owned and (rather expensively) mis-managed comonns.

Ed Dolan is exactly right about incentives problems facing BP and regulators, none of whom really directly own the downside risks, which instead are borne by fishermen, oystermen, shrimpers, the tourist industry, those who value wildlife and a clean environment, and those who consume what harvesters catch. Some of these are very marginalized communities, but all face tremendous difficulties organizing and expressing their interests effectively with respect to resources on which their very livelihoods may depend, but in which they have no ownership rights.

On the other hand, the oil industry are very powerful actors, very well organized and represented in the corridors of power and influence (remember Cheney’s secret energy meetings, and that BP was one of Obama’s largest donors?), and are adept at shifting risks to others (though self-damage is possible when catastrophic losses occur). As Ed Dolan rightly notes, this is built into their very nature as a result of the government grant of limited (zero) liability to shareholders, who have disincentives to monitoring too closely or to questioning whether profits come at the expense of others who – because of government ownership – have no effective voice regarding losses they bear.

It’s hard to feel much sympathy for either the oil cos or government in theis Avatar-like situation, but I don’t mean to castigate either as “evil”. Rather, we simply need to take a close look at the problems of Moral Hazard that our government interventions – from grants of limited liability, to government resource ownership and concomitant inept and occasionally management – have been fuelling.

Answers lie not in gross CBA analysis, but in letting resources users own the rights to manage and harvest wild resources (which would give them direct claims agains polluters), AND to determine when and where seabed resources are developed. (NOAA’s successful experiments with “catch rights” need to be vastly scaled up.) We would still have oil & gas development, but the fishermen would do a vastly better job of policing the oil companies – who would have to face other resource users with full incentives and abilities to protect their livelihoods. (Obversely, oil companies would also be better managers if they had control over the very valuable fish harvest rights in particular blocks, and would manage to in a way that would reflect such value.

Sincerely,

Tom

Austrian-leaning Ed Dolan, whose recent post on Moral Hazard and agency issues I have just noted, joins in on the comment thread. 

Sadly, Sumner is not alone in paying little attention to those who are at the short-end of the messy oil stick.

2. Liberal blogger Matt Yglesias has a useful blog post up in response to Scott; unfortunately his comment thread has fallen into blind, clear-sighted partisan bickering.

3. I see Richard Posner now has a similar blind piece of blather up at the Washington Post: “From the oil spill to the financial crisis, why we don’t plan for the worst”; more on Posner perhap’s later.

4. Sadly/fortunately, for those of you who haven’t seen or (or could use a little further diversion) this litle one-minute “BP kittens ” YouTube video does a better job than virtually all discussions I’ve seen in noting relevant agency and institutional failure issues.

Ed Dolan (Professor at Stockholm School of Economics in Riga, Latvia and editor of the Austrian classic, The Foundations of Modern Austrian Economics (online here), and author of the classic pamphlet TANSTAAFL: An Economic Strategy for the Environmental Crisis (1971), has a post up at his new economics blog that ties together the above subjects, each a favorite of my own.

As I noted in a recent post referring to BP and ocean ecosystems :

Aren’t there huge and obvious commons-related problems that stem from government ownership and “management” of resources – be they federal lands, the seas, our fiat currency, or our financial institutions and publicly-listed companies?

But enough of me; here is the meat of Mr. Dolan’s post, What Oil Spills and Financial Crashes Have in Common: Gambling with Other Peoples Money (emphasis added):

:What do the Gulf oil spill and the recent financial crisis have in common? Both of them are the result of risk-taking gone wrong. …

The real trouble comes when you have a chance to gamble with other people’s money. Then you start looking for strategies that usually give you at least a modest payout even though they involve a small chance of catastrophic loss. These are called negatively skewed risks. You take these risks, even if you know they have a negative expected value, because you think you will pocket a gain most of the time. You expect that when disaster finally strikes, you will be able to walk away with your past winnings in the bank while sticking someone else with the loss.

Several common situations in business life give rise to the temptation to gamble with other people’s money. Executive compensation plans that emphasize short-term bonuses, include golden parachutes, and lack clawback provisions are one example. Not only top executives face such incentives–mid-level traders, engineers, and analysts may also take risks in the hope of bonuses or promotions, with the expectation that the worst that can happen in case of catastrophe is that they lose their jobs. Stockholders may condone such risk taking because they are protected by limited liability.

Both the Gulf oil spill and the financial crisis had their origins in negatively skewed risks. Investigators in the Gulf disaster are looking at whether BP and its contractors underplayed downside risks when they made technical choices, ignored warning signs, and neglected preparations for dealing with a worst-case spill. In the financial crisis, negatively skewed risks involved excessive leverage, manipulation of ratings, design of complex securities, and several other factors.

What can be done? Regulations can be made stricter, but who will regulate the regulators? Who will ensure they are not captured by special interests? Compensation plans can be changed–but if shareholders do not take the initiative, can outsiders fix the system for them? Corporations can be held to strict standards of legal liability, but individuals who make bad decisions are not necessarily the ones to pay when their corporate employers are found liable.

There is no magic bullet. We can only hope that after a couple of really big disasters, people will be more alert to early warning signs the next time.

What Ed has failed to note is that both the financial crisis and the BP oil spill/Gulf crisis are examples of the “Tragedy of the Commons” – when the commons are either the government pocketbook itself, or resources owned/managed by the government. Solutions to management of the Gulf lie in giving more rights – such as “catch rights” and a veto over oil and gas development – directly to resource users like fishermen. With their livelihoods on the line, they would be much more diligent than government can ever be in making sure oil and and gas development proceeds safely.