Thoughts on Environmentalism: Conservation

Let us now  deal with the ‘conservation’, as opposed to the pollution, side of environmentalism. By ‘conservation’, environmentalists typically mean attempts to prevent certain natural phenomena such as animal or plant species or natural landscapes from being ‘destroyed’ by the actions of humans, or to protect natural resources from being depleted. Unlike pollution, ‘conservation’ is a relatively simple issue to deal with via a normal private property rights solution, as it exhibits no significant negative economic externalities that are difficult to internalize. Essentially, if enough people who have amassed enough means (money) want something to be conserved, on a free-market it will indeed tend to be conserved for the sake of these people. For instance, if a protected wildlife sanctuary/nature park that is privately owned attracts a lot of paying customers or donors, keeping it as such a sanctuary or park will probably be the most profitable use of it, and hence entrepreneurs will tend to favour retaining it for that use. If however, another sanctuary/park does not attract very many paying customers or donors, it will tend to be converted by entrepreneurs into a more profitable use. The environmentalist may object if this happens, but what right has he to impose his value judgements on other people? If, for instance, the wilderness of a park is cleared to make way for a series of potato farms, an entrepreneur has demonstrated that he thinks the consumers will pay more for the potatoes than they would for the land as a sanctuary/park. It is true that entrepreneurs are not always correct in their decisions, but they will tend to try their hardest to be because being correct results in monetary profits, while being incorrect results in monetary losses.

The environmentalist may, if he wishes, choose to become an entrepreneur with his own, donated, or borrowed funds and buy the land and retain it as a sanctuary/park, and if he has exhibited keen entrepreneurial judgement he may even make a profit on this transaction if the consumers approve of his desired use of the land over others’. In most cases though, the environmentalist complainer will make no such attempt, and will instead try to convince the government to stop by force anyone who thinks they can make better use of the land. In the process, the environmentalist will usually denounce the vicious profit motive that could result in such outrages, as for him, any change of land-use away from what he thinks is the best, but is not willing to pay enough for, is indeed an outrage. Taking the broader view though, we see that this is all part of the democracy of the market guided by consumer`s sovereignty, and that at the end of the day, the people the environmentalist really is opposing are the consumers who are predicted by the entrepreneur to derive more utility from the land used as a potato farm over the land used as a sanctuary/park. On the free-market, conservation that is desired by the consumers, demonstrated by their purchasing or charitable decisions, will be tend to be effected, while ‘conservation’ that is not desired by the mass of consumers or some rich donors but by a few environmentalists will not be. It is simply a conflict over land-use and it is unclear why the desires of nosy environmentalists in this respect should automatically override the desires of consumers and the owners of the land in question who usually attempt to serve these same consumers in the best way with their land.

Another worry of conservationists is the depletion of natural resources through production. ‘Sustainable Development’ is a trendy term nowadays, meaning economic development that uses up as few natural resources as possible. The free market and private property, however, are very well equipped to deal with this ‘problem’. Firstly, when a natural resource becomes scarcer as it is depleted, its supply offered for sale will go down and, other things equal, its market price will go up as a result. Higher prices will induce producers and consumers to try to substitute other resources for the scarce natural resources in question, as doing so will save them money. Thus, as a natural resource becomes scarcer, the free-market, through the price system, induces an automatic ‘rationing’ procedure for that resource.

Secondly, as the price of a resource goes up, entrepreneurs will be even more encouraged to try to find and bring to market either substitutes for the natural resource in question or ways to make more of the natural resource available for human use. Oil is a good example of this. People have been worrying for a long time that oil would eventually be depleted, but in response to the higher prices of oil, entrepreneurs have found it profitable to try to develop alternative sources of energy and to look for oil in tar sands and shale deposits with new techniques. The earth has so many natural resources that humans haven’t even come close to being able to fully exploit them (think of all the energy and minerals that lie deep in the earth’s crust, and the potential energy from splitting atoms), and with advances in space technology, perhaps we won’t even have to confine our search to the earth itself. It is a pretty defeatist attitude and one not in line with the historical path of humanity over the last 200 years to worry about depleting natural resources and trying to ration them as a result at the expense of human well-being.

Finally, environmentalists argue that under capitalism, producers are encouraged to exploit natural resources as quickly and as irresponsibly as possible, and by doing so, endanger the material prospects of future generations of humanity. In response, firstly, how can a private property society function if present owners are not given real ownership of their land, but have to share it with some ghostly ‘future generations’ of humanity? Who speaks for the desires of future generations? The usual answer is the government, but this would just result in socialism, with all of the problems that that entails. In fact, the institution of inheritance and the family within a private property framework tends to result in people looking out for the next generation at least, that generation looking out for the next, etc…  Secondly, it is not true that producers are always incentivized to exploit natural resources as quickly as possible. If they own the capital value of the land as well as its current production, they will be encouraged to balance future use versus current income, and will consult their own time horizons to make that choice. Unfortunately, presently many natural resources and exploitable lands are owned by the government as ‘public lands’, and private companies are granted licences to exploit them. Of course, in this case, producers are incentivized to maximize current production and resource exploitation and not care about what happens to the future use value of the lands, because they are not the ones who own the capital value.     

Thoughts on Environmentalism: Pollution

            Essentially, what is necessary to strike a rational balance between pollution that quickens material economic development and environmental goods that retards it is a firm system of private property rights in the environment. This will prevent things like air and water pollution from being negative economic externalities, that is, costs that the producers of the externalities, in this case the polluters, can impose on other members of society without compensating them, in this case the victims of pollution. They are indeed negative externalities if no one except far-removed national governments owns environmental goods such as air and water and are consequently responsible for their protection. To illustrate how ownership could help reduce environmental pollution, consider the following: a man decides that he does not like the looks of bags of household waste sitting in his garage until garbage pick-up day, so he decides to throw them over the fence onto his neighbour’s front yard. Under current law, this, of course, is illegal. The neighbour’s front yard is his property, the man has no right to use it as a garbage disposal ground without his consent. Now imagine a similar scenario, but this time, the polluting man is a paper mill located on a river, and the neighbour is a farmer downstream. The paper mill disposes of its garbage (industrial waste) in the river, sullying the water downstream that adjoins the farmer’s property, which he liked to use as drinking water or as a place to swim. The facts of the case are similar, but for whatever reason, under current law it is treated very differently. The polluter of the river is not fully liable for his actions the way the garbage-tossing man is. This is because the farmer’s property rights in the river adjoining his property are not properly recognized. Now imagine that the law is changed to treat the farmer's portion of the river in the same way as the neighbour’s front yard, as his property that he may protect from physical invasion or pollution. The farmer would have a strong case against the paper mill, and he would presumably be allowed to sue them for damages and have the courts force them to cease polluting the farmer’s part of the river immediately, unless of course the paper mill paid the farmer for the right to continue polluting. The same reasoning applies to air, only this time, the ‘garbage’ is the noxious fumes given off by factories that waft into the lungs of nearby inhabitants, and, given recognition of private property in the air, the legal remedy would probably be a similar one.

            

           Now, the reader may be thinking that such legal remedies would actually weight the scales of ‘development’ versus ‘environmental goods’ tremendously in favour of environmental goods, thus joining the radical environmentalist proposals in results, even though the reasoning employed is different. For if pollution is considered an invasion of the just property rights of nearby people in their air and water, than any even minorly-polluting factory would be operating illegally and would be vulnerable to lawsuits that might be able to shut down their operations. Needless to say, this eventuality would be a disaster for industrial civilization if it occurred. These worries are justified, and I have worried about them a lot myself. Luckily, there are some ways to deal with these problems while still getting the benefits of private ownership of environmental resources. 

           As it is for a lot of libertarian ideals, the practical difficulties generally lie not so much with the ideal system itself but with the transition from a non-libertarian to libertarian arrangements. In an ideal world, reasonable property rights in air and water would have been acknowledged and respected the moment Homo Sapiens started settling land to farm and build structures on, according to the homesteading principles for acquiring previously un-owned land laid out most famously by John Locke. Real history, unfortunately, does not correspond to this ideal, consisting as it does of many forms of aggression against person and property and the trampling on and ignoring of what should have been private property rights. For our particular case, for example, the private property in air of land owners was generally acknowledged by courts in the early 19^th century, and plaintiffs could successfully sue defendants for polluting their air. This changed from the mid 19^th century on though, and polluters were allowed to continue polluting because the development of industry as quickly as possible was deemed to be in the ‘public interest’ and hence could not be interfered with by plaintiffs claiming that their property rights to air were being violated. Unsurprisingly, given this legal green light, industrial complexes that gave off a lot of pollution proliferated and what would have been considered property rights violations before became widespread. If private property to air was recognized, we could probably have expected the following: 1. Industrial complexes would have been situated in areas more remote from residential areas in order to avoid the consequences of violating air property rights. 2. More importantly, factory owners and other polluters probably would have attempted to buy an easement right to pollute the air of others, in exchange for money. This is how the free-market system could have decided between ‘economic development’ and ‘environmental goods’ in a rational way: by recognizing private property in environmental goods and allowing the holders of this property to trade away rights to these environmental goods for a price. Because the conflict is between potential and current polluters and potential and current victims of pollution, the people best equipped to work out the conflict in a mutually beneficial way are these two groups and them alone, through the mechanisms of voluntary exchange. This would force polluters to internalize what is now a negative externality by paying the main victims of pollution to bear the environmental cost. It would on the one hand incentivize producers to employ processes of production that resulted in less pollution, as this would mean they would have to pay less to nearby bearers of the environmental cost, and on the other hand would result in compensation for the people who actually bear the brunt of the negative consequences of the pollution, the ones whose land, water, and air is affected significantly by the pollution.

            

           The problem is that this framework of respecting private property rights to environmental goods was not maintained in actual history, pollution being treated like a negative externality by polluters instead. To affect a reasonable transition from the current state of affairs to the one envisaged, we must, to the best of our abilities, try to guess what free-market arrangements would have been in existence if environmental property rights had been respected. Some libertarians writing on this issue, such as Murray Rothbard and Walter Block, have portrayed air and water pollution mainly as invasions, aggressive actions perpetrated by polluters against their hapless, defenceless victims. While polluting someone’s air and water without their consent should indeed be considered illegal, the problem is that since private individuals generally were not allowed to assert their ownership over air and water resources, they were prevented from either giving or withholding their consent. To portray air and water pollution as in the main a criminal invasion is to guess that if a free-market, environmental property-respecting system had been in place, owners of air and water resources would have steadfastly refused to allow their environmental resources to be used as receptacles for pollution no matter what. This scenario, however, is unlikely. Clean air and water, like any economic good, has diminishing marginal utility, that is, the cleaner the air, the less people will tend to value one ‘unit’ of cleanness and consequently the more willing they will be to exchange such a ‘unit’ for some other good, such as money. Though perhaps most could bit have been induced to accept heavy pollution putting them at risk of serious lung disease, most probably could have been induced, if paid the right price in money or other goods, to accept some amount of pollution resulting in a reduction in the cleanness of their air or water resource.

            

           Keeping these considerations in mind, I will now try to outline some principles that could probably fruitfully be followed in any transitional period. The first is that polluting factories should generally have the right to their existence affirmed, provided that they adopt reasonable best practices to help keep pollution to a minimum. This is because, given a regime where environmental property rights were delineated and respected, few factory owners in their right mind would have opened a polluting factory in a certain area if they knew that by doing so, they were vulnerable to lawsuits and court injunctions to stop their activities. This would represent a huge waste of investment capital if it happened. Rather, before setting up shop, factory owners probably would have made sure that they came to an arrangement with the owners of the environmental resources they would be polluting, probably buying some kind of pollution easement in exchange for money, that is, paying the people who would be bearing the environmental cost a voluntarily agreed-upon sum of money in exchange for their loss. The amount that would have to be paid for such easements would have entered as a serious item into any competent factory owner’s calculations being used to determine which location to situate his factory in. If the costs proved prohibitive, factory owners could have decided to locate their factories in more remote areas or in more industrially-dedicated areas where pollution was more acceptable, provided the disadvantages of doing so did not prove too overwhelmingly great. In the real world, conditions are different from these hypothetical considerations, factory owners for the most part viewed pollution as a negative externality they could impose on non-consenting people with no cost to themselves and situated themselves accordingly. Nevertheless, it would be impractical to just maintain that since the factory owners did not have easements to pollute, any pollution currently being done should be treated as a criminal action. The factory owners did not buy easements to pollute because they did not need to do so and because individuals did not have the right to sell such easements, but they presumably would have bought such easements if environmental property rights had been consistently respected. To simply allow current victims of pollution to force the factories to cease and desist their polluting operations might not only result in a catastrophic fall in production and a waste of capital investments made in the past on a monumental scale, but seems unfair to the owners of the factories. Essentially, they are being hit with an ex-post facto law. On the other hand, to simply assume that all polluting factories would have had the necessary easements to pollute to the levels that they do currently and thus allow them to proceed as before is unfair to the victims of pollution, who never got a chance to defend themselves from pollution or reach mutually beneficial agreements with the polluters.

 In light of these considerations I propose the following transitional arrangement: 1. Polluters will be given ownership of pollution easements over the property that they are currently polluting but only to the extent of the amount of pollution typically created by average production using available environmental technologies and best practices that the polluter can reasonably be expected to adopt at non-prohibitive costs. 2. For this easement, the polluter will have to pay an amount of money annually to the owners of the air resources being polluted (probably an air protection association, but more on this later) based on the amount of pollutants emitted. This amount will have to be an appraised, not a market, value and thus will be pretty arbitrary. Perhaps a calculation involving the costs of curing pollution-related diseases divided by the increased likelihood of getting such diseases that each bit of pollution brings might be a reasonable way of making such an appraisement.  3. The forgoing applies only to polluters situated in mixed residential-industrial areas. For polluters situated in mainly industrial areas, it can be assumed that pollution easements had been homesteaded by industrial polluters and thus owned by them, and that any residents who lived in such areas knew what they were getting into and knew that area would be particularly polluted when making their decision to live there. 4. If polluters do not wish to reduce their pollution to the easement level outlined in point #1 in mixed areas, they may negotiate with the owners of the air resources to buy a bigger pollution easement from them, presumably in exchange for money. Similarly, if the people being polluted wish to have less pollution than defined by the easement level, they may give up some of the compensation money or even pay additional money to the polluters in order for them to give up or level down their easement level. 5. In order to prevent a non-market price (the appraised compensation value) from lingering indefinitely and interfering with genuine market exchanges, it and any associated pollution easements should expire after a sufficient length of time to allow factory owners to adopt cleaner technology, consider different locational options, and generally adjust themselves to the new institutional framework, perhaps 20 years. Hopefully by this time, and certainly after, genuine market exchanges between polluters and polluted will become the norm and the arbitrariness necessarily involved in the transitional period will dissipate.

This transitional plan is of course not perfect, but any such plan will involve difficulties. The fact that such plans are difficult to formulate points to the importance of establishing private environmental property and free-market transactions as quickly as possible, for only through these can the problem be solved in a rational and non-arbitrary way, based on the demonstrated preferences of owners and would-be owners of environmental goods such as air and water. In one sense though, even the transitional period will be an improvement over the status quo. This is because currently, far-removed governments impose environmental taxes on polluters, with the proceeds going into the general treasury of the government. Though the level of the taxes and the amount of pollution permitted by the government and the appraised compensation value and level of pollution easement during the transitional period are all arbitrary, at least during the transitional period the victims of the pollution will be the ones compensated by the polluters, rather than the national or provincial government stepping in and taking that money for themselves.     

With this provisional transitional plan roughly in place, let us now consider some possible problems once the ideal system is reached. The main problem with carrying out transactions with environmental goods such as water, and especially air, is that there will most likely be a great number of these resource owners affected by pollution. For a factory to be compelled to make individual deals with each person whose air quality will be affected by pollution from that factory would be very costly and thus impractical. Another problem is that of the stubborn hold-out. What if a factory owner reaches a mutually beneficial agreement with every inhabitant of the locality whose air is to be polluted except for one who refuses to make a deal at any price or at only prohibitively high prices, perhaps because he is a die-hard environmentalist? A relatively small number of such people could render industrial production nearly impossible in vast swathes of territory, something that would probably result in a serious decline in the society’s material standard of living. Some hardcore libertarians might object that just because I disagree with the value judgements of some owners of air resources does not mean that I have a right to label them a ‘problem’ and try to find a way to get around their stubbornness. After all, interpersonal comparisons of utility are not methodologically sound and only completely voluntary market exchanges demonstrate true benefits for both parties. While strictly speaking, all this is true, I personally care about our society’s material standard of living too much to allow the value judgements of a few isolated environmentalists to sabotage it.

As a solution to these problems, I suggest that owners of air resources should be compulsorily organized into Air Owners’ Associations, perhaps on the basis of existing municipal or county-based small administrative divisions. Thus, for example, everyone with a permanent or semi-permanent residence in Scarborough, Ontario (including residential renters) would be a member of the Scarborough Air Owners’ Association. If any factory wanted to open that would result in a reduction of Scarborough’s air quality via pollution, they would have to negotiate a mutually beneficial compensation arrangement with the association. This association would then divide the compensation equally among its members as it came in, whether annually, monthly, or whatever. The typical procedure would probably go as follows: the owner of a potential new factory to be built in the area or an existing factory owner who wanted to increase his pollution levels would go to the relevant association and try to make an arrangement to increase the level of his pollution easement. The association would probably track the level of air pollution currently in the air and make this information public, and based on this it could make an informed decision, based on the desires of its members that it represents, on whether to allow more air pollution and if so, for what amount of compensation. A factory owner may have to make arrangements with more than one association if his activities affect the air quality of more than one association’s member base. I imagine that the association would run on a representative-basis, members electing ‘air politicians’ to represent them. The most prominent issue in such elections would probably be whether a candidate would go for more dividends for members or more protection of air quality. I envisage a similar model applying to water resources, although the member base of these associations would probably be smaller and votes would not be equal but would be based on the amount of a body of water owned. Furthermore, water associations would have to deal with additional issues besides compensation arrangements with water polluters such as whether to allow any dams, water extraction, etc…

While this association idea is still a bit collectivist, I could not think of a way to make what would be the ideal solution, individual ownership and control over rights to the environmental resources of air and water, work in the real world. I do think that the association compromise is much better than the current system of government command and control regulations though. Firstly, as alluded to earlier, the polluters will be compensating the owners of the environmental resources being polluted, or those that bear the cost of the pollution, rather than paying money to a distant government. Though making polluters bear some of the external costs of their actions in the form of taxation is not a terrible idea, making the polluters pay the actual bearers of these costs directly makes a lot more sense. Secondly, these associations will be single purpose and will have a smaller member base, as opposed to national or provincial governments which are multi-purpose and have larger member bases. This should render the associations more responsive to their members’ desires on the particular issue of what to do with their environmental property than larger general governments are to their voters, where multiple different issues are debated and packaged up in elections. Thirdly, the smaller scope of these associations when compared with national or provincial governments leaves more room for interregional competition. Associations that are too unyielding when it comes to protecting air quality could lose potential factories, potential drivers of regional economic development, to other areas with more compromising associations, which might prompt members to vote in association leaders who are more compromising themselves. The same applies vice versa with associations that are too gung-ho about sacrificing air quality for monetary gain and economic development, for they might lose residents to less polluted areas and residential property values might fall too much. These three advantages mean that the association scheme will approximate the individual ownership and right to contract with environmental resources necessary for a rational calculation of the costs and benefits of polluting activities while avoiding most of its practical difficulties.

At its core, the problem with government command and control ‘solutions’ to environmental problems is that they do not consult the subjective values of those affected with very much precision. Do citizens prefer more economic growth with more pollution or less economic growth with less pollution? Besides voting in far apart elections that concern a vast array of other issues as well, the citizenry has no real way of making their exact opinions on this issue known. Besides, some voters may claim to be adamantly opposed to pollution in the abstract, but in government systems they generally do not face the real costs of this attitude until quite a bit later and in an indirect way. With the associations idea, being relatively more opposed to pollution has a price, namely, less money in the form of environmental dividends in your pocket and a more direct connection between this attitude and less economic and employment opportunities in your home area. In the same way, some voters claim that they are all for economic development and that all this environmentalist stuff is a leftist conspiracy, but some do so while living in places with relatively good air quality. Again, with the associations idea, being relatively more in favour of pollution has a price, namely, you yourself experiencing more pollution first-hand. While under government command and control, environmental issues tend to be framed as big, polarized, ideological issues representing different philosophical views, under the associations scheme, trade-offs become very real to the owner of environmental property, pollution versus money in the bank, air quality versus more economic development in the region. Also, in this form, individuals can make decisions on these issues in more precise and gradated ways, instead of in all-or-nothing are you an ‘environmentalist’ or an ‘economic development guy’-type decisions. 

Thoughts on Environmentalism: General Thoughts

            Environmentalism is a school of thought that displays great concern regarding issues related to pollution, conservation, and climate change. Most of its adherents mix these concerns with primitivist or socialist ideologies, ideologies which I bitterly oppose for many good reasons. This does not mean, however, that environmentalist concerns themselves are irrelevant or unsound, it only means that environmentalism must be refined in a way that is consonant with sound economic principles and a respect for individual liberty.

            

           First, though, we should attempt to isolate the ‘bad’ variants of environmentalism. Primitivist environmentalism asserts that raw nature is necessarily better than nature reshaped by humans for human purposes. For example, no matter how many additional houses or medicinal products could be made through commercial exploitation of a rainforest, the primitivist environmentalist will oppose it because these actions will allegedly result in the ‘destruction’ of the said rainforest. Primitivist environmentalists tend to admire the cultures that are alleged to be more in tune with nature, such as aboriginal cultures of North America. The problem with this ideology is that it is usually hypocritical and always anti-human. Most of the people who claim to espouse this ideology do not think it necessary for them to cease consuming products and using technologies that were only made possible through the heavy transformation/exploitation of nature that makes an industrial civilization possible. They admire pre-contact aboriginal cultures but do not voluntarily reduce themselves to the standard of living that was prevalent in these ‘nature-loving’ cultures. Such people demonstrate that they want the benefits of industrialism, but at the same time fanatically condemn the allegedly ‘anti-nature’ actions that industrialism involves. This is the hypocritical aspect of this ideology. The anti-human aspect is that strict adherents tend to put the interests of animals, plants, and ‘ecosystems’, above the interests of humans.

            

           Another ‘bad’ variant of environmentalism is the kind of environmentalism that is really just an excuse for calling for more government control of business, in other words, socialism. The impoverishment and collapse of communist regimes all around the world as much as possible settled empirically what had long since been settled theoretically in the minds of sound economists; that socialism would result in economic impoverishment on a large scale. The socialist-environmentalist does not argue that socialism will be more productive than capitalism as the older socialists did, he instead changes the indictment of capitalism, accusing it of producing too much, something that will eventually result in a catastrophic degradation of the environment and the collapse of civilization. Heavy government interventions into the free-market order are allegedly necessary in order to strike a proper balance between ‘development’ and ‘conservation’, something that only an activist government is alleged to be able to accomplish. The problem with this argument, as with all other socialist arguments, is that it underestimates the ability of private property, free-markets, and free prices to solve these problems and overestimates the ability of government to do so. Just as free-market mechanisms assure, to the greatest extent possible, that Frisbees are not overproduced at the expense of Yo-Yos, so, given a conducive property rights and institutional framework, could it assure that pollution and depletion of natural resources as a result of production processes are not overproduced at the expense of environmental goods, and vice versa. At the same time, just as the Soviet economic bureaucrats failed to prevent serious overproduction of certain goods at the expense of serious underproduction of other goods (evidenced by episodes such as the distribution stores being filled with too many socks but not nearly enough toilet paper and many others), so governments in general have no rational standard to balance ‘development’ giving off pollution and depleting resources and environmental ‘conservation’ and would make similar mistakes in this field. 

Economic Externalities: A raison d’être for government?

           One argument frequently made against the free-market is that there are many economic externalities, both positive and negative, that are not taken into account in the market price, thus resulting in a ‘sub-optimal’ working of the price mechanism and the production structure. This post will explore the externalities issue and see what implications, if any, for economic policy could follow from it.

            

           A negative externality is when an activity of one actor negatively affects another, without the first actor having to pay the second for the cost of his action. The most commonly cited example of a serious negative externality is that of air pollution. Factory owners produce products for sale and while doing so, their factories tend to spew out pollution. This pollution results in a lowered air quality of the area and, possibly, in an unbalancing of the earth’s climate, costs that others feel but which the polluters don’t have to pay.

            

           As with many other negative externalities though, the answer to ‘internalizing’ the external cost is simply a more complete enforcement of property rights. If the courts recognized land owners’ property rights in the quality of the air in their land, than these people who were negatively affected by the pollution would have an enforceable right to make the polluters pay for that cost, either by coming to a monetary arrangement for pollution rights or by forcing them to stop the excessive pollution (minor, undetectable pollution could not really be proved as harmful and hence would probably not constitute an invasion). Possible effects of pollution on climate change are a bit trickier, but the principle is the same: pollution is a violation of property rights, in this case the property right in a climate not substantially changed for the worse by the actions of other humans. In this case, after a court case proved damages (in this case, proved that climate change was a clear and present danger that would cause a certain amount of damage to the property of others), some kind of governmental-type body may have to step in and impose a carbon cap-and-trade system over the area or something. But, this is an exceptional case due to its dispersed and indirect effects. In most cases, a simple recognition of property rights would be enough to internalize most negative externalities. Instead of this, vast governmental regulatory apparatuses are often substituted for a proper recognition of property rights, to the detriment of the people who are actually affected by the externality and for people living in society at large.

            

           A positive externality has a different character than a negative externality. It is when an actual, or possible, activity of one actor positively affects another, without the second actor having to contribute to the costs of the activity of the first. A simple example would be if one person planted an attractive flower garden on their property that their neighbour liked very much. Planting the flower garden certainly benefited the first actor (for pure personal enjoyment and/or to raise the capital value of the property), or else he would not have done it. But the second actor also benefits, making him a ‘free-rider’ on the actions of the first. In this case, one might think: where’s the problem? The first actor clearly benefited from the action, and the fact that the second actor also did is just an added bonus for the world. This assessment is correct when we are analyzing an action with a positive externality that has already been done, but it becomes more complicated when we are talking about potential actions and incentives. The contention of positive externalities theorists is that because the benefit received by the second actor does not enter into the calculation of the first actor, either monetarily or psychically, the provision of the good in question, in this case the planting of attractive flower gardens, will be ‘sub-optimal’. The goal of the free-market economy is to satisfy the demands of the consumers, but if some of these demands take the form of positive externalities, they will not enter into the calculation of producers and the consumers will not be as satisfied as they could be.

            

           One serious example of positive externalities, not often cited by the literature dealing with this subject, is capital accumulation. Accumulating capital goods, or goods intended for future production rather than immediate consumption, out of savings, is the engine of economic growth and benefits almost every market participant. The person actually doing the savings does receive interest, based on the current state of the time market, for his trouble, but there are a great many other benefits as well. As capital becomes more abundant, labour becomes relatively more scarce and, equipped with the more productive tools that capital accumulation brings about, becomes more productive. Hence, labour becomes relatively more valuable, and wage rates, as well as the general productivity of the economic system, rise. The saver accumulates additional savings because of his relatively low, compared to the rest of society, time preference, or preference for present goods over future goods. He has a longer term view and hence does not mind not consuming his income immediately, instead letting it grow through investing it and receiving interest payments. But, in this calculation, the saver is not considering all of the tremendous benefits that capital accumulation has for the rest of the market society. For him, these are external benefits, and humanity is very lucky that humans have not been spendthrift profligates since the beginning, or else we would still be living as hunter-gatherers in caves.

            

           Another example is technological innovation. Without governmental interference or IP laws, the innovator of a new technology earns for himself both fame and a first-mover advantage, meaning that he can be the first one to market his new technology. However, the advantages of technology are significantly wider than this. Soon, other market participants will copy the new technology, thus benefiting from the first’s discovery. With competition, the new technology will become more widely available to the general public, as was the case in the computing market. Thus, it is posited that without government encouragement, whether through subsidies or IP laws (granting of a temporary monopoly), particularly in the case of technologies requiring large up-front investments to develop, the fame and first-mover advantages of the innovator will not always be enough to outweigh the costs, and certain technologies that would really be of great benefit to all market participants will simply not be produced.

            

           Thus, in the important cases of capital accumulation and technological innovation, it would seem that the government could have a role to play in encouraging these activities, which the market allegedly will not do sufficiently due to the existence of positive externalities. But there are serious problems with this solution. How do we know if there really are positive externalities, and if there are, how do we know their magnitudes? The free-market works on the basis of demonstrated preference, the various market participants making innumerable choices between a and b and making exchanges based on these choices generates the array of market prices on which the entire capitalist production structure rests. But what characterizes a positive externality is precisely that it is not based on demonstrated preference. If, for instance, the government takes 1% of everyone’s income in taxation in order to fund the research and development of a commercially viable jet-pack  how do we know that every market participant really wanted to pay 1% of their income to advance the future possibility of having a jet-pack?  It is left up to the arbitrary, paternalistic decisions of governments as to what people really 'should' want. Perhaps people believed that they had better uses for that 1% of their income. Also, if we can prove that even one person was hurt by the taking of their income for this purpose, we then need some kind of ethical theory to justify hurting this person for the benefit of others.   

            

           Thus, in many cases, abstractly, we suspect that there are significant positive externalities, and that not factoring these in to market calculations could result in an under-provision of the good in question, but there is no way of knowing for sure that they exist or in what magnitude they exist. Also, potential positive externalities are so prevalent that an over-zealous economic planner could use this argument to take over the entire economy in the name of economic ‘efficiency’. However, then we would just have socialism, a system that cannot calculate economically and thus cannot ever be ‘efficient’. Therefore, we must be careful with how we use this particular argument, for it can be taken way too far and the government has motivation to take it too far in order to exert their control over the economic system for reasons far different than economic ‘efficiency’. Nevertheless, it would be rash to dismiss it entirely based on these considerations, especially in important areas such as capital accumulation, where perhaps a modest forced savings plan could be an option for consideration, and technology, where IP monopoly grants, with a modest duration, could also be an option for consideration. In general though, freedom seems to do much better in even these areas then the government, which tends to stultify technological innovation and adopt policies which encourage capital consumption. For this reason, we must always be vigilant and make sure that the externalities argument is not used to justify tyrannical absurdities. 

Five Political Imperatives: 4-5

4. Repeal the minimum wage: 

The minimum wage is a government-imposed price control, and like any price control, it will not lead to the result most people think it should. Minimum wages are imposed with the intention of helping poor people. In fact, they cause unemployment among these very people. If a person’s services are only worth $5 an hour to marginal buyers on the free-market, mandating that he be paid $10 an hour will tend to put this person out of work. Employers will try to reduce the amount of unskilled labour they need using machines that they would not have used without the minimum wage because of their cost. Or, they will simply cut back on the number of hours of people paid at the minimum. The result is to economically marginalize those whose services are worth below the minimum, effectively barring them from getting a full-time job. 

5. Take away the special legal privileges of labour unions: 

Labour unions enjoy a strange legal privilege under current law. They are allowed to use coercion to prevent members of their trade from working when they have declared a strike. Furthermore, there are labour laws in place that force employers to negotiate with labour unions instead of trying to hire workers that are willing to work, and some that force workers to be ‘represented’ by a union without their real consent. Certainly, no one should be barred from creating a labour union, nor should they be barred from voluntarily leaving their job in the hopes that their employer will give them higher wages. What labour unions should not have the power to do is to use coercion against people, forcibly preventing them with their picket lines from ‘breaking the strike’. Government is supposed to have a monopoly on the use of coercion, and yet they allow labour unions to prevent citizens from going to work by force. Besides the legal injustices, unions serve to create unemployment. They negotiate, with their coercive powers, wages that are higher than those on the free market for their workers. This has the same effect as the minimum wage, preventing the labour market from clearing, and thus causing institutional unemployment. Union members become a labour aristocracy, while those that they exclude constitute the labour underclass. The union decides who can enter the trade and what wages their members are to make. A similar analysis applies for professional associations whose members have the monopoly to practice a certain profession, such as medical associations or law societies. They claim to be protecting the consumer from sub-par services, but the main thing they do is restrict the supply of people in that profession and hence raise the wages of their members, barring consumers from spending less money on services the associations deem “sub-par”. Certainly these societies could exist as voluntary, professional associations, giving their stamp of approval to certain practitioners, something which many consumers would probably take into account, but their monopoly privileges just leads to monopoly prices and pricing lower end consumers out of the market for that particular service entirely. Often, powerful labour unions and professional associations do not exist in every field of employment. In this case, they restrict the supply of workers in their lines, forcing those trying to find a job into other lines artificially. The result is that these lines experience a supply of workers higher than they would on a real free-market, tending to reduce wages in these lines. Combined with the minimum wage, once enough workers are pushed into these fields, they are then pushed by the minimum wage out of work entirely.

           With these two reforms, unemployment would not be eliminated entirely but it should be significantly reduced. Welfare subsidies can create incentives to remain unemployed and rapid changes in industrial make-up stemming from central-bank induced boom-bust cycles (which I would see eliminated with the first reform) or just rapid economic progress or change can create some frictional unemployment as workers and employers look for each other. However, it is absurd that governments that are always yelling about the unacceptably high unemployment rate should actively maintain policies (minimum wage and allowing coercive unions) that can clearly be demonstrated to create unemployment by artificially favouring some workers at the expense of others. 

           

           The reason governments do not repeal these policies and why many people do not wish them to is because they believe in some version of the Marxist exploitation theory, where it is assumed that, left to their own devices, greedy capitalists would pay the workers less and less and grab more and more for themselves. This is a myth though based on bad economic reasoning. Employers compete with one another to get the labour that they need so that they can use it to make a profit for their businesses. This competition will result in a tendency for workers to be paid at a rate corresponding to their marginal productivity. For our purposes, this means that if one employer insists on paying say, a fast-food service worker $6 an hour, but if another employer expects that the services of that worker would add more than, say, $6.50 an hour to his businesses' revenue, it will be in the other employer's interest to offer the higher wage of $6.50 an hour to the worker to try to bid him away from his previous employer. The more capital is accumulated in an economic system, the more labour becomes relatively scarce and the more productive labour tends to become, thus resulting in a tendency for wages to rise. It is these forces, not the amount of money necessary for the worker to subsist as the Marxists claim, that determines the height of wage rates. Intervening to try to artificially force wage rates up through minimum wages and unions, without an increase in worker productivity as a result of an increase in capital goods or a higher personal efficiency of the worker, just results in unemployment and division of the labour force into a labour aristocracy and a labour underclass.

       

Five Political Imperatives: 2-3

2. Tax reform: 

A large state is a futile endeavour by which, as Bastiat says, ‘everyone endeavours to live at the expense of everyone else’. One way to curb this destructive urge is to reform the tax system. Currently, taxation hits different groups in different ways. For instance, under the progressive income tax, rich people pay a bigger percentage of their income than poorer people. This non-uniform taxation leads people to demand services from their government, but expect not to have to pay for them themselves. People will seek to tax the rich, corporations, manufacturers, alcohol vendors, or whoever else so that the services they desire are paid for by someone else. This principle leads to the destruction of representative democracy, when political decisions are about who should loot the other to pay for the services that they want. Thus, a radically simplified taxation system is needed. There shall be no loopholes, progressive rates, corporate taxes, or anything else. The only permissible forms of taxation are universal, flat taxes. These can include a flat income tax, where everyone pays a certain percentage of their income, or a flat sales tax, where everyone pays a certain percentage of the sales price, regardless of the nature of the good. Tax lobbying and shifting the tax burden will be eliminated. Though the rich will in fact pay more, everyone will pay the same portion of their income and expenditures. A tax rise will mean more funds coming from all people at the same percentage, which will cause people to more closely associate tax increases with more government services, which will allow them to make a more informed decision on the matter.

3. Balanced budget requirement: 

Politicians enjoy promising services and promising to cut taxes at the same time. But how do they do this? Besides reneging on their promises, the answer is often deficit spending. The government, made easier by their control of the monetary printing presses, borrows money to pay for its expenditures so that it does not have to reveal the full costs, in the form of taxation, of their programs. Inflation constitutes a hidden tax on the people which governments blame on others. Or, if inflation is not used, deficit spending simply means paying the debt back in the future, plus interest payments, resulting in capital diverted to less productive purposes in the present, and more taxation being necessary in the future. In either case, deficit spending should not be allowed under any circumstances. This includes war, for the world would be a much more peaceful place if people knew that they would have to pay the full cost in taxation for each war their government undertakes. As with progressive taxation, allowing large government deficits and debts subverts representative democracy. One generation of voters are allowed to make political decisions about the future taxable incomes of future generations of voters.  

With these first three reforms, taxes will be more closely associated with government services than they are at present.  Rather than the illusions of inflation, budget deficits, and shifting the tax burden, each citizen will know that for whatever service they vote for, they will have to pay a corresponding cost out of their own pocket. The association will not be as direct as for free-market exchanges of course, but it will be a significant improvement I think over the present situation. Hopefully, voters will be able to be more prudent about what services they vote for, making sure that the services are truly useful before they vote for them. 

Five Political Imperatives: 1. Monetary Reform

The following five political measures are those that I think are most imperative in order to improve the operation of human societies. The first three are aimed at halting the rapid and reckless growth of government and to help secure individual property rights instead. The last two are aimed at helping to alleviate one of the great social ills of our time: unemployment.

1. Monetary Reform

When the government controls the monetary printing press, and thus controls the value of the money that we earn, what civil liberties do we truly have? The government uses the printing press, under the euphemism, ‘monetary policy’, to print more money, making our money worth less by increasing the total money supply. The money that they print they usually give to bankers, often in return for government bonds. This allows the government, by way of the supposedly independent central bank, to amass more and more debt and allow that debt to be paid off more easily, as the worth of the money it is denoted in falls by their policies, at the expense of every creditor and person on a fixed income in the country. Besides this, inflation is the prime mover behind the dreaded business cycle. When the central bank artificially lowers the interest rate through its printing of money by pumping that new money into the banking system first, the interest rate is in fact distorted below its free-market rate. Thus, businessmen, tempted by the low rates, tend to borrow more to invest in more time-consuming production processes, while at the same time, the inflation caused by the government actually leads to a reduction in the pool of the real savings of the populace, with people more eager to spend their depreciating currency and businessmen led to overconsumption by the illusion of higher nominal profits which are just the result of inflation. The boom that ensues is based on an illusion (because no new savings have actually been accumulated, which would allow sustainable investments in more time-consuming production processes), and must be followed by a bust when inflation slows and credit thus starts to contract. In the process, real wealth of the country is used up by businessmen who malinvest and consume some of their capital, believing more real savings are available to be lent than actually are and believing that their profit margins are greater than they really are. Thus, the evils of inflation are numerous, and the apparent benefits are illusory. It allows government to live beyond its means at the expense of money holders, creditors, and those who in general are late to receive the new money printed as it flows through the economy, reduces the incentive to save, causes the business cycle, and leads to capital consumption.

The way to stop this is to return to a sound currency, ie. one not subject to government manipulation. Ultimately, some kind of gold standard would be a good choice, as gold emerged historically as the commodity most suitable to be used as a medium of exchange throughout most of the civilized world due to its divisibility, scarcity, non-perishability, and uniformity.

The banking system is intimately linked to the currency system. Fractional reserve banking, ie. the bank printing more gold claim notes than they had gold in their vaults, was responsible for inflation in the days before fiat money and central banks and continues to play a role in the inflation of the fiat money supply. While some would disagree, I am willing to allow this practice with conditions. The first is that the government must not step in to bail out or help ailing banks in any way. If a bank prints too many claims to gold and is caught in a bank run, that is its own folly and other banks and their customers will learn from their misfortune. The second is that customers of the bank must be explicitly notified that not all of their demand deposits are in fact held in reserve, and every bank note printed must indicate that bank’s reserve policies. This will allow them to make an informed decision about which bank to trust with their money, a fractional reserve bank, or a bank that keeps 100% reserves. In effect, fractional reserve notes would not really be money at all (ie. a medium of exchange that is widely accepted as final payments for goods and services), but lottery-type, first-come-first-served claims to a pool of money kept at the bank and which yields interest payments. Under these conditions, it is very possible that fractional reserve banking would just die out, leaving only 100% reserve banking.

All that said, I will now discuss a way to get from the present disastrous monetary situation to the better one described above:

The goals of a monetary and banking reform should be the following:

1. To stop inflation of the money supply by the central bank, ie. stop printing new money.

2. To substantially limit the practice of fractional-reserve banking, replacing it with 100% reserve banking for withdrawal-on-demand accounts. This will stop inflation of the money supply and will prevent the prospect of major deflations and bank runs in the future.

3. To prevent a major deflation and bank run in the process of reform.

In order to achieve this, I suggest the following, step-by-step plan:

1. Engage in one last spurt of central bank money printing in order to make the monetary base (the amount of money that would exist if all commercial banks ran on 100% reserves) correspond with the True Money Supply (includes entries in checking and savings accounts at fractional reserve banks). Give this money to the commercial fractional-reserve banks in exchange for the assets that are supposed to be backing up the withdrawal-on-demand accounts’ money. Prohibit the expansion of the money supply via fractional-reserve banking as a fraudulent activity in the future, banks can only engage in the practice if they issue separate fractional-reserve notes that clearly state the nature of these claims on each and every note.

2. Set up a government holding company to hold all of these assets and collect the money due from them.

3. Liquidate the central bank and transfer all of its assets to the holding company.

4. Declare that the holding company is now responsible for paying off as much of the government’s outstanding debt as possible with the cash gained from its assets, and that the rest of the government is no longer responsible for the debt. The company will be owned and controlled, pro-rata, by the creditors of the federal government.

5. Holding company aside, balance the governmental budget and pass a constitutional amendment prohibiting the further issue of government bonds.

6. Make clear that any person or institution that tries to increase the money supply by printing more base money notes will be treated as a criminal counterfeiter.

7. Repeal all legal tender laws and any laws intervening with the field of money and banking, besides basic laws against force and fraud; especially be sure to repeal sales taxes and capital gains taxes on precious metals. This will then give people the choice of continuing to use the now (probably only temporarily) stable paper money or of moving to a commodity standard such as gold.

The benefits of this plan are that it eventually reaches the goal of a sound monetary and banking system, while avoiding traumatic episodes of heavy deflation or bank runs. The disadvantages are mainly moral, ie. why are the banks and the government, the two main perpetrators of the deplorable state of affairs, essentially rewarded and bailed-out of the mess of their own making? On the other hand though, if we went the deflationary route and just withdrew government support from the commercial banks and let them fail in a run, this would be unfair to debtors who would be crushed by the deflation and to depositors who, though they probably should have known better, nevertheless thought that the bank was keeping their money safe for them. Also, politically, this route would be suicidal, as a leader who presided over massive deflation and bank runs would not last very long in office. Though there are of course some political sacrifices in my proposed method, they are less severe and could be offset by the subsequent stabilization of the monetary and financial system.  

(Note: For any reader interested in learning more about inflation and how the current banking system generates it with government support, I strongly recommend Murray Rothbard's The Mystery of Banking. It is available for free PDF or EPUB download in the Literature section of www.mises.org)