Michael Strong is posing some exciting questions–asking us to look at the way our structures and systems are influencing what’s possible economically and environmentally. What if we intentionally designed our governing structures to support entrepreneurial decisions that benefitted the world. The September FLOW newsletter is worth pondering! Read on . . .

FLOW Vision News – September 2009

What if it was possible to re-arrange our legal institutions so that more economic growth resulted in ever greater improvements in environmental quality? What if the power of capitalism was harnessed on behalf of sustainability?

One of my greatest frustrations is the ongoing public and media focus on environmental moralism: People urging us to change our personal behavior vis-a-vis various environmental problems. This ubiquitous moralizing is frustrating because while well-intentioned, in general the focus on environmental moralism prevents real solutions to environmental problems from being understood and implemented.

Since at least the 1940s, free market economists have been proposing property rights solutions to environmental problems. Most (and, arguably, all) threats to environmental sustainability are due to the fact that many aspects of our environment are treated as externalities – the cost of the environmental damage is not included in the price of the good sold. From the perspective of an economist, the solution to such situations is very simple: internalize the externality so that the cost of the environmental damage is included in the price of the good sold. Once this is done, the price system, a.k.a. free market capitalism, automatically solves environmental problems. From this perspective, the moralizing is entirely superfluous. Let’s just solve the problem rather than righteously continue to harass each other.

For instance, in order to prevent the damage caused by acid rain, in the 1990s a property right was created that allowed polluters to emit a specified amount of sulfur dioxide into the air. Many environmental organizations fought this approach to solving the acid rain problem because they regarded such an approach as giving polluters “a license to pollute.” But what they didn’t understand is by limiting the total amount of such permits and allowing a tradeable market in sulfur dioxide permits to come into being, a mechanism had been created that resulted in the profit motive driving environmental improvements. A company that invested in innovative technologies to reduce sulfur dioxide emissions could sell some of its permits on the market, and thereby become more profitable by reducing emissions. Meanwhile, environmental organizations bought up some of the permits, reducing the total number of permits to emit sulfur dioxide, thereby increasing the incentive of for profit companies to invest in innovative technologies that reduced emissions.

The net result was a powerful win-win, driven by the profit motive, such that sulfur dioxide emissions have been cut in half in the last 20 years at a cost of less than one-tenth of what had been expected, and most ecosystems that had been damaged by acid rain have largely recovered.

Meanwhile, the plants that emit sulfur dioxide have expanded, adding to our GDP, and the sulfur dioxide reduction technologies that were developed added to our GDP, such that with respect to the impact of this property rights solution, increased economic growth directly resulted in an improved environmental impact. Most sulfur dioxide emissions come from electrical power plants, and thus consumption of electricity increased while forests recovered simply due to the interaction between property rights, innovation, and the profit motive.

Many environmentalists are Malthusians who believe that we are “running out” of natural resources and that we must “conserve” resources. In the small tribal environments in which we evolved, if some of us were taking too many fish out of the river, and especially if we were wastefully destroying the fish in our river, the rest of us quite appropriately would scold those who were wasting resources. In a small tribal environment, such scolding was a necessary and appropriate response to the waste of resources, and the scolding was likely to be an effective solution to the problem of wasteful or destructive behavior.

While occasionally such scolding may still be useful, most of the time it is not. Encouraging electricity conservation through moralizing is largely ineffective; most of the time people continue to use more electricity when prices are low and less electricity when prices are high. Many of these “decisions” are hard-wired into business plans and family budgets. When companies select various technologies for their factories, or when homeowners select heating and cooling systems for their homes, fundamental decisions regarding electricity consumption are made that may be varied slightly, but which are mostly taken for granted on a month-to-month, year-to-year basis. More scolding will not change the behavior of those aspects of the economy that have been “hard-wired” into budgetary systems.

Insofar as a significant focus of the environmental movement consists of such scolding, it is not useful and, moreover, serves as a distraction from the implementation of real property rights solutions. Worse yet, many people have come to the conclusion that “we,” usually meaning very comfortable, well-educated people in the developed world can’t “let them”, usually meaning the poor people of China, India, Africa, and elsewhere develop because “there aren’t enough resources.”

Prior to the creation of the sulfur dioxide permit system, it was true that further economic growth would result in increased emissions of sulfur dioxide that would result in increased acid rain and ecosystem damage. The system was not “environmentally sustainable.” After the creation of the sulfur dioxide trading system, increased economic growth did not result in increased sulfur dioxide emissions and, as environmental groups continued to purchase some of the sulfur dioxide emissions, it even resulted in decreased sulfur dioxide emissions. With this set of rules, increased economic growth results in improved ecosystem performance.

Unless one has studied property rights solutions to tragedy of the commons problems, this sounds paradoxical, even impossible: Increased economic growth results in healthier ecosystems. Most of us are so constantly bombarded by messages of environmental catastrophes every day, combined with moralizing messages telling us that we must conserve resources, that the possibility of increased economic growth combined with healthier ecosystems sounds inconceivable. And in reality, because most key ecosystems and natural resources are not yet protected by means of property rights, it is true that many aspects of our current economic system are not environmentally sustainable.

It is important to note that the point I am making here is an analytic point; property rights solutions are a general strategy that is under-utilized. How, exactly, to implement property rights solutions to diverse problems, including those relating to the global atmosphere or the deep seas, will require thoughtful and creative legal arrangements in the coming decades. But these thoughtful and creative legal arrangements are more likely to come into being if we approach them from the perspective that we are creating a win-win world that works for all rather than if we continue to scream righteously at each other. What if leaders of the environmental movement graciously thanked the free market economists for their far-sighted wisdom (as Peter Barnes acknowledges Ronald Coase in his book Capitalism 3.0)? Might gratitude be more effective than invective?

Once one deeply internalizes the powerful win-win dynamic of property rights, innovation, and the profit motive, then one realizes that the extraordinary power of capitalism can quite elegantly be flipped around from being a force for environmental destruction to being a force for environmental sustainability. It may take us thirty or forty years to complete this process, but as we do so, we can then look forward to living in a world of an ever-expanding standard of living for all the world’s people, while also living in a world in which our relationship with the natural world of our planet is deeper and more positive than it was throughout much of the 20th century.

Towards a sustainable peace, prosperity, happiness, and well-being for all,

Michael Strong
CEO & Chief Visionary Officer
FLOW

P.S.: For an example of marine ecologists understanding this dynamic in the case of deep sea fishieries, see this New York Times article. Conversely, for an example of marine ecologists failing to understand this dynamic, see this earlier, more typical, New York Times article. All too often very smart people in one field (say, marine ecology) fail to understand this elementary economic logic.