The Coase Theorem and the Environment

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About 25 years ago, when I worked for a national bank in Europe, I had an interesting meeting. Three tall, redheaded representatives of the Icelandic fresh cod (as opposed to dried or salt-cod) fisheries cooperative were looking for a loan to expand packaging operations in France. To justify the loan, we had to learn about their business. How to get collateral from things that can swim away, for example.

The Icelanders confidently and proudly addressed every question. I learned a lot, much of it surprising. For example, I learned that the cooperative itself was not a corporation or association, but an entity created by special act of the Icelandic legislature (the Thing, or more precisely the Althing or General Assembly). I also learned that property rights were the key to the fisheries’ reliability.

For many years, I forgot about this meeting, then a friend of mine posted this link to a social media website. The story identifies a trend: young adults not buying cars. His comment on the story was, “We are renters on this planet, not owners.” That was meant as a conservationist statement to encourage good ecological stewardship of planetary resources.

If acting like a renter does not make for good ecological stewardship of planetary resources, what does?

I thought to myself that if exhortation would make us greener, the hot air coming out of Al Gore and many others would have restored the planet to Eden at least a decade ago. What I said online was, “Renters always trash the place. In economics, one version of this is called the tragedy of the commons. Ownership and property rights promote good management of natural resources. We drive on public roads, burn subsidized fuel, get fat on subsidized farm commodities.” But all of this made me remember the Icelandic fishermen and a certain Mr. Coase.

If acting like a renter does not make for good ecological stewardship of planetary resources, what does? Part of the answer is in the Coase theorem. (Here tip your hat to Ronald Coase, who died in 2013.) It suggests that clear and tradable ownership rights help people bargain to allocate resources efficiently.

The Wikipedia entry on the theorem offers alternative versions of it:

  • Version 1: A clear delineation of private property rights is an essential prelude to market transactions.
  • Version 2: As long as private property rights are well defined under zero transaction cost, exchange will eliminate divergence and lead to efficient use of resources or highest valued use of resources.
  • Version 3: The allocation of resources is invariant to the assignment of private property rights under zero transaction cost and zero income effect.

I think of it as the opposite of the tragedy of the commons. Overfishing is a big example of the tragedy. In most parts of the ocean, fish stocks are not owned but regulated (or not). People trolling through the waters are not owners. Instead they have some usage rights, like renters in an apartment, and they have rules to obey that are analogous to the clauses of a rental contract. But like a lot of renters, they don’t always obey the rules. They trash the place, as they would not if they owned it.

In fact, it’s even worse than that, because there is competition to trash the place. As an edible species of fish gets rarer, the price goes up and competitors vie to take as much as they can before the stock is depleted. They might know it’s a disaster in the making, but that does not change the incentives. If they moderate their catch, the depletion occurs anyway. There’s no owner to get the long-term benefits of fishing sustainably.

Property rights created by governments are attractive alternatives. Iceland, for example, for more than 25 years has been regulating its fisheries in a way that partly approximates ownership. Basically, license holders get quota rights that they can trade. In (Coasian) theory, the rights end up in the hands of the fishers who get the most value from the quota. I believe that the results have been good. In June of this year, Iceland Magazine reported that the country’s cod population was at historic highs and quotas would increase.

They might know it’s a disaster in the making, but that does not change the incentives. If they moderate their catch, the depletion occurs anyway.

My examples and observations here make for an extremely superficial treatment of ideas and phenomena that have been debated, studied, and written about for more than half a century. I intend them only as an initial antidote to the implications of vapid slogans like “We are renters on this planet.”




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Making Sauerkraut

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Last spring, I took advantage of low cabbage prices and the still cool temperatures in the cellar to make my biannual batch of sauerkraut. I spent a pleasant hour turning ten dollars in raw materials into 50 dollars worth of kraut. Making the kraut requires hand mixing of salt, cabbage, onions, etc., a process that always makes me think of John Locke and property.

Locke’s Second Treatise talks about the individual taking raw, worthless land (as in America) and converting it into property if “he had mixed his labor with it and joined it to something of his own and thereby made it his property.” Locke undoubtedly knew that the word “property” comes from the Latin proprius and means “one’s own” or part of the very person himself. Locke (and Ayn Rand) felt that property was that which the individual needed to earn a living and avoid being a slave.

In Locke’s time, raw forest and prairie abounded and was worthless. Productive farmland was needed to make a living by most people — hence his emphasis on the effect of work on raw land. Nowadays, farmland in much of the U.S. is reverting to forest, but there has emerged plenty of raw material open to anyone for exploitation — an innovative business idea, and possibly a vague theoretical concept that could be turned into a brilliant invention or, as in my case, cheap cabbage to make sauerkraut. No matter what the raw material, adding labor makes it become the property, a part of the very substance, of whoever found and developed the unexploited potential.

Property in this Lockean sense seems to be restricted to things that an individual develops, evolves, or uses and are part of how he makes a living, what he thinks, or how he fits in with others. The property owner, personally involved in the production and enjoyment of his property, becomes so closely identified with the object that it becomes almost indistinguishable from himself. It’s only a small leap to see that the lived life of the individual also develops from raw potential.

I’ll illustrate this framework with my personal circumstances. My education and training, work history, experience, and business contacts are my formal means of making a living. My home, automobile, the books and computers that I use to entertain myself are certainly my property. My thoughts and dreams, the videos that I make, my conversations, the articles that I write, my family, friends, and my civic life (serving on several voluntary boards, etc.) — in short, the stuff that constitutes my daily lived experience, was either conjured out of nothing by focused work or grew out during a long quiet life. All this must be reckoned among my properties. I consider the customs, habits and hopes that can be construed as features of a moral life as part of my being and so my property as well.

But there is the second sense of “property” that is more troubling for me. As a result of working hard and living frugally I’ve accumulated unexpended work as savings and pensions that are invested in various financial instruments. I’d like to reflect on how this form of property, which I’ll call “investments,” differs from the property of my day-to-day lived life.

Let’s say that I buy 100 shares of some large corporation. Was my involvement anything more than doing some research on that stock and putting it into my online stock account? Is this investment really embedded in my life? The corporation was started many years ago by individual owners who made it their property and embedded in their lives. Ownership was eventually divided among an ever enlarging circle of partners, share holders, and lenders. It’s now divided in a million ways, but very few of the present owners either understand or have the information necessary to make good business decisions. Most are not critically dependent on this one stock and see it only as an accounting entry in a properly diversified portfolio.

This company has in fact become a public-private partnership run by an incestuous gang of managers and directors, all cooperating with government officials and forming a kind of nomenklatura. It typically plays fast and loose with ethical business practices, sponsors ad hoc laws to restrict competition, obfuscates losses, makes money with which it handsomely rewards the in-group, buys politicians, and keeps the stockholders placid.

Such companies can be vindicated to some extent. They cause big things to happen; large projects get built, and markets remain tranquil. The accusation of greed (one of the seven deadly sins) makes no sense when directed at these impersonal entities. Corporations are at once property and also hold property, and those property rights must be respected. Analytically, corporations are fungible, that is, can be bought and sold on a whim (try to sell my professional status on the stock market). It is individuals, not corporations, that hold the spoon; these companies are surprisingly vulnerable to changes in public tastes.

From my perspective, investments have evolved naturally in a normal free-market economy as the main insurance we have against age and illness. Stocks and bonds (and a Social Security check, if I can cut a chunk out of the pig’s ass as it waddles past) are necessary for a time when I can no longer earn a living by using my Lockean property. My CPA points out that wealth is important, not because it allows the individual to do nothing, but because it allows the individual to make better decisions. Investments do affect the owner in good ways.

But it irks me that I have no choice but to invest in such Juggernauts (an apt metaphor for ponderous objects of worship that sometimes crushed their devotees). I’m alienated from these investments; their methods and effects do not reflect my moral and intellectual values. They often operate against the commonweal and employ arbitrary political power that is foreign to my nature. They are impersonal and therefore amoral. Their investments are often mysterious, chaotic, and irrational. They are unprincipled, untethered from moral codes.

How can I deal with my disquiet?

I could follow news events regarding my holdings and sell my stock when I see something that particularly irks me. Boycotts can be employed when corporations cross some ill-defined moral line. I can vote or run against politicians who take money or do favors for corporations. Corporations won’t hire anarchists like me, so working on the inside is not an option.

In short, I can’t do very much. It's not the least bit like making sauerkraut.

 

 

 

 

 

 

 

          




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