The following is a lecture delivered by Bruce Yandle, at Saint Vincent College, Latrobe, Pennsylvania, on February 18, 1998 as the 40th lecturer in the Alex G. Mckenna Economic Education Series. Dr. Yandle is an Alumni Distinguished Professor of Economics &Branch and Trust Scholar at Clemson University.
On the frontispiece of Rachel Carson's powerful 1962 book, Silent Spring, one finds a quotation from Albert Schweitzer: "Man has lost the capacity to forestall and foresee. He will end by destroying the earth." Schweitzer's words seem entirely appropriate to Carson's significant work, one of the first modern efforts to call attention to uncontrolled activities that might damage the environment. Forestalling and foreseeing? How can we limit environmental abuses? How can we become more knowledgeable about the longer run consequences of our actions? Shall we rely on the rule of law and markets? Or must we rely on command-and-control and the rule of politics?
Though later scientists would offer strong rebuttals to Ms. Carson's assault on DDT, the principal object of her story, most would agree that Silent Spring helped to usher in a new environmental era when Americans turned to regulation in the hope of avoiding, or at least postponing, Schweitzer's pessimistic forecast. Instead of relying on markets and the rule of law to forestall and foresee, we chose to regulate. Indeed, market forces were seen as the problem, not the solution.
During the 1970s and 1980s, the United States built one of the largest regulatory enterprises the world has ever witnessed, much of it in the name of environmental protection. The thrust of the 1970s can be seen graphically in the number of pages in the U.S. Federal Register, a daily government publication that announces new and revised regulations. From 1970 forward, a rising tide of regulation encompassed every feature of American life, focusing particularly on environmental safety and health. Starting in the late 1960s, the count of annual pages rose and accelerated from fewer than 20,000 to reach a high of 80,000 pages of new and revised rules in 1980; the annual count settled and has bounced around 60,000 to 70,000 per year since 1980. Environmental protection became a growth industry.
Should we desire or expect any less? After all, I am talking about the air we breathe, the water we drink, and the earth that sustains us and all other life forms.
Oddly enough, many people believe that the move to federal regulation marked the beginning of enhanced protection of environmental rights. I will argue just the reverse. The shift to federal control marked the end of a decades-long era when environmental rights were strongly protected by market forces, property rights, and rules of common law that forced polluters to bear the cost of their actions. In the pre-federal period, people closest to the problem, those with the greatest incentive to manage effectively, devised solutions to the problems of pollution. Natural resources and the environment were protected first by private law--property rights enforced in common law courts, supplemented by state and local ordinances and multi-state compacts. Indeed, at the time the EPA was being formed in 1970, air pollution and other environmental statutes were in place in each of the 50 states.
The process was competitive. Communities and states took different approaches; there were experiments in the laboratory of the states. No state could force its rules on any other state. Communities understandably sought to balance environmental protection with income growth and other important aspects of life. After 1970, what had been private property protected by the rule of law was converted to public property and a commons to be guarded by politicians in far away Washington. The experiments ended; hardened, infrequently passed, statutes allowed little room for adaptation, selection, mutation, and reproduction. Input-based, command-and-control regulation replaced outcome-based enforcement of property rights.
If the move to federal regulation was about improving the environment, an examination of the record raises serious questions about what followed. Relative to 1970, environmental quality has improved significantly for many pollutants or at least gotten no worse for others. We should expect no less. We are a much richer people, and Maslow's hierarchy of needs predicts that higher incomes call for aesthetic improvements. But knowing that things are better is just half of the problem. We must ask "relative to what?" Could the environment be even more improved? Have we found the low-cost path for sustained economic growth and environmental improvement? I don't think so.
We have chosen a high cost, low output, approach to the problem. Huge amounts have been spent on command-and-control regulation. Estimates for 1998 indicate that the full cost of all federal regulation exceeds one trillion dollars annually or about $3000 per U.S. citizen. Indeed, the 1998 regulatory costs imposed by the U.S. Environmental Protection Agency alone are estimated to be $100 billion. Beyond these amounts, the command-and-control regime fostered by the national government has stifled innovation and blunted investment in new plant capacity and lower cost techniques for protecting the environment. In many instances, we have been driven by a crisis mentality that caused us to spend huge amounts to reduce trivial risks while doing very little to fix the truly serious problems. Consider the sobering 1997 conclusions reached by two Resources for the Future scholars after completing a three-year assessment of federal efforts to protect the environment:
For all its accomplishments, we conclude that the pollution control regulatory system is deeply and fundamentally flawed. While there is no consensus about how to remedy these flaws, some agreement exists on the principles that should guide changes in pollution control and about the characteristics of a pollution control system for the next century... Failure to make the changes will be costly to the economy, to the environment, and to every citizen.
Why have we failed to apply common sense, common law, and reliable market forces to the environmental problem? Why do we manage the environment as a hummingbird economy, where each person or firm has an incentive to get more environmental quality while the getting is good, instead of conserving these precious resources for the future? And is there any promise that things may improve in the 21st century?
To address these questions, we must understand hummingbird economies and how they operate, become more familiar with how common law and common sense was applied to protect environmental rights, and then see how bootleggers and Baptists helped form the process that delivered the flawed system that now claims to protect environmental quality.
Everything Begins with a Commons
In the summer, I watch hummingbirds fly and hover near a feeder that Dot carefully fills with nectar and hangs in view of our kitchen window. The store-bought nectar is colored red, since people think that hummingbirds find that color attractive. Business around the feeder picks up following rains that wash away the birds' naturally provided food. It is then that the feeder becomes crowded and a hummingbird struggle ensues. Almost always, there is at least one bird that attempts to control access to the feeder what naturalists sometimes call a dominant male.
The dominant male seeking to maintain control will fly rapidly to the feeder, place its beak into the small openings for a quick draft of nectar, and then fly to a nearby perch where it vigilantly monitors the feeder. When other birds attempt to feed, the monitor quickly tries to intercept and force them away from the stock of sweet food. But, while the monitor engages in dogfights with one bird, another often swoops in and takes its fill.
The feeder is a common-access resource, but not just for hummingbirds. Bees are attracted to it as well, and oddly enough, bees are able to drive off the larger hummingbirds. So even if the dominant bird is able to deflect competition from other members of its species, this is not enough to protect the nectar, and the defense itself is costly in energy burned. The feeder contents are never secure.
Hummingbirds have no way to stake a claim to the feeder. So far as we can tell, hummingbird communities have no constitution that reflects socially evolved rules for establishing a social order. Most likely, a long process of adaption and selection has generated hummingbirds capable of living in a world where nourishment is a common-access resource, a commons. The genes of dominant males and capable females perpetuate a species that can exist in a world without property rights. Hummingbirds live a life of flight, engaging in a constant search for nourishment to feed their high-energy lives and, at times, fighting for temporary control over valuable resources.
People are like hummingbirds in their attempts to use environmental resources. But unlike hummingbirds, people are able to build institutions that take the edge off the frantic commons behavior. They have unwritten and written rules and property rights that help to establish social order. Even for people, all environmental problems, indeed all problems of resource use, begin with a commons and end with institutions that affect environmental use. We rarely find any accumulation of wealth among people who do not show mutual respect for private property rights.
Two Approaches to the Commons Problem
I place the social institutions developed by people for managing environmental resources into two categories. I refer to one as a process approach and the other, a systems approach. Process relies more on evolved legal constraints, accepted by the community, that establish binding rules that affect their behavior. The constraints are like the rules to be followed in baseball games. These rules apply when games are played after the rules are formed; hence, the postconstitutional period. The rules may be formal, written on parchment, or informal habits of the heart. In any case, the rules should be easily understood and applied but not easily changed.
The term process gets its name from the market process that continues after the rules are in place. As the name implies, the market process operates at the scale of markets where buyers and sellers engage in mutually beneficial transactions. The process itself forms functional property rights, contracts; it then relies on firm rules of law derived from individuals and accepted by the community. The common-sense rules protect individual rights, which evolve with the rules. That which is owned legitimately by a person or family is protected by the community. Payment or recompense is required when these rights are violated or damaged. With rights secure in law, freedom to bargain and contract inevitably yields market transactions where prices and costs provide information-filled signals that allocate effort and resources.
The market process yields a spontaneous order that is based on agreement between contracting or cooperating parties and is supported by evolved customs, traditions, social norms, and rules of law. But the spontaneous order cannot emerge unless property rights are defined, enforced, and are subject to voluntary exchange, which means that agreements will be enforced. Once property rights are defined and secure, individuals have understandable incentives to devise lower-cost approaches for managing resources. In truth, this is the only logical choice if progress is to be made. When information is scarce and valuable, some individuals will specialize in providing information and other services that reduce the cost of transacting in the marketplace. Constitutional constraints that prevent interference with and support of contracting and property rights provide market process bedrock.
The Systems Approach
In contrast to process, the systems approach is centralized and relies on dictators or elected politicians to write statutes and rules for managing natural and environmental resources. The presence of limited specialized knowledge is often offered as justification for taking a centralized systems approach. The scale of the decision-making unit tends to be much larger than for the process approach. Statute writers are seldom close to the problem being addressed, and the zone of control generally has little to do with the ecological limits of the problem to be solved. Constitutional constraints that favor markets, contracts, and property rights can be relaxed by statute. The subtle linkages that connect individual action to outcomes can be severed. Whereas the process approach depends on cooperation, markets, and contracting in a common-law setting, the systems approach concentrates information and then relies on politicians to write statutes that are applied to one and all by political agents. Voting, politics, statutes, and regulations are dominant themes found in the systems approach. Markets, property rights, and the rule of law are dominant characteristics for the process approach.
The systems approach gets its name from a much-repeated quotation taken from Adam Smith's Theory of Moral Sentiments, published in 1759. Speaking of the man of system, Smith says:
The Constitutional Fence
The two approaches process and systems reflect two sides of the constitutional fence that establishes two decision-making zones, one private, the other public. Representative government and majoritarian rule are found on the public side of the fence where duties of government are performed. In an idealized sense, markets and private action are on the other side. However, there are no ironclad rules that determine where topics or problems will settle when controversies arise. Will the issue be settled in the marketplace or in the halls of the legislature? If the issue is pulled to the public side of the fence, previously settled property rights can be disrupted, and incentives for individuals to protect environmental assets can be blunted. For example, decisions regarding many aspects of land use are made by private parties who are close to the resources being traded and managed. Markets, long-established property rights, and contracts affect outcomes. But many features of land use are regulated by more remote governments that write statutes and regulations affecting the use of land. In short, we have a blending of systems and process in the management of land and other resources.
Prior to the 1970s, management of environmental resources had evolved primarily through markets, taking a process approach. There were few national statutes and hardly any federal regulations affecting the use of the environment. Environmental use was controlled by a mixture of common law rules, city and county ordinances, and state statutes. The blending of systems and process across diverse regions created an environmental protection laboratory. Mobility across regions made it possible for people to vote with their feet. Competition that could arise from differences that happen to exist across groups and communities introduced a realism to law and custom that tended to reflect preferences and costs.
Long before the terminology of environmental degradation evolved and the regulatory machinery existed to declare what constitutes illegal pollution, people knew that when their property was invaded by unwanted pollution that it was offensive, sometimes dangerous, and destructive of property value. The common law rule governing water pollution was elegantly simple; its essence is found in actions for trespass and nuisance. People downstream held environmental rights to reasonable levels of water quality in the stream that passed their property. I note that the common law rightholders did not own the water; they held rights to the quality of the water. Any upstream discharger that reduced the level of water quality violated the rights and could be sued. The remedy was simple and severe. Stop polluting and pay for the damages. There were no government issued permits that allowed a discharger to degrade the rights of other people. While evidence of harm had to be shown for damages to be assessed, the basic notions were commonsensical.
A New York high court case illustrates how common law worked and how environmental rights could protect the water quality rights of one citizen against large business interests. A new pulp mill polluted a creek. A downstream farmer, Whalen, sued the mill for making the water that passed by his land unfit for agricultural use. His cow got sick. He had to obtain another water source for his crops and animals. He asked for $312 in damages. The mill, which cost more than one million dollars, employed hundreds of people. The trial court awarded damages of $312 and granted an injunction, ordering the mill to end harmful pollution within one year or shut down. The case was appealed. The appellate division overturned the injunction and reduced the damages to $100. The court noted that the mill was an important economic asset to the area. It cost more than $1 million to build and employed more than 500 people, which was worth far more than the water was to the plaintiff. That decision was appealed. The Court of Appeals (New York's highest court) reinstated the decision of the trial court:
With all its practical virtues, common law environmentalism faces some important criticisms that need to be considered. The first, and most frequently mentioned one, has to do with the notion of a "race to the bottom," a criticism that is leveled at the entire pre-1970s approach to environmental protection. The charge goes like this: People in some locations who wish to set high environmental standards face competition from people elsewhere who want lower standards. Some are willing to trade off the environment for improved economic opportunity and income. The result? A race to the bottom, where the lowest common denominator would become the norm.
There is some validity to the charge. Clearly, some people prefer jobs and income to cleaner air and water, particularly so in the 1960s and 1970s. After all, some U.S. regions during that period had hardly scratched the economic development surface, while others had already achieved high incomes, partly as a result of industrial growth and pollution. There are two things to consider here. First, if some people want less environmental quality and their choice imposes on cost on others who prefer more, then, we should allow freedom and the rule of law to dictate the outcome. A people dedicated to liberty would do no less. Second, significant and rigorous research on the relationship between income growth and measured environmental quality tells us that rising incomes are the best and most reliable remedy for environmental degradation. If people in the poorer regions go for industry and jobs, they will experience income growth. Higher income leads to a demand for more environmental quality. The problem tends to be self-correcting.
When we rely on politics to control market outcomes, lobbyists and favor seekers home in on congress. It is much less costly for a trade association or environmental organization to sway a few politicians in Washington than to persuade 50 state governments or hundreds of local governments to do it their way.
Theories of regulation help us to predict what happens. Politicians seeking to serve to the public interest must obtain information from those they seek to regulate or serve. Environmentalists provide volumes of studies and testimony. Industry does the same. The vast majority of ordinary citizens are simply not there. They are rationally ignorant about the technical details of what is going on. Theory tells us that smaller, better organized groups can obtain valuable political prizes and spread the cost across larger unorganized groups. But for this to happen effectively, those who hope to have wealth pushed their way by politicians must use some high-sounding language in describing their goals. They take the moral high ground. Bootleggers and Baptists enter the picture.
Recall the old bootlegger and Baptist story. Bootleggers are people who illegally sell alcoholic beverages. They flourish when the legal outlets are closed. Baptists are people who seek to limit the consumption of alcoholic beverages. They want the liquor stores to be closed on Sunday or to limit the trade to state-operated and licensed outlets. Guess what? The bootleggers like Sunday closing laws too. They get the market to themselves. The tighter the restrictions on legal sales, the better the market for the bootleggers. Bootleggers and Baptists want the same thing--tight regulation on the sale of alcoholic beverages. And the bootleggers can count on the Baptists when it comes to a political showdown.
How does this relate to environmental regulation? Our basic air and water pollution statutes impose uniform, nationwide, stricter technology-based standards on new plants and new sources. What does this accomplish for the bootleggers? Entry by new competition is limited. The national standards cartelize national industries. Prices rise and monopoly profits are earned. And what about the Baptists? They support command-and-control; they favor tighter standards on new sources; and they demand more rules and help to enforce them. Could this be accomplished by protection of environmental rights in common law courts? No way. The common law looks at outcomes, not to regulations based on inputs.
So we have regulations that require electric utilities to install scrubbers to remove sulfur from coal, even when they use low sulfur coal. We have dioxin regulations addressing the chlorine used in paper making even though the industry produces less than one percent of the dioxin. We have toxic release inventory requirements for all chemical plants, even though the controls are not based on toxicity and even though industry produces less than 17 percent of the emissions controlled. We see eco-labels required for consumer products across many European and Asian countries and observe that it is practically impossible for imported products to be certified. We have limited the entry of new insecticides that are less toxic and less damaging than the older ones still being marketed.
We have accelerated the use of meat inspectors to protect the nation's food supply even though techniques for irradiation, which require fewer inspectors and which are common across Europe, and which are more effective in destroying pathogens, are suppressed. We have limited the use of cement kilns for burning hazardous waste because the people in the waste treatment business do not want competition. We have built a high cost, technology-based, pollution control enterprise that focuses on inputs while disregarding environmental outcomes. Indeed, we have not built an extensive national monitoring system that can tell us whether or not we making meaningful progress in our efforts to improve environmental quality.
Even the EPA agrees with the implications of these stories. In a widely distributed 1987 self study, the EPA examined its wide-ranging regulatory activities, the budget allocated by Congress to each of them, and then ranked the relative riskiness of 31 problem areas addressed by the agency. Each of the 31 areas was evaluated for four types of risk: Cancer risk, non-cancer health risks, ecological effects, and welfare effects. In the study, 75 EPA staff members sought to determine how well the agency's efforts to reduce risk matched the riskiness of various problem areas. The report concluded that "the rankings of risk...do not correspond closely with the EPA's statutory authorities" and "the rankings of risk do not correspond well with the EPA's current program priorities."
The long list of High Risk/Low Effort activities provided in the report included indoor radon, indoor air pollution, non-point source pollution, and the accidental release of toxic materials. By contrast, the report listed Superfund, municipal non-hazardous waste site cleanup, and cradle-to-grave regulation of toxic chemicals as high budget items that deal with low risks. The report concluded that the EPA is hamstrung by politics.
Hummingbird economies, property rights, common law, bootleggers and Baptists. What can we make of all this? Is there a better way?
I believe firmly that there is a better way and that it is high time we started taking the environment seriously. The smokestack economy of the past is gone, but we still have smokestack regulations. A new information-based economy has emerged, one that allows ordinary people in their own homes to obtain data on obscure topics from around the world. Yet we still attempt to centralize information in Washington where uniform solutions are devised for diverse and distinctly different problems. We have a high income, well-informed society that is racing to the top, not the bottom. We are engaged in a globally competitive economy but limited by thousands of rules that constrain the creativity of America's entrepreneurs, limit the introduction of improved technologies, and blunt our abilities to foresee and forestall.
We will not destroy the earth, but we can surely do a better job of protecting its biological envelope while maintaining liberty and the pursuit of happiness.