Calculation and Environmental Policy: Lessons from Human Action — Timothy D. Terrell

[00:00:00] Speaker 1: I'd like to first thank Brian Lee Briggs for sponsoring this talk. If you get a chance to talk with him at this conference, don't pass it up. He's got wide-ranging interests, and you'll enjoy the conversation. I became interested in environmental policy when I was in graduate school here at Auburn, partly because I wanted to take on some of the more challenging arguments against markets. I had a vague idea going into grad school that private property and markets could resolve some environmental problems. And as I learned more, I began to see some of the problems with the standard approaches to environmental economics. And I tried to deal with some of those honestly, and I started to appreciate more of what the Austrian school had to offer in this area. In writing Human Action, Mises did not devote much space to a direct discussion of environmental policy. But as I went through the book with an eye toward material related to environmental issues, I saw some comments from Mises that show that his advances in economic calculation, his thoughts on conservation, his understanding of the function of private property, and his remarks on interest group politics, are all applicable to today's debates on environmental policy. And so I'd like to explore a few of these. I'll start with an underappreciated passage in chapter 23 where Mises points out the problem of externalities, that proprietors will, quote, "disregard those benefits which do not increase his own satisfaction and those costs which do not burden him." Mises is clear that the ability to dump some of the costs onto others results in calculation problems. Quote, "It is true that where a considerable part of the costs incurred are external costs from the point of view of the acting individuals or firms, the economic calculation established by them is manifestly defective and their results deceptive." End quote. At this point, mainline environmentalists and their allies and most economists will argue that this is the point where government needs to step in and correct the market failure. But they would do well to read the rest of the paragraph in Human Action. Quote, "But this is not the outcome of alleged deficiencies inherent in the system of private ownership of the means of production. It is on the contrary," Mises says, "a consequence of loopholes left in this system. It could be removed by a reform of the laws concerning liability for damages inflicted and by rescinding the institutional barriers preventing the full operation of private ownership." End quote. Because of alleged external costs resulting from the use of fossil fuels, numerous proposals for a federal carbon tax have appeared in the last several years, including the Green New Deal. And even some who claim to be libertarians have proposed them. For example, Gary Johnson, who in 2016 was the Libertarian Party nominee for president, said that he was, quote, "open also to the notion of a carbon tax." End quote. These are known as Pigouvian taxes after the Cambridge economist, Arthur Cecil Pigou. And the corollary of these taxes, emissions taxes, would of course be emissions subsidies to be applied to cases where there are external benefits. That's why we're looking at this point. Statists will argue that since the profit-seeking businesses will not engage in adequate planting of trees or recycling or habitat restoration, it then becomes incumbent upon government to intervene. Well, Mises reminds us that a project is unprofitable when consumers instead prefer the satisfaction they can obtain from other projects. Profits then direct entrepreneurs to pursue the projects that maximize consumer satisfaction. But critics of the profit system then bring out the externality argument. Well, the unprofitable project really is beneficial, they would say, if only the external benefits were taken into account. So according to these critics, Mises says, quote, "As profit-seeking business entirely committed to selfishness declines to embark upon such unprofitable projects, it is the duty of government to fill the gap. Government should either run them as public enterprises or it should subsidize them in order to make them attractive for the private entrepreneur and investor." Think solar panel subsidies or wind power subsidies or you name it. There are all kinds of these kinds of approaches. So, well, that's the criticism of profit-seeking when it comes to these things. But Mises goes on to point out that funds for this project require the sacrifice of profitable projects that people otherwise would have carried out with the funds. Quote, "From the point of view of the consumers, the employment of these means of production for the realization of an unprofitable project is wasteful. It deprives them of satisfactions, which they prefer, to those which the government-sponsored project can furnish them." The government's effort to increase efficiency by subsidizing the externality, positive externality producing good, is thwarted by two related and incontrovertible problems. First, it is impossible to determine whether and to what extent the free market underproduces that good. Second, it is impossible to determine whether any value produced by the government subsidy is greater than the opportunity cost of the government spending. However, many economists and their associated bureaucrats will continue to pretend that the necessary information is within their reach or that the difficulty can be simply dismissed. William Baumel admitted the information problems in a defense of Pigovian taxes. He said, quote, "Despite the validity and principle of the tax subsidy approach, in practice it suffers from serious difficulties, for we do not know how to estimate the magnitude of the social costs, the data needed to implement the Pigovian tax subsidy proposals. For example, a very substantial proportion of the cost of pollution is psychic. And even if we knew how to evaluate the psychic cost of some one individual, we seem to have little hope of dealing with effects so widely diffused through the population." End quote. Later on, he said, "We don't know how to calculate the required taxes and subsidies, and we don't know how to approximate them by trial and error." So, one would think that having rightly observed these problems, Baumel would then give up on at least this sort of government intervention, but Baumel essentially dismissed these problems and proposed acting, quote, "on the basis of a set of minimum standards of acceptability, finding some maximal level of this pollutant that is considered satisfactory." This, of course, sweeps the calculation problem under the rug, which he admitted. Baumel said, "If we permit ourselves to be paralyzed by councils of perfection, we may have still greater cause for regret." In other words, it's better to do something to reduce pollution than to impose no pollution limits whatsoever. Well, this is not the case. I mean, it's quite possible for the something that government does to reduce pollution to be worse than the pollution problem that the policy is supposedly intended to resolve. And following Mises' arguments about the socialist calculation problem, government has no way of calculating the socially optimal level of pollution. And even if it could, it faces constant pressures from interest groups who want to suppress competition by weaponizing regulation. And I'll say more on the matter of interest groups later on. So it is, in fact, quite possible for the cure to be worse than the disease. And there are other cures that don't involve tax, subsidy, or regulatory approaches. I should take several minutes here to address some relevant comments made by the celebrated Ronald Coase. There are some who are free market environmentalists who regard Coase as essentially supportive of markets. And in comparison to command and control environmental regulation, I can see their point. But we should be careful because there are some underlying assumptions in Coase that we shouldn't let slide by unchallenged. In his introduction to his 1990 book, "The Firm, the Market, and the Law," which was a collection of Coase's essays published about a year before his receipt of the Nobel Prize in Economics, Coase wrote that it was a mistake to presume that the existence of an externality required government intervention. He said, quote, "It is easy to show that the mere existence of externalities does not in itself provide any reason for governmental intervention. The fact that governmental intervention also has its costs makes it very likely that most externalities should be allowed to continue if the value of production is to be maximized. This conclusion is strengthened," he said, "if we assume that government is not like Pigou's ideal, but is more like his normal public authority, ignorant, subject to pressure, and corrupt. Whether there is a presumption when we observe an externality that government intervention is desirable depends on the cost conditions in the economy concerned. We can imagine," he says, "cost conditions in which this presumption would be correct and also those in which it would not. It is wrong to claim that economic theory establishes such a presumption. And what we are dealing with is a factual question." Now after reading this, many of us who favor markets over coercive government interference would cheer and say, "Well, I mean, none other than the great Ronald Coase has taken the status down a notch. Anybody who believes that externalities are a shoe-in for some kind of government intervention will be corrected by this, but not so fast because Coase has not dealt adequately with Mises' arguments concerning economic calculation. And in failing to do so, Coase left a hole large enough to drive an electric-powered bus full of COP28 environmental conference attendees through. Coase said the government intervention could be desirable depending on cost conditions in the economy concerned. What are these cost conditions? As Coase said, "We can imagine cost conditions in which this presumption, the presumption that government intervention is desirable," would be correct in those in which it would not. But that's all Coase has, imagining. In the absence of free markets, there's no way to pin down these cost conditions. In particular situations, we can't do this and we can't do anything more than speculate about what the cost of externalities or the cost of transactions or the cost of intervention might be. Coase here is tied to this cost-measurement chimera. His statement that if with governmental intervention the losses also exceed the gains from eliminating the externality, would just leave us with fundamentally indefensible cost-measurement criteria as the only argument against the presumption of intervention. Later on in his Nobel acceptance speech, Coase made the same error. He was discussing his infamous Coase theorem, and that was his word, infamous. He said, "Since standard economic theory assumes transaction costs to be zero, the Coase theorem demonstrates that the Pigovian solutions are unnecessary in these circumstances. Of course, it does not imply when transaction costs are positive that government actions could not produce a better result than relying on negotiations between individuals in the market. Whether this would be so could be discovered not by studying imaginary governments, but what real governments actually do." Now note that Coase believed that some kind of empirical study of governments could determine whether or not government intervention would produce improvements, measured of course by market values on output. The Misesian response is clear. We can't measure these costs in the absence of freely acting individuals revealing their preferences through market transactions. No amount of study of government intervention will reveal to us costs in a way that would allow us to find out whether government action will in fact produce a better result in the market. Many of those who are inclined to recognize the power of markets have suggested tradable pollution permit systems. And these have been in use in the United States since the EPA started its acid rain program and started auctioning off sulfur dioxide permits in 1993. And these have a kind of a superficial appeal to people who are kind of market friendly economists and policy makers because after all the permits do trade in a market. Unfortunately, it's only a quasi market because the supply of permits is dictated by regulators. And they could end the system at any point. They've got control over this system. It is not a free market. And so those systems might have some advantages over command and control regulation, but tradable permits don't solve the problem of calculating costs. They only have this kind of superficial appeal because you've got a fake market of some kind. The problem of calculating costs becomes even more acute when we introduce the passage of time. So these tax and subsidy proposals are intended to prevent damage or maybe create benefits that could theoretically occur in the distant future to people who are not yet born. Environmental regulation today fails because it cannot calculate without the information revealed in market transactions. But we can know even less about the capabilities and priorities of these remote descendants of ours and the costs could extend generations into the future before these possible benefits materialize. The preference of goods today to goods in the future is a basic fact of human existence evidenced in the originary interest that Mises mentioned in human action and which prevails in market economies. Mises defined originary interest as the ratio of the value assigned to want satisfaction in the immediate future and the value assigned to want satisfaction in remoter periods of the future. So while legislation can specify some kind of discount rate that would be intended to be used for certain purposes like assessing the present value of damages incurred over a period of time, the market interest rate is a product of human preferences. As such, Mises says, quote, "there cannot be any question of abolishing interest by any institution's laws and devices of bank manipulation. He who wants to abolish interest will have to induce people to value an apple available in a hundred years no less than a present apple," end quote. And yet it's not uncommon to see suggestions among environmentalists that the market determined rate is too high and that proper accounting for the needs of future generations demands a lower rate. For example, the very influential 2006 study from the British government, Stern Review on the Economics of Climate Change employed a near-zero discount rate, 0.1% per year. The implication for emissions reduction policies such as carbon taxes or emissions taxes is that the tax today on carbon would need to be much higher, preventing any kind of investment in productive capital in the present. William Nordhaus pointed out the absurdity of this. He said, "Suppose that scientists discover a wrinkle in the climate system that will cause damages equal to 0.1% of net consumption starting in 2200 and continuing at that rate forever after. How large a one-time investment would be justified today to remove the wrinkle that starts only after two centuries? Using the methodology of the Stern Review, the answer is that we should pay up to 56% of one year's world consumption today to remove the wrinkle. In other words, it is worth a one-time consumption hit of approximately $30,000 billion today to fix a tiny problem that begins in 2200." When we get into these kind of politically determined discount rates, where governments trying to determine the appropriate interest rate instead of acting individuals in the marketplace, we get all kinds of strange results. For example, the federal government spent $9 billion developing a waste repository for spent nuclear fuel at Yucca Mountain in Nevada. The facility was to have a design assuring safety for 10,000 years into the future. But a controversy arose when a National Academy of Sciences panel determined that in 270,000 years, a single person standing just outside the fence would receive a radiation dosage that was 60 times the allowable dose. The U.S. Court of Appeals agreed 10,000 years is not enough time. And so if we were to apply this discount rate necessary to have 300,000 years of no unallowable emissions outside the facility fence, the discount rate would have to be near zero. It doesn't make any sense at all. This connects to some concerns, too, about natural resources depletion. There are, of course, many examples of worries about exhaustion of this or that resource, and we look back on many of those today and we say, well, these were needless worries. Whale oil, for example, was commonly used for lighting and went from 23 cents per gallon in 1820 to $1.42 per gallon by 1850. And that was increasing demand and also the fact that it was becoming harder to find whales. Then along came John D. Rockefeller and his cheap kerosene. Lighting became cheaper. The whales were saved. I sometimes tell my students that John D. Rockefeller did more to save the whales than Greenpeace ever did. In 1920, the chief geologist of the U.S. Geological Survey reported that only 7 billion barrels of petroleum remained to be recovered with existing techniques. And that at the existing rate of 500 million barrels per year, there were 14 years left of oil to be extracted. And so by 1934, we were going to be out, he said. Well, 1934 arrived and 12 billion barrels had been produced with another 12 billion barrels that had been discovered in proven reserves. Carl Pope, executive director of the Sierra Club, said in 2006 that, quote, "U.S. oil production peaked in 1971 and our proven reserves have declined by 20% since 1990." Worldwide, he said, "Petroleum geologists say that as soon as 2010, we may reach the moment called peak oil when production tops off and begins its inexorable decline." And he was writing this at a, or near a low point in U.S. oil production. By 2010, U.S. oil production was on the rise again and by 2018 had blown through the old 1971 peak. And while proven reserves did decline from 1990 to 2006, just five years after he commented on this in 2011, proven reserves were already higher than they had been in 1934. And they continued to rise until by 2022 they were 75% higher than they had been in 1990. But new worries always arise and invariably the proposed solution from mainline environmentalists is more government intervention to regulate the rate of use of these exhaustible resources. They say this is necessary in order to conserve resources for future use. Well, this is problematic for several reasons. One, which Mises pointed out in Human Action, is that we do not know what resources will in fact be in demand in the future. He wrote, quote, "Many people are alarmed by the reckless use of the deposits of minerals and oil which cannot be replaced. Our contemporaries," they say, "Squander an exhaustible stock without any regard for the coming generations. We are consuming our own birthright and that of the future." Now, these complaints make little sense. We do not know whether later ages will still rely upon the same raw materials on which we depend today. It is true that the exhaustion of the oil deposits and even those of coal is progressing at a quick rate. But it is very likely that in a hundred or five hundred years people will resort to other methods of producing heat and power. Nobody knows whether we, in being less profligate with these deposits, would not deprive ourselves without any advantage to the men of the 21st or the 24th centuries. It is vain to provide the needs of ages, for the needs of ages, the technological abilities of which we cannot even dream." End quote. So he's pointing out, I mean, and goes on in this section to point out some of the contradictions in simultaneously complaining about resource exhaustion and monopolies over natural resources. Well, I mean, since monopolies will tend to reduce production in order to get a higher price, shouldn't those who are really concerned about resource exhaustion support monopolies, or at least cartels, in oil or in other natural resources? And since higher prices of fossil fuels would produce a shift toward alternative sources of energy, shouldn't those same groups support monopolization in cartels? But they don't. I mean, not long after OPEC countries agreed to cut oil production, the Sierra Club director of energy campaigns said, quote, "The actions of global oil and gas producers are once again putting American families at risk of skyrocketing energy prices this winter, thanks to our continued reliance on fossil fuels." She goes on to talk about the whims of greedy drillers and so on. Well, I mean, ultimately what the argument amounted to was if you reduce output of polluting, this polluting natural resource, and you cause higher prices, well that's bad if it's a foreign oil cartel. But if you are trying to increase output to lower prices, well that's bad if you're a domestic producer. So, in the interest of time I'll skip over some of this on Monopoly, in the chapter in the book you'll see some more on this. But ironically it's the state that actually contributes to a lot of these kinds of resource depletion problems. I mean, elected officials have a time horizon that is truncated by the next election. If you're, even if you could somehow imagine that they could solve the calculation problem and discover the optimal rate of resource depletion, they would have little incentive to adhere to that rate with regard to government owned natural resources. After all, if they leave something in the ground in some kind of government owned deposit, then the next person to occupy that office will get the credit when that resource is extracted. So, while a profit seeking firm has an indefinite life and therefore must take into account the present value of a stream of earnings extending off into the indefinite future, the elected official gains little or nothing from a resource that is used by a successor. There's a final problem which I think we should pay attention to in Mises. It was much more developed in some of Mises, in some literature that was developed after Human Action was written. We know that elected officials typically are not seeking the public good, they are working to benefit special interest groups. Mises addresses this problem as well and he addresses some of the deficiencies in property rights law as the result of governments that are kind of vacillating between satisfying different interest groups. Well, I'll leave a lot of that discussion as well for the chapter, but just to conclude, when Human Action was published in 1949, the environmental movement had not achieved the grip on policy making that we see today. Rachel Carson's Silent Spring would be published in 1962, in 1968 we saw Paul Ehrlich's The Population Bomb, which an American journalist calls one of the most spectacularly foolish books ever published. Garrett Hardin's The Tragedy of the Commons would appear also in 1968. The First Earth Day and the establishment of the EPA would occur in 1970. And today, most people have completely bought into mainline environmentalism's message that human freedom is responsible for climate catastrophe, for impending resource exhaustion, overpopulation, worsening pollution and the rest. And handing more power to the state is considered the only viable solution to all of this. As we've seen, government doesn't have the information it would need to calculate what level of pollution or resource use is efficient for an entire society, and government officials don't have the incentives to be particularly interested in efficiency anyway. Had environmentalism built on the insights in human action, on the insights into the power of the market that are in that book, it might have taken a different turn. A commitment to property rights instead of state ownership and state control over natural resources would have generated both better lives for human beings and a reduction of many of the environmental problems that we've seen. Unfortunately, mainline environmentalism has become an avenue for vastly expanding the role of the state or the power of the state, and in terms of environmental quality, it's not clear that the state's coercive efforts have made things better, have made things better instead of worse. So on Human Action's 75th anniversary, I think it's appropriate to remember how important Mises' insights are in dismantling the myths and misconceptions of today's environmental policy. Thank you. [00:29:06] Speaker ?: Thank you.