The real threat to our environment

While I’m not very fond of the term, it occurs to me, that the concept of “social capital” can be usefully used when discussing the economics of the environment. 

One frequently sees phrases like “harm the environment,” “good for the planet,” etc. especially now after the US rejection of the Paris accords. These utterances betray a fundamental misunderstanding about the nature of productive resources, what we often call capital-goods. In a brilliant, but underappreciated article, Hayek considers the question of “The Maintenance of Capital” (1936). He asks the common-sense question, what does it mean to maintain capital intact? How should an entrepreneur act in order to conserve his capital? He points out that the objective is not to maintain capital in any physical sense. It is not a *physical quantity* of any capital item whose maintenance is the objective of the exercise. Rather it is the *value* of his capital that he wants to keep intact. This means arranging his productive resources in such a way that they remain capable of yielding the same (desired) value of revenue in the future – behaving in such a way as to ensure that the current level of revenue is sustainable. To do this he will probably have to devote a part of his current revenue to the purpose of making good any decrease in the *value* of the combination of production resources that has occurred in order to produce that revenue. This is known commonly as depreciation. Anything put aside in excess of this is intended to produce an increase in revenue available in the future and can be thought of as saving or investment.

Note that maintaining capital in this sense may have little to do with the physical deterioration of productive resources. Mostly, in our modern world, it has to do with economic obsolescence – the decrease in the value of a production-good because of a change in technology that makes it less valuable than some new, better substitute.

The same distinctions between depreciation and investment and physical deterioration and obsolescence apply when considering the environment. Physical quantities of various types of environmental resources should not be the ultimate objective in preserving the environment. When we speak of conserving resources we should not think ultimately in terms of the physical quantities of those resources – like oil, or coal. Rather, it is the capacity of resources in general to produce outcomes that make our lives better, that is rightly thought of as the objective of the conservation exercise. The value of any resource in the environment or in a business results from and only from its usefulness in producing valuable goods and services for human beings.

Understood in that way, there is absolutely no danger right now in the industrialized countries of the world of permanently “damaging the environment.” The capacity of our environment to yield valuable goods and services that improve the lives of human beings has never been greater for now and for the foreseeable future. The resources that exist on the planet, the material items, may be marginally less in one form or another over time as we use them, but, in value terms, because of our technological abilities to productively use them, they have never been in greater abundance.

On the other hand, government policies that discourage private saving at the expense of public spending *do* inhibit our capacity to sustain our standard of living, our capacity to produce valuable goods and services from our productive resources, because to productively use those resources, entrepreneurs need financial capital that if diverted by government spending will not be available to them and they will not be able to profitably organize and combine those resources to produce what we humans need and want to sustain our lives. That is the real threat to our “environment”.

The Third Way

Many, if not most, people reading this will already know everything I am going to say. I am writing it, however, for those, however many, who have never heard it. They constitute the majority among the population at large and, more significantly, the majority among the population who think at all about political affairs. I am frustrated by how often I encounter these immovable presuppositions, so I am offering this in a modest effort to change some, maybe just a few, minds.

What has become the conventional wisdom, the common mode of thinking, imagines a political spectrum with the liberals on the one end (the left) and the conservatives on the other (the right). Anyone on either end is usually labeled an extremist, which means you don’t have to listen to them. This is true for both extremes, but it is especially true for the right, hence such terms as “hard right.” As a general rule the left end of the spectrum is more urbane, sophisticated, eloquent and educated. The right wing is often shrill, crass, repetitive, uninformed and transparently stupid. Like all generalizations these are not true characterizations of everyone who fits the label. Just impressions. The people somewhere in the middle to the slight right or left of the center are regarded (regard themselves) as the reasonable and normal majority. They vilify and demonize the extreme right and patronizingly dismiss the extreme left (who are to be admired for their idealism but discounted for their lack of realism). Perhaps you recognize this story.

This traditional dimension from liberal to conservative that I just described is deficient. It neglects to break down the liberal or conservative mindsets along two relevant sub-dimensions, social affairs and fiscal affairs. The following pictures will help illustrate.

Figure 1 below illustrates the traditional political spectrum.

Figure 1 - The Traditional Spectrum – Social and Fiscal
Left-wing liberal	Right wing conservative

Some clear issues divide the traditional left and right on the question of limiting or using the power of the government, the state. For example, the left believes in free speech, is pro-choice, supports  recognizing gay marriage and liberalizing immigration and perhaps decriminalizing drugs. The right vigorously opposes these advocating state power to restrict these choices. But there are other issues that divide them on the basis of whose state-sponsored agenda should be implemented. On the left we have anyone who wants to use the state to achieve a “liberal” social agenda (income redistribution, entitlement programs, socialized health-care, consumer regulation). On the right we have anyone who opposes these programs in the name of fiscal prudence, and maybe some other reasons, but who believes in using the state to achieve other agenda items like a strong defense, wholesome family values, a prominent role for religion and so on. Where do we put someone who opposes both of these agendas on the basis that they involve unwarranted, dangerous and inefficient uses of the state? There is no place for them in this spectrum. 

Figure 1 is a one dimensional spectrum. it combines fiscal and social issues. So it mixes the issues.  In Figure 2 we introduce a distinction between fiscal and social issues

Figure 2 - The Third Way – breaking it down
	Fiscal
Social		Liberal	Conservative
	Conservative	( Spindrift for socially conservative issues?)	Right wing conservative
	Liberal	Left-wing liberal	Libertarian – Classical Liberal

The traditional spectrum portrayed in Figure 1 now lies across the diagonal of Figure 2 from bottom left (left-wing liberal) to top right (right-wing conservative). The most significant additional information is provided by the third alternative to these two, namely the Libertarian or Classical Liberal in the bottom right cell. This characterizes my own perspective. It puzzles people. When I talk to traditional left-wing liberals they want to put me in the top right and are, therefore, puzzled by my support for gay marriage, decriminalization of drugs and liberalization of immigration. When I talk to right-wing conservatives they want to put me in the bottom left and are therefore puzzled by my support for limiting government spending, deregulation of business, a limited military and freedom of religion. They are confused because they are thinking in terms of a constraining spectrum.

But once understood, the expanded framework is very simple. It is based on the key question of the appropriate role of power, hence of the state. In fact "liberal" as commonly used is a distortion of its original meaning. Originally “liberal” meant someone who believed in individual liberty and supported policies to guarantee it especially limiting government power. It retains much of that meaning in European political discourse. I am not sure what “conservative” means in this context, but the other end of the spectrum is anyone who supports using the state for their social agenda whatever it is, so we can them the a “statist.” So if we were to re-collapse Figure 2 into a one dimensional spectrum we would get the picture depicted in Figure 3

Figure 3 – A better conceptualization
Classical Liberal	Statist

This is how I think of it. The statists are dangerous because they either support the use of state power for their agendas and don’t care about freedom (like fascists, Nazis, Soviets, etc.) or else they are naïve in thinking they can use the state for noble ends and still preserve individual freedom (like democratic socialists, some anti-poverty activists, most environmentalists, etc.). They tend to underestimate the power for good of the free market and overestimate the power for good of the state. Much of what I and like-minded friends and colleagues are trying to do is to shift the debate to this spectrum.

Somewhere over the rainbow!

I am guest-blogging on Organizations and Markets.

Here is my latest post:

I am envious. My brother in law and my nephew are in the Serengeti National Park in Tanzania. He is sending short reports via his Blackberry. His descriptions are graphic — he is awe-stricken. Sounds incredible, beyond imagination — to those of us veteran Africans used to having to search hard for game on our game park safaris. In the Serengeti there is game in exaggerated profusion. Lions, leopards, and cheetah virtually next to each other. Huge migrations of herds, hundreds of thousands strong. A trip for a lifetime. I should live so long.

It seems clear that this wonder of nature (a giant crater-bubble full of wild life) would not exist in the absence of the revenue from international tourism. Though government managed, it is subject to vigorous competition from other game parks in that part of Africa. The area is the traditional homeland of the legendary Masai tribe, who have a cattle-based economy. Population growth, technological change, and the pace of modernity threatened to destroy their world. Now they seem to be flourishing. The Masai have turned out to be successful entrepreneurs! I wonder if this is an instance of Ostrom’s successful local initiatives.

More generally, the preservation of wild-life in Africa has turned on the successful management of a plethora of wild-life game parks (many of them quite small relatively speaking), some having the status of super luxury hotels. There is an irony in there somewhere. (I wonder what it is like to have to manage a wild-life park as a business firm).

Of course most of the environmentalists never tell you about the preservation successes of market competition.