Once upon a time in the West

Khyaati Acharya
The National Business Review
27 November, 2015

Butch Cassidy, the Sundance Kid and their gun-slinging, bank-robbing outlaws once ruled the lawless western frontier. With only rudimentary government to manage civil society, life in the Wild West was nasty and brutish. At least, according to Hollywood.

Despite the absence of a formal state, cooperation and the friendly exchange of property emerged.

During the mid-1800s, the great open plains of Montana were spared no mercy from nature or man. Predators and disease ravaged the landscape; so, too, did cattle rustlers and nomadic Native American tribes.

But the Montana plains were nobody’s land and rustlers were herding cattle to graze there. Unclear ownership rights meant the overgrazing of Montana’s lush grasslands was a major problem. Cattlemen congregated from across the state and formed the Montana Stockgrowers Association in 1885 to bring some order to the chaos. Each cattle rancher was allocated specific blocks of grazing land.

Cattle were also branded, allowing easy identification of who owned which beast. Ranchers could then trade or sell their grazing rights to other ranchers, enabling a far more efficient use of land and much more effective settling of disputes. Better yet, ranchers now had an incentive to care for their blocks of land, prevent over-grazing and manage their own cattle.

Contrary to Hollywood’s analogies of the Wild West, property rights were well defined, respected and protected; civil society did not descend into chaos.

These same rights are being promoted by US economist Terry Anderson. Montana-born and bred, Dr Anderson relayed the reality of life on the frontier at an event hosted by the Law and Economic Association of New Zealand (LEANZ) in Wellington last week.

He used the example of 19th century Western America to illustrate how private property rights are essential for more effective environmental sustainability.

A senior fellow at the Hoover Institution, Stanford University, and executive director of PERC (Property and Environment Research Centre), Dr Anderson is an advocate of free market environmentalism and of private property rights.

Certainly, protecting and preserving the natural environment is an increasingly critical priority on domestic and international agendas. Competition for scarce natural resources, combined with an increasing demand for environmental amenities, require pioneering solutions to the care and management of natural endowments.

Finding ways to support free enterprise and free trade, expand economies and reduce poverty while mitigating and minimising poor environmental outcomes are a continuing challenge.


Property rights first

In attempts to try to improve environmental outcomes, Dr Anderson argues the low-hanging fruit has been picked. Too often, this is done through centrally-mandated regulations, levied only when a situation becomes obviously dismal.

But top-down command-and-control regulations are rarely the best solution. An ambulance at the bottom should never be preferable to a fence at the top of the cliff.

Dr Anderson reasons that establishing private property rights, and letting the markets determine how and when natural resources are used, are often more conducive to better environmental outcomes.

Near the bottom of the globe and not often the subject of Hollywood blockbusters, New Zealand may seem a far cry from the Wild West. But New Zealand still has a need to sustainably manage and protect natural resources.

Fortunately, property rights here are strong. As Dr Anderson says, “[They] are well defined, well quantified and sanctified … New Zealand is head and shoulders above the US in that regard.”

To illustrate, Dr Anderson describes the establishment of a quota management system in the Fisheries Amendment Act 1986, in which he was heavily involved.

The domestic fishing industry generates around $4 billion annually and is a major part of the economy. It is by no means a perfect system. But well-defined quotas for more than 90 marine species help manage the precious ecosystem. Preventing excessive commercial exploitation is an essential part of the industry’s future.

Many international waters, by comparison, are much more like Montana’s open plains, before the ranchers figured out a viable solution. With no individual or organisation tasked with caring for the marine environment, there is no incentive to fish sustainably. A lack of clear ownership creates a common pool problem whereby natural endowments are essentially a free-for-all.


Not without costs

Assigning private property rights recognises that individuals and organisations have much more in-depth knowledge about how best to care for environmental endowments. This is crucial for strengthening many industries, be it marine, forestry or air.

Contrary to the belief that markets are the cause of catastrophic environmental degradation, markets can and do promote environmental sustainability. Private property rights helped conserve the grasslands of Montana and they help conserve the marine ecosystem in New Zealand.

Free market environmentalism champions the importance of well-specified property rights to natural and environmental resources. In his book, Free Market Environmentalism, co-written with Donald Leal, Dr Anderson states that whoever holds those rights is a minor concern.

What does matter is that, if users of a resource impose a cost on property owners as a result of poor decisions, then they suffer penalties commensurate with the damage done.

“If private owners can sell their rights to use resources, the owners must not only consider their own values, they must also consider what others are willing to pay,” he states.

Placing natural resources in a market setting confers the disciplines of private ownership on the environmental amenities. And though most natural resources are scarce, scarcity leads to competition that often induces constructive action designed to help mitigate that scarcity.

Property rights provide resource owners with the means and incentive to protect and conserve a resource. Environmental markets with well-defined and defendable property rights for resources allow voluntary trade to occur. This is often much more conducive to mutually beneficial exchange. This is far preferable than costly law suits to resolve environmental disputes.

Property rights also create incentives to protect the future value of a resource. This is because the price reflects the future benefits the owner expects to receive.

Political environmentalism is often more concerned with using negative incentives to improve environmental outcomes. This means using taxes and regulation to control the environment. But free market environmentalism emphasises the positive incentives generated by prices, profits and entrepreneurship.

Of course, establishing and maintaining private property rights is not without a cost. While they benefit both the individual and society, defining and defending property rights, especially for natural resources, can be expensive.

Assigning rights is not always easy. But as the value of environmental endowments increases, enabling cooperation rather than conflict over scarce resources becomes more pressing. Working toward complete and clear private property rights is a viable solution.

If the Wild West could do it – and without a formal government – so can the rest of the world.

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