Internalizing Externalities

And the Big Picture Paradigm Shift

My larger project is to support a paradigm shift from a focus on zero sum political conflict that mostly makes us all worse off to inspire an understanding of how a voluntary, entrepreneurial approach to solving problems can make us all much better off.

Especially during an insane electoral season in the US compounded by an epistemological crisis, it may be helpful to take a longer term perspective on how to instill hope for the future by creating a better world for all.

My 1st principles approach:

1). Promote entrepreneurial governance; better governance solves almost everything else. 2). Promote entrepreneurial education resulting in new culture creation; developing better subcultures addresses most of the rest. 3). Internalize externalities.

Here is a piece introducing entrepreneurial governance as a path to improving the world. The basic idea is to proliferate many startup cities with their own law and governance similar to creating Hong Kongs and Singapores around the world (the fastest growing entities in the past 60 years) similar to Prospera. My wife, Magatte Wade, is leading Prospera Africa in order to accelerate the path to African prosperity. With several hundred Native American tribes in the US, the Catawba tribe is pioneering a similar model with their Catawba Digital Economic Zone.

Many of my pieces here have addressed entrepreneurial education resulting in new cultural creation (see here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, and here). In essence I’m drafting a book here on this topic (and would love support in getting this published as a book).

It is time to briefly sketch out institutional innovations for internalizing externalities. I’m inspired to provide this because for the past few days I’ve gotten into a Twitter convo with Genevieve Guenther, an influential climate alarmist and degrowth advocate, on the issue of environmentally sustainable economic growth. In engaging with these people I’ve finding that they are ENTIRELY unaware of the various categories of institutional innovations to protect the environment. They believe that “endless economic growth” necessarily leads to the destruction of the environment and an unsustainable world for humanity, therefore they want to attack growth itself.

My wife, as an African, is absolutely horrified by this - it amounts to sentencing a billion people to the most horrific poverty and misery (watch this 30 min. award winning documentary on her work, I’ve watched it dozens of times and cry at the end every time). It is shocking to me that well-intentioned people can be both so cruel and so clueless. So see below for an introduction to institutional innovations to protect the environment.

Institutional Innovations to Protect the Environment

Many people are rightly concerned about ongoing damage to the environment. That said, there are many diverse ways to redesign institutions in order to provide better long-term protections for the environment.

1. Property rights solutions: Much environmental destruction is due to the “tragedy of the commons.” For instance, when everyone uses the same aquifer without regard to excess usage, the aquifer is likely to be depleted. Similarly if everyone fishes without regard to the sustainability of fishing, the fisheries are likely to be depleted. Likewise if everyone pollutes without regard to the damage caused to the environment, the air will become polluted.

In each of these cases, one possibility is to eliminate the “tragedy” of the commons by specifying ownership so that there is no longer a commons to be over-used. For instance, if an aquifer is owned by an entity then that entity will not want to deplete it. With respect to fisheries, “Individual Fishing Quotas” (IFQs), also sometimes called “Catch shares” allow fisheries to be divided up into shares such that each share owner has a long-term interest in preserving the value of shares owned. In some fisheries, this kind of a system has largely eliminated overfishing. With respect to pollution, the most famous property rights solution is the sulfur dioxide trading program launched in the 1990s. Polluters were allocated a limited amount of sulfur dioxide they were allowed to emit. A market developed buying and selling these shares with some environmental organizations purchasing the shares and eliminating them from the market. Because polluters found it more cost effective to develop innovations to reduce their sulfur dioxide emissions so they could sell their permits, this approach stimulated an active for-profit industry associated with reducing pollution. The EPA regards it as one of their most successful programs ever.

These are simply examples of a much broader strategy: In order to eliminate a “tragedy of the commons” is it possible to define property rights in a manner that results in private incentives to preserve an environmental asset?

Resources:

A. An introduction to IFQs, “The Ecological Role of IFQs in U.S. Fisheries,”

https://www.perc.org/wp-content/uploads/old/ifq_ecology.pdf

B. “A Political History of Cap and Trade,” how the sulfur dioxide trading markets came into being,

https://www.smithsonianmag.com/science-nature/the-political-history-of-cap-and-trade-34711212/

2. Environmental trusts: Property rights solutions are being designed in remarkable ways to address environmental problems. That said, they typically result in private ownership of the specific environmental asset involved. Sometimes we want to preserve an environmental asset without using it for private use. The social entrepreneur Peter Barnes and Nobel laureate economist Vernon Smith have each proposed a sort of “environmental trust” designed to preserve a particular environmental asset. A legal “trust” is an entity that has a fiduciary obligation to maintain the terms of the trust in perpetuity. The trustees may be sued if they fail to do so. Thus if we wanted to put an aquifer, a forest, a river, or a lake into such a trust, the trust would be legally obligated to preserve it in the state specified in the original document that set up the trust.

An advantage that these trusts have over traditional government control is that the trustees are legally responsible. With traditional government control, politicians, regulators, and bureaucrats are usually not held responsible for environmental degradation. Thus there have been cases in which the U.S. Forest Service has subsidized the destruction of old growth forests. At one point the U.S. Army Corp of Engineers drained more wetlands in one year on one project that was both ineffective and unnecessary than did all private developers combined that year. Thus environment trusts are a unique innovation that reduces the harms associated with strictly private control while also addressing the problems of systemic government failure to protect environmental assets.

Resources:

A. Peter Barnes’ talk for the E.F. Schumacher Society provides his overview of the concept along with some real world examples,

https://centerforneweconomics.org/publications/capitalism-the-commons-and-divine-right/

3. Ostrom solutions: Elinor Ostrom, the first woman to win a Nobel prize in economics, won her prize for her lifelong study of effective ways to voluntarily manage an environmental commons. Her core principles are:

8 Principles for Managing a Commons

1. Define clear group boundaries.

2. Match rules governing use of common goods to local needs and conditions.

3. Ensure that those affected by the rules can participate in modifying the rules.

4. Make sure the rule-making rights of community members are respected by outside authorities.

5. Develop a system, carried out by community members, for monitoring members’ behavior.

6. Use graduated sanctions for rule violators.

7. Provide accessible, low-cost means for dispute resolution.

8. Build responsibility for governing the common resource in nested tiers from the lowest level up to the entire interconnected system.

Resources:

A. A deeper overview of Ostrom’s principles:

http://www.onthecommons.org/magazine/elinor-ostroms-8-principles-managing-commmons#sthash.Q5lwJImz.dpbs

4. Green tax shifts: A general way to reduce environmental harms is to tax activities that harm the environment and reduce taxes on other activities. A carbon tax in exchange for a reduction in payroll taxation is one example — designed correctly, it would reduce carbon emissions while also increasing employment (a payroll tax indirectly reduces the number of jobs available because it taxes both businesses and employees for each job). But there are many other examples: One example that is widely supported among economists across the political spectrum is to tax land values and reduce taxes in other ways. The advantage of taxing land values is that it provides an incentive to create greater urban densities (and thus reduce commute times and urban sprawl).

A. Sightline Institute’s primer on Tax Shifts,

Tax Shift — Sightline Institute

By Alan Thein Durning and Yoram Bauman “Revolution comes in small packages.” — Independent Publisher In the other…

www.sightline.org

B. A wonky introduction to the Land Value Tax, also known as “Georgism,” after Henry George, a famous 19th century American economist,

http://www.foldvary.net/works/policystudy.pdf

5. Price rationing of environmental goods and harms: This is more of a general principle rather than a specific strategy. Most of the foregoing strategies will make it more costly to harm the environment. There is a great deal of evidence that pricing mechanisms are more effective than is moralizing in changing behavior.

For instance, water economist David Zetland has pointed out that most governments around the world under price water (often making it free). While we can exhort each other to “use less water,” the fact is most uses of water are invisible to us. For instance, about 80% of water use in California is agricultural with only about 14% residential. Of the residential, about half is used for landscaping. So even if everyone in California took much shorter showers, at best that might only reduce water usage by perhaps 2%. The point of understanding price rationing is that if one can change the pricing structure of environmental asset, then millions of for profit spreadsheets will instantly change the decision-making structure of for-profit entities. No amount of moral exhortation can do that.

A. Overview of California water,

https://www.kcet.org/commentary/drought-by-the-numbers-where-does-california-water-go

B. David Zetland, Living with Water Scarcity, (way more than you may want to know on the economics of water scarcity and how to address it),

http://www.kysq.org/lwws/LwWS_Free.pdf

The foregoing is all offered in the spirit of helping honest, open-minded people who are concerned about environmental destruction due to capitalism an entry point into the rich solution sets possible. In my conversations at Genevieve Guenther’s twitter and her degrowther following, not one of them had any awareness or knowledge concerning any of the above. They have aggressively anti-growth opinions while being utterly ignorant concerning relevant solutions.

Towards a New Paradigm

I regard the current divisive political conflict in the US as somewhat analogous to the hundred years war in Europe. Catholics and Protestants spent a long time killing each other then gradually learned to become tolerant and got on with life. Ultimately I hope to see a transition in the US (and around the world) from ongoing attempts to fight the other to a live and let live voluntary society (which was the original constitutional plan of the US).

In the meantime, I celebrate and support an intellectual focus on creating a better, more voluntary, world, hopefully joined by ever greater amounts of capital and talent. Many in crypto are already there. But we need far more people focused on, and then investing in (through capital or talent) new opportunities for entrepreneurial governance and/or entrepreneurial cultural creation through new educational institutions.

I’m deeply embedded in both worlds and know many of the players and opportunities. Let me know if you’d like to become more involved in any of this.