Sunday, May 06, 2007

Free Market Environmentalism

A Nobel Laureate talks about his intellectual journey.

March 2007
Volume 25 | Number 1
From Farm to FME
By Vernon L. Smith


VERNON L. SMITH was awarded the 2002 Nobel Prize in Economics for his pioneering work in experimental economics. Smith is a professor of economics and law at George Mason University, and research scholar at the Interdisciplinary Center for Economic Science.

Growing up on a farm in Kansas provided an invigorating child-hood—learning about crops and animals, befriending pet chickens, and shooting rabbits for dinner with an 1890 vintage lever action 12-gauge Winchester. My early interaction with the “environment,” coupled with the ideas associated with free market environmentalism (FME), which were so eloquently put forth in Terry Anderson and Don Leal’s book, helped shape my thinking about natural resource policy.

Life on the farm provided ample opportunity for lessons in “how things work”—an interest I have carried throughout my life. My family had a direct incentive to tend to our gardens, grain crops, and well pumps if we wanted to eat and drink. I quickly learned that one cannot ignore the important role of incentives in guiding human behavior. Similarly, Anderson and Leal pointed out that the famed conservationist Aldo Leopold learned through first-hand knowledge from working his Sand County farm in Wisconsin that incentives or rewards for private landowners lead to the best environmental outcomes. Thus, “Conservation will ultimately boil down to rewarding the private landowner who conserves the public interest” (Leopold [1934] 1991).

Traditional thinking about environmental issues tends to emphasize incentive problems inherent in markets but ignores them in the context of political processes.

Many economists and policy analysts assume that an efficient allocation of resources will be reached when government correctly accounts for the costs and benefits. Free Market Environmentalism challenged this presumption and provided a more realistic way of thinking about environmental policy—a way that emphasized the important role of incentives, transaction costs, and well-defined property rights to natural resources. These rights, whether held by individuals or a group, create inherent incentives on resource users because the wealth of the property owner is at stake if bad decisions are made.