Free Market Environmentalism

Terry Anderson | President, PERC

I grew up in Bridger, Montana, a little town south of Billings, where my passion was hunting, fishing, hiking, and skiing up at Red Lodge Mountain at the time. I used to spend a good deal around Cooke City, when it wasn’t wilderness area, with my dad in an old Willy’s jeep, driving in to the lakes to fish when the snow would melt off in the early summer.

I think it was those experiences that gave me my love of the environment and love of what all of who live in Montana care so much about: Big Sky Country. I went off to the University of Montana thinking I would become a forester and majored in forestry. I imagined walking around the woods every day. It wasn’t too long into that career when I realized that if I was going to be a forester, I was going to be a bureaucrat working for the U.S. Forest Service. And I don’t think that was quite what I had envisioned as my role in life. Maybe that goes back to growing up in a small town like Bridger. Maybe that’s why I’m a bit of libertarian. Everybody knew your business, and you didn’t think they should.

So I wasn’t cut out to be a bureaucratic forester. Somewhere in that process I discovered economics and decided that was what I wanted to do. I changed majors a couple of times and decided that I would continue on and get a PhD in economics.

I left the University of Montana for the University of Washington, which at the time was kind of a farm club of the University of Chicago. The University of Chicago is where Milton Friedman, George Stigler, and a couple of Nobel Prize winners were very instrumental in promoting markets, free markets, as an alternative to more government.

At the University of Washington we were taught that markets worked. Markets worked to produced food. They worked to produce clothing and housing and should be used more for medical care. But we were always given one example where markets failed, and that was for the environment. I never really thought about it while taking my courses. Maybe it’s because you gotta’ take the courses and get through. But I never really thought why, why not markets for the environment?

And it became very clear as I took those courses, that if you were going to be an economist you had to understand one important lesson, and it is captured in two words: incentives matter. Those two words have really guided my thinking ever since.

When we started Property and Environment Research Center (PERC) we were interested in exploring just why markets fail for the environment and how we could make them work. I suppose it’s fair to say, back to my bureaucratic notions, that when we started we were bureaucrat bashing. We said, “Well, if markets aren’t going to solve environmental problems, can bureaucrats, can the government, can politics?”

A good deal of our early research focused on this. In fact the first book published out of PERC, by John Baden and Richard Stroup, had the title Bureaucracy vs. Environment. We examined how subsidies to dams, subsidies for hurricane insurance on barrier islands in the gulf coast, and how below-cost timber sales were all leading to quite the opposite of environmental quality. In fact they were leading to quite a lot of destruction of the environment.

That was pretty easy, to bash bureaucrats. Anybody can do that. The next challenge, with incentives matter in mind, was, if it’s not going to be the government, if government is not doing it right, can we make government work better? And not just can we make it do better, but can we harness market forces, can we find ways to make the markets bring us environmental quality?

This ultimately led to the publication of a book that I co-authored with Donald Leal at PERC entitled, Free Market Environmentalism. Free market environmentalism is quite simply harnessing market forces to improve environmental quality. This means relying more on individual decision making, on private property rights, and in people engaging in trade.

It might be useful to give an example of this, and the area that I’ve done most of my research in is water markets. There is no better case, really, than how government has made a mess of things than in water markets. Governments make water cheaper than dirt. When it’s cheaper than dirt we treat it that way. We don’t worry about leaky faucets. And we don’t worry about conserving water because the government provides it at below cost from citizens to farmers to industries.

And that just has to change, and markets can help do that. Another way the government has really added to environmental destruction with water can be seen with all the dams in the Pacific Northwest where salmon are in danger because no one thought about whether they could jump over big dams or get back through on their way back to the ocean. We’re now paying the price for that. I really believe that markets are a way of at least reducing some of these adverse effects.

Here in Montana we have pretty clear property rights to water. They go back to our frontier days. And those property rights to water are a key to improving water use efficiency. Farmers often trade water between one another, moving water out of one field where it’s producing wheat into another where it might be producing sugar beets.

It is also important to recognize that environmentalists, I think, see the potential for markets. If you’ve been around Montana for a while you can’t help but notice that there is conflict over water: whether water should be diverted for agricultural uses or left in stream for people who like to fish, such as myself, people who like to kayak, or raft, or just to be left where it is.

There has been a tremendous increase in the use of markets to increase stream flows by getting farmers to retire diversion rights and leave it in stream. That’s a revolutionary change, and one that I think Montana can be proud being a part of. We changed our laws in Montana in the 1980s to allow marketing for in stream flows. And when we did, it sort of was a signal to the environmental community that this was an alternative to just fighting in the courts, to fighting battles with people over whether they could convert water for other uses.

In a way, free market environmentalism has come a long way since I co-authored that book in 1991. In fact a reviewer of that book said that free market environmentalism was an oxymoron, and that my co-author and I were the moron part, suggesting that people couldn’t imagine that markets and the environment should go together. But today people from all kinds of environmental groups are using markets. Everyone knows about The Nature Conservancy, a great organization. Here in Montana we have the Montana Land Trust, just a perfect example of people using private property rights and markets to preserve agriculture and our agricultural heritage.

That concept though, to a lot of Montanans, doesn’t sit very well. The notion that we should have to pay for the environment is almost antithetical to the way people in Montana think. Therein, it is an important part of what I think has to change in the psyche of Montanans. I grew up, as I said, in a little town where I could take my shotgun when I was twelve years old and walk out the front door and in a few hundred yards be hunting. I knew everybody. My dad knew the landowners. I knew them. I knew you didn’t go hunt on old lady Jones’s place or she’d kick you off. I knew that if I hunted the land I had to take care of it. But we’ve seen big changes since the days when I was twelve. And those changes brought a lot of pressures on our resources. Not just pressures to mine, not just pressures to cut trees or to grow crops. But pressures from those of us who compete to get to the Yellowstone Park campground first in July, those of us who compete to get to the best fishing streams or best hunting grounds, those of us who compete for the best camping sites in the wilderness. All these are examples of changes that put pressure on our Big Sky, on our resources that create the amenities that we all know and love.

The bottom line is that we have to come up with ways of dealing with these conflicting uses, these pressures that we’re putting on our environmental amenities. Markets are one way of doing that. So is politics. But I think there is a big difference, and to me, this is the crucial part of how our mentality has to change. Politics is very seldom win-win. It is I win, you lose. If you go back to water for a moment and think, if I can succeed in getting the courts to force you the farmer to not defer water, I get the water and you don’t. And that makes for bad water. It makes a kind of acrimony that I don’t think is what those of us who live in Montana want.

Markets don’t solve every problem, and they won’t take all the acrimony away. But they really provide a way of inducing us to find ways to cooperate. If I want to get you as a farmer or you as a city to conserve more water and I can find ways to pay you for the water you conserve, to leave it in streams, you have a lot more incentives—back to incentives matter—to do so.

So when we think to the future of Montana I think we have to bring markets more into it, not just our treasures, and when you think of markets and how they’ve worked, they’ve worked well for agriculture. We have a very productive agricultural sector, we have a productive timber sector, smaller but productive, and if we can bring those same market forces to bear for our environmental amenities then I think we’ll have a very productive environmental sector.

When I look at why I love Montana, and in fact why the people I know, grew up with, and live with now love Montana, it’s because of the beautiful Big Sky we have. They love Montana because of the wonderful people who enjoy that Big Sky. But all of us love our liberty and freedom. And the question is: how can we manage to maintain the productive part of our lives, the amenity production of our lives, and maintain our freedom and liberty? At the heart of that I think is honoring one another’s rights—honoring one another’s rights to land, to water, to wildlife, to one’s social preferences, to one’s religion.

And if we can find ways to do that, and I think that is what markets are about—finding ways to respect one another’s rights and then engage in cooperation with respect to how those rights are used—then we can really have a Montana that we can all be proud of. We will go into the future in a way that will allow us to be the Treasure State and Big Sky Country all at one time.