The Ingenious Gentleman George Monbiot

In case you missed the reference...I'm saying that George Monbiot is Don Quixote.  This guy is really tilting at windmills...The Impossibility of Growth.  The same article was also published by the Guardian... It's simple. If we can't change our economic system, our number's up.

Quixote perceives that the giant problem that we should all attack is "carbon-fuelled expansion"...

On Friday, a few days after scientists announced that the collapse of the West Antarctic ice sheet is now inevitable(4), the Ecuadorean government decided that oil drilling would go ahead in the heart of the Yasuni national park(5). It had made an offer to other governments: if they gave it half the value of the oil in that part of the park, it would leave the stuff in the ground. You could see this as blackmail or you could see it as fair trade. Ecuador is poor, its oil deposits are rich: why, the government argued, should it leave them untouched without compensation when everyone else is drilling down to the inner circle of hell? It asked for $3.6bn and received $13m. The result is that Petroamazonas, a company with a colourful record of destruction and spills(6), will now enter one of the most biodiverse places on the planet, in which a hectare of rainforest is said to contain more species than exist in the entire continent of North America(7).

Of course Quixote is very mistaken.  The real giant problem is the fact that the $13 million that Ecuador received does not come even remotely close to accurately reflecting how much the world values its park.  Monbiot would know this if he had studied public finance.  Despite his glaring ignorance...Monbiot had no problem charging into the field of public finance anyways...which is exactly why he's Don Quixote.  

The world has a huge surplus of Quixotes just like him...which means that there's a massive shortage of classes on public finance.  Let me try and remedy this problem...  

In order to put limited resources to their most valuable uses...it's necessary to correctly determine how much society values the various possible uses.  The park in Ecuador is a perfect example of a limited resource.  Should it be developed...or should it be conserved?  Which use of the land does the world value most?  We already know how much the world values its development...$7.2 billion...so the challenge is to correctly determine how much the world values its conservation.

One way to find out would be to conduct a survey (contingent valuation).  We could go around and ask 7 billion people how much they value the park in Ecuador.  The problem with this technique is that people wouldn't have an incentive to accurately report their valuations.  If payment wasn't required...then they would have an incentive to over report their valuations.  If payment was required...then they would have an incentive to under report their valuations.

Our current system completely side-steps the preference revelation problem.  Citizens are simply coerced into contributing to the collective.  Elected representatives (impersonal shoppers) then determine the value of public goods for us.  The problem with this method is that public representatives can't possibly come even close to accurately gauging the true demand for public goods.  This is because people don't all demand the same things equally.  In other words...values are radically subjective...our diverse and varied preferences aren't all the same intensity.

Wake up!!  No snoozing in class!  This lesson is extremely important.  In order to increase the chances that you'll thoroughly understand this lesson...I'm going to hedge my bets and share other people's words on the topic.  If you don't want to be Don Quixote barking up the wrong tree...then it would behoove you to carefully read these passages.

First up is Cowen and Tabarrok...

Voting and other democratic procedures can help to produce information about the demand for public goods, but these processes are unlikely to work as well at providing the optimal amounts of public goods as do markets at providing the optimal amounts of private goods.  Thus, we have more confidence that the optimal amount of toothpaste is purchased every year ($2.3 billion worth in recent years) than the optimal amount of defense spending ($549 billion) or the optimal amount of asteroid deflection (close to $0).  In some cases, we could get too much of the public good with many people being forced riders and in other cases we could get too little of the public good. - Tyler Cowen, Alex Tabarrok, Modern Principles of Economics  

The supply of a good is considered optimal when it perfectly matches the demand for the good.  In our case...in order for the supply of conservation to be optimal...it has to perfectly match the demand for conservation.  But because governments do not know what the actual demand is for conservation...it's extremely unlikely that the supply of conservation will be even close to optimal.  

Rothbard does a very good job of fleshing out the details...

In the first place, how much of the deficient good should be supplied? What criterion can the State have for deciding the optimal amount and for gauging by how much the market provision of the service falls short? Even if free riders benefit from collective service X, in short, taxing them to pay for producing more will deprive them of unspecified amounts of private goods Y, Z, and so on. We know from their actions that these private consumers wish to continue to purchase private goods Y, Z, and so on, in various amounts. But where is their analogous demonstrated preference for the various collective goods? We know that a tax will deprive the free riders of various amounts of their cherished private goods, but we have no idea how much benefit they will acquire from the increased provision of the collective good; and so we have no warrant whatever for believing that the benefits will be greater than the imposed costs. The presumption should be quite the reverse. And what of those individuals who dislike the collective goods, pacifists who are morally outraged at defensive violence, environmentalists who worry over a dam destroying snail darters, and so on? In short, what of those persons who find other people's good their "bad?" Far from being free riders receiving external benefits, they are yoked to absorbing psychic harm from the supply of these goods. Taxing them to subsidize more defense, for example, will impose a further twofold injury on these hapless persons: once by taxing them, and second by supplying more of a hated service. - Murray Rothbard, The Myth of Neutral Taxation

This passage is especially relevant because Rothbard mentions the specific example of the snail darters.  You can read about the controversy on Wikipedia.  Do you think that the government chose the most valuable course of action?

Here's Rothbard's mentor, Mises, also on the topic of determining the value of conservation...

It can never obtain as a measure for the calculation of those value determining elements which stand outside the domain of exchange transactions. If, for example, a man were to calculate the profitability of erecting a waterworks, he would not be able to include in his calculation the beauty of the waterfall which the scheme might impair, except that he may pay attention to the diminution of tourist traffic or similar changes, which may be valued in terms of money. - Ludwig von Mises, The Nature of Economic Calculation

The problem, which should hopefully be very clear by now, is correctly determining the value of goods which "stand outside the domain of exchange transactions".  The solution is extremely simple...we just need to expand the "domain of exchange transactions"...

The economic approach stresses the fact that any expenditure always has an opportunity cost, i.e. a benefit that is sacrificed because money is used in a particular way.  For example, since biodiversity is threatened by many factors, but chiefly by changes in land use, measures of value denominated in monetary terms can be used to demonstrate the importance of biodiversity conservation relative to alternative uses of land.  In this way, a better balance between 'developmental' needs and conservation can be illustrated.  To date, that balance has tended to favour the conversion of land to industrial, residential and infrastructure use because biodiversity is not seen as having a significant market value.  Economic approaches to valuation can help to identify that potential market value, whilst a further stage in the process of conservation is to 'create markets' where currently none exist. - David Pearce, Dominic Moran, Dan Biller, Handbook of Biodiversity Valuation A Guide for Policy Makers

Currently, conservation is not correctly valued because its value is determined outside the market (consumers aren't free to valuate opportunity costs).  If we want conservation to be correctly valued...then it's imperative that we create a market in the public sector.  People would still have to pay the same amount of taxes...but they could spend their taxes on any country's public goods.  Taxpayers would be free to to choose whether they wanted to spend their own tax dollars on A. fighting the war on drugs or on B. conserving Ecuadorian biodiversity or on C. improving public healthcare or on D. some other public good.

Because no country has this essential information...they are all Quixotes.  Ecuador is charging ahead with the development of a biodiversity rich park despite the fact that the world might have derived far more value from its conservation.  If people don't have accurate information...then it's a given that they will end up wasting limited resources tilting at windmills.  This is exactly what happened to George Monbiot.  Because he's never studied public finance...he's wasting his resources attacking the really wrong target.  The problem definitely isn't "carbon-fuelled expansion"...it's the simple fact that we don't have the information that we need in order to correctly determine whether limited resources should be developed or conserved.

Monbiot has no idea that he himself has information that Ecuador must have in order for it to choose the most valuable course of action.  This essential information is Monbiot's own valuation.  How much of his own tax dollars would Monbiot actually allocate to the conservation of biodiversity in Ecuador?  If we want Ecuador to have this essential information, then we must upgrade our system of government so that Monbiot has the freedom to put his own taxes where his heart is.

With the current system, it's irrelevant how much Monbiot values biodiversity.  That's extremely absurd.  This degree of absurdity should blow your mind.  It should keep you up at night.  Nothing should scare you more.

Think about it...what if we had a system where it would be irrelevant how much Monbiot values food?  Do you think that this system would function properly?  Do you think that the optimal amount of land, labor and other limited resources would be used for the production of food despite the fact that the demand for food was unknown?   Would you predict that the system would result in a great leap forward?

Consider this passage by Krugman...

The immense Soviet efforts to mobilize economic resources were hardly news. Stalinist planners had moved millions of workers from farms to cities, pushed millions of women into the labor force and millions of men into longer hours, pursued massive programs of education, and above all plowed an ever-growing proportion of the country's industrial output back into the construction of new factories. - Paul Krugman, The Myth of Asia's Miracle

Why didn't the Soviet planners realize just how mind-blowingly absurd it was for them to shift massive amounts of resources in a valuation vacuum?  It was because they didn't read Adam Smith...

It is unjust that the whole society should contribute towards an expence of which the benefit is confined to a part of the society. - Adam Smith, Wealth of Nations

Does Monbiot truly benefit from the allocation of additional resources to the conservation of Ecuadorian biodiversity?  It's easy enough to find out.  All we have to do is give him the freedom to choose where his taxes go.  Maybe, when confronted with the alternative uses of his own tax dollars, he will decide that there are bigger fish to fry.  But maybe not.  It's entirely possible that he will be more than happy to put his own taxes where his mouth is.

As my faithful readers (all 11 of them) would know...this really isn't the first time that I've taught this class.  Here's a section from an entry...Visualizing And Evaluating The Public Goodness Threshold...that I posted back in February...

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For example, let's consider the Brazilian EPA's effort to conserve the Amazon rainforest.  Here's what the demand chart might look like if only Brazilians were free to give their taxes to their EPA...

What would happen to the demand chart if American citizens were also given the freedom to give their taxes to the Brazilian EPA?  It stands to reason that the demand would increase...

As each additional country gives its citizens the freedom to give their taxes to the Brazilian EPA, the accuracy of the demand chart increases...

If we look at the disparity in demand...then it's clear that massive amounts of value would be destroyed if we prevented taxpayers from shopping in the public sectors of other countries.  The Brazilian EPA would receive the wrong amount of funding...and as a result, rainforest that should have been conserved would be destroyed instead.

The amount of resources directed to the conservation of the Amazon rainforest should be determined by the amount of value the world derives from the Amazon rainforest.  And the only way we can know how much value the world truly derives from the Amazon rainforest would be to allow taxpayers to spend their taxes on any country's public goods.

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It's really sad to say that my prediction has come true regarding the destruction of rainforest that should have been conserved.  The very unfortunate fact of the matter is that my predictions will continue to come true unless people thoroughly understand why it's essential that we correctly determine the actual demand for public goods.  

For additional entries on the topic...

• A Global Free-trade Agreement for Public Goods
• Block vs Flow