Entrepreneurship and the theory of free market environmentalism



Free market environmentalism (1) is a new discipline which began to emerge incipiently at the beginning of the last decade and which today, little more than ten years later, has reached a remarkable level of development.(2)

In the final analysis, what has been developed by the theorists of free market environmentalism is a theory of the intimate relations which exist between economics and environmentalism. These relations, moreover, are obvious, above all taking into account that the most modern definition of economic science is the theoretical study of the dynamic processes of interaction which take place between human beings (3), while environmentalism could be defined as “the science which studies the relations of human beings with each other and with their environment.”(4)

It becomes evident, therefore, that the conception of the two disciplines is absolutely parallel, as are the subjects they study, the subject of economics being based on the analysis of the market understood as a decentralized spontaneous order and that of environmentalism on the study and monitoring of ecosystems conceived, like the market, as evolutionary decentralized processes in which the different species undergo spontaneous adaptations and modifications in accordance with a multitude of specific circumstances of time and place which nobody is capable of fully predicting or knowing.(5)

The most significant discovery of the free market environmentalism theorists is that there exist spontaneous processes impelled by the creative force of human entrepreneurship which assist the economic and social development of the human race to efficiently and respectfully coordinate with and adjust to the rest of the species and elements of the natural environment. It has been discovered, in short, that the most important aggressions against the natural environment, the problems of pollution, the threat of the extinction of many species, the deterioration of natural resources and of the environment in general, far from being an inevitable result of economic development, the operation of the market and the spontaneous system of social organization based on free enterprise, appear when the State intervenes systematically, institutionally and coercively and, to a greater or lesser extent, impedes the spontaneous process of coordination and adjustment which arises from the market and from the free practice of entrepreneurship in all the areas in which human beings relate to each other and to other species and natural resources.

Coercion, property rights and the environment.

It should be emphasized that the problems of environmental deterioration constitute, from this point of view, one of the most typical examples of the perverse effects of the systematic practice of institutional coercion or aggression against human action or entrepreneurship.(6) The non-intervened and uncoerced practice of entrepreneurship spontaneously gives rise to the emergence of a series of institutions, understood as established schemes of behaviour which emerge from the entrepreneurial process itself and, at the same time, make it possible.(7) Among these social institutions which, like ecosystems, emerge and develop in an evolutionary, decentralized and adaptive way, perhaps one of the most important, together with language and money, is that which is constituted by private law in general and, specifically, by contracts and property rights. In fact, few human actions would be carried out if the creative result thereof, instead of being appropriated by the actors themselves, were coercively expropriated by a third party (i.e., by someone whose action was not in accordance with the law) or if other persons could be attacked or harmed by such actions, as happens when the cost of opportunity incurred on acting is not duly taken into account. It is, therefore, essential, and this constitutes one of the fundamental bases of the institutional network of the free enterprise system, to establish the necessary property rights, with regard to all those items which may in some sense, under each historical circumstance, become scarce in relation to the attainment of any end. This property rights, firstly, allow the external costs incurred on acting to be internalized (8) and, secondly, guarantee to each entrepreneurial actor the attainment, within the framework of the rules established by property law, of the corresponding ends discovered, created and achieved entrepreneurially.(9)

It is easy to realise, looking at the situation of the natural environment which surrounds us, that it is precisely in the areas where the definition and/or defence of the corresponding property rights and, therefore, the free practice of entrepreneurship subject to the traditional principles of private law, are prevented where the tragic effects of deterioration and expoliation of the environment, so often criticized by nature lovers, occur most virulently. In fact, if we had to give a theoretical definition of deteriorated or threatened natural environment, we would say that it is a combination of the following two types of species or natural resources: in the first place, those resources which were extremely abundant up to know in relative terms but, due to circumstances, are now becoming scarce, to a greater or lesser extent, from the point of view of certain specific actions. They are, for example, the resources which are on the border between what we could call “free goods” and the resources which are scarce in relative terms with regard to the satisfaction of human needs and which, obligatorily, must be allocated in economic terms. The fact is that, inasmuch as the definition of property rights in relation to these “border resources” is prevented, as has occurred frequently with regard to traditionally free resources which have become scarce (as happened, for example, with the prairies of the American West in the 19th century), there is a tragic effect of over-exploitation or deterioration, which Garrett Hardin describes with the now generally-accepted expression of “tragedy of the commons”.(10) The second type of resources in constituted by all those species and resources which are, in fact, already scarce, but to which the State has, for certain reasons, prevented the extension of private contractual law and property rights and, in consequence, they are considered as “public property” from a legal and administrative point of view.

The origin of these two types of resources, which inexorably cause the over?exploitation of the natural environment, may be found either in the granting of a privilege by the State to certain private entities, enabling them to violate the property rights of others with impunity (such is the case of many industrial polluters who are protected from the consequences of their aggression in the interests of an incorrectly understood defence of industrial progress), or in the development of an erroneous doctrine of “public goods” (11) with regard to certain scarce resources, which is used to justify the brake on their spontaneous privatization, blocking the entrepreneurial spirit necessary to use them appropriately and thus making it impossible to discover and introduce the technological innovations necessary to correctly define and defend the corresponding property rights.

Environmentalism and the impossibility of economic calculation under socialism.

In this way the force of entrepreneurship is destroyed and its impetus and creative spirit is perversely diverted. Moreover, it is clear that environmental problems constitute a special case which illustrates the theory of the impossibility of socialist economic calculation to perfection, socialism being defined, as we have seen, as a coercive system which, to a greater or lesser extent, systematically impedes the free practice of entrepreneurship. In fact, the existence of areas reserved as public or communal property prevents, in the first place, the economic calculation necessary to assign resources with full knowledge of the facts.(12) We should understand economic calculation to be any estimate of on the value of different courses of action. Thus, when the free market is prevented from operating and property rights are not assigned, the information necessary to act rationally cannot be created and not even the most radical environmentalists can be sure that the specific measures they advocate do not provoke even greater environmental damage than that which they are intended to avoid. How can we, for example, be certain that the obligatory establishment of SO2 purifiers for factories which use coal will not produce secondary and indirect effects which have a higher environmental cost? It may be the case that the cost of installing the purifiers, in terms of economic and environmental resources, is much higher than that of other alternatives which could be discovered entrepreneurially if entrepreneurship was allowed to experiment in an environment of well-defined and protected property rights (for example, instead of installing purifiers, coal with a lower sulphide content could be used).

In the second place, the extension of the legal concept of public property to natural resources does not only prevent, as we have seen, rational economic calculation, but also perversely diverts the practice of entrepreneurship, as it modifies in general the incentives which stimulate entrepreneurs. It is clear that, if the air is declared public property, the definition of property rights over it is prevented and anyone can pollute it as much as they like. Thus the incentive for all entrepreneurs to pollute it emerges, as those with a more environmentalist conscience who decide to install a purifier will increase their costs and will not be able to compete with others who merely dirty the air, meaning that the former will be expelled from their business. Therefore, the phenomenon of the “tragedy of the commons”, which threatens all the areas in which the practice of entrepreneurship is not allowed, where property rights are not appropriately defined or defended or where the free operation of the market is coercively intervened, is again explained to perfection.

The fact is that, in the case of any area declared to be publicly-owned, each actor internalizes all the profits derived from its use, without assuming or being responsible for all the costs incurred, which are not even seen or discovered and which are diluted over all the present and future potential users, meaning that there will always be an incentive to damage or over-exploit. As the saying goes, “what belongs to everybody belongs to nobody” and, effectively, for example, if the poacher does not kill the buffalo or the elephant today to remove its skin or its tusk, he knows that another poacher will very probably do so tomorrow. The inexorable result of public ownership is the disappearance of the elephant, the buffalo, the whale or the publicly-owned natural resource in question.

Moreover, it is of little use to try to uphold the publicly-owned or communal nature of the resource without defining private property rights over it, while establishing the conditions governing its use through State regulations. This is due to the fact that the operation of political systems is highly inefficient, as the theoretical analysis of the School of Public Choice has rightly demonstrated in detail.

Governmental decisions substitute the free network of voluntary contracts in which all the parties gain (because if not, they would not be made) by the political struggle between interest groups, in which some gain and some lose (“zero sum games”). Public management is composed by an incomprehensible legislative network or tangle which makes the management of resources tremendously inefficient, not only because it is the result of a political consensus, but also because of its arbitrary nature and, above all, due to the position of ineradicable ignorance in which, in the final analysis, the legislator or bureaucrat is always situated with regard to individual actors. In fact, the information relative to any phenomenon of society, in particular to natural species and resources, is information which is exclusive, dispersed, subjective and difficult to articulate and which varies at each specific coordinate of time and place and can only be known, that is to say, discovered and interpreted, by each individual entrepreneur in the context of his action. Therefore, not only is it impossible to transfer such information to the controlling governmental organ, but, moreover, the coercive intervention of the Administration prevents the practice of entrepreneurship, thus blocking the emergence of the information necessary to allocate and manage natural resources appropriately. How can we know, for example, what type and composition of babies’ diapers are the most suitable from an environmentalist viewpoint? Given that the collection and treatment of garbage is a government responsibility financed through taxes, there is no way in which the consumers can internalize the costs of processing the different types of rubbish, meaning that diaper manufacturers do not have any incentive to consider the environmental aspects of their product. The same thing occurs in all the fields where the State intervenes, although in most cases we do not realize it.(13)
The entrepreneurial solution to environmental problems.

How, then, could the environmental problems which threaten us today be solved? One of the most notable virtues of the free market environmentalist theorists is that they reiteratedly insist that the only real and definitive solutions which may be provided to the environmental problems are institutional solutions. Or, in other words, that what is really important is to put the entrepreneurial processes tending to solve the problems into operation. This means that no specific technical recipes can be given, as they will have to be discovered, taking into account the specific circumstances of time and place of each environmental problem, by the force of entrepreneurship, within a context of free enterprise and the correct definition and defence of property rights.(14) The fact is that only entrepreneurial creativity will be able to find solutions to introduce the technological innovations necessary to make the definition and defence of property rights possible in areas where this has not been possible so far. Thus, for example, perhaps the mention of private roads will surprise many people, but it is a perfectly viable possibility from technical point of view and would mean an enormous increase not only in the safety of the roads, but also in their atmospheric cleanliness. And, in the same way, the problems posed by the different natural resources may be systematically analyzed, ranging from those related to the natural parks to those posed by water, air, garbage, pollution and species threatened by extinction. The dynamic theory of processes based on entrepreneurship may be applied to all these areas and indications given of the possible solutions which, by analogy to what has already been created entrepreneurially in other similar areas, or because they have already begun to be timidly conceived, the entrepreneurs would be able to develop and implement to solve effectively the problems which threaten us today.(15)

Therefore, the practical strategy to defend the natural environment is based, above all, on the privatization of public property and a redefinition of the role of the State, which should devote all its efforts to fomenting and favouring the definition and defence of property rights over both publicly-owned scarce resources and the “border resources” which have been free so far, but which now are beginning to become scarce (16). Making possible the definition of property rights, establishing an effective legal system and defending appropriately the correctly defined property rights are the most important and urgent measures which the government should take if it wishes to conserve and improve the natural environment.(17) In short, the new theory of free market environmentalism has shown that, theoretically, public ownership of the natural environment is unjustified. The problems which may supposedly justify its existence create an extremely strong incentive for their solution through entrepreneurial creativity. In this dynamic perspective, therefore, whenever the circumstances which give rise to so-called communal property arise, the spontaneous forces which tend to eliminate them come into operation, meaning that this kind of public property as a whole also becomes empty of content.(18)

I am writing the last lines of this article in Formentor, one of the most beautiful ecosystems of the Spanish geography. Observing the reality which surrounds me, the over-exploitation of the bay by the boats, forest fires which place the existence of millions of pine trees in danger, the crowded beaches and water which, although they are still clean, are increasingly threatened, I realize, when I apply the free market environmentalism theory, that this privileged natural environment of Mallorca can only be conserved for future generations, free from abuses and increasingly cared-for and pure, if its exploitation in accordance with the typical criteria of the free market is permitted and all the natural resources involved are completely privatized, in such a way that they become property

rights which are well defined and defended by the public organisms. And we are sure that all well-intentioned nature lovers who read the present article with an open mind will reach the same conclusion as I have reached in agreement with the free market environmentalism theorists.

Formentor, 8 August 1994

Jesús Huerta de Soto
Professor of Political Economy
King Juan Carlos University of Madrid, Spain

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(1) Corresponds to the original title of the work on this subject by Anderson and Leal (Terry L. Anderson and Donald R. Leal, Free Market Environmentalism, Pacific Research Institute for Public Policy, San Francisco 1991). These authors consider free market environmentalism as a “new sociopolitical movement which advocates the defence of nature” through the market and free enterprise .

(2) In fact, as Richard Stroup rightly points out, the intellectual movement in favour of free market environmentalism starts to be conceived in the second half of the 1970’s by a group of young nature-loving economists concerned about the environment, grouped around the University of Montana, the University of California in Los Angeles (U.C.L.A.) and the Public Choice Center. This group of economists gradually gave rise to a new discipline which, under the name of “New Natural Resource Economics” is based on three theoretical bodies which are different but complementary: first, the theory of the Austrian School of Economics based on the study of the processes of social interaction which result from the creative force of entrepreneurship; second, the School of Public Choice, which makes theoretical analyses of the incentives, conditioning factors and results of the combined action of politicians, bureaucrats and voters; and third, the evolution, development and basis of the economic theory of property rights. See Richard Stroup’s work “Natural Resource Scarcity and the Economics of Hope”, published in Economics and the Environment: A Reconciliation, edited by Walter E. Block, The Fraser Institute, Canada 990, page 132. These ideas reached Europe at the now historic seminar organized by Liberty Fund in Aix-en-Provence in September 1985, which was attended by, apart from professors John Baden and Richard Stroup of the University of Montana, the author of this article and other prestigious European economists and nature lovers. One of the fruits of this seminar was my work in Spain on the subject, published in 1986 under the title “Derechos de propiedad y gestión privada de los recursos de la naturaleza” (“Property rights and private management of natural resources”), Cuadernos de Pensamiento Liberal, No. 2, Unión Editorial, Madrid 1986, pages 13-30, republished in Volume III of my Lecturas de Economía Política, Unión Editorial, Madrid 1987, pages 25-43.

(3) See my Socialismo, Cálculo Económico y Función Empresarial, Unión Editorial, Madrid, pages 45, 54 and, above all, 84-85.

(4) First definition of the term “ecología” in the Diccionario of the Royal Academy, Espasa Calpe, Madrid, 1992 edition, page 555.

(5) What is more, as Walter Block correctly states, it is not that there is a simple analogy between the market and the ecosystems, but that the laws of evolution and interaction in the two processes are very similar and, therefore, it could be said that environmentalism is simply a part of economic science (giving rise to the term free market environmentalism), or, if one prefers, that economics itself would be a discipline included in another broader discipline, environmentalism. See Walter Block’s article “Environmental Problems, Private Rights Solutions”, in Economics and the Environment: A Reconciliation, op. cit. page 289.

(6) Elsewhere I have defended the thesis that socialism should be defined as “any system of institutional aggression against the free practice of entrepreneurship” and have tried to demonstrate that such an aggression has the effect of preventing the creation and discovery of the practical information necessary to adjust and coordinate the behaviour of human beings, thus making the development of civilisation impossible. When, in any social area, specifically in those related to the natural environment, freedom of human action is prevented, there is the paradoxical result that human beings are unable to realize that they are acting inefficiently and uncoordinatedly, meaning that numerous social adjustments are not discovered and the most flagrant cases of environmental aggression are neither discovered nor remedied. In this respect, see my Socialismo, Cálculo Económico y Función Empresarial, op. cit., Chapters II and III, especially pages 117-118.

(7) The theory of the evolutionary development of institutions originates from Carl Menger, Untersuchungen über die Methode der Socialwissenschaften und der Polistichen ökonomie insbesondere, Duncker Humblot, Leipzig 1883, page 182, and my Socialism, Cálculo Económico y Función Empresarial, op. cit., pages 68-73.

(8) See, especially, Ludwig von Mises’ judicious pioneer considerations in this respect in “The Limits of Property Rights and the Problem of External Costs and External Economies”, heading 6 of chapter XXIII of Human Action: A Treatise on Economics, Henry Regnery, Chicago, 3rd Edition, 1966, (the 1st edition was published in 1949), pages 614-663.

(9) With regard to the basic principles of property law which are necessary for a free enterprise economy to function and their specific application to the case of environmental problems, see Murray N. Rothbard’s thought-provoking article entitled “Law, Property Rights and Air Pollution”, included in Economics and the Environment: A Reconciliation, Walter Block (editor), op. cit., pages 233-179. In this interesting article Rothbard defends and develops the application of the traditional principles of property law, which emerged through evolution and entrepreneurship in the way explained in the main text, to the new circumstances which unpredictably arise, refining their historical impurities and logical errors and proposing their application to the new realities which emerge as a result of the evolution of civilisation. In this way, Rothbard explains the great advantages of, for example, the privatization of roads, air corridors, the different uses of the sea, air and subsoil, also indicating, with a great deal of ingenuity and imagination, how this could and should be put into practice technically and legally.

(10) Although the literal expression was created by Garrett Hardin, the first analysis of the “tragedy of the commons” was made by Mises in 1940 in his “Die Grenzen des Sondereigentums und das Problem der external costs und external economies”, heading VI of Chapter 10 of Part IV of Nationalökonomie:Theorie des Handelns und Wirtschaftens, Editions Union, Geneva 1940, 2nd edition Philosophia Verlag, Munich 1980, pages 599-605. Garrett Hardin’s contribution, “The Tragedy of the Commons” was published almost 30 years later, Science, December 1968, republished on pages 16-30 of the book Managing the Commons, Garrett Hardin and John Baden (editors), Freeman & Co., San Francisco 1970. Hardin’s analysis offers little more than Mises’ and, moreover, reaches certain neo-Malthusian conclusions which we cannot share and which show that Hardin is a biologist rather than an economist. In particular, Hardin ignores the fact that having more children does imply a cost which is discounted a priori by the parents more or less explicitly. Moreover I have defended elsewhere that the increase in the population is a necessary condition for all economic and social development and that the problem of the current underdeveloped societies is derived, rather than from the population, from the coercive imposition of institutions and economic systems which do not permit the creative practice of entrepreneurial capacity or the coordinated development of free and efficient markets (socialism and interventionism). See my Socialismo, Cálculo Económico y Función Empresarial, op. cit., pages 80-83.

(11) As Mises rightly points out (Human Action, op. cit., page 917), the problem of public goods emerges from the existence of external positive effects with regard to the resources where there is a joint offer and no rivalry in their consumption and has, therefore, an intrinsic entity, completely different from the cases of external costs which arise whenever the definition and/or defence of property rights over natural resources is prevented, giving rise to the “tragedy of the commons”. It is, therefore, analytically erroneous to apply the concept of “public good” to the problem of the deterioration of the environment with which we are dealing. Incidentally, I have argued elsewhere that public goods as a whole tends to become empty of content in a non-intervened economy and that, therefore, the static analysis of its supposed existence cannot be used to justify the existence of the State. See Socialismo, Cálculo Económico y Función Empresarial, op. cit., pages 36-37.

(12) “It is true that where a considerable part of the costs incurred are external costs from the point of view of the acting individuals or firms, the economic calculation established by them is manifestly defective and their results deceptive. But this is not the outcome of alleged deficiencies inherent in the system of private ownership of the means of production. It is on the contrary a consequence of loopholes left in this system. It could be removed by a reform of the laws concerning liability for damages inflicted and by rescinding the institutional barriers preventing the full operation of private ownership.” Ludwig von Mises, Human Action: A Treatise on Economics, op. cit., pages 657-658.

(13) Moreover, those who defend the theory of public property commit an irresolvable logical contradiction when they try to resolve the management thereof through the democratic political system. This is the case because they try to solve a problem of “external effects” by creating another similar problem which is much greater. In fact, given that the effort of obtaining information on political matters and acting and voting thereon on the basis of sound knowledge benefits the whole community, implying a high individual cost for each actor, a typical case of positive external effects is generated, which leads human beings to, in general, ignore the democratic processes, tending not to obtain adequate information or participate. How will the democrats resolve this contradiction inherent to their system? By justifying institutional coercion on the citizens so that they obtain the information necessary and vote in the democratic system? Would this not mean the death of the democratic system and the emergence of an iron dictatorship? It is evident, therefore, that the attempt to define and manage public property through political processes generates a much greater public good problem, which cannot be solved by political means.

(14) Effectively, according to Israel M. Kirzner, we cannot have today the knowledge which will only be created tomorrow by entrepreneurs acting in an appropriate institutional environment and trying to solve the problems and face the challenges related to the environment. But precisely what prevents us from knowing the specific solutions to be adopted (entrepreneurship) is what paradoxically allows us to feel secure and confident that the most appropriate solutions to the environmental problems will be adopted at any given moment. See Israel M. Kirzner, Discovery and the Capitalist Process, The University of Chicago Press, Chicago 1985, page 168.

(15) Second-best solutions, of a temporary and subsidiary nature, may also be considered for the areas in which the immediate privatization appears less viable and which, in general, are based on the creation of markets of permits or rights to pollute, capture certain species, etc. This system would be much more efficient than those currently employed, although it is true that it leaves a great weight on bureaucratic intervention to fix, for example, the total amount of pollution or fishing which can be carried out. In any case, it should be reiterated that second-best solutions must always be put into practice on a temporary and subsidiary basis, without losing sight of the fact that the fundamental objective must be to make the free practice of entrepreneurship possible and that the latter should creatively discover the technical innovations and solutions which are necessary to define and defend appropriately the corresponding property rights.

(16) It is disheartening that, up to now, the tendency in Spain has been the exact opposite of the tendency indicated by the conclusions of free market environmentalism. It is enough to remember the Water Act promulgated by the socialist government which eliminated the existing property rights over subsoil water. We hope that this tendency will change in the future, above all in the non-socialist local or regional Administrations which study the environmental problems less dogmatically. Thus, it would be very easy to start by privatizing numerous items of public property (zoos, natural parks, garbage collection services, etc.) and equally easy, in relative terms, to introduce second-best solutions in relation, for example, to the pollution rights of heating fuelled by coal and gas-oil in the buildings of the major Spanish cities, specifically Madrid. They are measures with a low political cost which could be taken quickly, the benefits of which would make it easier to take the subsequent steps ahead in the reform process tending towards the privatization of other natural resources and environmental areas which, today, appear more problematic.

(17) The essential political principle which must be defended is not, therefore, “he who pollutes pays”, as has been clumsily established in the political programs of the Spanish centre-right politicians, but rather the principle that “he who pollutes indemnifies those who are polluted and, possibly, is penalized through a criminal process if there is culpability or negligence in the damage and no voluntary agreement is reached with the prejudiced parties”.

(18) Another of the great advantages of the free market environmentalism theory is that it demolishes the entire analysis based on sustained development, which has been prevalent to date due to the support of many ingenuous environmentalists and natural scientists who are not familiar with economic theory.