In my last article, “How Government Budget Deficits Reduce Wages and Raise Profits”, I explained why those who complain about profits rising at the expense of wages should not blame the free market but, in part at least, the growth in government budget deficits. I’d now like to show that in addition they should blame the environmental movement and the government intervention that it has inspired.
Environmentalism operates systematically to withhold land and natural resources from the market. Wherever it can, it prohibits economic development, in the form of housing construction, power-plant construction, and road construction. It attempts to stop the opening of new mines and especially new oil fields. While it claims to favor what it calls renewable natural resources, it also attempts to stop logging operations, even though new trees can be grown to replace those removed. It has also succeeded in imposing limits on the emission of such chemicals as sulfur dioxide, nitrogen, and chlorofluorocarbons (cfcs) into the atmosphere, and in these cases systems of “tradable emissions rights” have been established. It currently seeks similarly to limit the emission of carbon dioxide into the atmosphere and to establish a system of tradable emission rights in its case too; indeed, a limitation on carbon dioxide emissions and a system of tradable emission rights for carbon dioxide already exist in the European Union.
Under a system of tradable emission rights, the government acknowledges long-standing emissions and confers a legal right for them to continue. For example, if for many years, a firm has been emitting a ton of sulfur dioxide into the atmosphere each year, the government may grant it a legal right to continue doing so indefinitely and, in addition, to sell that right in the market from year to year or to sell it permanently, just as the firm might rent or sell any other durable property that it owns. Newcomers who wish to emit sulfur dioxide, or established firms that wish to increase their emissions, cannot do so unless they buy emission rights from the firms that possess them. Emission rights quickly become scarce and progressively more valuable as the need for additional production of the kind that must result in more emissions intensifies and comes up against the barrier of the prohibition on a larger volume of emissions.
I do not know of any reliable estimates of the aggregate dollar value of the tradable emissions that are now purchased in a given year in the United States or around the world. But whatever it may be, it represents a clear addition to the aggregate amount of profits in the economic system. This is because the firms that sell their emission rights thereby have sales revenues for something that costs them virtually nothing whatever to provide. And so long as they sell these rights merely on an annual basis or for a limited term of years these sales revenues and profits will be recurring.
Furthermore, looking at things now from the perspective of the purchasers of the emission rights, the need to purchase emission rights equivalently reduces the funds available to business firms for the purchase of other things, notably capital goods and labor services. Thus, the effect of the existence of tradable emission rights is both an increase in the aggregate amount of profit in the economic system and a decrease in the aggregate amount of wages paid in the economic system.
The effect of payments for emission rights on wages can be further inferred from the following considerations. Assume for the moment that the price of emission rights were to count simply as an additional cost of production, added to all of the other costs of production, and to correspondingly drive up the prices of goods to the point required to cover this additional cost. If this happened, the quantity of goods demanded in the economic system would fall. It would fall simply as the result of the combination of higher prices and limited funds with which to pay prices.
The result of the fall in the quantity of goods demanded would be unemployment. If unemployment is to be avoided, the prices of goods must not rise. But in order for them not to rise, their costs of production must also not rise. In order for costs not to rise in the face of the addition of the new component of cost that is constituted by the price of emission rights, another primary component of cost, notably wages, must fall. In other words, the value of tradable emission rights ends up being at the expense of wages. Thus, environmentalism and the system of tradable emission rights serve to raise profits and reduce wages.
It must be stressed that if wage rates do not fall in order to offset the additional costs constituted by the value of tradable emission rights, then the result is both higher prices and unemployment. In this case, while wage rates in terms of money do not fall, wage rates in terms of buying power still fall because the same wage rates in money must be used to pay higher prices for goods.
The fact that such are the consequences of the system of tradable emission rights should not be taken as a criticism simply of that system. The imposition of the same environmentalist restrictions on production without an accompanying system of tradable emission rights would result in even worse consequences. This is because the costs of complying with the environmental regulations would then be far greater, with the result either that prices would have to rise or wage rates fall by that much more.
For example, a firm that could avoid a million dollars of additional costs if it could emit an additional ton of sulfur dioxide would simply have to incur those additional costs even though elsewhere in the economic system there was a firm that would incur additional costs of only a few thousand dollars if it reduced its emission of sulfur dioxide by a ton. The absence of tradable emission rights in this case would cause the needless imposition of almost a million dollars of unnecessary costs, requiring a corresponding rise in prices or fall in wages in the economic system. It is clearly the substantially lesser evil in this case even if the right to emit a ton of sulfur dioxide were to be sold for several hundred thousand dollars.
The problem is not the system of tradable emission rights. The problem is the prohibition of the increase in emissions that is the necessary accompaniment of the increase in production. The prohibition of additional emissions thus serves to prohibit the increase in production. Of course, in the absence of prohibitions on additional emissions, there would be no basis for the existence of systems of tradable emission rights, and thus they would simply not exist.
As indicated at the beginning of this article, environmentalism’s prohibitions on production go far beyond those that have been accompanied by systems of tradable emission rights. With or without tradable emission rights, the effect of imposing laws and regulations based on environmentalism is to make land and natural resources artificially scarce relative to human labor and thus to enhance the economic value of land and natural resources while reducing the economic value of human labor, above all, wage rates. In the terminology of the old British classical economists, what environmentalism is doing is increasing the portion of national income that takes the form of “land rent,” and doing it at the expense of the portion of national income that is wages.
The rise in the economic value of land and natural resources—the rise in land rent—shows up in the form of a rise in profits. All net monetary earnings derived from the ownership of land or natural resources are profits from the point of view of business accounting. Profits rise to the extent that the prices of minerals and of agricultural products rise relative to the costs of producing them. And precisely this is what happens when the demand for these products rises and environmentalism has meanwhile succeeded in preventing commensurate increases in their supply.
The leading example of this phenomenon at present is the recent rise in the price of oil and natural gas. A growing population and a growing need for oil here in the US, coupled with major economic progress in China and other parts of Asia, has substantially increased the demand for oil and natural gas. However, the environmental movement has done everything in its power to prevent increases in the supply of these commodities.
It has prevented the development not only of the oil deposits in the North Slope of Alaska but also oil and gas deposits on the continental shelf off California and the Gulf Coast, as well as oil and gas deposits present in the vast land areas set aside as wilderness preserves and wildlife areas. In addition, it has prevented the construction of new atomic power plants, whose existence would serve to diminish the demand for oil by the electric power industry and thus make oil more available for other purposes, and at a lower price. The same is true in connection with coal mining. Its expansion too is blocked, and thus the availability of this major substitute for oil is also held back. The result is that the need for oil is made that much more intense and its price correspondingly higher.
Different parts of the supply of minerals and of agricultural commodities have different costs of production. For example, there are some petroleum deposits which are so easily accessible and so productive that they can be exploited at a cost of production of perhaps just $3 or $4 per barrel. But such petroleum deposits can meet only a small portion of the demand. The rest of the demand must be met by exploiting higher-cost deposits, deposits with a cost of production of $10, $20, $30 per barrel, and more. Every time the price of oil rises because its supply is prevented from increasing, profits are increased on all the petroleum deposits in production.
The same principles apply to wheat production and housing construction. The result of all increases in demand not matched by an increase in supply, because environmentalism prevents the increase in supply, is a rise in price and an increase in the portion of the good’s price that reflects the resulting greater scarcity and higher value of land and natural resources. And, as we have seen, this higher value of the economic contribution of land and natural resources that environmentalism causes takes the form of higher profits.
In sharpest contrast to today’s markets that are distorted by environmentalism and the government intervention that it has brought about, a free market would produce results of an opposite kind. In a free market, with its powerful incentives to increase production and to find new and more efficient ways of doing so, supply would increase not only commensurately with the increase in demand but more than commensurately. Lower-cost methods of production would be found that would make it possible for prices to be driven down rather than up. A free market operates to increase the supply of useable, accessible land and mineral deposits relative to the supply of human labor and thus to make them progressively cheaper in real terms.
Accordingly, profits based on the ownership of lower-cost natural resources and farm land would be sharply contained, and even diminish, as scientific and technological progress and capital accumulation served to make available more such deposits and farm land or equally good or better substitutes for them and thus to drive the prices of products produced by means of such deposits and land closer to their low costs, meanwhile further reducing those low costs.
In a free market, wages rise relative to the value of land and natural resources and are thus correspondingly higher relative to profits. This was the record of the United States and the rest of the Western World for approximately 200 years following the start of the Industrial Revolution.
Environmentalism is a movement dedicated to the undoing of the Industrial Revolution. If not checked, one of its results will be the progressive reduction of wages and the further elevation of profit incomes based on the ownership of land and natural resources.
This article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book and provided that mention of the author’s web site www.capitalism.net is included. (Email notification is requested.) All other rights reserved. George Reisman is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics. For elaboration of the subject of this article, the reader is urged to read Capitalism, pp. 316-317, 667-668, and 313-316.
{ 16 comments }
Local newspaper tells me local zoning czars did not approve the recent developments of multi-family homes in the area. Apparently they gave a the go-ahead before the planning was complete.
But ‘luckily’ the 180+ such developments will be allowed to procede because many people would be caught in the middle of construction. This is supposed to give the ‘little’ guy a break. I agree that it is a good thing people can complete their homes – but at the same time they are essentially the last that will be able to construct such homes for a while, and most of them are not little people, but millionaires. The next page goes on to complain that too many businesses are leaving the area!
quincunx, I was listening to NPR here in North Carolina, another state where manufacturing is declining.
First, a story about the decline, with interviews with angry former workers and activists, and some activist who declared that the state must MUST do more for displaced workers, provide more services, more welfare.
Then, not 10 minutes later, they announced that due to tax breaks and other “concessions”, Dell was going to build a manufacturing plant near Raleigh.
These two contradictory thoughts existed at the same time. So who is harmed? Local businesses and people who cannot relocate when the taxes are raised to pay all this welfare because the profitable businesses _did_ relocate to avoid the taxes and regulations.
Does anyone want to start a pool on when TokyoTom comments on this thread?:~)
Yancey,
The last time you brought that up, the ensuing thread caused black-outs in Queens~ :^)
I’ve never understood how the “right” of polluters to dump their filth on the property of others became a rallying point for “libertarians”.
So what’s the solution? As Person points out, clearly polluters violate the property rights of others. Anyone who’s spent any time in China knows about the days when the air burns your eyes and turns your snot black. We just don’t worry about it because who cares if it’s too miserable to walk outdoors as long as GDP is growing?
Professor Reisman,
The article states:
“The effect of payments for emission rights on wages can be further inferred from the following considerations. Assume for the moment that the price of emission rights were to count simply as an additional cost of production, added to all of the other costs of production, and to correspondingly drive up the prices of goods to the point required to cover this additional cost. If this happened, the quantity of goods demanded in the economic system would fall. It would fall simply as the result of the combination of higher prices and limited funds with which to pay prices.”
I would analyze the impact slightly differently. The increase in costs of production on entry into the polluting industry due to emission rights would not immediately drive up selling prices, but rather would restrict further entry into this market, keeping marginal producers out and directing resources towards other otherwise less profitable production. It would have a cartelizing effect on this polluting industry. So due to the artificially reduced supply of goods, prices for these goods would then increase. The result is a market distortion where more of other goods and less of the goods in the cartelized market are produced than what the consumer would otherwise desire. Because of this, what is certain is that consumer satisfaction is reduced, and therefore on net, real wages and rents, especially of those outside of this cartelized industry will have also been reduced. At the same time, profits of those owning the emissions rights could remain higher than other businesses in the economy.
I would also differ slightly with the following:
“The result of the fall in the quantity of goods demanded would be unemployment. If unemployment is to be avoided, the prices of goods must not rise. But in order for them not to rise, their costs of production must also not rise. In order for costs not to rise in the face of the addition of the new component of cost that is constituted by the price of emission rights, another primary component of cost, notably wages, must fall. In other words, the value of tradable emission rights ends up being at the expense of wages. Thus, environmentalism and the system of tradable emission rights serve to raise profits and reduce wages.”
Resources including labor will be directed to other non-polluting lines or stages of production. There is no necessity, assuming minimum wage laws play no role, for unemployment to result. It is, however, as you state, wages (and rents) must fall in the non-cartelized industries as must overall consumer satisfaction, and all this to the benefit of profits of those holding the rights to sell these emissions rights in the cartelized industry.
Finally, while legislated emissions rights, and emissions legislation in general are not strictly justifiable, I would say that under a free market with complete observance of private property rights, that it may well be that pollution lawsuits would prohibit new entry into a polluting industry. However, while this could have similar effects to legislated restrictions, at least these would be justified and the resulting adjustments in the market would not reflect a market distortion, but ultimate consumer demand, accounting for the values of private property owners affected by the late-comer’s pollution.
Good article.
Person writes: I’ve never understood how the “right” of polluters to dump their filth on the property of others became a rallying point for “libertarians”.
Frankly, I don’t understand how this could be a rallying point for libertarians either. Dumping filth on other people’s property seems totally un-libertarian. I bet that’s why none of us actually advocate it. Take your strawmen elsewhere.
James: it’s no strawman. At every juncture, so-called “libertarians” here gripe and moan about how this or that pollution law won’t let them spill filth into the air and thus onto others’ property. For heaven’s sake, right here, Reisman, who is usually sound as a bell, is griping about how those evil evil people will limit the amount of SULPHUR he’s allowed to dump into people’s lungs. There are probably reasons out there why you should be allowed to dump that junk into the air that other people breathe, without compensating them, and while privately capturing the proceeds of the process that led to that pollution, but libertarian principles … just ain’t one of them.
Happy to see there’s at least Person here willing to disagree with Dr. Reisman’s thesis!
Yancey and MEH, when are you guys going to do some of the heavy lifting??
Of course I’ll be back, to greet Dr. Reisman and help him build and cross the bridge he is starting to see is necessary. In addition to appreciating the toned down rhetotic, let me quickly observe that Dr. Reisman does not give private property rights and markets the credit they deserve.
Dr. Reisman says that:
- “Emission rights quickly become scarce and progressively more valuable as the need for additional production of the kind that must result in more emissions intensifies and comes up against the barrier of the prohibition on a larger volume of emissions.” and that
-”The problem is the prohibition of the increase in emissions that is the necessary accompaniment of the increase in production. The prohibition of additional emissions thus serves to prohibit the increase in production.”
Of course there is no “iron law” in the markets that holds that having property rights in natural resources – including emissions rights – will necessarily lead to continual price increases. The right to emit will have a value set by the market in transactions between those who wish to emit and those who have rights to emit. Given competition in markets and human ingenuity, real prices for basic raw materials, commodities and even high tech goods continue to fall, and of course creating tradable rights in emissions would tend to do the same with respect to the value of the right to emit. Manufacturers will continually have incentives to use fewer rights, and those who are the most clever and can reduce their emissions most cheaply will have an asset that they no longer need and can sell.
For the same reason, an increase in production in emissions need not require an increase in emissions, so setting a cap under which the tradable rights are established would not serve to prohibit an increase in production.
I think the classic example now to illustrate both points is telecommunications – how much copper is being mined, smelted and strung to create today’s fabulous telecommunications network? Darn little, of course, because the market for copper made it worth while for firms to find ways to do without – and now we have a surfeit of telecommuncations capacity based on fiberoptics, using little more than sand!
The key of course is simply to establish property rights, so that markets have something to work with, instead of a tragedy of the commons where no one owns a valuable asset and has no incentive to use it wisely, being limited only by the cost of access to the asset.
So in unowned fisheries, we see ultimately ruinous investment in a race to catch; in the air, we see ruinous pollution, limited only by the cost to pollute – namely the cost of fuel, which has itself gradually increased energy efficiency (but much less than is economically rational, since the price of fuel does not reflect the costs its use imposes on others via the environment).
Some day, I hope that “environment” will be a good word for Dr. Reisman; until then I am afraid I must remain that “environmentalist who hides behind the name of TokyoTom”
I’ll be back!
Tom,
Heavy lifting is bad for the back.:~)
However, I ignore Reisman’s obvious disdain for environmentalism. On the issues of this particular essay, he is, more or less (see Paul Edwards comment above), correct. Environmental regualations, regardless of the form, do lower real wages. It is a simple recognition of the fact that pollution is an effect that ultimately is caused by consumers and their choices.
Even if environmental legislation reduces wages, it’s a cost we should be willing to pay. However, we should always analyze cost/benefit. Then we should prioritize environmental/social issues in order to attack the worst problems first because we have limited resources. Some people are already attempting this, but it’s hard to get radical environmentalists and politicians to think like economists.
Roger M sez;
“Even if environmental legislation reduces wages, it’s a cost we should be willing to pay.”
You assume too much Roger – why should people’s wages be garnished to pay for pollution?
The radical interpretation would be that polluters pay restitution for their trespass on persons and property, all property being owned. If a government or other body wants to own the seas, that isn’t an obstacle. Air pollution can be handled as a trespass on the bodies of people.
No government necessary – we can all save money.
At every juncture, so-called “libertarians” here gripe and moan about how this or that pollution law won’t let them spill filth into the air and thus onto others’ property.
You are thinking backwards. It is not that libertarians gripe at not being able to pollute more, but that pollution is taken as justification for regulation and taxation, regardless of the validity of such. Prof. Reisman is not griping about not being able to spew more sulphur, but that sulphur emissions are taken as a justification for more government, whether people spew sulphur in vast quantities or not!
For heaven’s sake, right here, Reisman, who is usually sound as a bell, is griping about how those evil evil people will limit the amount of SULPHUR he’s allowed to dump into people’s lungs.
Really, Person. Government could not care LESS about the amount of sulphur we take into our lungs. What bureaucrats care about is the justification for increasing the size of government. If environmental laws were really THAT effective, would not we see a shrinking EPA budget every year?
There are probably reasons out there why you should be allowed to dump that junk into the air that other people breathe, without compensating them, and while privately capturing the proceeds of the process that led to that pollution
There are no reasons to do that, Person. It is not a question of allowing people to pollute – if it can be proven that a person pollutes, violating your property rights, you should be able to take them into court and ask for compensation. The problem resides in the SWEEPING legislations created by government, which affect (negatively) people who do not pollute.
You are thinking backwards. It is not that libertarians gripe at not being able to pollute more, but that pollution is taken as justification for regulation and taxation, regardless of the validity of such. Prof. Reisman is not griping about not being able to spew more sulphur, but that sulphur emissions are taken as a justification for more government, whether people spew sulphur in vast quantities or not!
Maybe you should read what Reisman wrote. He was talking (negatively) about a cap on the current levels of sulphur. That presupposes there is such a level, and people are spewing such quantities. In a year that they don’t, that law would be irrelevant. Such a “cap on dumping sulphur into people’s lungs” is like a “cap on murder”. Okay, we can have 5000 murders per year … BUT ONLY FOR PEOPLE WHO WERE ALREADY MURDERING.
Really, Person. Government could not care LESS about the amount of sulphur we take into our lungs. What bureaucrats care about is the justification for increasing the size of government.
Look, I admire your skepticism of government, I really do, but whether “people should be prevented from dumping filth into the lungs of others” is a separate question from whether “legislators’ motives are impure.” The latter does not negate the former.
If environmental laws were really THAT effective, would not we see a shrinking EPA budget every year?
Please, please tell me you didn’t actually say that.
There are no reasons to do that, Person.
Try reading the rest of the passage you were responding to there.
Person,
No libertarian would say that there is such a thing as a “right” to dump waste onto property which belongs to someone else. Such is a violation of the property rights of the owner. The solution to stopping pollution is the enforcement of property rights, with those who own property able to stop others from polluting it. But the system we have is a combination of poor enforcement of property rights and areas of common property (lakes, rivers, the atmosphere) where no one can effectively assert property rights. Consequently others can pollute these areas of “common property” and suffer few consequences. Instead of fixing the underlying problems of undefined or poorly defined property rights and enforcement, we end up with a regulatory system which is inefficient, vulnerable to rent seeking by polluters and other interest groups, and not flexible enough to respond to people’s diverse preferences for protecting the environment.
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