0:33 Intro. [Recording date: August 1, 2014.] Russ: So, you are one of the founders of, as I said, of what is called 'Free Market Environmentalism'. You wrote a book with that title, co-authored it, back in, I think 1991. And it's being revised and it's going to come out soon. What distinguishes your approach, the free market approach, from other ways of dealing with environmental issues? Guest: Yes, you're right, Russ. The book, Free Market Environmentalism was published in 1991. And the second edition in 2001. The third edition forthcoming in 2015. I think I could start by recalling the review of the first edition, in which the reviewer said, 'Free market environmentalism is an oxymoron.' And then said, 'The authors,' since it's coauthored with Don Leal, 'the authors are the moron part.' Russ: That's always flattering. Guest: That actually captures the view of the idea. And the idea was to find an interface between markets which we know do a great job in producing everything from shoes to houses, and the environment, which we are demanding more of. Our thinking in the late 1980s was the first to question whether government did a good job of producing the environmental goods and services we demand. And second, to find ways that markets could do it better than government was. And so, we began asking: What are the forces of markets that are important to shoe production or house production and how can we harness those for the environment? Russ: And what are those factors? Guest: Well, the obvious one, and it's especially important for the environment, is the existence of well-defined and enforced property rights. When we think about what environmental problems are to most people, they don't think of it this way, but they're really property rights problems. You are dumping your gunk into my receptacle, be it the air, the water, my land. And I want some recourse. And if we have a well-functioning legal system that respects and defends property rights, your dumping gunk into my receptacle means you have to pay me or cease and desist. And that's been the cornerstone of free market environmentalism. Let me just use the example that I've written the most about, namely, water markets, where we have well-defined property rights to water. And we have those in many parts, certainly, of the Western United States, and increasingly around the world. Once we have those property rights, people can trade water. And that happens. People get very aware of what that water is worth in other uses and compare that to what its use is for them as owners. Again, a quick story. I wrote a book on water markets back in the 1980s and a local farmer called me after it was published and featured in the local Bozeman paper, and said, 'You don't think we should sell our water for coal slurry, do you?' This was a time when they were going to use water to take coal to Texas. And I said, 'Well, what's your water worth in agriculture?' And he said, 'Oh, you know, $50', per unit. And I said, 'Well, I've heard it's worth $250 in coal.' And there was sort of dead silence at the other end, and he finally said, 'What were those numbers again?' If he owned his water and could sell it, he had to consider what the opportunity costs were. Russ: As I'm sitting here in Stanford--you're in Montana, now--you were at Stanford earlier this year, but, we're pretty far apart. And as you probably know--it's not news--there's always water problems here in California. And right now on the Stanford campus, all the fountains are off, to conserve water. A lot of visitors come here from all over the world to take pictures here at Stanford and tour the campus. And those pictures are not going to be as pretty. And walking around is not as nice as it would be otherwise, because they've turned off the water. And most people think, when they see the little sign that says 'Water fountain is off to conserve resources,' they think, that's a good thing. What's your perspective? Guest: Oh, yeah, I saw the dry fountains when I was there this spring, in my annual excursion. There are two important points, I think. The first is that we often do these things that are pretty superficial. Water being squirted into the air and draining back into a fountain doesn't really use a lot of water. Even though it might look as though it does. That often is recycled in the same fountain. This exists in Las Vegas, where people say, oh, it's in the desert; look at what they do at the Bellagio. Or wherever. And in reality, it's not a lot of water used in that it's all recycled. But a more important point is that if the water is really valuable for that picture that's being taken of the Hoover Tower, then there should be a price on it that reflects that. The problem is: Water is cheaper than dirt in most places. Even in a drought situation-- Russ: To the user--cheaper to the user. Guest: Cheaper to user. Yes, absolutely. And yet, it has alternative values. And it has huge costs to store and deliver. Without markets, the likelihood that we'll get those two sides of the scissors, the demand and supply side, to come together, it'll require just turning off fountains and we'll think we're doing something. But it really won't solve the problem in the long run.

7:06 Russ: But, water's a necessity, Terry. Don't you think it's wrong to charge people for it? Guest: I've debated a woman named Maude Barlow who now is at the United Nations working on water issues. And Maude thinks that water is a basic human right. And there are lots of other people who run this line. I can imagine the-- Russ: It seems reasonable. Guest: Yes, and I think it could be something--you could make the case that there's a basic human right, that the rest of us have a responsibility to meet, when it comes to some minimal level of drinking water, bathing water, cooking water. But we don't quite think that water is a human right to fill swimming pools or to water green lawns or to wash the Lexus that sits in one's driveway. And so, it's not a question of can we supply or should we as a society supply some basic minimal amount to people, but after that, what should we charge people who want more? And here--to use an economics term you'll be familiar with--some places use increasing block rate structures. And that means, as people consume more, they pay more. So, we could make the basic human right free. But if you get above that amount then you have to pay more. And each time you get up into a new block, you pay more yet. And that also reflects the additional cost of those extra units. So, where increasing block structures are used, people do respond to prices. Russ: And here in California, the structure of those prices, to the extent there are prices--a lot of users get either 0-price water or highly subsidized water, correct? The North and the South here have very different patterns of usage and payment, correct? Guest: Oh, absolutely. Russ: Explain the rough outline of that. Guest: If you look back at the history of water in the United States, and especially true in the Western United States, but true in the East as well, you have agencies like the Bureau of Reclamation that have built dams, built delivery systems, and contracted to deliver that water often to agriculture, and that's 80% if the use in the West. To agriculture, at incredibly low prices. And it's put on crops that make not even, that won't even come close to covering the real cost of the water. So, if you are a farmer and you are in a contract with the Bureau of Reclamation to receive water, let's say $40 an acre-foot--that's roughly a football field covered with a foot of water, or 325 gallons of water. If you are paying $40 for that acre-foot of water, and you are putting it on a crop worth, say, where it generates $60 in value, you are saying, 'Pay this, it's great for me.' But if that's costing--and these are real kinds of numbers--$350 an acre-foot to deliver: Somehow the economics of that can't work. And that's true throughout, especially the agricultural sector, where as I said, it's 80% of the use. And in the municipal sector, where it's another 10% plus. The one place where people probably come closest to paying the full cost is the industrial sector; and it's one of the smaller users.

10:56 Russ: Let's go back to the property rights emphasis that you mentioned earlier. And we've talked a lot about Ronald Coase on EconTalk. And the economics profession, up until the midpoint of the 20th century looked at issues of externalities--pollution--typically as problems that had to be fixed by top-down regulation. And Coase really opened up the possibility that there was an alternative way to get there. I see--I want you to comment on this--the free market environment movement, which has its emphasis on property rights as a way of taking some of Coase's insights--not all of it but some of it--and making it a legitimate alternative to government regulation. I think it's misunderstood in that people think it means a no-government solution. Typically the advocates for these property rights solutions want government to enforce these property rights and they want to use that role for government rather than a regulatory command-and-control model that says you can't do this but you can do this. Rather, give people rights to these precious resources and let people who have the highest value of them use them. Is that a good summary? Expand and change that if you want to. Guest: I don't have many changes to make. You summarized it quite well. I'll start by saying that Professor Coase was really the cornerstone of our thinking even if we weren't explicit in saying so in the early years of developing free market environmentalism. I think more and more relying on Coase has come to be just the most important part of free market environmentalism. You used a word that I have tried to expunge from my vocabulary and do so at every opportunity with others, and that's that e-word, 'externality.' We use it freely in economics and now many other disciplines use it as if we know what it means. But Coase--and he didn't use the word when he wrote his famous "Social Cost" article. He made us aware that to call something an externality requires thinking about who was harming whom. And thought of in that way, I often say Coase was a causal agnostic. That is, he didn't say: The cause is the train burning up the wheat. He wanted to know: How does the law sort this out? And I think that's a large part of what environmental issues are about. The sorting out part is indeed, as you said, the role of government courts, especially: the rule of law. How do we know? Does your action harm me or does my existence in the face of your action harm you if I tell you to stop? I think all free market environmentalists and good economics understand that there's an extremely important role for government to play in helping to define rights and enforce rights. Then the question is, what about the tradability of them. And that's the market part. And here let me use my favorite example of how an environmental entrepreneur, someone who is trying to solve environmental problems using markets, sees this whole issue of rights. Here in Montana we have an issue regarding the wolves that were reintroduced in 1995 into Yellowstone National Park; exploded in population faster than any biologist ever imagined. They wander outside the park, and once in a while they kill livestock. This is a classic Coase problem: Is the wolf eating the livestock an externality to the farmer, or are the cattle being in harm's way an externality to the wolf lover? And my favorite example is an environmentalist Hank Fischer, who said: I'm not going to debate who has what right. I'm going to just stipulate that the rancher has a right to be predator-free; I'm going to raise private money and pay the ranchers if a wolf kills livestock. Done deal. Market transaction. And he has now expanded this to actually paying farmers to move their cattle out of harm's way. This is Ronald Coase writ large. And I think it's a great example of how free market environmentalism takes care of this conflict between wolves and livestock owners. Russ: Yeah, and there's an example where you don't want to pen in one of those creatures, and whatever way you pen in the other, say the cattle, it's expensive to do it in a way a wolf can't get through. So there's no easy private solution right off. You've got an issue then of how do you make that world a better world. And that's a beautiful story. Where does--and I assume he raises money from private individuals, or, who like wolves? Guest: Private individuals and foundations. When he first started he had a local artist paint a stylized vision of what wolves would look like with geysers in the background. He sold these posters--after they did the painting they made them into a poster--for $35 each. And he raised $100,000 very quickly. I have one of the posters. It was a way for people to say two things: One, I support you, Hank Fischer, in your efforts to move forward with resolving this conflict. And, two, I kind of have a badge of honor on my wall that I can show to people and say, hey, I'm holier than thou. Russ: How's that working for you, Terry? Guest: Or maybe that's greener than thou. Russ: Or wilder than thou. It's pretty cool.

17:11 Russ: It's a really interesting example because--I was going to ask you later about private national parks--whether national parks should be run federally. But most people are very uncomfortable. I love--I have to say, I think the national parks are one of the better things the government does and I get a tremendous amount of pleasure from many of them. My kids, who know I'm not a big fan of government, say, Well, do you think the government should run the national parks? And I say, well, it's not the worst thing in the world that they do; but in many ways they run them very badly. They tend to let lots of people in, because they charge low prices; and the land gets overused. The habitats get overused. And worse, in the early days of Yellowstone--not the early days, but early part of the 20th century--they got rid of a lot of the wolves, because tourists didn't like--they were afraid of them. And they also liked seeing elk, which are very safe, and as a result the elk population was out of control in Yellowstone. Which meant there was a huge amount of degradation of grasslands there, and habitat. Especially riparian stream site stuff. And I've been fascinated by this reintroduction of wolves. Which--I don't know much about the consequences of it. Has it reduced the elk population? I see it's reduced some of the cattle population? But has the elk population changed--do you know? And has the habitat within Yellowstone responded accordingly when the elk, which are incredibly destructive and unnatural at that level because the wolves aren't there--has the habitat responded? Guest: I'll take a circuitous route to the final part of your question. But I have to preface it saying, you are talking to an elk hunter, who now has fewer elk to hunt. Russ: Life's tough, Terry. You've got competition. Guest: I am not an unbiased observer. But I want to go clear back to your point about governments running national parks and emphasize that if you look at the history of Yellowstone--and I have a paper with P. J. Hill on this and we're actually revising it for a conference celebrating the 100th anniversary of the park service--Yellowstone was really established by railroads. And it was the railroads who saw the value in that if they could bring people to these wonderful natural sites, they could make more money in transportation. The problem for the railroad was, they couldn't get private ownership of Yellowstone because the Homestead Acts were in place. All you could get was 360 acres in a maximum. And that meant that you couldn't really own the entire area necessary to capture this value. And so the option for the railroads was to get them declared a national park, Yellowstone in particular, but this is true of Grand Canyon; it's true of Mt. Rainier; it's true of Crater Lake; it was true at the state level with Yosemite. But to get them declared a national park, and then get a monopoly on taking people into the park--feeding them, housing them. And the Northern Pacific Railroad was a master of this. So, it was really a private park to start with. Ratchet forward in time now and look at how we manage them today, and you've captured it well. They are overcrowded. You go to Yellowstone or Yosemite during the peak times, and it is a classic case of congestion, just making the experience not nearly like what you think it would be. You take a picture of Old Faithful, but you have a bald head in the foreground. And so, national parks are operated--might even go back to the [?] notion of: Isn't it a basic human right to get into a park for a low price? I--I'm old enough I get my Golden Eagle Pass. I pay for it once--it was $20; I get into Yellowstone or any other park for free the rest of my life. And yet, truly, retired people have more wealth than the average taxpayer. So we could charge people. What about the tourists who come from out of the country? We can charge them more, reduce congestion and have more revenues. And that's something here at PERC (Property and Environment Research Center) we push for, and actually now is a part of policy. The money they do collect, at least a share is kept at the parks and reinvested. And that kind of makes a bit of a connection between the consumer and the producer. All that said, trying to balance these various demands on the park, come back to me being an elk hunter and you being a wolf lover, there was competition. The ranchers really are the ones who pushed for the extermination of the wolves in and around parks and all through the West, really. They shot them, trapped them, poisoned them. And got to what they thought was the optimal number--zero. Time changed, and people like Hank Fischer said, 'I want more wolves.' And, to be sure, you are correct. The herd in Yellowstone, the northern half of Yellowstone elk herd, was over 20,0000. And I've hiked and horseback-ridden that part of the park a lot. There were no young aspen trees because they were all grazed off. There were no willows on the banks of streams because they were grazed off. There were no beaver. So the wolves came in--were brought in. And they did reduce the elk herd. They pushed the elk herd back into the high country; they pushed the elk herd out into the meadows. And it's a very different environment today. Is it better? Well, it's better if you are wolf lover and not better if you are an elk lover. You can almost never see an elk in Yellowstone today. And so, the 'better' is a matter, I think, of how we humans interface with a dynamic environment. And our demands on that environment is--our demands are also dynamic. And the bureaucracy, park one or environment protection agency one, those bureaucracies have a hard time dealing with that kind of dynamism. And the result in Yellowstone is, I think, the meadows look better to me. The beavers are happier; there are a few more dams. There are a few less elk, and lot more wolves. And if I were the Park Czar, I would reduce the number of wolves a little bit and try and tweak the dial. But I think therein is how to think about this about this as an environmental problem. Where should that dial be set given that we are changing all the time what we want as humans and what the environment can supply us? Russ: It's really a--I can't help but think about macroeconomics and fine-tuning. And the Fed adjusting the interest rate by a little bit. They don't really understand the connection always between the knob and the outcome. And I've written, drawing on the work of others, that when they get rid of the wolves, they got of the beaver. I said 'elves'--that's a 'wolf-elf'; a 'wolf-elf' is an 'elve.' But when they got rid of the wolves, the unexpected consequence was the beaver got less numerous. Which you would not have anticipated. But that was the connection between wolves not trimming the elk herd, the elk herd then having the ability to destroy streamside habitat, which made the beavers' life much more difficult. And I think there is an important parallel between the economy as an ecosystem and the unintended consequences that are often the case when you change that dial. But the point I wanted to clarify-- Guest: Let me just make one quick point on what you just said. I think a growing number of ecologists are seeing just what you've described not as an effort to find the exact point on the dial where we have the balance of nature--which is what some people still think of as the wolf being a way to balance nature. But I think more and more ecologists are understanding this is a dynamic process, the point you were getting at.

25:43 Russ: We'll talk some more about that, I hope. But I think one way to think about it is--there's a temptation; I've fallen into this myself, to say, Well, the wolf naturally belongs in Yellowstone National Park at such-and-such a level. When I think of such-and-such level, I think, the level that would exist without human beings. That's the natural, the right level. Neglecting the fact that populations without human beings are not stable. There's not some perfect equilibrium. And often when we are talking about the world, then, human beings, we mean: White human beings. We're neglecting the impact of Native Americans who changed ecology and habitat in the West, all over the United States. But somehow we romanticize that. That kind's okay, but not recent kind. Guest: Oh, I think we just have to go back, if we are going to be good ecologists and good economists, and think about free market environmentalism. We have to do what you just did and go back and think about how humans interacted with the environment for ages. You put this in the context of Yosemite: In the forthcoming edition of Free Market Environmentalism, we have a great series of pictures of the Yosemite Valley. And if you look at those pictures in the mid-1800s, the early ones taken by Carleton Watkins, there weren't many trees in the valley. And they weren't there because the Indians burned them off. Burning them off made better wildlife habitat. Better places to find deer and elk. And then we made it into a National Park. The trees began to grow. They started to get thick. And people said, 'But we can't see El Capitan!' And so the Park Service came in and cut a few of them down. Now people say, 'Oh, we need grove[growth?].' And if you look at the exact same view taken from the exact same point starting with those mid- to late-1800 photos, today, you cannot from that point see any element of El Capitan. So, what's the right one? Should we go back to 1944? Would you prefer 1921? And I think therein is the difficult problem we humans face in how we interface with the environment. You and I as economists are quick to draw a diagram on the board talking about the optimal level of pollution based on benefits and costs. But what is that optimal level? How is it changing? To say nothing of how we get there. Free market environmentalism is partly about how we get to that optimal level. But even trying to think about what it is, is, in this dynamic kind of viewpoint, is very difficult.

28:41 Russ: So, before we leave this area, talking about property rights generally, and free market environmentalism, I want you to talk about barbed wire. Because that was an important part of your research. And I'd like to hear you talk about it. Why is barbed wire interesting and important to a free market environmentalist? And an historian. Guest: Anyone who has ever seen The Lonesome Dove movie or read the book, knows about cattlemen coming to Montana, driving these herds of cattle up from Texas. And I always try and imagine--suppose they got to the border of Montana and they met Russ Roberts. And Russ said, 'Let me tell you boys about the Tragedy of the Commons.' And he drew this diagram in the sand. And these cowboys look at Russ Roberts and say, 'What are you talking about, man?' Suppose they understand your graph. They would say, 'Well, how could there be a tragedy here? There's grass forever, and we just have a couple thousand head of cattle.' And so they move in, and this goes on year after year with Russ Roberts wringing his hands and frustrated at the inability of people to recognize the problem. But even without Russ's lectures, people began to recognize the potential for the Tragedy of the Commons. And quite quickly formed Cattlemans' Associations--the kind of thing that Elinor Ostrom would, you know, love to talk about; and I've talked about it with her. Russ: These are voluntary restrictions on the use of resources, not government, right? Guest: Government wasn't even a--close to Montana at the time these were formed, these were people saying, 'Gee, our cattle are mixing with one another and are breeding and maybe we don't want that. And if you put all your cattle where I put mine, there will be a tragedy of the commons.' And so, even before barbed wire, these cattlemen associations got together and carved up customary grazing territories. And then they said, We need to kind of define these and enforce them. And so they defined them by actually writing down. You know, Terry Anderson gets from the big rock up on the ridge, along the ridge to the big tree, down from the tree to where the two cricks come together; and so on and so forth. And then they-- Russ: I just have to interrupt, I have to interrupt here. It's the first time in 430+ episodes of EconTalk that the word 'crick'. [I.e., 'creek'. It's a regional pronunciation.--Econlib Ed.] has been used. I love that. Keep going. Guest: Well, careful to get the right pronunciation in there. And I'm sitting there in my office looking at a wonderful photograph taken in about 1882 of what was called a 'line camp.' And it's a log cabin, on a ridge, with two cowboys and two horses in the foreground. Obviously staged. But a line camp was the place where these cowboys, who had to ride the line between customary grazing territories, would ride every day and shoo them little doggies back to one side or the other. So even before barbed wire we had an innovative way of solving the property rights problem. And then barbed wire comes along as a much cheaper way of defining your rights, and enforcing them. And barbed wire, when it came into existence, actually drove a lot of these cowboys into the unemployment world. There was no longer a need for as many cowboys once barbed wire existed, was invented. And it quickly spread, because it was so cheap. With barbed wire you could keep your cattle in various pastures, not overgraze. You could refine your herd. You could have Angus. You could have Hereford. You could get the best bulls so that you had the best calves. And the list goes on. So barbed wire was just a magnificent solution to the property rights problem. I think there's a wonderful history there. And I love studying history. So, in writing about it, and P. J. Hill and I have done a lot of that with respect to barbed wire. But I think there are some really important lessons to learn from that as well. And the lesson is that technology plays a crucial role in defining and enforcing property rights. Let me give you a couple of more modern examples. Today, we don't have to take a rectangular survey crew out and try to shoot lines to determine whose property is where. We have something called the GPS (Global Positioning System). And with Global Positioning satellites we are able to find points on the earth that are able to be within inches of exactly where we want them. We worked with a group from Bolivia trying to resolve an issue of harvesting trees in the cloud forests and as a result reducing water supplies to downstream farmers. This environmental group partnered with the farmers; went to the loggers; convinced the loggers they could make more money if they raised bees instead of cutting trees. And the result was magnificent. The loggers said, hey, we want more money. And then they said, Well, why don't we define our property rights to the logging areas more precisely so we know whether our forests, that we want to save for our bees, are defendable against outsiders? And so they went up with a GPS and literally marked all the points and got everybody to agree whose property was whose. So, here's barbed wire, in the modern context. Russ: Wow. Incredible. Guest: In a pollution-kind of context. Guest: There has been some experimentation with tracers, which allow the government, as an enforcer of property rights to say, we know it's the gunk coming out of Terry Anderson's smoke bag that's falling on Russ Roberts's laundry--to go back to Ronald Coase. And Terry Anderson--you have to either pay Russ Roberts for the damage or you have to stop. Tracers offer a really neat, new technology for identifying who are the emitters of smoke or pollutants into the water, and who is receiving them and what are the costs and who should bear those costs. So, barbed wire is just a good way of thinking about the importance of technology, and there are lots of places where it can be used today. [?] The last one: Whales. We can tag whales and, Russ Roberts can own whales. And so can Terry Anderson. We can know at any point in time right where they are. Russ: Is that being used in any way to maintain that population? Guest: It is not at this stage in any systematic way. Some people are tagging them for scientific purposes and tracking them. But it's not really a property rights sort of solution. But there is one in fisheries. In New Zealand, where they established individual fishing quotas--that is, they said, we're overfishing the common fish resources--they said, we will assign the government, we'll establish a quota, we'll allocate that quota to the people who fish. And a share of the quota. And they can fish it; they can trade it, they can bank it. But there is always a problem of what if someone sneaks into the fishery and catches some of the quota. One of the New Zealand fisheries, the people involved, voluntarily said: Let's all put transponders on our boat. It will send a signal to a satellite. We'll have somebody monitor this. And they'll be able to tell at any point in time whose boats are out there. And if there is a boat out there that shows up on the satellite that isn't sending out a signal, we'll know that that boat doesn't belong to our group. Russ: It's a poacher. Guest: We can go out and say, 'Hey, what are you doing here, Terry Anderson?' I can say, 'I'm just pleasure cruising.' Russ: At 3 in the morning. Guest: At 3 in the morning with my hold full of orange roughy. Probably there will be just a friendly little chat. And if it happens again, a sunken boat. Russ: Yeah.

37:23 Russ: You mentioned when the book first came out, the book you wrote with Donald Leal, Free Market Environmentalism, at least one review--I'm sure it wasn't the only one that was not positive. Talk about how the response to a market-based or property rights-based approach to the environment, about how that response has changed over time, if at all. So, there is still a lot of hostility to it, obviously. Has it gotten better, in your opinion? Guest: Oh, I think it's almost a sea change. More than just better. If I go from the moron [?] part to the second edition in 2001, comparing the two, the first edition was a bit of a theory, if you will. It wasn't full of equations and graphs that would tickle hearts of economists. But it was a theory in the sense that it said: If we had property rights to water, if we had property rights to wildlife, if we had tracers in the smokestacks, then we could have a property rights approach. But there weren't many examples. Well, now it's 2001; we are writing the second edition. And the Hank Fischer story about wolves is right for putting in there. By then, environmental groups were purchasing water from farmers, to leave it in the stream for fish. We were able to find many, many examples by 2001 of environmental entrepreneurs that work. And now, to the edition that will come out next year, since 2001, coincidentally, PERC started running our Enviropreneur Institute. So, Environmental Entrepreneur Institute. And the Bolivian example I mentioned earlier comes from that institute. We have 200 and I think almost 250 people now, who come from this sort of crash MBA (Masters of Business Administration), I like to call it. With an eye towards 'How do we apply this?' And the number of just ripe examples, some of which I've used already, I think tell just how much more receptive people are. Doesn't mean everybody. And I, without mentioning names, can recall going to New York City to visit the heads of two environmental groups to discuss the possibility of getting rid of grazing on public lands through a market approach, by the grazing permits from the livestock owners. One of those people said, 'Well, we could do that. But they shouldn't have those rights.' And we went back and forth with that discussion for some time. And finally agreed that he wasn't going to join the team to try and convince government officials to allow this kind of transaction. That's another story. Governments stand in the way of markets. But he said, 'Oh, they shouldn't have it. They shouldn't have it.' And I finally gave up. If that's your position they you are going to have to win the battle in the political arena. And with the next day[?] to another environmental leader, who said, 'Hey, let's just get on with it. We can help raise money. We'll facilitate these transactions.' That environmental leader is from the Environmental Defense Fund, and their motto is 'Finding Ways that Work.' And as Fred Krupp, that person put it to me, when he started as a lawyer with EDF (Environmental Defense Fund), their unwritten motto was, 'Sue the Bastards.' And today it's 'Finding Ways that Work.' Markets are one of those ways that entrepreneurs, environmental entrepreneurs, see as solving the problems they want solved.

41:13 Russ: What do you see as the biggest limits to this approach? Guest: Well, the biggest limits are the property rights limits, really. I've--every time I speak, and as I have here, I start with land. Because that one's pretty easy. Barbed wire. GPS. I go to water. That one's pretty easy, too--it does flow across boundaries and changes the supply, the supply changes from season to season, drought to drought. But it's--again, relatively easy. Then we shift to air emissions. And well, they're a little tougher, but as long as they are within a state, probably not too much of a problem. And in the forthcoming edition of Free Market Environmentalism we talk about ways in which the Common Law dealt with air emissions. But then when air emissions start crossing state boundaries--so, for emissions in the Midwest, causing acid rain in the Northeast--now you are in a problem of how do you facilitate a Coasean solution? How do you overcome--as he would have clearly pointed out--the transactions costs associated with getting the person in the mid-West to pay for the damages? And now, just shift to the mother of them all-global emissions of carbon. And other greenhouse gasses. Once you get into that realm, free market environmentalism doesn't have a lot of hope for providing a property rights/market solution. Russ: So, one criticism of your approach, that you hear sometimes, is that you are just a pawn of corporate interests. Your goal, Terry Anderson, and people like you, and I would include people like me: we want smaller government, and we argue that government, when it's smaller, can make room for these market-based solutions. These entrepreneurial environmentalists. But that's really just to cover for the fact that the corporations just want more freedom to despoil the resources that are precious to folks in the name of profit. What's your response to that? Guest: This year you are certainly correct in saying that is a conclusion that many people jump to. But I come back and use a phrase I used earlier. Like, Coase, I'm a causal agnostic. I want to get a property rights solution, and once we have it in place, let the market dictate how things are going to work. I think we need to ask, what are the property rights that people have to their air and water. These are the real two issues, I think. And most people would say, Well, I have a right to clean air, at least enough air that I won't have asthma, I won't die prematurely of lung disease. And if we can show whose gunk it is that's coming into my lungs, and that's going to be mostly from a corporation--although today, indoor emissions in the developing world are probably the biggest source of air emissions that kills people. But if it's a corporation, they should have to pay. We've documented a case here in Montana at the turn of the century when the Anaconda Copper and Mining Co. ruled the state. They owned the legislature, they owned they newspapers; they were in charge. And yet, when their smelter in Anaconda, Montana leached from its tailings piles toxic waste onto neighboring ranch lands, the neighbors said, It's our property; you've violated it; cease and desist, and pay up. And the court held with the ranchers. And there are actually, today, in the courthouse, pollution easements, which the Anaconda Co. paid for, with the idea that they acknowledged that it was their gunk on the land and if their gunk trespassed, they would pay the damages. So this is how you hold corporate America accountable--with property rights and if necessary with some regulations to reduce the transactions costs with a solution that make the polluter pay. One more quick point, I just was looking at, because I taped a session with John Stossel just yesterday: Before the Clean Air Act was passed in 1972, Milwaukee was dumping raw sewage into Lake Michigan. Chicago was having to clean up its drinking water from Lake Michigan to get Milwaukee's sewage out. Chicago sued--the state of Illinois, really--sued Milwaukee and said, You are polluting our water; it's our property right to clean water; you're taking it from us. The court ruled, all the way to the Supreme Court, I believe, that Milwaukee was violating Chicago's rights. Along came the Clean Water Act, EPA (Environmental Protection Agency) set down some technological standards, said, 'Put these filters on your pipes.' Milwaukee did it. It still didn't clean the water up; but Milwaukee's defense was, 'We've done what government said we have to do.' It basically obliterated a property rights solution and substituted for it a far less superior regulatory solution. And to this day, Milwaukee dumps raw sewage into Lake Michigan. Russ: Yeah. That's a lovely story. I hope they are still cleaning it up in Chicago, before they drink it. Guest: I presume so. I have drunk their water. Russ: We're alive. Me, too. I'm alive, you're alive, so obviously it's working. Guest: Well, I think that's a crucial thing to understand, too. The environment--as I entitled one of my books: You have to admit, it's getting better. How much of it's due to regulation is up for debate. But certainly markets have played a role at a minimum at improving technology. I taught a class at the Stanford Business School on environmental entrepreneurship, and I tried to get the students to understand: Every input that you pay for at the back door that doesn't go out the front door as a saleable product is waste. And so if you are buying electricity or buying coal or buying wood or buying chemicals, and they don't get converted into a product you can sell, you have to get rid of them. You may choose to get rid of them into the air, but the fact that you're not capitalizing on the output side gives you a lot of incentive to reduce your use of coal, wood, chemicals, and so on. Russ: My favorite example of that is the aluminum can, which I've probably mentioned before on the program. But when I was a boy, 1954 birth; but in the 1960s only the strongest of the strong could crush an aluminum can. It was a way of showing off. Today, you can crush it with your finger, with your little finger. And that's because aluminum is expensive. They've found ways to use less of it, to still keep the can structurally strong enough. I love this, just the innovation of the shape of a soda can, its top, the way it tapers a little bit toward the rim, is a way to create structural stability and thereby use less aluminum, save money. They are not saying, I hope we can save the environment or preserve this previous resource. They are just saying, I want to make higher profit. Of course, they all compete, and as a result they don't get to capture the profit. But the effort to do so means the world's a better place. Guest: Yeah. And that's a part of free market environmentalism. Russ: Yeah. Hear, hear.

49:31 Russ: So, you recently wrote a piece with Daniel Botkin, who was a guest on EconTalk a while ago--but the piece was recently in the Wall Street Journal--on wildfires, which is something I'm interested in. Talk about what you argued in that piece. It's summertime. The forests are dry. And out here in the West especially you get a wildfire problem. So, talk about forest fires and wildfires and what you think we do wrong. Guest: I've come to be great friends with Dan Botkin. He's a wonderful ecologist. He's really changed my entire view. He had a huge impact on this edition of Free Market Environmentalism that's in press. And he did because in a book entitled Discordant Harmonies, Dan explained and opened my eyes-- Russ: Great book. Guest: It is a great book. I don't think it's read by ecologists, but I wish more would. In that he used the wonderful phrase that some of the people listening who are young might not understand. But he said, 'The environment is not a Kodachrome still life. It's a moving picture show.' When I read that phrase, I was just like--I've been thinking about this wrong all along. I was a balance-of-nature guy, you know, just back toward [?] dials, twist it here, tweak it here. And so on. Russ: Or, take my hand off the dial, because then it'll all just go back to its 'perfect natural state'. Guest: Yeah. Russ: It would persist forever, a Garden of Eden. Guest: And once I realized, from Dan's writing, that that was just not the right way to look at it--and I should note another great line that Dan has. In some of his writings he says, 'If you ask the average ecologist, is the environment dynamic?' They'll say yes. And then if you ask them, what policy would they put in place, it's a static balance-of-nature kind of policy. So, I've learned off that from Dan, and he visits here, PERC, often; and so he and I were talking about, we ought to write this up in some way to capture how his ideas interface with free market environmentalism. And that's what led to the Wall Street Journal piece. And forest fires are just a great example of the Kodachrome moment. We look out--and I can see it right out of my window--we look out at these green, forested mountains and we say, 'Keep it that way. That's what I like.' It's not even a balance of nature, now, because it was always burning from lightning or native Americans. But we take that Kodachrome picture and we say, 'Keep it that way.' And the result is, we don't manage the forests even in a dynamic kind of context. And so here in the West we have this huge buildup of fuels; we've hardly cut any trees on the national forest since the spotted owl debacle. I think the number of trees cut on forests is about 10% of what it was in the late 1990s when the spotted owl was a big debate. And so, these forests, unfortunately some are on national forest right behind my house, are tinderboxes waiting to go up. And so here in Montana this summer we've had a lot of rain and snowpack, so we're not worried at all. But California, Washington, Oregon--they are burning up. The point Dan and I tried to make was we need to find ways to create dynamic policies that are compatible with a dynamic environment. And that means, if you aren't going to have native Americans burning the forests, then you need to get in there with chain saws and cut or thin the forest. Russ: But isn't the problem also that when there is a fire, we try to put it out as soon as possible? Isn't that equally important as--seems to me, we shouldn't necessarily be logging here and there and trying to figure out what the right way to thin it is. The real challenge, it seems to me, is how much to let it burn. Guest: Yeah; but they go hand in hand, I think. If you don't do the logging, then when the forest does build up the old-growth trees that are dying, when it does catch fire, it's going to be a big fire. And coupled with that, of course, that today a lot of us, myself included, live on that, as it's called, 'urban wild land interface.' And living there, we say, Well don't let my forest burn--because that means my house burns. And so we spend billions of dollars on this every year. And it's that massive attack that has allowed this buildup. Because for the most part, fires don't get too big, because we get to them. We had a little one here near Bozeman last week. It was .6 acres. They dropped 8 smoke jumpers in; they had fire trucks there. That was not going anywhere. So, yeah. The question is: How do you create a more dynamic management system? And I think the answer, no surprise to you, is we need more private ownership of these forests. To give you just my favorite example: The Flathead Indian Reservation in northwestern Montana is home of the Salish/Kootena Confederated Tribes. They have forest that butts right up against national forest. If you compare the two, their forests earn $2 for every dollar they spend--the Indian forest. The Federal government just about breaks even; and that's really unusual. So, give the Federal government some credit--they did make it, there. But the Flathead forests have a better age distribution of trees, a better species distribution of trees; better water quality, better wildlife habitat. Better everything. Because they truly try to manage it in a way that reflects their dynamic needs and demands, and the dynamic nature of the forests they manage. It's on a large enough scale they can really do something. I think it's those kind of more localized--state governments are much the same--more localized and if possible private solutions to force management that really will be the way to deal with fire issues. All that said, I don't think in my lifetime we're going to see much privatization of national forests. But we should strive towards, I think, ways of localizing the management to take account of dynamic changes.

56:38 Russ: What purpose do the national forests serve? Obviously there's a great deal of recreation that's enjoyed within them. But they are different from national parks: people are allowed sometimes to log there, to use the resources there. What would be, if you had your druthers, what would be a good solution? And I just want to say, and I want to come back for a second to our national park discussion, people say, Would you want Walt Disney to run Yosemite? And my thought is, Well, they kind of do right now, because as we talked about before, the government runs it the way I think a lot of people think Disney would run it. It's an amusement park. It happens to be a natural amusement park. But they let a lot more people in, I think, than Disney would if Disney ran it. But the Sierra Club could run it. It doesn't have to be run by a for-profit corporation. It could be run in a lot of different and creative ways. And the real, fundamental question is, Is the governance structure of the Federal government responding to incentives in a useful way, or a not-so-useful way, relative to a different steward of that land? Whether it was a profit-making organization or a non-profit. So, what do you see for the national forest, which try to balance all these interests; and I suspect they don't do it very well? Guest: Well, your last point about balancing all these interests is key. Both the national forests and national parks. The fact of the matter is, these agencies are charged with managing multiple use. The Forest Service signs used to say--I don't know if they still do, but used to say, 'The land of many uses.' And that's true. They are the land of many uses. I want to hunt on them. You want to hike on them. Somebody else wants to snowmobile. Somebody else wants to ride horses. And somebody else says, Wait, that's my watershed. The list just goes on and on. And the problem, in the political arena, is trying to somehow manage across the multiple uses in a way that doesn't simply result in the land's being a political football. They are a political football. Russ: Let me caricature it, though. When I look at the government solution, I always think it always tends to enable and listen to the most powerful. A lot of people would say, well the free market approach listens to the richest. And that's not good either. Guest: Well, I think the powerful and the rich are often one and the same. And in the political arena, what's happened with national forest management is it is the powerful and the rich. Management of forest, as Jack Ward Thomas-- Russ: As opposed to the 'people'--that we like to think they do. Sorry. Guest: Jack Ward Thomas was Chief of the Forest Service in the Clinton Administration. And a good friend of mine. He describes the management as a giant Gordian knot. And he said, We had people who knew what to do. We had people who knew how to fight fires, where to fight fires, when to fight fires, when to cut trees. And the list goes on. But he said, we couldn't do any of it. Because every time we tried anything, we were tied up in court. And the court battles are generally battles led by environmental groups who have this balance-of-nature, pristine environment, keep-your-hands-off the dial perspective of forest management. And the result is, there's no management. And there is no such thing as no management; there never has been. And when you have this Gordian knot, the only result can be, a). conflict, because there are other groups that are trying to fight back from this. We care in Bozeman about our watershed. The land behind my house is likely to burn; it's in the Bozeman watershed; and yet, the trees that have been marked for cutting for 10 years still stand because every time they start a chainsaw, another lawsuit erupts. So, it's conflict, conflict, conflict, that I call multiple conflicts over multiple uses.