Designing Institutions for the Anthropocene

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Wednesday, November 30, 2016

Getting the incentives right.


Irrigation districts are self-governing entities that perform functions of government at a local level. Copyright: Daniel Barnes 

Writing in 1990, Daniel Botkin observed that since the beginning of the modern environmental movement in the 1960s, environmental policymakers have had one core mission: restore the balance of nature. The laws and regulations intended to achieve this objective are designed to halt further human disruptions of nature or reverse the consequences of past disruptions. Recently, Emma Marris explained that this balance-of-nature paradigm leads virtually every scientific study of environmental change to use or assume a baseline. The baseline environmental scientists usually choose is the condition of nature before it was exposed to human influences. 

This understanding of environmental problems easily translates into policy prescriptions for “healing a wounded or sick nature” and to ethical claims that “[w]e broke it; therefore we must fix it,” writes Marris. Thus, baselines “typically don’t just act as a scientific before to compare with an after. They become the good, the goal, the one correct state.”

Both Botkin and Marris reject the balance-of-nature paradigm and its reliance on baselines. In their view, the natural environment is always changing, and humans have been an integral part of nature’s story for millennia. There is no balance to be restored, just an uncertain future. Humans may be able to influence that future, but they and all other living things must adapt to it, or perish. 

Yet a quarter century after Botkin labeled his theory the “new ecology,” public policies trail behind. Policymakers are generally discouraged from adapting to new understandings of the world by those with vested interests in existing policies. And bureaucracies face constituencies more interested in stability and the benefits derived from existing regulations than in policy changes that respond to new knowledge.

But if Botkin and Marris are correct that nature is constantly changing and that humans are an integral part of nature, policy changes are needed. If nature is always changing, restoring it to some previous state—if that is even possible—makes no sense. In reality, what has been described as the balance of nature turns out to be only the state of nature preferred by those claiming it to be in balance.

Without a baseline of nature in balance, environmental policies, like all political decisions, ultimately come down to competing preferences. And if there is no single correct policy objective, centralized policymaking is unlikely to be the best approach. Given shifting human preferences, a steadily changing and highly variable natural environment, and a wide array of human actions that affect nature, decentralized institutions allow for locally appropriate and timely decisions. We should, therefore, seek institutions that allow environmental policies to evolve along with changes in the environment and in response to shifting human preferences.

Local Problems, Local Solutions
Beginning in the 1980s, some economists began to argue that a greater reliance on private property rights, contracts, and markets would create ground-level incentives for people to make environmentally sensitive decisions. Free market environmentalists, as they became known, claimed that even if restoring the balance of nature made sense, it was a mistake for policies to treat all resources across a vast continent as if they were the same. Local property owners and resource users have knowledge that centralized regulators could never have. And unlike bureaucrats, private resource owners have strong incentives to make timely and informed adjustments when conditions change. 

This justification for decentralized decision making was, of course, not entirely new. Europeans have relied upon the principle of subsidiarity as a guide for designing institutions that govern large regions. The idea behind subsidiarity is that problems should be addressed at the most decentralized level that is appropriate to their solution. Problems tend to be less complex on the local level, where knowledge about those problems also tends to be deeper. When local problems have regional, national, or global effects or causes, then there may be justification for governance at a more centralized level. Subsidiarity allows for diversity and adaptability in both policy priorities and the means to achieve those priorities.

The American federal system is also an illustration of subsidiarity. But it is far more complex than the relative powers of the national and state governments that we tend to focus on. Counties, cities, towns, school districts, zoning districts, irrigation districts, drainage districts, rural fire districts, and weed control districts all perform functions of government. From the perspective of subsidiarity, all of these governing entities and decision makers should be viewed as parts of the structure of American government.


Environmental policies, like all political decisions, ultimately come down to competing preferences. And if there is no single correct policy objective, centralized policymaking is unlikely to be the best approach.

Hierarchy and Self-Organization
If we embrace the principle of subsidiarity, two concepts in ecology theory—hierarchy and self-organization—suggest how we might think about the allocation of authority among this wide array of human decision makers.

If we embrace the principle of subsidiarity, two concepts in ecology theory—hierarchy and self-organization—suggest how we might think about the allocation of authority among this wide array of human decision makers. 

Hierarchy theory serves to isolate segments of highly complex systems for careful study. For example, to understand the role of a particular organism in a larger ecological system, there are two necessary reasons for things being as they are: the underlying parts of an ecosystem such as climate and habitat must allow for a given organism to exist, and that organism’s existence must not be constrained by other organisms or factors. Take the lowly mouse as an illustration. Absent particular food sources, water, and temperatures, the mouse is not possible. Thus, mice are not observed everywhere on earth. But the prevalence of mice where they are possible is constrained by predators, disease, and even traps set by humans. 

The existing combination of possibilities and constraints that allow the mouse to exist is not by design. It is the result of what ecologists call self-organization. What appears to be conscious coordination among organisms within an ecosystem is actually the result of spontaneous and fortuitous interactions among individual organisms. Thus, the mouse has a shot at, but is not assured, a role in a particular ecosystem at any given point in time. 

What distinguishes humans from all other organisms in an ecosystem are the capacities to understand interactions among organisms and to consciously regulate effects on the ecosystem. These capacities can be employed through many different institutional arrangements. As the following examples illustrate, the ecological principles of hierarchy and self-organization are instructive in applying the concept of subsidiarity to the allocation of authority among various levels of government.

fishing boat photo credit Thomas Quine
Under catch-share management, a total allowable catch is determined by a centralized authority, and individual fishers are granted a form of property right known as an individual transferable quota to catch a share of the total harvest limit. Photo: Fishing Boats in Iceland > Photo credit: Thomas Quine 

Marine fisheries
When it comes to ocean fisheries, it is often not possible for local or even national governments to manage fisheries that are both widespread and transient. National regulation of fisheries will be limited by national jurisdictional boundaries, while also being constrained by various international agreements. This combination of restraints from below and above argues for some sort of international institution, yet the actual fishing is done by individual private entities who will be difficult to police given physical realities of the oceans. So the best solution in terms of both productivity and conservation may be one that is highly centralized in setting harvesting limits and highly localized in creating incentives to comply with those limits.

Land
The environmental successes and failures of land management regimes in the United States tend to confirm the validity of the subsidiarity prescription. Zoning by local governments is intended to protect wetlands, wildlife habitat, open space, scenic vistas, and other so-called ecosystem services. Although some of these values either can be or already are supplied privately, an absence of markets can limit the possibilities to solve environmental problems through the decentralized institution of private property. But the wide variation in ecological conditions across a large area of diverse communities constrains the effectiveness of zoning implemented on a state or national level.  

Oregon, where a set of statewide goals and guidelines govern land use planning and regulation in every corner of the state, is illustrative. Because it is not possible for a statewide system to account for the preferences of every individual, and the state consists of a wide variety of communities with different shared values, the result has been an imposition of urban values on rural communities along with processes appropriate in some settings yet unduly burdensome in others.  

Water
With water resources, ownership of the physical resource is not possible given the transitory nature of most water bodies. In England, the institution of riparian rights emerged, likely as a result of self-organization among neighboring property owners. This riparian doctrine, under which owners of lands adjacent to a particular stream had correlative rights of use in the water, was received by the eastern U.S. states and initially adopted by new states heading west. But the naturally arid conditions of the American West imposed significant constraints on the effectiveness of the doctrine.

Once again self-organization among water users led to a new approach in the arid West: the first-in-time, first-in-right, prior appropriation system, which facilitated the beneficial use of scarce water. With a growing population and more water rights claimants, record keeping and permit systems were put in place to avoid conflict and inform potential users of existing rights. As water sources became heavily exploited, concerns about future water needs led state governments to impose conditions and limits on new permits. More recently, states have imposed restrictions on previously established rights, usually in an effort to protect fish and wildlife. 

Today, there has been a strong push for more centralized planning and policy directives regarding water resources in response to increased urban demand, the requirements of policies like the Endangered Species Act, and extended droughts. Contrary to the principle of subsidiarity, the default has been toward greater centralization. Most notably, the efficiency advantages of market allocation have been abandoned to regional and statewide planning.  

While some level of centralization in water allocation is needed to achieve certain policy goals, there is little reason to think we have the institutional arrangements correct overall. The fact that the system was, in its beginnings, self-organized is persuasive evidence that it served the needs of private users. Yet there is no doubt that public needs, particularly those of the modern environmental era, were neglected due to the constraints of the private rights system. Centralized authority, however, has its own constraints and possibilities that will not be evaluated and understood if the default is ever more centralization, whether toward policies that govern water or any other natural resource.

Constraints and Possibilities
Although environmentalists often prefer to view their causes as the pursuit of a higher good, environmental protection and preservation are really just an aspect of the larger challenge of allocating scarce resources. The fact of scarcity is what leads to concern about polluted air, endangered species, threatened wetlands, open space, and every other resource we might value.  

If we understand the objective of environmental policy to be the allocation of more resources to the satisfaction of environmental values, and we accept that this objective will influence the selection of institutions for resource allocation, “new ecology” provides some guidelines for getting the institutions right. The principle of subsidiarity holds that we should prefer the most decentralized approach that achieves our purposes. People closer to a problem usually have better knowledge of both the causes of the problem and the remedies likely to solve it. Self-organization also informs institutional design, Humans have a natural capacity for it, as happens in markets, where the force is no less powerful than in the self-organization of natural ecosystems. And while hierarchy theory in ecology seeks to explain why things are as they are, the concepts of possibilities and constraints can be helpful to institutional design. What is impossible should not be attempted, and constraints—both natural and human-imposed—will limit alternatives that would otherwise be possible.  

It all seems rather obvious, but the tunnel vision of special interest politics too often leads to policy choices that are doomed to fail in the face of unrecognized or unacknowledged limits from below and above.

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James L. Huffman is dean emeritus of the Lewis & Clark Law School and a PERC board member. His recent article "People-Made Law: Spontaneous Order,Change, and the Common Law" appears in the Journal of Law, Economics & Policy.James Huffman has served as the Erskine Wood Sr. Professor of Law at Lewis and Clark Law School in Oregon, and served...
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