By Herman Daly
Economists have traditionally considered nature to be infinite relative to the economy, and therefore not scarce, and therefore properly priced at zero. But the biosphere is now scarce, and becoming more so every day as a result of growth of its large and dependent subsystem, the macro-economy. As the macro-economy expands into the ecosystem it displaces what was there before, namely habitat of other species (and of indigenous and poor members of our own species). Consequently, biodiversity decline is a salient index of the increasing scarcity of nature, as is involuntary resettlement of people to make way for dams, mines, soybeans, and cattle; and of course increasing depletion and pollution. Sacrifice of nature’s scarce services constitutes an increasing opportunity cost of growth, and that in turn means that nature must be priced, either explicitly or implicitly. But to whom should this price be paid? Nature would prefer not to sell herself, but if forced to it by growth, would at least like to divide equally among her children the revenue from the forced sale of her previous gifts. From the point of view of efficiency it does not matter who receives the price, as long as it is counted and paid by the users. But from the point of view of equity it matters a great deal who receives the price for nature’s increasingly scarce services. Such payment is the ideal source of funds with which to finance public goods, and to redistribute to the poor.
“Value added” belongs to whoever added it. But the original value of that to which further value is added by labor and capital, the value of scarce natural resources and natural services, should belong to everyone. It is the original commonwealth. These “payments to nature” should be the focus of redistributive efforts. Payment for what is now too scarce to be treated as a free gift is measured and appropriated by markets as a rent (payment in excess of necessary supply price). Rent is unearned income to the recipient, but allocative efficiency requires that it be paid by the user of the resource. Taxation of value added by labor and capital is certainly legitimate. But it is both more legitimate and less necessary after we have, as much as possible, captured natural resource rents for public revenue.
The above seems to be the basic insight of early American economist Henry George (1839-1897) who applied it specifically to rent on the scarcity of desirable locations of land rather than to rents on natural resource scarcity in general. Could we not extend Henry George’s logic to resources in general? For resources the necessary supply price is the cost of extraction—so any payment above cost of extraction is rent. Since land has no cost of extraction all payment for land is rent. If no rent is paid, land does not cease to exist. Neoclassical economists accept this definition of rent but resist Henry George’s ethical emphasis on rent as unearned income.
The modern form of the Georgist insight is to tax the rent from land, and by extension from natural resources and services of nature, and to use these funds for fighting poverty and for financing public goods. Or we could simply create a trust fund from these rents, and disburse the earnings from it to all citizens, as in the Alaska Permanent Fund. Our present practice of taxing away a lot of the value added by individuals from applying their own labor and capital creates resentment, and discourages the supply of labor and capital. Taxing away value that no one added, scarcity rents on nature’s contribution, does not create as much resentment, and the resentment it does cause is less justified. In fact, failing to tax away the scarcity rents to nature and letting them accrue as unearned income to a landlord class has long been a primary source of resentment and social conflict. Furthermore, taxing land and resource rent does not diminish their quantity. Soviet communists tried for a while to abolish the category of rent because it represented unearned income—a part of “surplus value” like profit and interest. They jumped to the conclusion that therefore resources and land must be free. But that makes it impossible to allocate resources efficiently. Better to follow Henry George and retain rent as a necessary price for measuring opportunity cost, but to then tax it away as unearned income to the landlords. The more we tax away rent the less we have to tax the value added by human labor and capital.
Charging scarcity rents on natural resources and redistributing them to the commonwealth can be effected either by ecological tax reform, or by quantitative cap-auction-trade systems. In differing ways each would limit expansion of the scale of the economy into the biosphere, thereby preserving biodiversity and also providing revenue to run the commonwealth. I will not discuss their relative merits here, but rather emphasize the advantage that both have over the currently favored strategy. The currently favored strategy might be called “efficiency first” in distinction to the “frugality first” principle embodied in each of the policies mentioned above.
“Efficiency first” sounds good, especially when referred to as “win-win” strategies, or more picturesquely as “picking the low-hanging fruit.” But the problem of “efficiency first” is with what comes second. An improvement in efficiency by itself is equivalent to having an increased supply of the resource whose efficiency increased. The price of that resource will decline. More uses for the now cheaper resource will be made. We will end up consuming perhaps as much or more of the resource than before, albeit more efficiently, as pointed out in the nineteenth century words of economist William Stanley Jevons:
“It is wholly a confusion of ideas to suppose that the economical [efficient] use of fuel is equivalent to a diminished consumption. The very contrary is the truth.” (The Coal Question, 1866, p. 123)
We need frugality (diminished consumption) more than efficiency. “Frugality first” induces efficiency as a secondary consequence, an adaptation; efficiency first does not induce frugality—it makes frugality less necessary, and it does not give rise to a scarcity rent that can be redistributed. Let us put frugality first by reducing physical throughput with ecological tax reform and/or cap-auction-trade systems for basic resources, and by so doing both avoid the Jevons effect and collect the scarcity rents on nature for the commonwealth rather than the elite.
If we could directly limit population and per capita resource use (scale of the macro-economy) to a level that nature could easily sustain, then nature’s services could remain free. But if we insist that population and per capita consumption must be free to grow, then the rising cost of natural resources must indirectly limit growth, and the question of who receives the increasing rent (who owns nature) will become ever more pressing, and Henry George’s thinking ever more relevant. Alternatively, our increasing takeover of nature will, beyond some point, render moot the question of distribution of rents by eliminating all potential claimants! When an overloaded ship sinks all aboard drown—even if the overload is justly distributed and efficiently allocated!
Herman Daly is CASSE Chief Economist, Professor Emeritus (University of Maryland), and past World Bank senior economist.