You Really Want Government Drilling for Oil?
It's about incentives.
You’ve got to hand it to the people who really dislike free markets. They see them everywhere (under every bed?) and especially wherever any serious problem arises. That no free market exists within a thousand miles makes no difference whatsoever.
Take the oil spill in the Gulf. Market opponents are having a field day. They say this finally demonstrates the need for government to run things. Private firms can’t be trusted.
But it looks more like government can’t be trusted. The central government is, in law and in fact, the owner of the part in the Gulf where BP drilled for oil. (I didn’t say it was the legitimate owner.) The owner leased its property to a private company, BP, with a bad safety record (though a good one for sucking up to the environmentalist establishment and bureaucrats) and issued permits for the drilling operation. It then failed to keep a sharp eye on what BP and subcontractors Transocean and Halliburton were doing to its property. That might have something to do with the fact that government regulators don’t have the sort of relationship to “their” property that real private owners do, and they can always be counted on to get friendly with those they regulate. The Minerals Management Service in the Interior Department has a special conflict of interest: It makes money off the drilling it permits and regulates. Thus it could benefit from decisions that are bad for the public.
So what failed here, the market or the State? The call isn’t even close. The free market was nowhere near the scene. It has an airtight alibi. It didn’t exist.
Now with some effort you might get a die-hard anti-market person to concede this. So we move to the next step. What should replace the current hybrid (government-corporate) system? I see only two choices: full government management or full market management. Full government management wouldn’t appear terribly promising, considering that the current problems are traceable back to government management already. How would things change substantially if, instead of contracting out the drilling to a nominally private company, the government instead hired the personnel itself and paid them directly from the U.S. Treasury? Who cares if the rig says “BP, ” “Transocean,” or “U.S. Government” on it? The same fallible people would be in the same position to make the same fateful mistakes. Not much would have changed.
Incentives Matter
That’s because what matters is incentives, not whether a worker is on the government payroll. Why assume that civil service employees know more or care more than people paid by corporations?
But, it will be said, the government workers will have a mandate to protect the environment and the public. Okay, let’s go with that. Let’s say the decision-makers are environmental hawks who really don’t like oil drilling anywhere. They’ll be tough: no drilling unless it’s 100 percent safe. Leaving aside the obvious problem with this standard, that policy would have costs. The risk of oil spills may drop to zero, but we might have to forgo certain important benefits in the process. Poor people, say, might have their prospects dimmed by more expensive energy.
Is the tradeoff worth it? How do we go about answering that question? Government is no help here. It can certainly impose a plan, but constructing a plan beneficial to the public would be like playing darts in the dark. What bureaucrats think is good for us may not actually be good for us, no matter how much they care. Mises and Hayek covered this in their writings on state socialism and economic calculation.
Things are sure looking bleak. Government assurances are worthless whether it contracts out for drilling or does it itself. That leaves only the free market. Can it be trusted?
First off, let’s remember that we live in the real world. There are no iron-clad guarantees. The best we can hope for is relative security. Option A can’t be perfect. All we can ask is that it is better than Options B, C, and D. But how do we decide? When people conclude that government management is the best alternative, knowingly or not they have rigged the game. They are comparing the messy real world in which free markets would operate to an impossible government-managed smooth-running utopia, where regulators have complete knowledge and total dedication to the public interest. This is the Nirvana Fallacy, and the problem with it is that utopia isn’t on the table.
What is on the table are two options: an arrangement where incentives align economic activity with the public interest and one where they don’t. Now which setup seems more promising? One where personnel risk no capital, face no prospects of bankruptcy, and procure their revenue by force (taxation) after flattering members of special-interest-serving congressmen? Or one where: capital had to be raised from wary investors in a competitive environment, insurance would be priced according to risk, products would have to be sold to buyers who are free to say no, and full and strict liability would haunt every decision, with bankruptcy always looming and no government bailout are even implied?
When you come down to it, the choice is really rather easy.
Pingback by You Really Want Government Drilling for Oil? on 11 June 2010:
[...] Thus it could benefit from decisions that are bad for the public. Your government at work. You Really Want Government Drilling for Oil? | The Freeman | Ideas On Liberty Blog: http://libertarianblue.blogspot.com/ Death to Socialist Liberals and Authoritarian [...]
Comment by Norman on 11 June 2010:
Headlines read “Obama to scold Tony Hayward, age 62, CEO of BP Oil, and tell him to stop dividend payment on stock to halt political criticism.” Why does this man continue to work? I hope he has enough money to retire, read Atlas Shrugged, and join the leisure society. It’s time for free market advocates, who can, to retire, smell the flowers, and let the government drill for oil.
Pingback by BP Oil Spill Another Example of Government Failure - Civitas Review Online on 11 June 2010:
[...] Sheldon Richman points out in this column,however, the free market’s hand prints are nowhere near the BP incident. Take the oil spill in [...]
Comment by TokyoTom on 11 June 2010:
Sheldon, nice post, but you haven’t really sketched out what the free-market alternative to government drilling or the status quo would look like.
As I noted in a comment to Scott Sumner, in a free market alternative, resource users would own the rights to manage and harvest wild resources (which would give them direct claims against polluters), and would have a voice in determining when and where seabed resources are developed.
To move in this direction, NOAA’s successful experiments with “catch rights” need to be vastly scaled up.) We would still have oil & gas development, but the fishermen would do a vastly better job of policing the oil companies – who would have to face other resource users with full incentives and abilities to protect their livelihoods. (Obversely, oil companies would also be better managers if they had control over the very valuable fish harvest rights in particular blocks, and would manage to in a way that would reflect such value.
Under the current system, fishermen are trapped by government ownership/mismanagement in a “tragedy of the commons” and beholden to government for protection of the resources and for some recompense in the case of damages suffered.
Comment by Dennis on 11 June 2010:
Another great article, Mr. Richman. It seems as though interventionists are always quick to blame a free market where none exists. My blood comes to a boil every time I hear somebody say that free markets need to be reined in to avoid greed.
I also share Norman’s frustration and agree 100% with his comments.
Comment by TokyoTom on 11 June 2010:
Norman: How are Tony Hayward and heads of other large corporations that are doing their best to use government to give them sweet deals that shift risks to society at large “free market advocates”, in any sense of those words?
To Sheldon and real lovers of freedom, the current situation itself is an anathema.
Dennis: “My blood comes to a boil every time I hear somebody say that free markets need to be reined in to avoid greed.” And this reaction, while understandable, is wrong and makes MY blood boil. The productive response is to sympathize with the anger of others at obviously unjust behavior, and to explain that greed is human nature, but it runds rampant when government control resources and markets.
Comment by Tim on 12 June 2010:
Sheldon is correct. A legal regime which respected property rights and strict liablity would encourage responsible behaviour on all the parties. The mixed or corporatist system that is currently in places is rife with moral hazards. If BP had been confronted with full costs of liability, the company would have been more safety conscious or perhaps abstained from drilling in the area all together.
Only the free market knows. Those who believe the government can somehow intervene to correct for “market failure” presume perfect knowledge and pure motivations on the part of the regulators. Believing in such a state is akin to believing in Santa Claus and or the Tooth Fairy.
Pingback by Capitalism V3.0 Roundtable » Blog Archive » You Really Want Government Drilling For Oil? on 13 June 2010:
[...] You Really Want Government Drilling For Oil? June 13th, 2010 Posted by Robert Fredericks You Really Want Government Drilling For Oil? [...]
Pingback by You Really Want Government Drilling For Oil? | Strike-The-Root: A Journal Of Liberty on 13 June 2010:
[...] Bureaucracy You Really Want Government Drilling For Oil? [...]
Comment by Frankinbun on 13 June 2010:
So it was the GOVERNMENT now! If they had just left BP alone, they wouldn’t have drilled so carelessly. Dude! You need to listen to yourself! To say the least, your logic is slightly SKEWED!!
If the government can’t be trusted, and tramples all over peoples freedoms, then why do you believe the official 911 story and the whole homeland security, patriot act bull? Why are we spending trillions on defense and wall street bailouts? That must be all bull too,right? So are you for investigating 911?
Comment by Mark W. Stroberg on 13 June 2010:
Frankinbun, I don’t know where Richman stands on 911 truth, but he is absolutely, positively, againt the Patriot Act, the national security state, the Wall Street bailouts, and spending trillions on defense. If I am correct, he is a voluntaryist, and does not believe in any government at all. He is, after all, in favor of the free market, therefore he opposes these things. Please do your research before spouting.
In a truly free market, we would not be drilling for petroleum in the open ocean. It is likely that petroleum would not even be a major source of our energy (look into legalizing industrial hemp).
Pingback by BP Oil Spill: So what failed here, the market or the State? on 13 June 2010:
[...] Read the whole thing here: You Really Want Government Drilling for Oil? [...]
Comment by Jesse Walker on 13 June 2010:
I see only two choices: full government management or full market management.
I’m not advocating it, but there’s a third choice: a full-fledged prohibition on drilling at those depths. While this would presumably be imposed by the government, I’d say it’s a step beyond “management.”
Comment by William Anderson on 14 June 2010:
Mr. Richman is correct. Furthermore, the safety and environmental record of state-owned oil outfits hardly is worth emulating. If anything, government-owned oil companies have worse records than our own semi-privately-owned companies.
Unfortunately, this “government-solves-everything” that has become our present social mantra fails to look beyond the rhetoric.
Comment by John Davidson on 15 June 2010:
Sheldon, while you’re arguably correct to say that the free private market was not, technically, a player in this drama, it’s equally true that genuine public government was not a player either. The “government” at issue is privately owned; it’s a corporate subsidiary. The incestuous relationships between the MMS and the oil industry make this clear. Obam’s appointment of Salazar (an energy industry shill) to head interior makes this clear. (See http://www.npr.org/templates/story/story.php?storyId=98347731) Obama received more campaign money from BP in recent years than any other politician.
The idea that private ownership of a resource encourages responsible stewardship of that resource has some validity in some contexts. But the principle has serious limitations.
One obvious problem with the principle: private ownership does not encourage multi-generational stewardship; it discourages it and is, to that extent, inefficient. Suppose, for instance, that you, the “owner” of a submerged oil deposit, can choose between two extraction strategies. Strategy one will allow you to extract 1/3 of the oil (worth $1 billion) immediately but irretrievably waste the other two thirds. Strategy two will allow you to extract 1/10 of the oil every fifty years, retrieving all of it over 500 years, wasting none. Which strategy will you pursue as a private, rational economic actor/owner? Option one. The long term value of the resource has no worth to you. It is because of this dynamic that, while we find few old growth forest stands remaining on public lands, we find virtually none remaining on private lands.
I think the judicially recognized public trust doctrine, which goes back at least as far as the Roman emperor Justinian, recognizes an important truth: the control of some resources is so intimately connected with public welfare, and their potential mismanagement presents such public risk, that their control must be treated as inherently governmental. They are “sovereign” resources, and they cannot be legitimately privatized any more than core legislative and judicial powers can be privatized. Traditionally, the water resource has been at the core of public trust protection: oceans, beaches, and rivers are not to be privatized. Nor is wildlife. I would argue that fossil fuels should also be on that list, especially now that we have discovered the danger that their unregulated use poses to the other traditional commons — air, water, and wildlife. To the extent that offshore drilling directly implicates oil, ocean, and climate, it should be publicly managed or curtailed altogether.
Most private property advocates avoid discussing these problems. A notable exception is Richard Epstein’s “Justice Across Generations,” 67 Tex L. Rev. 1465 (1989). Epstein minimizes the problem and largely adopts your reasoning, but he acknowledges at p. 1489: “The one major concern is the environment. . . . The common pool problem with fisheries is not solved by a rule allowing everyone the right to keep the fish that they catch. Some rule must be devised to preserve the long-term stock as well against, for example, oil pollution. The common pool problem is writ large when the issue is the preservation of diverse species, the prevention of the greenhouse effect, or the restoration of the ozone layer. Some form of collective intervention is appropriate here, just as it is appropriate to prevent nuisances and the premature exhaustion of common-pool resources.”
Tokyo Tom’s response, above, is worthwhile. Taking free market theory seriously, he advocates at least minimal steps to insure that oil exploiters aren’t allowed to skew the market unfairly by externalizing harms onto the fishing economy. But, to be minimally just, an authentic free marketeer would need to go much further. What of the families who swim in the surf? Shouldn’t they have some control over the drillers who impact their recreation? The riparian homeowners? The surfers and scuba-divers? Also, I hate to throw a wrench into the works, but what about the sea creatures themselves? Are there limits to the extent to which the players in a human market may legitimately externalize their harms and costs onto other species? For a serious libertarian treatment of that question, see chapter 3 of Nozick’s Anarchy, State and Utopia.
Comment by Ryan on 28 June 2010:
John Davidson: Are you seriously telling me that “public government”, facing re-election every few years, has a greater interest in maintaining the value of property than a family business, who in a free market would not be subject to estate taxes, much less outright confiscation subject to whatever political risk comes down the pike? That “public government”, both author and executor of ‘the rules’, does an adequate job of protecting the people’s property rights from its own malfeasance? Guffaw!
Comment by James on 1 July 2010:
A friend and myself have been discussing this matter, and some questions about riparian rights have been raised, Doesn’t a countries boundaries usually end about seven miles off shore? Therefore how does some Corporation(Bp)or Country US get involved? Isn’t this area of the Gulf open water? Have Countries extended there boundaries that far out into open sea? During the Cold war when I served in SAC in USAF I thought the the US limit that Soviet subs could taunt the US perimeter was seven miles has something changed since 9-11?
Comment by djcokvme on 7 February 2012:
exrb4A kcmfyzdgdsfa, [url=http://jbfeljvtrcxp.com/]jbfeljvtrcxp[/url], [link=http://udocizubaaof.com/]udocizubaaof[/link], http://cyjvyphzuitk.com/
Trackback by stop spam plugin on 8 February 2012:
Usefull website…
[...]always a big fan of linking to bloggers that I love but don’t like spam links? Check this wordpress plugin.[...]……