22 Aug 2017

Review: Water Capitalism

I was sent a review copy of this book on the request of its authors, Block and Nelson (B&N), and its provocative subtitle ("The case for privatizing oceans, rivers, lakes and aquifers") intrigued me.

Sadly, the book is far more of a libertarian rant in favor of private property and against government regulation than is justified by the topic: water.

In this review, I will go over the (fatal) weaknesses in B&N's argument before spending some time directly responding to their interpretation and analysis of "my ideas" from my 2011 book, The End of Abundance. I will pursue this two-part strategy to give their book its due, but my criticisms may apply to both their book and their interpretation of my book.

Their book begins with a charming quotation associating the authors and their readers with "those maniacal mariners who have revolutionized society in ways that the pertrified toe-dippers of the world never believed possible" and goes on to invite the reader to join them on a "wild ride."

Sadly, that ride appears to take place on a fantasy road, rather than the roads of reality, as B&N appear to totally ignore the fundamental nature of water in oceans and rivers (and to a lesser extent in lakes and aquifers), i.e., the non-excludable nature of water as a common pool or public good. Now B&N clearly understand that difference, as they propose to privatize those commons, but they have (1) very little to say* about the "transactions costs" of converting the ocean to a private good (the term doesn't even appear in the index), and (2) nothing to say about the "global authority" that would be necessary to implement and enforce such a plan. (Actually, they do claim that "courts" would enforce the plan... and suggest the Better Business Bureau and American Arbitration Association (p 22). I'm kinda doubting those organizations have jurisdiction over the Pacific Ocean or that the BBB or AAA would stop the Chinese or Canadian navies from taking "private water" by force.)

Just over a year ago, I wrote "When to rely on markets and when politics?" to clarify that goods that are non-excludable (due to high transaction costs and/or lack of enforcement of property rights) need to be managed with that characteristic in mind, but B&N think that's unnecessary as they try to put square pegs into round holes. (They do engage a bit with Ostrom's work on managing common-pool good, but Brock seems reassured by his earlier criticism of Ostrom, i.e., that the only way to address the tragedy of the commons is by privatization, i.e., making common-pool goods excludable.)

Let me note here that I am happy to consider changes in property rights as a means of addressing water mismanagement (see my paper on giving property rights in national water to citizens or this one on auctions for water [pdf]), but those "solutions" work with -- and depend upon -- political interventions. They cannot work from a pure laissez faire perspective. See below (on my book) for more on why all or nothing solutions such as B&N's are oversimplified.

A few details from their writing will help you see just how naive some of their claims are:
  • "18 billion more people could live on our planet if we could privatize the seas" to allow private production on water (page 3).
  • The water cycle should not impede privatization just as the land cycle (volcanoes, erosion) does not stop privatization as "a cycle is a cycle is a cycle" (page 5).
  • Privatization of the oceans will "end the epoch of 'non-restrained fish migration.' They will have no more liberty to travel than do barnyard animals" (page 7).
Each of those claims will attract criticism, but they are stated as if uncontroversial. Looking for more? How about "Who will rightly own the rivers, lakes and oceans. On what basis will property rights in these bodies of water be distributed? It starts with the Lockean principles of homesteading" (page 9). Although  I am pretty sympathetic to the tragedy of the commons that affects, say, the migration of Atlantic tuna, I am pretty sure that such a move to homesteading would (1) reward might rather than right and (2) entirely ignore the nature of oceans as a shared -- not private -- good.

Just a month ago, Tyler Cowen said that I was a "conservative intellectual" when it came to water policy (due to my support for pricing, property rights, etc.), so it's not exactly hard for me to understand B&N's libertarian perspective on privatization, but I reject those perspectives as both unrealistic (no political support) and ineffective (managing a non-excludable good such as migrant fish or the water cycle as if they were private). Going further (on might over right), I have to say I have my doubts that homesteading wouldn't just be another land water grab by colonial types disinterested in the traditional uses or communities that colonizers exclude from "their" land sea.

Moving onto chapter 2, I noticed that B&N appear to separate the world into "individuals with private property," government ownership mismanagement, and the commons of non-ownership. What's missing from this list is community ownership, which they -- I think -- mistake or confound with Soviet communism, especially when it comes to their examples ("suppose that t-shirts were all owned in common" page 16). This example betrays a total incomprehension of the difference between an excludable, rival good (a t-shirt) and non-excludable, non-rival good (the ocean), which means that nearly every parallel assertion they make in terms of efficiency, tragedy and so on is just wrong. It's with these kinds of basic errors in mind (perhaps common when few economists study non-market phenomena) that I quickly tired of B&N's provocative but entirely unworkable ideas.

For example, they claim that "chaos and government control" are the only alternatives to privatization when it comes to managing a community lake (page 16). It seems that they have never heard of a club or other organization for such a task. A pity.

For example, they say "markets outperform state services in all times and places..." (page 17) but that claim is falsified by the existence, persistence and outperformance of legal and defense services over private providers. Yes, it may be better to have private guards in some US communities, but there are plenty of places in the world where the government's monopoly on force helps average citizens  prosper.

For example, they claim that competition among sewage and drinking water providers would improve innovation (pp 26-27). First, they entirely miss the fact that those systems are "natural monopolies" -- meaning their high fixed set up costs and low marginal operating costs makes entry -- and thus competition -- difficult.  Second, they appear not to understand that water utilities often combine public ownership with private cooperation and innovation. This kind of ignorance (or lazy ideology) really undermines any useful points that they might contribute.

For example, in discussing ownership, B&N say that "neither author subscribes to the riparian concept," which may be good when it comes to theories of the Tooth Fairy, but doesn't really matter when many people (billions of them!) do subscribe riparian regimes where one person's use is allowed as long as that use does not harm others. Seriously, that's why we think it's okay to have public swimming pools but not okay to pee in them!

Bottom Line: I give this book TWO STARS for collecting a number of libertarian talking points into one place for those interested in their perspective on privatizing water in the oceans and so on, but the book is fatally flawed by a failure to reconcile those claims with the reality of water, economics, politics or existing institutions.

* Try as I might, I had a very hard time reading more than a page without coming up with a few objections, so I did not read between pages 37 and 208. Although such an omission may mean this review is biased, I am pretty sure that the authors did not fix the mistakes and omissions of earlier pages -- let alone drop them entirely -- so I stopped reading as soon as I felt like I understood where they went wrong in their analysis. That stop also made it easier for me to relax again, as the book was far too aggressive in making unsubstantiated -- and therefore flawed -- claims about how their ideas could or would be implemented. I will add here that this "problem" of ideological blinders occurs with "progressives" as well as "libertarians" as the people at both extremes seem unable to recognize explanations or trends that do not fit into their narrow bias (corporate evil and government evil, respectively).

Now I'll respond to B&N's critique of The End of Abundance (TEOA) on pages 208-213 in their book. At first, I was flattered to attract their attention, but then I was disconcerted to see that they had not read my book very well.

In my book, I suggest "some for free, pay for more" pricing of residential water. B&N attack me as a central planner (linking to their essay critiquing central planning) without appearing to notice that pretty much all drinking water services, world-wide, are regulated as natural monopolies by the government (I discuss that fact extensively in TEOA). My some-for-free suggestion (updated here) is therefore structured to bring water to all people, cover system costs, reduce revenue volatility, and encourage conservation when water is scarce. Free markets may be good for providing and allocating t-shirts, but they suck for delivering drinking water. (You can read my papers on implementing water meters in the UK or a history of drinking water services in the Netherlands for more on those topics.)

Next, B&N get upset with my worry that the poor get screwed by bad water policies, saying "the word 'fair' sits uneasily in a book that supposedly offers an economic analysis of water scarcity. Zetland treads dangerously close to a conflation between the normative and positive here" (p 209, their emphasis). I nearly spit out my coffee when I read this sentence in their book, which is filled to the brim with normative ["what should be"] statements of libertarian excess. Indeed, I really struggled to find much positive ["what is"] analysis in their book, besides well-deserved, but entirely off topic, examples of how the Soviets were bad at producing private goods. Even more distressing is that B&N seem to have missed the entire second half of my book, which addresses the social water choices requiring political or community tools. Although I am clearer in separating and combining economic and social chapters in my more recent Living with Water Scarcity, it's awfully hard to see how B&N could have missed the need for (positive) political reality, let alone the importance of governance and communities in the political-economic perspective that gave birth to modern economics -- and to which many of us have returned as a means of pursuing better analysis and solutions. (B&N go on to make a number of claims that water can be managed like groceries, restaurant meals, and cable TV. I think they need to retake industrial organization.)

What could they possibly say next? How about "It appears in his view that feminism, of all things, can help water markets" (p 211) before quoting my words "In the early 1990s, the Indian government amended its constitution to require that one-third of the leaders and members of village councils be women... Villages where women had power had 60 percent more drinking water facilities" and responding with "what does this have to do with the economics of water? Shall we unleash women power on other industries, and expect the same beneficial results?" I'm not sure if B&N have ever considered how villages, cities and countries make decisions on spending collective (budget) money, but they seem not to understand my point -- that women with voting power used that power to fund water supplies -- in their haste to see a "free market in water supplies" that does not exist, at least not in those villages. It's around this time that I was asking myself if B&N aren't actually just trolling readers.

They go on to misrepresent Coase ("For Coase there are two states of the world. The zero transactions cost model and the realistic one where transaction costs are very high, higher than any possible gains from transactions" p 212). In reply to this, I suggest they read Coase's 1960 paper (again?), with particular attention to Section VI ("The cost of market transactions taken into account") as Coase was well aware -- and awarded the Nobel prize thereby -- of the third option in which transaction costs were material to choosing markets or regulation, but not so high as to block "any possible gains from transactions."

B&N repeat their mistakes in misunderstanding the nature of water by criticizing my policy proposal to limit consumption of scarce water (to conserve supplies held in common) or adding deposits on plastic bottles (to reduce litter in the commons). As noted at the start of this review, some goods need political or social management by their nature.

Speaking of political management, I will end by responding to B&N's final words on my book, i.e., "any free market credentials Zetland may have possessed are almost certainly vitiated by this embrace of his of communism" (p 215), with "this" referring to my agnosticism on private versus municipal ownership of drinking water utilities. As I say in the book -- they quote me -- and all the time on this blog, it's not ownership that matters when discussing a natural monopoly (again, a concept that B&N do not appear to grasp), but the quality of the regulator's oversight of that monopoly. There are plenty of examples of private or investor-owned firms abusing their market power or providing reliable safe drinking water services, but they do not do so in a free market like the one for t-shirts that B&N appear to think can work everywhere.

And with that, I lay down my conservative-communist pen.

For all my reviews, go here.

Addendum: I cross-post my reviews on Amazon all the time, and I was curious to see why my 2-star review averaged with a (one sentence) 5-star review resulted in a 3.5 star rating. It's because the other reviewer was a "confirmed purchase" from Amazon. I guess that's reasonable, if you assume that the only way to buy a book is on Amazon and that all outside reviews must be biased (but it's not!).

Thus, if you like this review and have an Amazon account, then click on the link for the book at the top and up vote ("helpful") my review, to raise its "weight" in Amazon's algorithm.


Praveen Tiwari said...

Very well written post and I appreciate your concept of "some for free, pay for more", Kudos to you.

Onno said...

The idea of privatizing the sea sounds like the snarky comeback of someone opposing ridiculous free market thinking. Reality has surpassed satire once again.
As with many privatization endeavors, private companies will either abuse newly acquired power (i.e. overfishing in the short term, expecting any otherwise is naive and not understanding how shareholders work), or government regulation has to be so elaborate it's insane (and expecting this to be done properly on a global level is incredibly naive once again). Seeing that this is a libertarian book, the authors would probably prefer the former over the latter, which would result in an ecological disaster unseen before.
This whole idea is like privatizing 1 million railroad companies at the same time and expecting it to turn out in favor of the public; only a libertarian could believe it.

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