Coase is an informative theory. I like it myself. But it isn't magic.
From the comments at Marginal Revolution:
I don’t know if Fustercluck is saying that, but in case she isn’t, I’ll say it. I’m saying it loud and clear. I know that you’re going to want to explain Coase to me, because if I don’t think that property rights allocations are the solution, then I must not understand the Coase Theory. Dude. I understand the Coase Theory. I have read, graphed, proved and taught Coase. But understanding isn’t agreement, and I do not agree that a Coasian allocation of rights would lead to an optimal distribution of water in the Klamath Basin.0
Coase requires low transaction costs, which is a stumbling block between two multi-party resource users, but maybe not insurmountable. It also requires perfect information. That is harder. But the real problem is that farmers are not profit-maximizers along every variable that they manage. Oh no they aren’t.
Farmers are generalists, and often very good ones. They keep everything on their farms running at, say, seventy percent1. But they are manifestly not nearing the marginal returns on nearly everything they do, and they do not respond to profit motives the way you think they do. Two concrete examples, off the top of my head:
Even in the absence of complicated calculations about whether someone would pay them more than they could reap from their next unit of water, real farmers in the real world do not respond to a profit motive the way a rational economic actor would. What is going on?
Well, farmers are notoriously slow adopters. Many are strong traditionalists, and chose an autonomous life-style because they do not want to have to change. It is a privilege they sacrifice money for. For some farms, the biggest source of change is generational succession.
More than that, though, is that farmers are incredibly busy, doing a very wide variety of things. They manage machinery, the crop, fertilizers, pesticides, harvest contracts, labor, water, soil, and their personal lives all the time. Frankly, they don’t manage all of them well enough to be finessing things like whether they could make more money selling the next acre-foot or using it themselves2. Some of them get all-fired-up for one or another aspect of farming. I remember one guy (surface drip on almonds, Sac Valley) who had an incredible system. His distribution uniformity was the highest I’ve ever seen. He went to irrigation conferences. He would know how much water he’s putting on and the value of the next increment. But I remember him because he was an exception. And, I’d be surprised if the time he spent on his irrigation system didn’t come out of somewhere else on his farm.
If you absolutely must believe that farmers are rational economic actors, then I could agree with you thusly: They are optimizing their personal preferences in time allocation and operational costs and adherence to tradition and desire for isolation and autonomy. I’d believe that. But they are far, far from maximizing any of several types of resource use, and they are never going to as long as farming is a generalist profession. What farmers are doing is a fine way for them to do business on their own farms. But it is not an acceptable way to allocate resources that matter to people and fish outside their farms.
A Coasian property allocation cannot work in a system where half the participants are not profit-maximizers in that resource3. Transaction costs are a problem and information is far from perfect. But even if those could be fixed, you’d have to overcome the problem that they are at the limits of their management capacity and more money in any particular area doesn’t tempt them enough to change what they actually do.
0I said below that I would trust Klamath irrigators to run the river to maximize their own profit. I am contradicting that now. I believe they would suck the river dry in support of their farming operations. I do not believe they would balance the value of the next unit of water they could apply to farming against the value they could get by selling it to fishers. (I remember that I also once said that a Coasian allocation would be the solution to drainage problems on the West Side. I'll stand by that. The growers are much bigger and more industrialized on the West Side, the problem is simpler and there is only the Feds on the other side of the negotiating.)
1You know who does do a much better job at nearly every aspect of farming? Large scale agribusiness. Those guys have Cadillac irrigation systems and they do not waste much. They have a person who does just irrigation, all the time. I would guess that they are equally proficient across the board. I’m opposed to large scale agribusiness for other reasons though (the vulnerability of monocrops, the mining of soils, the destruction of habitat they wreak (which is worse than small-scale farming), the concentration of wealth, the long-distance transportation of food.). Weighing my opposition to large scale agribusiness against their efficiencies in resource use is a particularly painful dilemma for me.
2Even when growers do take a strong interest in their own irrigation, they don’t have a good handle on what goes on in their fields. They aren’t the ones putting out siphons and moving pipe. They hire laborers to do that, and they do not pay their laborers enough to get a good job. A grower tells his irrigation foreman to have his crew move the siphons by five the next morning so that the night set was exactly twelve hours like the day set. The irrigation foreman isn’t going to wake his guys by five when they only make seven dollars an hour, and they get it done at six-thirty, right before the grower’s first drive-by. Day set is 11 hours; night set is 13 hours; your efficiencies are down and you wasted a couple acrefeet you could have sold in your imaginary market. But you get the job you pay for, and growers do not pay their irrigation laborers enough for finesse management
3I don’t know much about salmon fishers, but I can imagine an equally persuasive story saying they have lines to mend and boats to maintain and weather to watch and they are busy. You would have to convince me that on top of that, they are attentive enough to the Klamath River to decide whether they want to spend the next piece of money to get an extra cfs in there since it is predicted to be hot for the next week and that’ll raise the temperature of the river by a half a degree, increasing fry mortality by ten percent.
BEFORE YOU COMMENT:
I know how bad you need to tell me one more time about Coase and say “Well, when the incremental value of water is high enough to fishers, they’ll pay enough to get the farmer’s attention.” BEFORE YOU DO THAT, you must explain to me why that is different from farmers fore-going free money now (surge flows, fertilizer over-applications). Tell me why, based on your observations of what people really do on farms (or maybe in another comparable industry where it worked). “Because the theory I learned in economics is right and all my textbooks say the same thing” does not contradict the widespread practices I’ve seen or tell me that a Coasian allocation of property rights would work.
If your first sentence doesn't overcome the problem that farmers are not profit-maximizers in water use, DO NOT write a second sentence explaining a theory that depends on that assumption.
Sigh. We should start a pool for how many people are going to violate this comment stricture. My bet is four.
ADDED 9/26/7: A farmer, talking about the kinds of work he does.
Even more odd than the notion that whomever does own the rights would have access to data to signal when marginal returns occur and when it would make sense to sell/lease those rights to another party.
Posted by: fustercluck at Jul 1, 2007 12:58:07 AM
Fustercluck: I don't understand. If the next mega-gallon can produce $100 worth of crops or $200 worth of fish, are you saying that a farmer who owned it would not sell it (for between $101 and $199) to the fisherman? Just out of spite? Or stupidity? That strains credulity.
Posted by: David Wright at Jun 30, 2007 2:39:41 PM
I don’t know if Fustercluck is saying that, but in case she isn’t, I’ll say it. I’m saying it loud and clear. I know that you’re going to want to explain Coase to me, because if I don’t think that property rights allocations are the solution, then I must not understand the Coase Theory. Dude. I understand the Coase Theory. I have read, graphed, proved and taught Coase. But understanding isn’t agreement, and I do not agree that a Coasian allocation of rights would lead to an optimal distribution of water in the Klamath Basin.0
Coase requires low transaction costs, which is a stumbling block between two multi-party resource users, but maybe not insurmountable. It also requires perfect information. That is harder. But the real problem is that farmers are not profit-maximizers along every variable that they manage. Oh no they aren’t.
Farmers are generalists, and often very good ones. They keep everything on their farms running at, say, seventy percent1. But they are manifestly not nearing the marginal returns on nearly everything they do, and they do not respond to profit motives the way you think they do. Two concrete examples, off the top of my head:
1. Farmers on furrows can improve their irrigation efficiencies drastically by applying surge flows for the first hour of the irrigation event. Send a huge pulse of water down to the end of the furrow and that means that the rest of your water will reach the end of the furrow faster and infiltrate more evenly. It is worth an increase of about twenty percent to your distribution uniformity. In any irrigation event, using surge flows means that you can use ten or fifteen percent less water. In California, at least, water is now predominately billed by volume. They could save money by switching to surge flows.
There are no technological barriers to adoption of surge flows. You do not need new equipment. I suppose you might have to buy more siphons, but those are not a substantial cost. Surge flows require slightly more labor, but again, the costs of siphons and labor are small compared to the costs of the water they buy now.
It is, I tell you, a bitch to convince furrow irrigators to switch to surge flows. The work on surge flows has been done for decades and they are still not widespread. You tell a farmer about surge flows and he looks at you, says he never heard of such a thing. You say that it is working real well for those guys in the Friant, and he says they probably have different soils. You say, hundreds of dollars every time you irrigate, and he says he’ll think on it. Three years later you go back and he is still thinking.
2. Farmers in California at least, and my impression is that California farmers are as sophisticated as any in the world, profoundly over-fertilize. They over-fertilize until it burns their crop and then they cut back. Their excess fertilizer runs off their fields, carrying little tiny dollar signs with it. Your theory of profit-maximization says that farmers should apply fertilizer until the fertilizer-yield curve flattens out, and then stop paying for more fertilizer. But they don’t. They fertilize long past that point. Why?
I’ve wondered at this one myself, and the best I can figure out is that they are thinking superstitiously, putting the magic crop-guarantee on their fields, sure that more is better. It isn’t. But all the labels and all the instructions from the ag advisors and all the wasted money on fertilizers don’t stay their hand in the moment of application.
Even in the absence of complicated calculations about whether someone would pay them more than they could reap from their next unit of water, real farmers in the real world do not respond to a profit motive the way a rational economic actor would. What is going on?
Well, farmers are notoriously slow adopters. Many are strong traditionalists, and chose an autonomous life-style because they do not want to have to change. It is a privilege they sacrifice money for. For some farms, the biggest source of change is generational succession.
More than that, though, is that farmers are incredibly busy, doing a very wide variety of things. They manage machinery, the crop, fertilizers, pesticides, harvest contracts, labor, water, soil, and their personal lives all the time. Frankly, they don’t manage all of them well enough to be finessing things like whether they could make more money selling the next acre-foot or using it themselves2. Some of them get all-fired-up for one or another aspect of farming. I remember one guy (surface drip on almonds, Sac Valley) who had an incredible system. His distribution uniformity was the highest I’ve ever seen. He went to irrigation conferences. He would know how much water he’s putting on and the value of the next increment. But I remember him because he was an exception. And, I’d be surprised if the time he spent on his irrigation system didn’t come out of somewhere else on his farm.
If you absolutely must believe that farmers are rational economic actors, then I could agree with you thusly: They are optimizing their personal preferences in time allocation and operational costs and adherence to tradition and desire for isolation and autonomy. I’d believe that. But they are far, far from maximizing any of several types of resource use, and they are never going to as long as farming is a generalist profession. What farmers are doing is a fine way for them to do business on their own farms. But it is not an acceptable way to allocate resources that matter to people and fish outside their farms.
A Coasian property allocation cannot work in a system where half the participants are not profit-maximizers in that resource3. Transaction costs are a problem and information is far from perfect. But even if those could be fixed, you’d have to overcome the problem that they are at the limits of their management capacity and more money in any particular area doesn’t tempt them enough to change what they actually do.
0I said below that I would trust Klamath irrigators to run the river to maximize their own profit. I am contradicting that now. I believe they would suck the river dry in support of their farming operations. I do not believe they would balance the value of the next unit of water they could apply to farming against the value they could get by selling it to fishers. (I remember that I also once said that a Coasian allocation would be the solution to drainage problems on the West Side. I'll stand by that. The growers are much bigger and more industrialized on the West Side, the problem is simpler and there is only the Feds on the other side of the negotiating.)
1You know who does do a much better job at nearly every aspect of farming? Large scale agribusiness. Those guys have Cadillac irrigation systems and they do not waste much. They have a person who does just irrigation, all the time. I would guess that they are equally proficient across the board. I’m opposed to large scale agribusiness for other reasons though (the vulnerability of monocrops, the mining of soils, the destruction of habitat they wreak (which is worse than small-scale farming), the concentration of wealth, the long-distance transportation of food.). Weighing my opposition to large scale agribusiness against their efficiencies in resource use is a particularly painful dilemma for me.
2Even when growers do take a strong interest in their own irrigation, they don’t have a good handle on what goes on in their fields. They aren’t the ones putting out siphons and moving pipe. They hire laborers to do that, and they do not pay their laborers enough to get a good job. A grower tells his irrigation foreman to have his crew move the siphons by five the next morning so that the night set was exactly twelve hours like the day set. The irrigation foreman isn’t going to wake his guys by five when they only make seven dollars an hour, and they get it done at six-thirty, right before the grower’s first drive-by. Day set is 11 hours; night set is 13 hours; your efficiencies are down and you wasted a couple acrefeet you could have sold in your imaginary market. But you get the job you pay for, and growers do not pay their irrigation laborers enough for finesse management
3I don’t know much about salmon fishers, but I can imagine an equally persuasive story saying they have lines to mend and boats to maintain and weather to watch and they are busy. You would have to convince me that on top of that, they are attentive enough to the Klamath River to decide whether they want to spend the next piece of money to get an extra cfs in there since it is predicted to be hot for the next week and that’ll raise the temperature of the river by a half a degree, increasing fry mortality by ten percent.
BEFORE YOU COMMENT:
I know how bad you need to tell me one more time about Coase and say “Well, when the incremental value of water is high enough to fishers, they’ll pay enough to get the farmer’s attention.” BEFORE YOU DO THAT, you must explain to me why that is different from farmers fore-going free money now (surge flows, fertilizer over-applications). Tell me why, based on your observations of what people really do on farms (or maybe in another comparable industry where it worked). “Because the theory I learned in economics is right and all my textbooks say the same thing” does not contradict the widespread practices I’ve seen or tell me that a Coasian allocation of property rights would work.
If your first sentence doesn't overcome the problem that farmers are not profit-maximizers in water use, DO NOT write a second sentence explaining a theory that depends on that assumption.
Sigh. We should start a pool for how many people are going to violate this comment stricture. My bet is four.
ADDED 9/26/7: A farmer, talking about the kinds of work he does.
posted by Megan at 4:27 PM
42 Comments:
Megan, I do appreciate how honest and open you are about the shortcommings of your own arguments. As far as I'm concerned, all the answer required to this post is in footnote #1.
You are essentailly saying that small-scale farmers are such bad businessmen that, given control of this resource, they will manage it so poorly as to ruin their own businesses. Furthermore, you find their way of life so quaint and endearing that you want to manage this resource for them in order to prevent them from ruining themselves and being replaced by more efficient operators.
Since I don't work with farmers directly, I won't offer any opinion on your judgement of their business sense. But if you are correct, then I see no justification for the public to prop up their businesses for the benfit of your aesthetic sense. Let them fail and be replaced by more efficient (and, by your own admission, more environmentally friendly) large-scale agribusiness.
If you do personally place a high value on pastoral life, then instead of asking the rest of us to subsidize your tastes, you could always contribute to a charity group that performs re-enactments of old-style farm life. Or you could make a boat-load on money running a large-scale agribusiness and then retire to your own gentleman's farm.
Nice use of manipulation, making a public bet and guess at the outcome. Now you'll probably not get any violators of what you decreed, which ultimately is what you want.
I've had many arguments with a libertarian friend, especially on water rights/allocation. His discussion generally seems to be idealistic and I usually have a hard time seeing how it could be realistically applied. Thus, my problem with libertarianism is that it seems to be a lot of mental masturbation. I haven't seen it practically applied in any populous nation-state on this planet.
Do anyone out there have an example of a libertarian nation-state? I'd like (seriously) to read about whether it has been applied successfully somewhere in the world amongst a largish population of people.
dcw:
They haven't gone out of business yet. That is another basic assumption of economics, that inefficient businesses will be forced out. It sounds self-evident, and yet farmers (partially subsidized and otherwise) still persist. As long as they persist, we have to deal with the way they actually act.
by your own admission, more environmentally friendly) large-scale agribusiness.
I did not say more environmentally friendly. Along some axes, they are; among others, they aren't. I said that figuring out where I come down on that keeps me up at night.
you find their way of life so quaint and endearing that you want to manage this resource for them
You can't hear me when I say this, so perhaps I should give up trying. It isn't solely about my personal biases. It isn't about yours, either. It is about the collective will of the American people, which may well override either. You think that a market is the best way to express that. I'm not convinced. I think laws are a partial reflection of the will of the American people, distorted by lots of things, but nevertheless what we've got. Someone then has to use her skills to enforce them, and that person is a civil servant.
Yay for this post.
One of the (many) things I fundamentally don't understand is why people mistake utility maximization for profit maximization. In some cases, they're the same. In others, they aren't. When you're talking about private individuals, there's usually substantial but incomplete overlap.
Why do you write that it's a "basic assumption of economics" that "inefficient businesses will be forced out"? It's not - it's a feature of systems with a whole lot of conditions that aren't generally met. Further, as you note, it's not at all clear that those conditions are met in agriculture.
I'm kinda curious about why that is - how much money does a farmer lose by not surge irrigating (or whatever else)? How does that compare with profit variability due to weather and other external conditions?
Thanks, ptm.
Ummm, wild-ass guess? On the order of a few thousand dollars a year. Water just isn't expensive enough for growers to give it their full attention. Another thing that people don't realize about farmers is that they deal with huge flows of money all year long. They routinely make decisions on the order of tens or hundreds of thousands of dollars. A million dollars may flow through their hands over a year and come back in. They keep about $40K of that as profit, but the flows are really big. I think that clouds their decision-making. $5K per year could be a big deal to them, but it gets lost in the swirling amounts of really big money.
Well now I want a post on the impact of agribusiness vs small farmers. You have to stop adding all these interesting tangents to your posts. It gets hard to stay on track.
cbakker
Do anyone out there have an example of a libertarian nation-state?
Somalia.
It seems to me that big ag farms would internalize many of the costs related to monoculture. In e.g. this paper, diversification appears to be a win even without considering system-wide effects. So individual actors ought to benefit from diversification; it seems like big ag would pursue that of their own accord.
I also don't see why the costs of mining the soils wouldn't be internal. Those big operators have a property right in the soil, right? So why wouldn't they have an incentive to maintain it? Are they not doing their discounting right?
Also, I have to think that some of the small-farm resource inefficiencies are due to subsidies.
Most of the farmers I know would earn more money f0r less work if they walked off their farms and got a job.
So I'm easily convinced that they wouldn't maximise their income, especially if it meant something like not having a crop this year and selling water rights to a fisherman.
It gets hard to stay on track.
I don't even remember the track.
Those big operators have a property right in the soil, right? So why wouldn't they have an incentive to maintain it? Are they not doing their discounting right?
There's also the resistance to change, and also the resistance to implementing anything that a hippie ever approved. Yeah, I think they aren't doing their discounting right.
Also, I have to think that some of the small-farm resource inefficiencies are due to subsidies.
Big farm inefficiencies, too.
I think that in the marketplace of ideas, where people vote with their feet, libertarianism has been largely been identified (by revealed preference?) as a poor choice for modern governance.
Megan: I don't know why you denigrate my engagement. ("You can't hear me when I say this, so perhaps I should give up trying.") But I'll try to overlook that rather mean-spirited remark...
I do hear you, and even agree, so far as you go. Yes, the decision to pass the ESA and have farm subsidies does represent, in some fashion "the collective will of the American people". So, I might add, does the decision to put Bush & Cheney in charge of the EPA. And so would a market allocation of water rights.
The argument isn't about what should count as the "more true" collective will. The argument is about which particular framework is best for making collective decisions about resource allocation. I and others have pointed out numerous advantages to the market mechanism, e.g. Pareto efficiency and the incentivization of conservation. I and others have pointed out numerous disadvantages to the democratic central planning mechanism, e.g. lack of information and political corruption.
What you now need to do is point out some intrinsic advantages to democractic central planning allocation mechanism. Yes, it has some political legitimacy, but so would market allocation. Yes, it produced some outcomes you liked, but that isn't an intrinsic advantage (because by "intrinsic", I mean without reference to your or my prefered allocations).
I also want to point out that there is no reason for us to get hung up arguing about whether farmers would respond rationally to owning water rights. You don't think so, and although I'm not convinced, I've already said I don't care who owns the rights. If you don't want the farmers to have them, give them to the fishermen. Or the tribes. Or the next homeless guy you meet. All I care about is that they are enforcable and tradeable.
Don't you feel odd arguing that, whoever gets the water rights, he shouldn't be allowed to sell them to someone else, because your office's decision that he should have them is more better than his own decision that he would prefer to sell them to someone else?
I fear that this is largely a reiteration, but as an ex-economist with an exaggerated interest in institutionns and information rigidities, I just can't help myself: Coase was not a coasian. He didn't even create the Coase Theorem, George Stigler did. If you read Coase, particularly The Problem of Social Cost, you find that he used the set of assumptions of which the Theorem is composed as a straw man for many of his analyses.
On a tangential matter, as the discussion has progressed, it seems like there has become a concensus that utility and profit maximisation diverge, particularly for small-scale farmers but also potentially for other groups.
And this seems to get at the core of the "libertarian" discussion from before. A libertarian system, as a previous poster (I fear it was Anon.) said, requires a certain degree of commonality to function. Profit-maximisation provides a common ground for discussion, whereas utility maximisation is unlikely to, since different people are maximising very different preference sets.
Which supports the use of bureaucracies as a Second Best in situations with many disparate interest groups, as Megan suggests above. As the cited theory suggests, in situations where any one assumption fails, it may be necessary to change many other, previously-optimal, variables in order to reach the best possible remaining outcome. This may include the use of individuals who do not have all the information on everything, but can help to manage the information transfer programme.
P.S. Mitch/Megan: on the discounting, could they just be varying their discount rates over time (hyperbolically).
P.P.S. This thread is wearing me down; any chance of a description of windsprints (for a foreigner)?
Let me start this out with a question: If there were a way to make a Coasian solution work, would you want to use it?
To help us build an intuition on this, let me toss out a "modest proposal" to solve the problem: Internalize the externality by giving me all the relevant property rights.
In this proposal, I would own the revenue from selling irrigation water to farmers as well as licensing fishers in the relevant area. I would also have to pay for the infrastructure to supply irrigation water going forward and for enforcement to prevent unlicensed fishing (although I would get the right to set the enforcement policies within reason).
To improve social efficiency, I’m also allowed to price discriminate so that (if I do it well) my monopoly profits won’t create inefficient incentives for farmers and fishermen to go out of business if they can’t make a profit at what would have been the uniform monopoly price, but could have made a profit at the cost of the water to the other group (since as a price discriminating monopolist, I’ll be willing to lower the price only to the level of my next best offer if I need to in order to keep someone from going out of business).
At equilibrium, the price of water will probably be much higher, and each farmer will have incentives to conserve it, but will not be required to by fiat if it doesn’t make sense for his situation.
So, what’s wrong with this picture? Probably everyone’s first objection will probably be that it feels wrong for me to make a profit using public resources that I got for free and harm farmers and fishermen in the process by extracting monopoly profits. Not a problem. Sell the rights at auction instead. If you like, the proceeds of that sale can be given to farmers and fishermen. Now what’s wrong with it?
Telnar
Small farmers almost certainly aren't the only businesspeople who fail to be efficient profit-maximizers. Economic theory often translates poorly to the real world.
Wind sprints are just a series of high-intensity sprints. The "wind" part refers to being "winded", or gasping for breath, after each sprint. The idea is to run so fast that you are quickly in significant oxygen debt (and glycogen depletion). For a highly trained athlete the "sprint" will be really, really fast. For someone who is untrained it might look more like a brisk jog. When I run 400s at high school track mine (especially the last few) look more like slow jogs :)
dcw:
you clearly know nothing about Western water law, and your ignorance does not serve you well.
While I don't know Oregon's water law, I do know California's. Riparian rights are allocated by the State W a t e r Resources Control Board.
The problem on the Klamath is that a mistake was made about 100 years ago when the feds agreed to deliver water to some otherwise marginal farmland. The Klamath is now overallocated and the interested parties need to find a way to ramp down the use of the river as to live within the river's means.
Mistakes like this exist across the West. The Colorado River especially is substantially overallocated and the Basin states are working hard to reallocate their rights in a collective process to avoid litigation.
But mistakes made 100 years ago cannot simply be made to disappear with a hand-wave and a citation to a legal theory with very little applicability to the facts.
Justus, I prefer to have the "wind" refer to my (desired) speed!
A good one we did in HS basketball was to wrap a damp towel around a two by four and run the sprints almost in a crouch, pushing it across the floor.
That was not very much fun.
Francis: You seem to think that I and all the people proposing Coasian solutions expect to implement them within the bounds of existing law. That is clearly impossible. The proposals on the table are proposals to change the law, so whether they are inconsistent with present law is immaterial.
I do appreciate the admission that the central planning of water allocation has consistently made massive mistakes over the entire course of its history.
OK. It helps a HUGE amount to say that we're not talking about the real world conditions. I think everyone here can agree that we can't do this with water rights as they stand. I suspect Francis more than any of us (but certainly me, if I shouldn't be speaking for her) would be say that our water rights system is convoluted and messy and has had unfortunate consequences.
So, yes. In imaginary world there are far better schemes for allocating and trading water. But, there is no realistic option of getting to that system. For real. The stuff you're talking about is riot-inducing stuff, and that's before there is a genuine proposal somewhere that might actually cause change.
Here's the same type of question back to you: given what really exists (NOT markets), what are the better options than agency management? (
Telnar, the primary thing wrong with that scenario is that it doesn't account for the Karuk or the fish themselves, which have intrinsic value. Another thing wrong is that people start out with unequal distributions of wealth, so that the same purchase price for water doesn't reflect the same desire for water.
But, you didn't answer the critique in my original post, which is that growers aren't attentive to their own marginal costs for water. Actually - I'll take that one back. They might be under this scheme... In Portugal, farmers purchase each day's water in an open market. It is also the only place my irrigation professor had ever been to where irrigation was traditionally and exclusively a women's activity.
3I don’t know much about salmon fishers, but I can imagine an equally persuasive story saying they have lines to mend and boats to maintain and weather to watch and they are busy.
Every time I see the word "fishers" I think of large weasels :) I know "fishermen" is gender-specific, and "anglers" is mainly limited to recreational vs. commercial fish-catchers, but some new term might be in order.
I've seen a fisher! Or a marten! I wasn't sure which and it was running away.
Profit maximization is a social institution sustained by a combination of large administrative bureaucracies (in private sector corporations), centuries of social investment in technologies for rationalizing money flows (like accounting), and decades of training for practitioners (many accountants and corporate execs have MBAs now). It does help markets run efficiently, but there is nothing "natural" about it. Markets existed for thousands of years before they were fully rationalized. Sociologists like Weber understood this clearly.
Megan's post gets at this very well with the contrast between individual farmers (who are probably much closer to markets in a "state of nature") and large scale agribusiness / industrialized farms, who are more rationalized.
Honestly, Megan, you could build off this post to do a fantastic dissertation. I could see material for a couple of publishable articles right there, although perhaps someone else has already done them. This stuff is also quite relevant to agricultural extension, etc.
For a while, I thought Footnote 2 would be my dissertation. Grad school didn't go well for me, though.
I do not understand why so many people talk about maximizing PROFITS;
economics is about maximizing UTILITY.
Perhaps the difference is smaal for a corporation, but for farmers and fishermen it is usually huge, families, lifestyle, tradition etc. all weigh in.
There's nothing like actually having to pay a cost (rather than it being an abstract opportunity cost in the form of a deal not made with a group of fishermen) to focus one's attention on it. I think that raising the price of water will go a long way towards solving the problem of inefficient use of water without requiring any regulations on how much water can be used.
If there were a true consensus on an inherent value to the fish themselves that was strong enough that we could call the fish a public good (which I doubt there is), the monopoly solution could easily accommodate it by having the government pay a bonus or charge a fine each year to the monopolist reflecting the remaining public good value of the fish. These payments, as long as they were disclosed in advance, would be part of the monopolist’s calculations in bidding for the monopoly.
Your other concern is more fundamental, but has nothing at all to do with water. How much water people are willing to buy at a given price is an excellent indicator of how they value it compared to other similarly priced goods. It’s of course true that people with more money buy more things in general, but if you object to that, then your real beef is with other social institutions: capitalism, inheritance, and private property for starters.
I don’t see any more reason for the government to subsidize water to help farmers who are not able to make a living as farmers (paying market prices for everything they use, including water) continue being farmers than for it to subsidize any other worker whose job is obsolete (or at least obsolete the way he traditionally did it). While I sympathize with their plight, I don’t want to live in a society where we have millions of people working as blacksmiths and lamenting the fact that no one seems to need horseshoes any more. Working at a job that is no longer needed is a luxury and a very expensive one. If someone is rich enough to live as a gentleman farmer and lose money at it, that’s his business, but it seems like an odd thing to ask others to help pay for. I’d rather focus on helping people transition to roles where they can contribute than to subsidize them in roles which no longer make economic sense.
Telnar
I do not understand why so many people talk about maximizing PROFITS;
economics is about maximizing UTILITY.
Because without a common observable metric, like money, to measure utility in then economics becomes totally tautological and incapable of making any predictions at all. You don't get very far in understanding the market by saying businesses do whatever they do, because that must be what they want to do. That's where utility maximization puts you.
While I sympathize with their plight, I don’t want to live in a society where we have millions of people working as blacksmiths and lamenting the fact that no one seems to need horseshoes any more.
Oh, man. I totally want a wrought-iron-decorated iPod.
Telnar:
In general in California the farmers or local governmental agencies hold the water rights, not the federal government. For example, the Imperial Irrigation District is a public agency that holds water rights to about 3 MILLION ACRE-FEET PER YEAR of water from the Colorado River. (that's a lot of water.)
The federal government operates dams on the Colorado River to allow the District to gain access to its property. In return, the District sends the water to its constituents, farmers in Imperial County, California.
The same story is true across California. Farmers grow rice in the desert because they own enough water rights to do so.
The subsidy comes in with regard to the price paid by the farmers to the feds for the cost of operating the diversion facilities. Farmers would argue, however, that urban residents receive far greater transportation subsidies from the federal government than they receive in low cost water delivery.
Two additional points: providing water to California growers (a) is a tremendous benefit to low-income Americans who can as a result buy a wide range of healthy food at low cost, and (b) has significant national security implications. See China.
The difference between ag subsidies (many of which are utterly irrational -- but that has nothing to do with California farming) and buggy whip subsidies is that we all still eat.
Francis,
It's quite a stretch to claim that farm subsidies are a national security issue when the US is a net exporter of food.
It's an almost equally large stretch to claim that in a country which supports farm prices and applies tariffs to several kinds of imported food that the motive for agricultural water subsidies is lower food prices -- especially when the water subsidies are more local than the market for food making them more likely to end up in farmers' pockets than in lower food prices.
In economic terms, subsidizing water so farmers can grow rice in the desert is worse than spending the same amount of money in cash to bribe the farmers not to complain when the water is sent elsewhere. At least the bribe is a pure transfer which doesn't waste resources needed elsewhere. Btw, the subsidy isn’t just operating costs to divert the water. It also includes the opportunity cost to the feds of what they could have received by selling the water to someone else who values it more (like, say, the city of Los Angeles).
I'm not in favor of transportation subsidies either (although I am in favor of collective action to build roads ultimately paid for by those who use the roads -- in tolls when they can be collected easily, or in taxes otherwise). There's no inconsistency in opposing both.
Telnar
Great post!
It also includes the opportunity cost to the feds of what they could have received by selling the water to someone else who values it more (like, say, the city of Los Angeles
BUT THE FEDS DON'T OWN THE WATER!
I thought that respect for private property rights was an integral component of libertarianism. Telnar, you're suggesting that the Feds expropriate immensely valuable water rights because you disapprove of the manner in which the farmers exercise those rights.
The comments about utility, and the feds not owning the water, reminds me of an old story from Montana's ongoing statewide water rights adjudication. There was a requirement that everyone file claims for their water, and the Water Rights Bureau had a series of public meetings as the filing date approached, to explain the forms, procedures, etc.
A colleague of mine was at a meeting in a town just outside the Crow reservation. Everything was going fine at his little table, as each person came up with his/her own particular issues, until a large man, a member of the Crow Nation, came and sat at his table.
Give me the Bighorn river back. I want the Bighorn River back.
Obviously referring to a then-recent Supreme Court decision. My colleague tried several way to move the discussion off the point, but the man was adamant: he wanted the Bighorn River back, and he wanted it that day. My colleague made a strategic retreat (a/k/a comfort break) which was the only decent way out.
Water is a very emotional subject. It used to be said that more people were killed in the Old West with irrigating shovels than with six guns.
IME, many efforts to apply economic theory to water use in the West are something like attempts to apply economic theory to marriage. Some man might think he would be better off, in particular circumstances, 'renting' his wife to another. And when it's a decision of the couple, while there might be laws against it, well, I'm not going to clamor overloud for the aggressive enforcement.
Small scale farmers have, IME, a personal relationship to their land and its products. One wouldn't expect them to part with much water unless they were ready to walk away from the life completely -- and many aren't intrested in doing so unless and until they are no longer making enough money to live the minimal standard they'll accept.
CharleyCarp
PS I've got a pile of old water rights stories to tell, should the mood strike. I'll not clog Megan's comments with them, though.
Francis,
I may not understand the current situation well enough. I thought that the most common situation (although not the only one) was that the feds had announced a policy of providing water to certain people based on their situations with that policy likely to continue but of unspecified duration without promising a particular amount of water to named people in particular years.
If that's a fair description of what's going on, then my point stands (people who take risks because they trust government policies to continue should do that at their own risk). On the other hand, if individuals or businesses have specific water rights based on contracts with the government for specific amounts of water in specific years, then the feds should attempt to buy those rights back in the market at prices sufficient to encourage farmers to give them up voluntarily rather than just seizing them. If that's costly, perhaps it will remind the Feds not to give away assets too cheaply next time.
Telnar
Telnar:
Francis or Megan can speak better to water in big projects. Ordinarily, though, in the West,* a rancher acquires an individual right to use water on a specific plot of ground by doing so. Once you've irrigated one of your fields, you have a property right to continue to do so, limited only by (a) the amount that you've put to beneficial use and (b) whether there is enough water so that the people who put some to use from the same stream before you did -- that is, who acquired their rights before you -- can get their water.
If there are 10 users on a stream, but only enough water to meet half the need, the five users with the earliest rights get all the water they need, and the next five get nothing. Guess where the fish in the stream are in this scheme?
This is a matter of state law, and, in several states, actually predates statehood. There's no federal sale.
Now obviously, the federal government could use its powers of eminent domain to take the water right from some rancher. Just try it.
Now it's true that when the federal government puts water to use -- or reserves it for use** -- it acquires water rights just like anyone else. The thing is, in most places, these rights are going to be relatively junior, because there wasn't much federal development until the Progressive era.
CharleyCarp
* This is how Montana water law works, and is basically the ordinary system in the West. There are local variants, some quite important.
** Look up the Winters doctrine.
Megan, you clearly have had some contact with farmers, but you appear to have rather confused your observations. No "small farmer" is going to have an "irrigation foreman" with a bunch of lazy workers. (And yes, a farm hand who won't get up to change water is LAZY. Also replaced.)
He is the irrigation foreman. His son might be the irrigation worker. Along with a million other things, as you mentioned. He is already getting up at 12, 2, and 4 to check water. And he isn't going to increase his labor by 30%/watering to change all of his gates. (A man has to get some sleep, after all.)
And for that matter, no farmer is going to do 12/12 watering, because there is less evaporation at night. (But 12 hours? Just how long are these fields? You could probably save even more water by cutting the field in half.)
But farmers have switched from flood to furrow, and from ditches to pipe to circles, and substantially increase their water efficency and decreased their labor at the same time.
No, farmers are not profit maximizers. I've just wasted five minutes trying to verbalize the attraction to farming.
If I had to guess about overfertilization (is that REALLY a current problem?), I would say that it is driven by fear of having a weak crop.
As others have said, there is a major path-dependence problem. The old rule most places was that if you could pump it, it was yours. That had to be changed when people started pumping it to transport it. Another set of changes is in the offing. I don't expect good results.
(Maybe some of our differences are differences between CA & KS.)
Nathan:
Thanks for showing up and commenting. I really appreciate it.
I think we are talking about different farming styles. I have never been on a farm that didn't have a Mexican laborer irrigation crew, and as much as I've seen farmers in their fields, checking several times a day, I've never talked to one that still ran his own irrigation sets.
Furrows here are long, quarter-mile long. Twelve hours on furrows and border strips aren't unusual at all.
I'm not as strong on fertilizer stuff as water (meaning I haven't personally seen it many times), but the completely consistent gossip I hear from all my ag friends is that overfertilizing by a lot is the rule, not the exception.
I don't know if anyone is even reading this thread anymore, since I am coming to it way late, but I just have one thought to add, for posterity, if not any readers.
Well, farmers are notoriously slow adopters. Many are strong traditionalists, and chose an autonomous life-style because they do not want to have to change.
I used to know a particular farm very well. I won't be more specific at the risk of outing myself, but very well. Those particular farmers were well meaning, and they did their level best to keep up to date on the latest thinking on at least some aspects of their farming, but, boy howdy, were they isolated. And they worked all the time. The idea that the transaction costs for them of obtaining information could just be dismissed is absurd, though easier to the sort of people who would rather think up libertarian theories then spend time getting mud on their boots.
t.s., I'm still reading it, and it has gotten considerably more interesting since we started talking about farming.
Well, if everybody is complaining about something, there is a good chance that it's about to change, or that it already has. I know that we dropped our fertilizer use because my memories of the bottoms of the field changed. I also remember grandpa griping about overuse of fertilizer AFTER we dropped. He wasn't talking about the enviroment, though. He was talking about $$$. "That's money washing off the field." He also took a very jaundiced view of hybrids.
Of course, he was the last to use horses in the county, and helped form the water district, so he was hardly average. ;-) Too bad he died seven years ago, or he could have given us an earful.
1/4 mile rows are longish, but we ran them as well. (I double checked w/ google earth on that...) I'll try to ask dad how long we ran. It may be a soil difference.
And if they have a Mexican crew doing their watering, it is a MUCH bigger operation than I grew up with.
Oh, you can tell I've been off for a long time. We are of course also having serious problems in the MW with farmers & cities pumping down the aquifers. When I was growing up, I was told that the river (which almost always ran) had a number of springs twenty years before. None when I grew up. Now, the Pawnee "River" only runs when there is a major rain.
I glanced over the article. We had one field that we had to split because of well location and strength. If you water from the inside, you just move the pipe back & forth (real labor cost, as well as halving the time between changes) & pick the whole thing up, working it as one field. (You raise the equipment when crossing the road for seed, fertilizer, roguing (sp), harvesting, but not for disking.)
And you should have felt my shock when I saw that milkly sludge moving down the furrow. Glad to know it was just a tracer.
I don't know anything about mid-Western farming. I'd heard about your aquifer problems, but only in passing.
Don't know whether the acreage is bigger than you're used to, but I was being literal when I said that I've never been on a farm without a laborer irrigation crew, and I've been on probably 60 or 70 farms out here. Mostly truck crops, all kinds of systems.
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