Naked Economics

by Wheelan, Charles

  Why do people kill black rhinos? For the same reason they sell drugs or cheat on their taxes. Because they can make a lot of money relative to the risk of getting caught. In many Asian countries, the horn of the black rhino is believed to be a powerful aphrodisiac and fever reducer. It is also used to make the handles on traditional Yemenese daggers. As a result, a single rhino horn can fetch $30,000 on the black market—a princely sum in countries where per capita income is around $1,000 a year and falling. In other words, the black rhino is worth far more dead than alive to the people of impoverished southern Africa.

  Sadly, this is a market that does not naturally correct itself. Unlike automobiles or personal computers, firms can’t produce new black rhinos as they see the supply dwindling. Indeed, quite the opposite force is at work; as the black rhino becomes more and more imperiled, the black market price for rhino horn rises, providing even more incentive for poachers to hunt down the remaining animals. This vicious circle is compounded by another aspect of the situation that is common to many environmental challenges: Most black rhinos are communal property rather than private property. That may sound wonderful. In fact, it creates more conservation problems than it solves. Imagine that all of the black rhinos were in the hands of a single avaricious rancher who had no qualms about making rhino horns into Yemenese daggers. This rancher has not a single environmental bone in his body. Indeed, he is so mean and selfish that sometimes he kicks his dog just because it gives him utility. Would this ogre of a rhino rancher have let his herd fall from 65,000 to 4,000 in thirty years? Never. He would have bred and protected the animals so that he would always have a large supply of horns to ship off to market—much as cattle ranchers manage their herds. This has nothing to do with altruism; it has everything to do with maximizing the value of a scarce resource.

  Communal resources, on the other hand, present some unique problems. First, the villagers who live in close proximity to these majestic animals usually derive no benefit from having them around. To the contrary, large animals like rhinos and elephants can cause massive damage to crops. To put yourself in the shoes of local villagers, imagine that the people of Africa suddenly took a keen interest in the future of the North American brown rat and that a crucial piece of the conservation strategy involved letting these creatures live and breed in your house. Further imagine that a poacher came along and offered you cash to show him where the rats were nesting in your basement. Hmm. True, millions of people around the world derive utility from conserving species like the black rhino or the mountain gorilla. But that can actually be part of the problem; it is easy to be a “free rider” and let someone else, or some other organization, do the work. Last year, how much time and money did you contribute to preserving endangered species?

  Tour and safari operators, who do make a lot of money by bringing wealthy tourists to see rare wildlife, face a similar “free rider” problem. If one tour company invests heavily in conservation, other tour companies that have made no such investment still enjoy all the benefits of the rhinos that have been saved. So the firm that spends money on conservation actually suffers a cost disadvantage in the market. Their tours will have to be more expensive (or they will have to accept a lower profit margin) in order to recoup their conservation investment. Obviously there is a role for government here. But the governments in sub-Saharan Africa are low on resources at best and corrupt and dysfunctional at worst. The one party who has a clear and powerful incentive is the poacher, who makes a king’s ransom by hunting down the remaining rhinos, killing them, and then sawing off their horns.

  This is pretty depressing stuff. But economics also offers at least some insight into how the black rhino and other endangered species can be saved. An effective conservation strategy must properly align the incentives of the people who live in or near the black rhino’s natural habitat. Translation: Give local people some reason to want the animals alive rather than dead. This is the premise of the budding eco-tourism industry. If tourists are willing to pay great amounts of money to spot and photograph black rhinos, and, more important, if local citizens somehow share the profits from this tourism, then the local population has a large incentive to keep such animals alive. This has worked in places like Costa Rica, a country that has protected its rain forests and other ecological features by setting aside more than 25 percent of the country as national parks. Tourism currently generates over $1 billion in annual revenue, accounting for 11 percent of the national income.1

  Sadly, this process is working in reverse at the moment with the mountain gorilla, another seriously endangered species (made famous by Dian Fossey, author of Gorillas in the Mist). It is estimated that only 620 mountain gorillas are left in the dense jungles of East Africa. But the countries that make up this region—Uganda, Rwanda, Burundi, and Congo—are embroiled in a series of civil wars that have devastated the tourism trade. In the past, local inhabitants have preserved the gorillas’ habitat not because they have any great respect for the mountain gorilla, but because they can make more money from tourists than they can by chopping down the forests that make up the gorillas’ habitat. That has changed as the violence in the region grinds on. One local man told the New York Times, “[The gorillas] are important when they bring in tourists. If not, they are not. If the tourists don’t come, we will try our luck in the forest. Before this, we were good timber cutters.”2

  Meanwhile, conservation officials are experimenting with another idea that is about as basic as economics can be. Black rhinos are killed because their horns fetch a princely sum. If there is no horn, then presumably there is no reason to poach the animals. Thus, some conservation officials have begun to capture black rhinos, saw off their horns, and then release the animals back into the wild. The rhinos are left mildly disadvantaged relative to some of their predators, but they are less likely to be hunted down by their most deadly enemy, man. Has it worked? The evidence is mixed. In some cases, poachers have continued to kill dehorned rhinos, for a number of possible reasons. Killing the animals without horns saves the poachers from wasting time tracking the same animal again. Also, there is some money to be made from removing and selling even the stump of the horn. And, sadly, dead rhinos, even without horns, make the species more endangered, which drives up the value of existing horn stocks.

  All of this ignores the demand side of the equation. Should we allow trade in products made from endangered species? Most would say no. Making rhino-horn daggers illegal in countries like the United States lowers the overall demand, which diminishes the incentive for poachers to hunt down the animals. At the same time, there is a credible dissenting view. Some conservation officials argue that selling a limited amount of rhino horn (or ivory, in the case of elephants) that has been legally stockpiled would have two beneficial effects. First, it would raise money to help strapped governments pay for antipoaching efforts. Second, it would lower the market price for these illicit items and therefore diminish the incentive to poach the animals.

  As with any complex policy issue, there is no right answer, but there are some ways of approaching the problem that are more fruitful than others. The point is that protecting the black rhino is at least as much about economics as it is about science. We know how the black rhino breeds, what it eats, where it lives. What we need to figure out is how to stop human beings from shooting them. That requires an understanding of how humans behave, not black rhinos.

  Incentives matter. When we are paid on commission, we work harder; if the price of gasoline goes up, we drive less; if my three-year-old daughter learns that she will get an Oreo if she cries while I’m talking on the phone, then she will cry while I am talking on the phone. This was one of Adam Smith’s insights in The Wealth of Nations: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” Bill Gates did not drop out of Harvard to join the Peace Corps; he dropped out to found Microsoft, which made him one of the richest men on the planet
and launched the personal computer revolution in the process—making all of us better off, too. Self-interest makes the world go around, a point that seems so obvious as to be silly. Yet it is routinely ignored. The old slogan “From each according to his abilities, to each according to his needs” made a wonderful folk song; as an economic system, it has led to everything from inefficiency to mass starvation. In any system that does not rely on markets, personal incentives are usually divorced from productivity. Firms and workers are not rewarded for innovation and hard work, nor are they punished for sloth and inefficiency.

  How bad can it get? Economists reckon that by the time the Berlin Wall crumbled, some East German car factories were actually destroying value. Because the manufacturing process was so inefficient and the end product was so shoddy, the plants were producing cars worth less than the inputs used to make them. Basically, they took perfectly good steel and ruined it! These kinds of inefficiencies can also exist in nominally capitalist countries where large sectors of the economy are owned and operated by the state, such as India. By 1991, the Hindustan Fertilizer Corporation had been up and running for twelve years.3 Every day, twelve hundred employees reported to work with the avowed goal of producing fertilizer. There was just one small complication: The plant had never actually produced any salable fertilizer. None. Government bureaucrats ran the plant using public funds; the machinery that was installed never worked properly. Nevertheless, twelve hundred workers came to work every day and the government continued to pay their salaries. The entire enterprise was an industrial charade. It limped along because there was no mechanism to force it to shut down. When government is bankrolling the business, there is no need to produce something and then sell it for more than it cost to make.

  These examples seem funny in their own way, but they aren’t. Right now, the North Korean economy is in such shambles that the country cannot feed itself, nor does it produce anything valuable enough to trade to the outside world in exchange for significant quantities of food. The nation is on the brink of famine, according to diplomats, United Nations officials, and other observers. This mass starvation would be a tragic repeat of the 1990s, when famine killed something on the order of a million people and left 60 percent of North Korean children malnourished. Journalists described starving people eating grass and scouring railroad tracks for bits of coal or food that may have fallen from passing trains.

  In the United States, there is a great deal of hand-wringing about two energy-related issues: our dependence on foreign oil and the environmental impact of CO2 emissions. To economists, the fix for these interrelated issues is as close to a no-brainer as we ever get: Make carbon-based energy more expensive. If it costs more, we will use less—and therefore pollute less, too. I have powerful childhood memories of my father, who has no great affection for the environment but could squeeze a nickel out of a stone, stalking around the house closing the closet doors and telling us that he was not paying to air-condition our closets.

  Meanwhile, American public education operates a lot more like North Korea than Silicon Valley. I will not wade into the school voucher debate, but I will discuss one striking phenomenon related to incentives in education that I have written about for The Economist.4 The pay of American teachers is not linked in any way to performance; teachers’ unions have consistently opposed any kind of merit pay. Instead, salaries in nearly every public school district in the country are determined by a rigid formula based on experience and years of schooling, factors that researchers have found to be generally unrelated to performance in the classroom. This uniform pay scale creates a set of incentives that economists refer to as adverse selection. Since the most talented teachers are also likely to be good at other professions, they have a strong incentive to leave education for jobs in which pay is more closely linked to productivity. For the least talented, the incentives are just the opposite.

  The theory is interesting; the data are amazing. When test scores are used as a proxy for ability, the brightest individuals shun the teaching profession at every juncture. The brightest students are the least likely to choose education as a college major. Among students who do major in education, those with higher test scores are less likely to become teachers. And among individuals who enter teaching, those with the highest test scores are the most likely to leave the profession early. None of this proves that America’s teachers are being paid enough. Many of them are not, especially those gifted individuals who stay in the profession because they love it. But the general problem remains: Any system that pays all teachers the same provides a strong incentive for the most talented among them to look for work elsewhere.

  Human beings are complex creatures who are going to do whatever it takes to make themselves as well off as possible. Sometimes it is easy to predict how that will unfold; sometimes it is enormously complex. Economists often speak of “perverse incentives,” which are the inadvertent incentives that can be created when we set out to do something completely different. In policy circles, this is sometimes called the “law of unintended consequences.” Consider a well-intentioned proposal to require that all infants and small children be restrained in car seats while flying on commercial airlines. During the Clinton administration, FAA administrator Jane Garvey told a safety conference that her agency was committed to “ensuring that children are accorded the same level of safety in aircraft as are adults.” James Hall, chairman of the National Transportation Safety Board at the time, lamented that luggage had to be stowed for takeoff while “the most precious cargo on that aircraft, infants and toddlers, were left unrestrained.”5 Garvey and Hall cited several cases in which infants might have survived crashes had they been restrained. Thus, requiring car seats for children on planes would prevent injuries and save lives.

  Or would it? Using a car seat requires that a family buy an extra seat on the plane, which dramatically increases the cost of flying. Airlines no longer offer significant children’s discounts; a seat is a seat, and it is likely to cost at least several hundred dollars. As a result, some families will choose to drive rather than fly. Yet driving—even with a car seat—is dramatically more dangerous than flying. As a result, requiring car seats on planes might result in more injuries and deaths to children (and adults), not fewer.

  Consider another example in which good intentions led to a bad outcome because the incentives were not fully anticipated. Mexico City is one of the most polluted cities in the world; the foul air trapped over the city by the surrounding mountains and volcanoes has been described by the New York Times as “a grayish-yellow pudding of pollutants.”6 Beginning in 1989, the government launched a program to fight this pollution, much of which is caused by auto and truck emissions. A new law required that all cars stay off the streets one day a week on a rotating basis (e.g., cars with certain license plate numbers could not be driven on Tuesday). The logic of the plan was straightforward: Fewer cars on the road would lead to less air pollution.

  So what really happened? As would be expected, many people did not like the inconvenience of having their driving days limited. They reacted in a way that analysts might have predicted but did not. Families who could afford a second car bought one, or simply kept their old car when buying a new one, so that they would always have one car that could be driven on any given day. This proved to be worse for emissions than no policy at all, since the proportion of old cars on the road went up, and old cars are dirtier than new cars. The net effect of the policy change was to put more polluting cars on the road, not fewer. Subsequent studies found that overall gas consumption had increased and air quality did not improve at all. The policy was later dropped in favor of a mandatory emissions test.7

  Good policy uses incentives to some positive end. London has dealt with its traffic congestion problems by applying the logic of the market: It raised the cost of driving during the hours of peak demand. Beginning in 2003, the city of London began charging a £5 ($8) congestion fee for all drivers entering an eight-square-mile section o
f the central city between 7:00 a.m. and 6:30 p.m.8 In 2005, the congestion charge was raised to £8 ($13), and in 2007, the size of the zone for which the fee must be paid was expanded. Drivers are responsible for paying the charge by phone, Internet, or in selected retail shops. Video cameras were installed in some 700 locations to scan license plates and match the data against records of motorists who have paid the charge. Motorists caught driving in central London without paying the fee are fined £80 ($130).

  The plan was designed to take advantage of one of the most basic features of markets: Raising prices reduces demand. Raising the cost of driving discourages some drivers and improves the flow of traffic. Experts also predicted an increase in the use of public transit, both because it is a cheap alternative to driving, but also because buses would be able to move more quickly through central London. (Faster trips lower the opportunity cost of taking public transit.) Within a month, the results were striking. Traffic fell 20 percent (settling after several years at 15 percent lower). Average speed in the congestion zone doubled; bus delays were cut in half; and the number of bus passengers climbed 14 percent. The only unpleasant surprise was that the program had such a significant deterrent effect on car traffic that revenues from the fee were lower than expected.9 Retailers have also complained that the fee discourages shoppers from visiting central London.

  Good policy uses incentives to channel behavior toward some desired outcome. Bad policy either ignores incentives, or fails to anticipate how rational individuals might change their behavior to avoid being penalized.