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Gerard Jackson: Free markets, forests and ownership

By Gerard Jackson,

A great deal of nonsense has been spouted about the economics of logging and of woodchips in particular. I take the stance that only the market can determine the true value of our resources, including forests, and the uses to which they should be put.

Despite the dishonesty and emotional silliness of the greens and their allies in both major parties it must be remembered that trees, like cattle, only have value to the extent that they serve human needs.

Unlike cattle, however, trees can serve to a considerable degree as consumption goods, that is, people can directly derive pleasure from them.

Alternatively, trees also serve as capital goods; they are cultivated, harvested and then converted through various complex stages of production into higher value goods such as furniture, housing, paper, etc.

The question is to which use should trees be put?

The market solves this problem for forestry as neatly as it solves for the wheat farming, mining or manufacturing. In the market place trees are valued, as are all other economic goods, by the subjective evaluations of consumers.

Let us say that because of a forest's location the owner only faces three choices:

  1. He can withdraw the forest from the market and keep it as it is for his own personal pleasure.
  2. He can charge people to camp in it.
  3. He can cultivate and harvest the trees.

Which one will it be?

The first choice is one of pure consumption and there is absolutely nothing irrational about it. However, we shall assume he eschews 1 in favour of an income.

Having done his calculations, he decides (horror of horrors) on logging.

What is to stop him from logging every tree? The same thing that stops the cattle farmer from slaughtering all his cattle — and that is the loss of future income. The trees are now his capital and his future income depends on maintaining his capital stock, i.e., trees.

He does not need politicians, bureaucrats or Green activists to direct his actions to conserving his capital any more than does the wheat farmer, rancher or manufacturer.

The value of the forest will be the discounted sum of its anticipated income. Therefore it is in the interest of the owner to maximise the present value of his forest by not exploiting its resources beyond the point where its capital value will be reduced. (Strictly speaking, it is the internal rate of return that is maximised). Whether the trees are chipped, used as weatherboard or transformed into furniture is totally irrelevant. What is relevant is that they are turned into higher valued goods to serve the needs of consumers.

It can be said that this is all well and good in theory but what about externalities? What if logging damages local agriculture by reducing water yields? Again, there is no real problem.

It must be remembered that part of the local farmers’ water supply is being produced by the forest owner’s capital. Until he employs that capital, the farmers are really receiving a gift from him. It is only because of his trees that they get the present water yield. The farmers can calculate the estimated value of the output they will lose when the forest owner utilises his capital and then make him an offer.

The point is that the value of the farmers’ lost output should at least be equal to the value of the forest owner’s income from the trees. To prevent him from harvesting his trees (i.e. force him to withhold his capital from the market) in order to save the farmers’ output is, in effect, forcing him to subsidise their activities thereby distorting production by misdirecting resources to the farmers thus lowering consumer welfare.

So long as all parties have property rights and are free to negotiate there is no real problem.

The essence of the argument is that private ownership of forests is far more beneficial for the public interest than state control, meaning control by politicians, bureaucrats and pressure groups. Politicians tend to serve their own interests; to them, profit maximisation only equals the maximisation of votes. And the forest industry now knows what that means.

In truth, if those who favour state ownership of our forests were consistent they would also apply the same logic to demanding state ownership of agriculture.

As for the greens, if they do not want to see trees used as capital goods then the solution is simple: they can compete with consumers for the trees by offering to buy the forest. But being socialists by temperament as well as conviction, they much prefer to pick the public’s pocket rather than dip into their own.

Whenever greens succeed in having forest production curtailed, the pockets of the general public become that much smaller and the tax burden that much bigger.

(c) 2006, Gerard Jackson
Reproduced with permission