By Jack Greer

Think globally and spend locally. This Farmers' Market in Anne Arundel County — one of 74 throughout the state — captures the essence of local economics in action. Reaching for new ways to pay for the cleanup of the Chesapeake Bay while preserving the region's farm economy will require a two-handed approach: employing the visible hand of government regulations and funding with the invisible hand of market forces and creative economic incentives and disincentives. Photograph by Suzanne du Pont, Maryland Department of Agriculture.

While it was John Smith who first explored the Chesapeake, it may be Adam Smith who will help us clean it up.

According to the second Smith, an influential 18th century economist and author of The Wealth of Nations, free markets work with an "invisible hand" to guide the economy. By acting in our own self-interest, he argued, we ultimately accomplish a common good. What many forget, however, is that Adam Smith also held that this invisible hand could only work in societies that honored the rule of law.

In other words, the invisible hand of market forces requires the more visible hand of government regulation to provide a level playing field and to mete out punishment for those who break the rules.

This is why Dennis King has recently focused on "enforcement economics."

King, a natural resource economist with the University of Maryland Center for Environmental Science, believes government subsidies without regulation and enforcement only lead to "gaming" the system. Market forces, he says, can help drive Bay restoration efforts, but only if they're in line with real economic benefits and real punishments for breaking the ground rules.

"The key issue is long-term monitoring and enforcement," says King of many current Bay restoration programs. He feels that if programs put in place to restore the Bay are not enforced, then they are meaningless.

The Blue Ribbon Panel appointed last year by the governors of the Bay states agreed. "Every successful environmental program in this country has depended on a combination of adequate funding and appropriate regulation," said panelist and former Arizona Governor Bruce Babbitt.

Beyond Regulation

For economist King, the funding of restoration will become more effective as it connects with economic forces. For example, those interested in planting oyster spat or seagrass seedlings could offer contingency contracts — these would guarantee a certain purchase, no matter what. This approach would offset the uncertainties of weather and other factors, King says, and make it financially worthwhile for independent contractors to ramp up production efforts.

Without that ramping up, he says, our efforts will likely remain inadequate.

King points to other creative methods to insure against uncertainty. He notes the use of weather insurance in international markets, where brokers trade against the odds that the weather will be good for crops at any given time — or not.

In the Bay, he says that this would in essence serve as "salinity insurance" or perhaps even "nutrient insurance." If, for example, rain falls in abundance one year and the salinity goes down — along with dissolved oxygen — and a grower's oyster spat die, then the grower could collect insurance. Such insurance could also cover losses to oyster growers if, during a drought, salinity climbed higher than normal and caused more oyster die-offs from disease. This kind of insurance would help mitigate the unpredictability of such risky enterprises as oyster growing and seagrass planting, and would rely on free market mechanisms — brokerage firms and insurance companies — to make it happen.

Other market-based mechanisms where Adam Smith's invisible hand might work:

• Biodiesel — adding soybean oil to diesel fuel to create a more renewable, environmentally friendly fuel.
  
  
• Bioenergy — creating energy from manure and poultry litter, as well as energy crops such as switchgrass, willow and poplar.
  
  
• Pelletized poultry litter — using waste from chicken houses to create a marketable fertilizer product, as does the Perdue AgriRecycle plant each year with 60,000 tons of poultry litter.
  
  
• Trading — using the unequal efficiencies of different entities (such as wastewater treatment plants) to set up a specific market for credits (for nutrients, for example). The Blue Ribbon Finance Panel endorsed the use of trading among point sources like wastewater treatment plants, but did not yet see a convincing model for point-to-nonpoint trading (as between a wastewater treatment plant and a farm).

New products and approaches such as these would take better advantage of the invisible hand of market mechanisms, as long as government provides the more visible hand of enforceable regulation.

It's time, King and others are telling us, to use both hands.

This page was last modified April 06, 2005

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