WEBVTT NOTE Surface Water Allocation in Alberta: Lesson from the Economic Calculation Debate 1 00:00:00.000 --> 00:00:14.000 This is the second time I've been to the Austrian Scholars Conference and it's always such a pleasure to be here and I compliment the organizers for doing an excellent job year after year. 2 00:00:17.000 --> 00:00:28.000 Since August 2006, portions of the South Saskatchewan River Basin in Alberta, Canada, where I'm from, have been closed to new water license applications. 3 00:00:28.000 --> 00:00:33.520 Notable exceptions include First Nations peoples and government approved water conservation 4 00:00:33.520 --> 00:00:39.880 and storage projects. The moratorium on issuing new water licenses has created an excess demand 5 00:00:39.880 --> 00:00:46.560 for them and consequently the economic circumstances that give rise to mutually beneficial interpersonal 6 00:00:46.560 --> 00:00:53.560 exchange. At present, provincial legislation allows for the transfer of water licenses, 7 00:00:53.560 --> 00:01:11.560 There is a public review of every proposed transfer, central authorities evaluate potential hydrological and third-party impacts, and the provincial government can retain up to 10% of the quantity traded for environmental purposes. 8 00:01:11.560 --> 00:01:19.560 In spite of water licenses that do not grant any form of private property right and ubiquitous government oversight, 9 00:01:19.560 --> 00:01:24.720 The process of transferring water from one person or group to another is characterized 10 00:01:24.720 --> 00:01:31.720 in academic, political and in lay circles as a market-based approach. 11 00:01:31.720 --> 00:01:38.720 My hypothesis is, the present system of transferring water licenses in Alberta is in no way a market. 12 00:01:39.440 --> 00:01:45.280 As surface water in Alberta is a non-privately owned resource, its distribution and application 13 00:01:45.280 --> 00:01:51.080 are determined politically and are thus subject to all the net shortcomings of central planning. 14 00:01:51.080 --> 00:01:57.440 My purpose is to draw lessons from the economic calculation debate to reveal that market-based 15 00:01:57.440 --> 00:02:02.700 solutions to perceived problems in Alberta are an illusion in the absence of saleable 16 00:02:02.700 --> 00:02:06.040 private property. 17 00:02:06.040 --> 00:02:12.960 The evolution of administrative solutions to perceived water problems in Alberta begins 18 00:02:12.960 --> 00:02:18.860 is rather oddly in a legal case that had nothing to do with the subject of irrigation or the 19 00:02:18.860 --> 00:02:26.440 semi-arid region in southern Alberta. Instead, it involved a dispute between two entrepreneurs 20 00:02:26.440 --> 00:02:35.440 located thousands of miles away southeast of Montreal in the province of Quebec, who 21 00:02:35.440 --> 00:02:43.440 were on opposite sides of the idyllic North Yamaska River in the town of Granby. 22 00:02:43.440 --> 00:02:50.440 Francis Gilmore owned land on the north side of the river and a grist mill built in 1830. 23 00:02:50.440 --> 00:02:56.040 He also owned the north half of an upstream dam and a sluice, which allowed water to flow 24 00:02:56.040 --> 00:03:02.440 downstream to his mill. Harlow Miner was the owner-operator of a tannery on the south side 25 00:03:02.440 --> 00:03:09.640 of the River, built in 1834. He owned the south half of the upstream dam and a flume 26 00:03:09.640 --> 00:03:16.200 that conveyed water to propel the inner workings of his tannery. The interpersonal conflict 27 00:03:16.200 --> 00:03:22.780 in a nutshell was this. In dry spells there was insufficient flow in the river to operate 28 00:03:22.780 --> 00:03:28.560 both the mill and the tannery. Gilmore would release water through a sluice to keep his 29 00:03:28.560 --> 00:03:44.560 In 1853, Miner commenced legal proceedings against his neighbour, which went all the way to the Privy Council in England, which at the time in Canada was the highest court in the land. 30 00:03:44.560 --> 00:03:54.560 In his judgement for the Privy Council, Lord Kingsdown summarised riparian law which had been recognised for centuries. 31 00:03:54.560 --> 00:04:01.560 All who had legal access to a stream could use its waters ad levandum e ad patandum, 32 00:04:01.560 --> 00:04:08.560 basically for personal washing and drinking for you, yourself, your family and livestock. 33 00:04:08.560 --> 00:04:13.560 Riparian proprietors also had the right to enjoy the normal flow of the natural stream, 34 00:04:13.560 --> 00:04:16.560 unchanged in quantity and unaltered in quality. 35 00:04:16.560 --> 00:04:23.560 The decision in Minor v. Gilmore confirmed that any Riparian proprietor could take water of his stream 36 00:04:23.560 --> 00:04:46.560 What was new was the specific reference that I have highlighted here to extraordinary purposes, such as irrigation. Other riparian proprietors could indeed prevent such use, but only if they could prove sensible damage resulting from the interruption of the natural flow. 37 00:04:46.560 --> 00:04:53.040 The judges of the Privy Council made a very important contribution to irrigation law by 38 00:04:53.040 --> 00:04:58.780 their decision. Specifically, what we know today is the doctrine of appropriation. It 39 00:04:58.780 --> 00:05:04.020 implied that any settler needing water to irrigate hay meadows or crops had the right 40 00:05:04.020 --> 00:05:08.900 to divert a stream for that purpose and could maintain that right against later settlers 41 00:05:08.900 --> 00:05:13.320 who also needed water but who had arrived too late to suffer damage from the initial 42 00:05:13.320 --> 00:05:19.680 Diversion. It is a variant of Locke's famous phrase of mixing one's labour with land as 43 00:05:19.680 --> 00:05:24.860 a means of establishing a claim of initial ownership in a water course. Thus, because 44 00:05:24.860 --> 00:05:29.520 of the use of the river's flow to propel the workings of the mill, preceded the use 45 00:05:29.520 --> 00:05:34.840 of it in the tannery, the court dismissed Miner's claim to legally force Gilmore to 46 00:05:34.840 --> 00:05:37.860 close his sluice. 47 00:05:37.860 --> 00:05:42.280 Twenty years later, as European settlement pushed westward into the arid regions of the 48 00:05:42.280 --> 00:05:48.720 of the Canadian Plains, access to water again became a concern. Irrigation in present-day 49 00:05:48.720 --> 00:05:55.720 Alberta began in the 1870s, but the constructed projects were few, small, and incongruent 50 00:05:55.880 --> 00:06:00.960 with the federal government's policy objective of mass settlement. The prevailing common 51 00:06:00.960 --> 00:06:06.120 law of riparian rights did not allow either large-scale irrigation or the development 52 00:06:06.120 --> 00:06:12.800 of Land that was distant from a water course. William Pierce was the first to advocate that 53 00:06:12.800 --> 00:06:18.280 irrigation could and should be developed on a grand scale as part of the overall approach 54 00:06:18.280 --> 00:06:24.960 of prairie settlement. Others, later others in the Department of the Interior, the Land 55 00:06:24.960 --> 00:06:30.200 Department of the Canadian Pacific Railway and other special interests perceived the 56 00:06:30.200 --> 00:06:35.360 pace of development would be impaired unless the right to access water was expanded beyond 57 00:06:35.360 --> 00:06:48.360 By 1894, the Minister of the Interior, T. Mein Daly, became convinced of the need to reform common law to realize the national government's plan for the Prairie Region. 58 00:06:48.360 --> 00:06:54.360 This was the object of the Northwest Irrigation Act, which he sponsored. 59 00:06:54.360 --> 00:07:01.360 The Northwest Irrigation Act and its provincial successors rest on four principles. 60 00:07:01.360 --> 00:07:07.480 1. Government Ownership This is the cornerstone of the legislation. 61 00:07:07.480 --> 00:07:12.400 To secure control over water use, the Act declared that the Crown owned all the water 62 00:07:12.400 --> 00:07:16.440 in the jurisdiction. In Alberta, the declaration of Crown ownership 63 00:07:16.440 --> 00:07:24.680 was extended to groundwater in 1962. 2. Allocation of Water by License 64 00:07:24.680 --> 00:07:29.680 With the exception of minor uses for basic domestic needs of repairing landowners, individuals 65 00:07:29.680 --> 00:07:34.360 Laws are prohibited from using or diverting water without first obtaining a government-issued 66 00:07:34.360 --> 00:07:40.180 license. According to the foremost legal expert on the issue, Dr. David Percy of the University 67 00:07:40.180 --> 00:07:46.720 of Calgary, water licenses in Alberta do not convey property rights nor any vested right 68 00:07:46.720 --> 00:07:53.180 arising under contract. While licensees tend to view their licenses as entitlements, they 69 00:07:53.180 --> 00:08:04.620 Prior allocation principle Priority of the license depends on when the 70 00:08:04.620 --> 00:08:07.220 application to the government was made. 71 00:08:07.220 --> 00:08:10.900 In other words, it is a first-in-time, first-serve system. 72 00:08:10.900 --> 00:08:15.380 The quantity of water allotted to the licensee is administratively determined rather than 73 00:08:15.380 --> 00:08:19.620 the amount put to beneficial use. 74 00:08:19.620 --> 00:08:21.620 and non-transferability. 75 00:08:21.620 --> 00:08:28.620 Licenses are apportuant to the land or undertaking specified in the license and inseparable therefrom. 76 00:08:28.620 --> 00:08:34.620 In other words, any removal of water from a different point of diversion or for a different purpose 77 00:08:34.620 --> 00:08:41.620 constitutes a breach of the terms of the license and is thus a statutory offence. 78 00:08:41.620 --> 00:08:48.100 The radical effect of this legislation on property rights seems to have completely escaped the 79 00:08:48.100 --> 00:08:53.540 attention of economists. The role of law in regard to the economic aspects of decision-making 80 00:08:53.540 --> 00:09:00.300 in the use of water is in desperate need of attention. Consider this. In its way, the 81 00:09:00.300 --> 00:09:04.500 assertion of public ownership of surface water and the transfer of its control from 82 00:09:04.500 --> 00:09:17.860 One can only imagine the consternation from a proposal to vest ownership in the Crown, 83 00:09:17.860 --> 00:09:24.020 the 27% of the land area in Alberta presently private, then granting licenses for centrally 84 00:09:24.020 --> 00:09:31.020 approved use, subject to the revocation at the discretion of government officials. 85 00:09:31.020 --> 00:09:35.740 But what did not slip under the radar screen was that giving out licenses and prohibiting 86 00:09:35.740 --> 00:09:39.860 their transfer would eventually exhaust available water supplies. 87 00:09:39.860 --> 00:09:46.120 This flaw was first pinpointed in 1920, though its effect was disguised until recently by 88 00:09:46.120 --> 00:09:51.980 years of multi-million dollar taxpayer finance storage and conveyance projects aimed at increasing 89 00:09:51.980 --> 00:09:53.780 the water supply. 90 00:09:53.780 --> 00:09:58.540 By the turn of the 21st century, some severe droughts and growing opposition to further 91 00:09:58.540 --> 00:10:24.540 In 1999, the provincial government in Alberta tried to address the rigid pattern of water use through the Water Act, a market-based approach. 92 00:10:24.540 --> 00:10:33.540 The Act enabled the legal transfer of all or part of a licensed allocation from an existing licensee to a new user. 93 00:10:33.540 --> 00:10:39.540 However, it had to be authorized through a water management plan approved by the provincial cabinet 94 00:10:39.540 --> 00:10:45.540 or by an order of the lieutenant governor and council, which can only be issued on the advice of the provincial cabinet. 95 00:10:45.540 --> 00:10:51.540 Because it was so bureaucratically burdensome in face of pent-up demand, 96 00:10:51.540 --> 00:10:56.040 In 2002, the provincial government removed several obstacles. 97 00:10:56.040 --> 00:11:02.720 The South Saskatchewan River Basin water management plan, for example, which covers the regions 98 00:11:02.720 --> 00:11:08.840 of southern and south central Alberta, authorizes the plan director to consider applications 99 00:11:08.840 --> 00:11:12.740 to transfer water within the entire basin. 100 00:11:12.740 --> 00:11:19.660 It requires the director to ascertain that a transfer will result in no net harm. 101 00:11:19.660 --> 00:11:23.920 The Director must ensure that the amount of water to be transferred does not exceed the 102 00:11:23.920 --> 00:11:28.420 amount of water allocated under the original license, and that the transfer does not impair 103 00:11:28.420 --> 00:11:33.820 the right of other water users. In addition, the transfer must not cause a significant 104 00:11:33.820 --> 00:11:40.140 adverse effect on the aquatic environment. Details of this administrative framework and 105 00:11:40.140 --> 00:11:45.740 the key strategic directions are outlined in the Water for Life Strategy. 106 00:11:45.740 --> 00:11:49.980 There are several regional directors throughout the province, but in southern Alberta where 107 00:11:49.980 --> 00:11:55.860 I'm from, that individual is Kathleen Murphy from Alberta Environment. 108 00:11:55.860 --> 00:12:00.620 She is the water approvals team leader of the water approvals team. 109 00:12:00.620 --> 00:12:06.760 I confess that I don't know Kathleen Murphy from EVE, but it is clear that she and others 110 00:12:06.760 --> 00:12:11.020 in similar positions have been assigned a challenging task. 111 00:12:11.020 --> 00:12:17.920 In the face of an ever-changing constellation of economic phenomena, is it reasonable to 112 00:12:17.920 --> 00:12:24.360 expect that provincial expert panels, water approvals teams and directors can determine 113 00:12:24.360 --> 00:12:30.120 the optimal pattern of water use transfers by license holder and by end use, the corresponding 114 00:12:30.120 --> 00:12:36.400 appropriate price level so that there is no net harm now and in the future? 115 00:12:36.400 --> 00:12:40.300 The issue of administrative allocation of non-private resources like surface water in 116 00:12:40.300 --> 00:12:45.880 Alberta was the focus of the economic calculation debate of the 1920s and 30s, and there is 117 00:12:45.880 --> 00:12:51.220 much that contemporary economists can learn from it. 118 00:12:51.220 --> 00:12:55.640 The economic calculation debate began in 1920 with the publication of Ludwig von Mises' 119 00:12:55.640 --> 00:13:02.280 Economic Calculation in the Socialist Commonwealth. Mises concluded that rational calculation, 120 00:13:02.280 --> 00:13:07.160 In the sense of adjusting production to the satisfaction of human wants is impossible 121 00:13:07.160 --> 00:13:12.480 without private ownership of the means of production and with prices necessarily absent. 122 00:13:12.480 --> 00:13:18.080 In contrast, market processes and prices discovered therein serve to allocate resources on the 123 00:13:18.080 --> 00:13:20.860 basis of expected profitability. 124 00:13:20.860 --> 00:13:25.720 In arguing that economic resource use is possible only if prices are applied to intermediate 125 00:13:25.720 --> 00:13:30.560 products and factors of production as well as final products, Mises contended that no 126 00:13:30.560 --> 00:13:37.560 No other conceivable process can take account of all the relevant facts, as do market prices. 127 00:13:37.560 --> 00:13:44.160 Mises inspired attempts by critics to duplicate the efficiency of markets through market socialism. 128 00:13:44.160 --> 00:13:52.040 That is, to develop methods by which a central planner could determine economically rational 129 00:13:52.040 --> 00:13:56.420 product and factor prices in the absence of private property. 130 00:13:56.420 --> 00:14:00.440 The best known are simulated market proposals by Oscar Lange. 131 00:14:00.440 --> 00:14:05.840 Hayek attended that if, for example, data on land resources, production alternatives, 132 00:14:05.840 --> 00:14:10.400 and consumer preferences are known, then the central planner can determine the efficient 133 00:14:10.400 --> 00:14:16.580 use of land and agricultural and other uses. This conceptualization of how to resolve economic 134 00:14:16.580 --> 00:14:24.320 problems is remarkably pervasive today. Lange conceded that prices were necessary, but that 135 00:14:24.320 --> 00:14:29.360 these could be simulated in some spot markets and that this was enough to make central 136 00:14:29.360 --> 00:14:41.360 Hayek's contribution, most brilliantly expressed in the use of knowledge in society, was that there is no known way for a planner to obtain these data. 137 00:14:41.360 --> 00:14:53.360 The data from which economic calculus starts are never for the whole of society given to a single mind which could work out the implications and can never be so given. 138 00:14:53.360 --> 00:14:57.360 They are individual, subjective, time and place specific. 139 00:14:57.360 --> 00:15:04.360 According to Hayek, the Langhi approach just assumes the proper and real economic problem away. 140 00:15:04.360 --> 00:15:10.360 While market socialism is not logically contradictory from a practical real world perspective, 141 00:15:10.360 --> 00:15:14.360 it is impossible because of overwhelming information problems. 142 00:15:14.360 --> 00:15:20.360 Even the most elegant algebraic model and advanced computer technology 143 00:15:20.360 --> 00:15:26.360 do not and cannot solve the irrefutable information problems identified by Mises and Hayek. 144 00:15:26.360 --> 00:15:34.520 The implications of the economic calculation debate apply in water use planning in Alberta, 145 00:15:34.520 --> 00:15:40.640 just as they do anywhere else for any other resource distributed through non-market means. 146 00:15:40.640 --> 00:15:46.240 In allocating aqueous resources by central direction, information problems arise just 147 00:15:46.240 --> 00:15:49.480 like those in economic central planning generally. 148 00:15:49.480 --> 00:15:55.960 The theoretical basis of centralized water use planning is deficient and that no way 149 00:15:55.960 --> 00:16:00.060 has been found to solve the inherent information problems. 150 00:16:00.060 --> 00:16:05.140 The director and the members of the various water approvals teams in Alberta really do 151 00:16:05.140 --> 00:16:07.720 face an impossible task. 152 00:16:07.720 --> 00:16:18.720 The knowledge they need is not available to them now or ever, either individually or collectively. 153 00:16:18.720 --> 00:16:23.980 To allocate water resources between competing end-users and end-users, two basic methods 154 00:16:23.980 --> 00:16:28.760 are available. Central planning and private decision making through private ownership 155 00:16:28.760 --> 00:16:35.440 and market processes. There is no third way. Despite the political and academic pressures 156 00:16:35.440 --> 00:16:41.540 to do so, the primary task of the research economist is not to determine the optimal 157 00:16:41.540 --> 00:16:48.540 pattern of water use on an enterprise, irrigation district or on a provincial basis. If we try, 158 00:16:48.540 --> 00:16:53.460 we are stymied by the insurmountable information problem identified through the economic calculation 159 00:16:53.460 --> 00:16:59.220 debate. Instead, the focus ought to be on the role of contemporary water law in creating 160 00:16:59.220 --> 00:17:04.620 shortages and interpersonal conflicts over water use and the logical consequences of 161 00:17:04.620 --> 00:17:08.700 the absence of private ownership of water resources. 162 00:17:08.700 --> 00:17:14.140 As water licenses are narrowly prescribed statutory permissions in Alberta, market processes 163 00:17:14.140 --> 00:17:21.620 for them do not and cannot arise. Market-based approaches to resolving problems are predicated 164 00:17:21.620 --> 00:17:26.620 on Individual Freedom, and Sailable Ownership of Private Property.