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Social and Private Costs and Benefits in Forestry

Associate Professor of Forest Economies, Yale University, Connecticut, U.S.A.

This excerpt from Professor Worrell's recent book Economics of American Forestry is reproduced by permission of the publishers, John Wiley and Sons, Inc., New York. The book is reviewed on page 170.

NO-ONE is really independent of the society in which he lives. He depends on that society to support him in many ways, to defend him, and in general to guarantee that he can live in a certain manner. What he does affects other people and what they do affects him. Our own society takes the attitude that it is desirable for individuals to be as free as possible in their decisions and actions. But, if each individual does absolutely as he pleases, we cannot live together as a society without continuous and violent conflict. So individual actions are restricted in the interest of group relations.

The social viewpoint differs from the private viewpoint in that it considers the effect of an action on everyone in the society rather than on any one individual. The economic goal of a democratic society may be said to be the maximum satisfaction of the group as a whole. This is a difficult concept because few, if any, events will benefit or hurt everyone in the group to an equal degree. Many happenings will benefit some and hurt others and these individual effects cannot be added in any way to determine the total effect on the group. Still as a nation we do have this concept and if we cannot accurately determine what increases total welfare we can at least try to recognize and allow for things that might decrease welfare.

A second difference is that society takes a much longer view of events than an individual does. Every individual knows that his lifetime is limited and it is difficult for him to be concerned about things far off in the future. To be sure, many people go to considerable pains to provide for their surviving relatives. And some guide many of their actions by the anticipated effect on their children or grandchildren. But, in general, an individual tends to be interested mainly in what will affect him personally. Of course, society does not have an unlimited outlook either - positive time preference exists for a group as well as for an individual. But, since the group perpetuates itself, it is concerned with a considerable period in the future. (A corporation differs from an individual in that its lifetime is not limited and it therefore can take a longer view of things. In this respect it may act more nearly like the social group than like an individual.)

Finally, the ultimate objective of society can probably be stated as "survival". That is, survival of the social group regardless of what happens to individuals in the group. This is plainly evident during a defensive war but it also shows up in many peacetime actions. Efficiency in resource use may have to take second place to security. And exhaustible resources may be reserved against future emergency needs even though today's individuals might be better off if they could use them.

Society is concerned with a number of things which an individual may ignore in his economic activities. The individual is primarily concerned only with the costs that he must bear himself and with the benefits that he can obtain himself. If he attempts to maximize his own satisfaction through rational resource use, these are the only costs and benefits he will consider. But society is concerned with all costs and benefits regardless of who bears them or to whom they accrue. This means that an attempt by each individual to maximize his own satisfaction may not result in a maximum total satisfaction for society. If every forestry producer uses his resources most efficiently in terms of his own profit, the total result will not necessarily be the most efficient forest-resource use for the country as a whole.

The real problem in efficient resource use is that all costs and all benefits must be included in the calculations. If all costs and benefits are included, economic analysis will lead to the most efficient pattern of use. Resources will be allocated to different types of production on the basis of their marginal-revenue products. Their use will be intensified to the point where marginal cost equals marginal revenue. The theory of rational resource use will still be valid. The difficulty is in getting all the costs and benefits into the determination. The free working of the price and market system fails to do this satisfactorily.

Social costs in forestry

Private costs consist of all the expenditures which must be made by an entrepreneur in the course of production and any losses or damages which he sustains during that production.

Many real costs of production do not fall directly on the entrepreneur. For example, dissatisfactions of doing the work in the productive process are borne by his employees rather than by the entrepreneur himself. But, in order to get these employees to do the work, the entrepreneur has to compensate them for their dissatisfactions by giving them money and perhaps some other forms of remuneration. So the real costs borne directly by the employees are passed on to the entrepreneur and he has to use part of the revenue he receives from his products to pay these costs. Social costs exist in a situation where the entrepreneur cannot easily be held accountable for some of the real costs of production. In this case, part of the cost is paid by other persons but the entrepreneur is able to keep that part of his total revenue which logically should go to compensate these other cost bearers.

Aside from the ethical objection that the revenue is not divided among all who contribute to its production, social costs also seriously affect the efficiency of resource use. As a simple example, suppose a logger has bought some stumpage, is cutting the timber, and is hauling the logs to a sawmill. Part of the haul is over 5 miles of unpaved public highway. During the logging his trucks tear up this section of road very badly. The logger is able to cover all of the other costs and makes a small profit as his own compensation. If the damage to the road is not taken into account this is an economically sound productive operation. But if the logger is forced to maintain the road in good condition during his operations and finally to restore it to the same shape as when he started, this additional cost will make the whole operation unprofitable. Considering all costs, it is not economic to log this timber. If the logger is not forced to maintain and repair this road, the cost of the damage done by his trucks falls on the other people who travel the road and on the public as a whole, which through its highway department must repair the damage. Part of the cost of logging the timber is borne by other people who receive none of the revenues from the logs. To the logger himself it appears to be a profitable operation and he will go ahead with it. To society as a whole it is an unprofitable operation and represents a misallocation of resources.

Most social costs that arise in forestry are not as simple as those in the case of the logger and the road. This was a case in which the amount of damage could easily be determined; there was no question of who was responsible for it; and he could be forced to assume the total cost of the damage he had done. There are probably many situations like this in forestry. From a logical economic viewpoint they should be eliminated and the total cost of production absorbed by the entrepreneur. More serious are the less obvious and more complex situations which follow.

A clear cut example of social costs is the downstream damages resulting from the use of land in the watersheds of streams. If headwaters forest lands are managed in a way that contributes to floods, the flood damages sustained by all of the affected people are social costs of managing those forest lands. These costs are so complex - and the people who bear them are so numerous and widely scattered - that they can hardly be passed back to the responsible entrepreneurs. Usually a large number of landowners are involved. They do not all operate in the same way and, therefore, are not equally responsible for the damages. In many eases the entrepreneurs are not even aware that they are causing damage.

A more definite situation exists where logging and other forest operations result in an increase in the silt load of streams and the consequent silting up of dams and stream channels. The damage here is more specific and the source of the silt may be identified with some certainty. But even in this case there is no easy way to force the logger or other entrepreneur to assume these costs.

An opposite extreme of indefiniteness exists where the form of silviculture practiced and the type of forest maintained affect the water regimen of streams flowing from a property. The influence may show up in total volume, seasonal distribution, and fluctuations of water flow in the streams. A change in forest management which affects any of these may work a hardship on communities or industries dependent on this water. Such hardships are social costs but they are difficult to measure and they may develop and change over long periods of time. It seems likely that some production costs will always remain social costs no matter how much effort is made to convert them to private costs.

An important social cost in forestry is the depletion or destruction of the future productivity of forest land and growing stock. Both land and growing stock are "flow" resources which can be maintained indefinitely by proper use and management. In extreme situations, both land and growing stock can be destroyed. The private cost to the entrepreneur of such an action is the price he pays for the land. If he paid $100 per acre for land and growing stock and when he is finished using it the land is bare and utterly worthless, he has incurred a cost of $100 for each acre used. The cost to society, however, is the value of all the timber crops which might have grown on that land in the future.

Theoretically, in a perfect market, the $100 price paid for the land would represent a capitalized value of its future productivity. But, in setting a current price the market may underestimate the future productivity of the land. (Most speculation in land assumes such underestimates). And the private market will discount future returns much more heavily than society might. It is probably not correct to say that a cord of wood to be received 100 years from now has the same value to society as a cord of wood to be received today. But this is more nearly true of society than of an individual.

The real extent of this social cost is hard to determine. If a large proportion of our forest land and growing stock were destroyed, there would be a future shortage of all forest products and services. Parts of China and some of the Mediterranean countries where forests were completely eliminated indicate that the long-run cost to society would be terrific. Because of our tremendous forest resources, the destruction of a limited amount of land probably does not represent a large social cost. If our population continues to grow, however, the pressure on resources may one day reach the point where even a small area of additional forest land would have great value.

The depletion of land and forest resources is not as serious as their destruction because such resources can be rebuilt. Depletion does not represent a permanent total loss to society. But, when land and growing stock are depleted today and must be rebuilt in the future, part of today's costs are being shifted to tomorrow's people. If forest products are made available at today's prices by stripping the timber instead of maintaining the growing stock, future people may have to pay much higher prices for the wood products they can get.

More serious is the fact that the total cost of rebuilding land and growing stock after it has been depleted is greater than the total cost of maintaining the growing stock would be. The amount of money it would have cost the entrepreneurs who cut the white pine forests of Michigan to provide for regeneration and to protect the new stands is insignificant compared to what it has and will cost to re-establish high-quality forests on those lands. Land and growing stock that has been depleted cannot be rebuilt in a short fume. It is not like depleting the stock of canned goods in a grocery store, which can be replaced almost immediately by a wholesaler. It is more nearly analogous to draining a large lake which is fed by a spring whose annual flow only slightly exceeds the evaporation from the surface. So long as the lake is full, the spring will keep it full. But if it is emptied it will take many years to refill it. When forest land has been seriously depleted it may take centuries of time and an ecological succession of various kinds of vegetative cover to rebuild its productive potential. The social costs of present forest-depleting practices may fall on a number of future generations of wood users.

The social costs resulting from the depletion or destruction of land and growing stock are spread over so many people that most are not even aware they are bearing them. These costs spread out over such a long time that their effect is noticed only gradually and their origins are hidden in the past. Nothing can be done today to pass the social costs originating in the depletion of our forests back to the entrepreneurs who did the depleting many years ago. The best that can be done is to try to prevent such costs of present productive activities from being passed on to future generations.

Another class of social costs in forestry results from the kind of employment. The industrial accident and death rate is high in forestry. Part of the cost of logging timber is the damage suffered by the men who do the work. The real cost of accidents and deaths is hard to quantify. If a man's coat is torn up in the course of his work, his employer can compensate him by buying him a new coat of equal quality. But the employer cannot replace a leg or an eye which a man has lost in a logging accident. The real cost of such a loss to the man involved is impossible to determine.

The courts and the workmen's compensation laws try to arrive at a reasonable monetary compensation for these losses. But how can they compensate a widow and her children for the loss of their husband and father? Much of the cost of industrial accidents and deaths falls on the families and friends of the men involved and may extend over long periods of time. These social costs of forestry have been high in the past. At one time the lumber entrepreneurs avoided them almost entirely. Today the workmen's compensation programs pass a considerable part of the cost back to the entrepreneurs. Perhaps even more significant is the effort being put into the prevention of accidents and the provision for prompt and thorough medical care of those who are injured. This is one social cost of forestry which is being materially reduced.

Past incomes of workers in forestry have been low in many parts of the country. Many of the costs resulting from such low incomes were borne by society. Poverty and crime go hand in hand. The low-income families had to look to public welfare agencies for medical aid, relief during periods of unemployment, and support in their old age.

Incomes of forestry employees have risen along with those of all labor and perhaps to a greater extent than in some other industries. The minimum-wage laws have transferred part of the burden of adequate support that had been borne by society back to the entrepreneur. The social-security law has made part of the expense of supporting workmen and their dependents in their old age a direct production cost for entrepreneurs. The retirement provisions written into many union contracts are moved in this same direction. State unemployment insurance programs make part of the burden of supporting workmen and their families during periods of involuntary unemployment into a direct production cost. The total effect has been to reduce the social costs of forestry from what they used to be.

A final class of social costs arises from the instability of supply and price. Forestry has been characterized by violent fluctuations in output and in the prices of its products. One effect of this has been the high mortality rate of entrepreneurs in the forest industries. The elimination of inefficient entrepreneurs and firms is a desirable feature of a competitive economy. But every time a business fails, a number of people beside the entrepreneur himself suffer damages. Workmen are temporarily unemployed; creditors lose part of their accounts; investors lose part or all of their invested capital. Business in general may be disrupted in a small community by the failure of one firm.

Another undesirable effect is the underemployment of labor and capital. It is difficult for labor to shift temporarily to other jobs when a plant shuts down or curtails operations for a while. And it is almost impossible to shift the invested capital. Productive factors are assembled to produce at the peak rates and when activity declines part of this productive capacity stands idle.

This is particularly noticeable in the East, where many small sawmills operate only part of the time. When capital or labor resources are idle, the country loses the goods and services which these factors might have produced.

The United States has a national policy today of trying to maintain a high level of economic activity and to prevent major business fluctuations. If this proves successful, conditions in forestry will be more stable than they were in the past. But some of the recent stability of the national economy has resulted from so-called "rolling readjustments." While business in one industry slumped, other industries were active and the average remained fairly stable. Fluctuations in individual industries have been much more severe. Since forestry is a raw-material producer, continued fluctuations in activity and their resultant social costs probably can be expected.

Social benefits in forestry

Private benefits consist of all the returns which an entrepreneur receives from his productive activity. Social benefits, by contrast, are gains and desirable results of production which accrue to other persons or to society rather than to the entrepreneur who produced them.

No entrepreneur is able to retain personally all of the return that he receives from his productive activity. He must pass on a large part of his revenues to the people who provide the labor, capital, land, raw material, and other factors which he uses in production. Thus, the private benefits of production are distributed among all those who contribute to the productive activity (except for those who bear social costs). Social benefits are a problem because they originate in a situation where the entrepreneur cannot easily appropriate them. And the entrepreneur is not able to obtain any compensation from them for the cost to him of producing these benefits.

Aside from the ethical question of people receiving benefits without contributing in any way to their pro. auction, social benefits also affect the efficiency of resource use. As a simple example take a man who owns a rocky and eroded hillside field along a much-travelled suburban road. This field is an eyesore to the people who travel the road. The owner considers planting trees on the field and investigates the costs and probable yields of wood products. He learns that because of its poor quality the land will never grow enough wood to repay him for the cost of afforesting it. If the land were forested it would have considerable scenic value. So the people who travel the road would benefit from the conversion of an unsightly field to an attractive woodland. The total benefits - both scenery and wood - produced by afforesting the field would exceed the cost of doing the work. But a large part of the returns would be in the form of social benefits. There is no way that the landowner could charge the passers-by for the pleasure they would receive from looking at his property. To the landowner himself, afforestation appears to be an unprofitable undertaking and he will not go ahead with it. To society as a whole it would be a profitable undertaking and allowing this field to lie idle and ugly is a misallocation of resources.

Watershed protection is one of the more definite social benefits of forestry. The benefits of watershed protection are so widespread and accrue to so many different people that it is difficult even to estimate them. The man who takes over a tract of land in the headwaters of a stream, reforests the open areas, builds up a good forest floor by eliminating fire and grazing, and stabilizes the soil on his roads has some beneficial influence on everyone along the whole length of the rivers into which his stream flows. The results of his actions cannot be separated from those of other landowners, so it is hard to measure what he himself has produced. At the same time it is virtually impossible to measure the benefits which have accrued to the recipients. Social benefits obviously are being produced but there is no easy way of arranging to have the consumer pay the producer for them.

A social benefit that may be produced is stabilization of the communities where forestry production is carried on. Many people are affected by productive activity besides those who personally engage in it. A wood-processing plant may have 100 people on its payroll. Another two or three hundred members of the employees' families benefit from the pay checks they bring home. Many more people benefit when these pay checks are spent - grocers, doctors, filling-station operators, barbers, town officials. The processing firm also spends money locally for raw materials, supplies, utilities, and services of various kinds. This money too passes on to many others. All in all, virtually everyone in a community of ten thousand people is affected by the fact that the processing plant is there.

The stability of such a community depends on a steady flow of wood to the processing plant. If the plant has to shut down temporarily or operate at a reduced capacity, the whole town will be affected. Managing the forests which produce the wood for this plant on a sustained-yield basis so the plant can operate continuously, therefore, produces community stability as well as wood. The owners of the forest lands might be able to make just as much money from a form of management that produced yields at irregular intervals. But, if they operated in that manner, they would not produce the social benefits of stability. Such social benefits can hardly be appropriated by the landowners but the communities may recognize their importance and attempt in various ways to compensate the producers.

A third category of social benefits from forestry is reserve capacity for emergencies. In a war or other national emergency the amount of wood consumed increases greatly. It would not be a sound national policy to regulate our forests to produce exactly the amount of wood consumed under normal, peacetime conditions. We are not too sure what our future population and demand for wood will be, even if there are no more major wars. It appears preferable to err on the side of long-run overproduction rather than underproduction. Maintaining a reserve supply of timber on the stump and a productive capacity in excess of current demand places a burden on forestry entrepreneurs. Part of the benefits they produce take the form of insurance against a shortage of wood in a future emergency. But this is a social benefit that accrues to the country as a whole and there is no easy way in which the entrepreneurs can claim compensation for producing it.

Society and forestry

Many important costs and benefits in forestry production are social rather than private. From a national viewpoint these social costs and benefits have a significant influence on the rational use of our forest resources. In making decisions based only on what affects them privately, individual entrepreneurs may ignore some of the most important costs and benefits. Unless the social costs and benefits are somehow included in the economic analysis there is little likelihood that the use of our forest resources will be completely rational.

In a theoretical situation in which there is perfect competition among producers and among consumers and where all the costs and benefits attach to the parties involved in the production and exchange, the efforts of the individual entrepreneurs to maximize their own profits would simultaneously maximize the welfare of society. But in our real economic situation we do not have perfect competition and we do have social costs and social benefits. So unrestricted private enterprise would probably fail badly to maximize the welfare of society as a whole.

Because of this, the activities of individual entrepreneurs are restricted in many ways. The most obvious restrictions take the form of government action and regulations. But many other institutions influence or restrict the individual in his economic activity - trade associations, labor unions, better-business bureaus, civic clubs, and chambers of commerce, to name a few. In addition, the large corporations do not behave like private individuals. The effects of their actions are so widespread and so obvious that most of them have developed a "social conscience". They realize that, because of their size and diversity of interests, actions which are good or bad for society as a whole are also good or bad for them as individual corporations.

The point to be stressed here is that the free working of the market system cannot by itself bring about efficient use of our forest resources. It is necessary that other controls governmental or institutional - be brought to bear on the use of these resources. This has been and is being done. There is a considerable difference of opinion about the form which such controls should take and the extent to which they are necessary. But there is little disagreement about the fact that the social costs and social benefits involved in the use of our forest resources are so great that some such action must be taken.

Saint John Gualberto

For several years now La Festa della Montagna, the Mountain Festival, has been celebrated in Italy. It has the active support of local and national government, and is attended by large crowds of people. The festival takes place every year in a different place in the mountains of northern, central and southern Italy on one of the early Sundays in July, when there is a succession of religious functions and items of folklore interest and entertainment. It is in this month too, on the twelfth, in fact, that occurs the Feast day of Saint John Gualberto, founder of the Vallumbrosan Order, whom His Holiness Pius XII in an Apostolic Brief dated 12 January 1951, proclaimed the Patron before God of the Foresters of Italy.

John Gualberto Visdomini was born in the year 995 into a noble and rich family, descending from an ancestor knighted by Charlemagne, while his mother was an Aldobrandini. From his early youth he bore arms and was soon numbered among the best knights of Florence, so well versed did he become in the ways of chivalry. One day, so the story goes, his elder brother was killed by a distant relative and John was charged by his aged father, following the custom of the time, with the task of avenging his brother and restoring the family honor. On Good Friday of 1028 he met up with his brother's killer and had him completely at his mercy. He was about to run him through, when, regardless of what his family, friends and society would think, he cast his sword aside and, forgiving his enemy, embraced him. Feeling that through this act a complete change had taken place within him, he immediately entered the nearby church of San Miniato to offer thanks to God for this self-conquest and threw himself at the feet of a painting of Christ which, suddenly alive, bowed its head towards him in sign of approval. Moved by this divine intervention, the young Visdomini resolved to renounce the life of ease and honor proper to his state. He entered the monastery attached to the Church and put on the Benedictine habit.

The corruption, which was at that time to be found among some ecclesiastics in Florence and elsewhere, moved him to speak out openly against the Bishop of Florence himself. Beaten up and wounded by the Bishop's armed men, he nevertheless managed to take the road to the mountains, resolute in his determination to carry on with his fight against a man who was causing such great harm to the Church. Wandering on, he arrived during a storm in a part of the country called Acquabella late one afternoon in March of the year 1036. He sought cover as best he could under a large beech tree which at that time of the year was without leaves. On waking up the next morning, John was surprised to find that his cloak was completely dry. Looking up above him, he saw with amazement that during the night the beech tree had grown new leaves and that its branches had bent down forming a canopy over him, so sheltering him from the rain which had been falling continuously throughout the whole night. This he took as a sign that God's will for him was that he should remain there among the trees and mountains. And thus he stayed on until almost the day of his death 37 years later at the age of 78. (It was a little more than a hundred years later, in 1193, that he was canonized by Pope Celestine III).

Not long after the miracle of the beech tree, a few other hermits joined him and John Gualberto built cells for them and a chapel in wood. Little by little his fame as a holy monk spread throughout the whole of Tuscany and the number of those coming to join him continued to grow. Already by the year 1040 the Community had its own Rule, which John wrote, basing it on that of St. Benedict but making it more austere. The Acquabella region later became known as Vallombrosa so that the Monastic Order founded by John there and confirmed by Pope Victor II in 1055, took the name of the Vallumbrosan Order. Even during its founder's lifetime, the Order spread throughout Tuscany, Romagna and Lombardy. Later it extended even further into many other regions, reaching as far as Sicily and France.

The Saint's work and struggle for the raising of moral standards was accompanied by efforts in many other directions as well, since St. Benedict's motto "Work and Pray" was also his. As if he saw a connection between the improvement of morals and that of the land, he set an example by working with his own hands to provide for the daily needs of the community and to reclaim and bring into a better state the area immediately surrounding his first monastic foundation - this in an age when work on the land was considered good only for serfs. He devoted part of his time to silviculture even in his old age and thus it was that he was successful in improving the Vallombrosan region which in those days was completely wild. The Saint and his monks had to use primitive methods adapted to the few tools they had. The stagnant waters were drained by ditches and the woodlands in the immediate vicinity of the monastery were cleared either for firewood or to ensure that no wild beasts or poisonous snakes could lie hid too close to the cells. After that work the new community passed on to the task of restocking the surrounding forests with new trees and to planting up empty spaces. The natural regeneration they encouraged by breaking up the soil round the trees with rakes so that the falling seeds would land in a soil where they would germinate; or else, at the right time of the year, they got pigs to break up the earth by grubbing around the trees. As for the reforestation which John carried out on slopes to prevent soil erosion caused by torrents and streams, he varied the methods according to the size of the area to be tackled. If small, he planted wildings obtained from adjacent woods or grown from seed in the small nursery adjoining the monastery. If the area were large, he established a properly stocked plantation there, or alternatively resowed the whole plot by first hoeing and plowing the soil, then carefully scattering the seed and finally earthing it over.

In the succeeding centuries the Vallumbrosan monks continued his work, and it was better organized on an ever greater scale. Their methods improved as new techniques were evolved. Just as Monte Cassino was later looked upon as the cradle of agriculture, so Vallombrosa laid the foundation of the scientific approach to silviculture. Vallombrosa became a small model oasis and all, both monks and mountain people, following the Saint's example, did their best to extend forest plantations into the surrounding districts as well. Many Vallumbrosans, in keeping with the tradition started by their founder, as well as seeing to the care of their forests, devoted themselves to the scientific pursuit of botany and silviculture at a time when this was an unknown study in Italy, and with such success that the most famous universities, Italian and foreign, used often to apply to the Vallumbrosan Congregation to be certain of having teachers of repute.

La Festa della Montagna for Central Italy took place this year precisely on 12 July, the Feast day of John Gualberto, in the very heart of the famous silver fir forest of Vallombrosa. The delegates to the Tenth Session of FAO's European Forestry Commission attended this festival and had the opportunity to judge for themselves just how fruitful had been the care of this area over nearly 1,000 years.

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