Surface Water Allocation in Alberta: Lesson from the Economic Calculation Debate

0:00This 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. 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. Notable exceptions include First Nations peoples and government approved water conservation and storage projects. The moratorium on issuing new water licenses has created an excess demand for them and consequently the economic circumstances that give rise to mutually beneficial interpersonal exchange. At present, provincial legislation allows for the transfer of water licenses, 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.

1:11In spite of water licenses that do not grant any form of private property right and ubiquitous government oversight, The process of transferring water from one person or group to another is characterized in academic, political and in lay circles as a market-based approach. My hypothesis is, the present system of transferring water licenses in Alberta is in no way a market. As surface water in Alberta is a non-privately owned resource, its distribution and application are determined politically and are thus subject to all the net shortcomings of central planning. My purpose is to draw lessons from the economic calculation debate to reveal that market-based solutions to perceived problems in Alberta are an illusion in the absence of saleable private property.

2:06The evolution of administrative solutions to perceived water problems in Alberta begins is rather oddly in a legal case that had nothing to do with the subject of irrigation or the semi-arid region in southern Alberta. Instead, it involved a dispute between two entrepreneurs located thousands of miles away southeast of Montreal in the province of Quebec, who were on opposite sides of the idyllic North Yamaska River in the town of Granby. Francis Gilmore owned land on the north side of the river and a grist mill built in 1830. He also owned the north half of an upstream dam and a sluice, which allowed water to flow downstream to his mill. Harlow Miner was the owner-operator of a tannery on the south side of the River, built in 1834. He owned the south half of the upstream dam and a flume that conveyed water to propel the inner workings of his tannery. The interpersonal conflict in a nutshell was this. In dry spells there was insufficient flow in the river to operate

3:22both the mill and the tannery. Gilmore would release water through a sluice to keep his 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. In his judgement for the Privy Council, Lord Kingsdown summarised riparian law which had been recognised for centuries. All who had legal access to a stream could use its waters ad levandum e ad patandum, basically for personal washing and drinking for you, yourself, your family and livestock.

4:08Riparian proprietors also had the right to enjoy the normal flow of the natural stream, unchanged in quantity and unaltered in quality. The decision in Minor v. Gilmore confirmed that any Riparian proprietor could take water of his stream 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. The judges of the Privy Council made a very important contribution to irrigation law by their decision. Specifically, what we know today is the doctrine of appropriation. It implied that any settler needing water to irrigate hay meadows or crops had the right to divert a stream for that purpose and could maintain that right against later settlers who also needed water but who had arrived too late to suffer damage from the initial Diversion. It is a variant of Locke's famous phrase of mixing one's labour with land as

5:19a means of establishing a claim of initial ownership in a water course. Thus, because of the use of the river's flow to propel the workings of the mill, preceded the use of it in the tannery, the court dismissed Miner's claim to legally force Gilmore to close his sluice. Twenty years later, as European settlement pushed westward into the arid regions of the of the Canadian Plains, access to water again became a concern. Irrigation in present-day Alberta began in the 1870s, but the constructed projects were few, small, and incongruent with the federal government's policy objective of mass settlement. The prevailing common law of riparian rights did not allow either large-scale irrigation or the development of Land that was distant from a water course. William Pierce was the first to advocate that irrigation could and should be developed on a grand scale as part of the overall approach of prairie settlement. Others, later others in the Department of the Interior, the Land Department of the Canadian Pacific Railway and other special interests perceived the

6:30pace of development would be impaired unless the right to access water was expanded beyond 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. This was the object of the Northwest Irrigation Act, which he sponsored. The Northwest Irrigation Act and its provincial successors rest on four principles. 1. Government Ownership This is the cornerstone of the legislation. To secure control over water use, the Act declared that the Crown owned all the water in the jurisdiction. In Alberta, the declaration of Crown ownership was extended to groundwater in 1962. 2. Allocation of Water by License With the exception of minor uses for basic domestic needs of repairing landowners, individuals Laws are prohibited from using or diverting water without first obtaining a government-issued license. According to the foremost legal expert on the issue, Dr. David Percy of the University of Calgary, water licenses in Alberta do not convey property rights nor any vested right

7:46arising under contract. While licensees tend to view their licenses as entitlements, they Prior allocation principle Priority of the license depends on when the application to the government was made. In other words, it is a first-in-time, first-serve system. The quantity of water allotted to the licensee is administratively determined rather than the amount put to beneficial use. and non-transferability. Licenses are apportuant to the land or undertaking specified in the license and inseparable therefrom. In other words, any removal of water from a different point of diversion or for a different purpose constitutes a breach of the terms of the license and is thus a statutory offence.

8:41The radical effect of this legislation on property rights seems to have completely escaped the attention of economists. The role of law in regard to the economic aspects of decision-making in the use of water is in desperate need of attention. Consider this. In its way, the assertion of public ownership of surface water and the transfer of its control from One can only imagine the consternation from a proposal to vest ownership in the Crown, the 27% of the land area in Alberta presently private, then granting licenses for centrally approved use, subject to the revocation at the discretion of government officials.

9:31But what did not slip under the radar screen was that giving out licenses and prohibiting their transfer would eventually exhaust available water supplies. This flaw was first pinpointed in 1920, though its effect was disguised until recently by years of multi-million dollar taxpayer finance storage and conveyance projects aimed at increasing the water supply. By the turn of the 21st century, some severe droughts and growing opposition to further In 1999, the provincial government in Alberta tried to address the rigid pattern of water use through the Water Act, a market-based approach.

10:24The Act enabled the legal transfer of all or part of a licensed allocation from an existing licensee to a new user. However, it had to be authorized through a water management plan approved by the provincial cabinet or by an order of the lieutenant governor and council, which can only be issued on the advice of the provincial cabinet. Because it was so bureaucratically burdensome in face of pent-up demand, In 2002, the provincial government removed several obstacles. The South Saskatchewan River Basin water management plan, for example, which covers the regions of southern and south central Alberta, authorizes the plan director to consider applications to transfer water within the entire basin.

11:12It requires the director to ascertain that a transfer will result in no net harm. The Director must ensure that the amount of water to be transferred does not exceed the amount of water allocated under the original license, and that the transfer does not impair the right of other water users. In addition, the transfer must not cause a significant adverse effect on the aquatic environment. Details of this administrative framework and the key strategic directions are outlined in the Water for Life Strategy. There are several regional directors throughout the province, but in southern Alberta where I'm from, that individual is Kathleen Murphy from Alberta Environment. She is the water approvals team leader of the water approvals team.

12:00I confess that I don't know Kathleen Murphy from EVE, but it is clear that she and others in similar positions have been assigned a challenging task. In the face of an ever-changing constellation of economic phenomena, is it reasonable to expect that provincial expert panels, water approvals teams and directors can determine the optimal pattern of water use transfers by license holder and by end use, the corresponding appropriate price level so that there is no net harm now and in the future? The issue of administrative allocation of non-private resources like surface water in Alberta was the focus of the economic calculation debate of the 1920s and 30s, and there is much that contemporary economists can learn from it.

12:51The economic calculation debate began in 1920 with the publication of Ludwig von Mises' Economic Calculation in the Socialist Commonwealth. Mises concluded that rational calculation, In the sense of adjusting production to the satisfaction of human wants is impossible without private ownership of the means of production and with prices necessarily absent. In contrast, market processes and prices discovered therein serve to allocate resources on the basis of expected profitability. In arguing that economic resource use is possible only if prices are applied to intermediate products and factors of production as well as final products, Mises contended that no No other conceivable process can take account of all the relevant facts, as do market prices.

13:37Mises inspired attempts by critics to duplicate the efficiency of markets through market socialism. That is, to develop methods by which a central planner could determine economically rational product and factor prices in the absence of private property. The best known are simulated market proposals by Oscar Lange. Hayek attended that if, for example, data on land resources, production alternatives, and consumer preferences are known, then the central planner can determine the efficient use of land and agricultural and other uses. This conceptualization of how to resolve economic problems is remarkably pervasive today. Lange conceded that prices were necessary, but that these could be simulated in some spot markets and that this was enough to make central 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.

14:41The 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. They are individual, subjective, time and place specific. According to Hayek, the Langhi approach just assumes the proper and real economic problem away. While market socialism is not logically contradictory from a practical real world perspective, it is impossible because of overwhelming information problems. Even the most elegant algebraic model and advanced computer technology do not and cannot solve the irrefutable information problems identified by Mises and Hayek.

15:26The implications of the economic calculation debate apply in water use planning in Alberta, just as they do anywhere else for any other resource distributed through non-market means. In allocating aqueous resources by central direction, information problems arise just like those in economic central planning generally. The theoretical basis of centralized water use planning is deficient and that no way has been found to solve the inherent information problems. The director and the members of the various water approvals teams in Alberta really do face an impossible task. The knowledge they need is not available to them now or ever, either individually or collectively.

16:18To allocate water resources between competing end-users and end-users, two basic methods are available. Central planning and private decision making through private ownership and market processes. There is no third way. Despite the political and academic pressures to do so, the primary task of the research economist is not to determine the optimal pattern of water use on an enterprise, irrigation district or on a provincial basis. If we try, we are stymied by the insurmountable information problem identified through the economic calculation debate. Instead, the focus ought to be on the role of contemporary water law in creating shortages and interpersonal conflicts over water use and the logical consequences of the absence of private ownership of water resources.

17:08As water licenses are narrowly prescribed statutory permissions in Alberta, market processes for them do not and cannot arise. Market-based approaches to resolving problems are predicated on Individual Freedom, and Sailable Ownership of Private Property.