51:3 Capital Rigidities, Latent Externalities

Abstract

Capital, one of two fundamental inputs to production, is critical to economic growth. As such, legal rules and institutions generally seek to create more of it, and they also seek to protect existing capital from policy changes. However, capital is often durable, and during its natural life, information may emerge pointing to negative externalities resulting from operation of that capital. Legal rules and institutions, in seeking to stimulate and sustain economic growth by promoting and protecting capital, thus tend to induce the creation of excess capital. This abundance of capital creates excess resistance to new regulation or policy reform, as capital owners will have a larger capital stake to defend and will expend more resources to resist changes in their legal and economic environment.

This theory of capital has special application to environmental externalities, which are commonly latent. Capital is thus almost always obtained with incomplete information about potential environmental externalities. Environmental law is the means by which many previously unforeseen externalities are sought to be addressed, but any change in environmental law is invariably challenged by capital owners. By enacting legal rules to promote and protect capital, developed societies have unwittingly erected larger barriers to environmental reform. Over time, environmental law has become more difficult to reform and the source of more litigation.