Book Review: The Natural Dividend

The Norwegian cure for the Resource Curse

(Spanish translation available here)

In 2023, Norwegian Researchers Jonathon Moses and Anne Margrethe Brigham wrote an excellent book called The Natural Dividend, whose basic argument is that natural resources are a big deal. If I had to summarize it in one sentence, it would be:

The Earth’s bounty belongs to everyone, private property rights are good, labor and capital deserve a fair return, and please don’t hand over our precious natural resources to Some Guy.

NOTE: Long-time readers will recall that we have covered some of this material before; I previously wrote a short primer on this blog concerning Norway’s petroleum management system and wealth fund; I also translated a research paper by Moses and Brigham entitled “The New Oil” into English, which is the predecessor to The Natural Dividend.

While the book’s arguments could also apply to conventional land, its scope is grander, amounting to no less than a comprehensive economic framework concerning all natural resources and opportunities. The authors’ central concern is the titular “Natural Dividend,” which is the bounty that flows not from any individual’s effort or investment, but instead from the free gifts of nature and the scarcity that arises when governments and private actors enclose and commodify them. The authors argue that most conventional natural resource management policies miss this entire point, and in so doing squander the National Dividend.

As for the Natural Dividend itself, it is classic economic rent—a windfall return far in excess of the cost of production—and which consists of three components: differential rent, locational rent, and regulatory rent. Understanding how each of these arises is essential not only for understanding how natural resource wealth is commonly squandered, but also how it may be secured for its true and rightful owners, the community itself.

The book itself is written in clear and practical English, and presents a thorough and empirical case study of how the different flavors of economic rent play out in real world scenarios. The authors cover many detailed case studies concerning topics as varied as hydropower, wind, solar, fisheries, fossil fuels, subsurface minerals, and more, with the strongest examples drawn from over a century of hard-won Norwegian lessons in natural resource management. This book will be of particular interest to anyone who wants to extend Georgist thought beyond land itself, as well as anyone with a specific interest in natural resource management and/or sovereign wealth funds.

This book review is divided into four main sections:

1. The Natural Dividend
   How it arises, what it’s composed of, and who captures it

2. Enclosure
   The process by which nature is commodified into natural resources
   

3. The Resource Curse
   The bad things that happen when you ignore the Natural Dividend
   

4. Lessons from the Norwegian Tradition
   How to avoid the resource curse, ensure efficiency and investment, and secure the Natural Dividend for the community instead of Some Guy

The Natural Dividend

To prime our intuition, the authors give the example of a family that owns a large estate, and which wants to dig a water well on their property. The family has several options for developing their resource: they can dig the well themselves, relying entirely on their own labor, capital, and expertise, or they can hire someone to do it for them. If they hire a contractor, there’s no limit to the financial arrangements sufficient to motivate a competent worker: an up-front fee, an hourly rate, a royalty share of water drawn for the next three years, etc. However, there’s one arrangement that makes no sense—the contractor simply shows up and declares, “I’ll do it only if you give me exclusive ownership of the water, forever.”

In this parable, the family represents the community, the estate represents the world, and the contractor represents the private sector¹. Since no person created the Earth, and the initial distribution of resources is essentially random, the natural and rightful owners of any particular part of nature are those who would be harmed or excluded when the resource is enclosed for exclusive private development. In practical terms, this resolves to the local population of the state which exercises sovereignty upon those resources. Private interests are welcome to develop the people’s resources (and get rich doing so) but they should never forget that the people are ultimately in charge, and that the Natural Dividend rightly belongs with them.

Next, let’s understand how the Natural Dividend itself arises.

1. Differential Rent

Differential rent is easiest to understand in an agricultural context. Some plots are more productive than others, simply because their soil is more fertile, or they’re less rocky, or not on the side of a mountain, etc. This applies not only to literal land but “all natural opportunities”—one vein of ore has more valuable minerals than another, one fishery is abundant and the other is tapped out, etc. Differential rent has to do with the inherent powers and opportunities inherent to the site or resource itself.

The origins of the differential rent can be traced Ricardo, who described it as “that portion of the produce of the earth, which is paid to the landlord the use of the original and indestructible powers of the soil. It is often, however confounded with the interest and profits of capital, and, in popular language, the term is applied to whatever is annually paid by a farmer to his landlord”
…
It is important to realize that the difference in productive capacity, which attracted Ricardo’s attention, is not limited to farmland, but can be found in any natural resource: some wind sites are more productive than others; some mines are more productive than others; some aquaculture sites are more productive than others; etc. It is difference that creates the unearned rent — hence differential rent.

The best way to understand this is to notice that the same amount of labor and capital, applied to both a superior and to an inferior resource or site, will yield different returns. The difference is differential rent, which is the first component of the Natural Dividend.

2. Locational Rent

This form of rent comes not from the thing itself but from its surroundings. Regardless of how many bushels of corn a particular patch of dirt can grow, if there’s no road connecting it to a market, and no pipes to keep it irrigated, its earnings potential will greatly diminish. The same goes for other natural resources, energy in particular, where prices are governed not only by global supply and demand, but by how much local supply can actually be transmitted to where it’s wanted.

Those sites that are located nearest the market, or are near to an efficient infrastructure that facilitates access to that market, are more valuable, ceteris paribus, than aquaculture sites that lie far off the beaten path. As we shall see in the chapter that follows, this difference in locational advantage generates another part of the Natural Dividend - what we call a locational rent.

Two equally fertile sites can still yield wildly different returns from the same amount of labor and investment, simply because of where they are located. If one plot lies too far away from infrastructure, the bountiful crops will rot long before reaching market, whereas the others will arrive swiftly and fetch a premium for being sold fresh. Crucially, the value from the surroundings are not provided by the site’s owner, but by nature, neighbors, and the community at large. The difference in returns between two equally productive sites due solely to their surroundings is locational rent, and is the second component of the Natural Dividend.

The line between differential and locational rent can sometimes get a little blurry (is good weather differential or locational?), but the important thing is that both of them clearly stand apart from the third kind of rent.

3. Regulatory rent

The very act of regulating access to a resource or commodity—even and especially if that regulation is entirely justified—limits access to others who might want to develop it, forming a kind of localized monopoly. This allows whichever person who happens to hold the rights to that thing to capture a windfall rent.

Let me give an example from my personal life. I have cataplectic narcolepsy, a serious neurological disorder that can be treated safely and effectively by a drug called Sodium Oxybate, trade name Xyrem. However, this drug is chemically identical to a notorious street drug. If the government were to allow this drug to be sold on the open market, it would be far easier to abuse. However, if the government banned it entirely, narcoleptic patients who have no alternative treatment would suffer greatly. The government’s compromise was to simultaneously classify Sodium Oxybate as both Schedule I (ex: Heroin) and Schedule III (ex: Testosterone), ban it for all purposes except treating narcolepsy, and grant exclusive manufacture and distribution rights to one company so regulators could keep a close eye on them.

The unsurprising result is that Sodium Oxybate is outrageously expensive. It wholesales for $7,460 a bottle, or $82.89/gram. This is not because it is costly to produce—adjusting for inflation, this same drug sold for $1.05/gram in the late 80’s as a bodybuilding supplement. The price also can’t be justified as necessary to recoup the costs of drug discovery, because the drug was described as far back as 1874.

This is a whopping 79x inflation in price. This premium is not necessary to attract the labor and capital to bring the drug to market, but as pure rent created by restraints on competition. Patients (or more typically, their insurers) pay the increased cost, and the windfall flows entirely to the private company.

To be clear, I am not arguing that Sodium Oxybate shouldn’t be regulated, as the drug’s dangers are very well known. However, it is quite the logical leap to go from “this drug is dangerous in the wrong hands and needs to be monitored carefully” straight to “therefore, it should be 79x more expensive and that windfall should go entirely to Some Guy.”

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These are the different forms of rent that comprise the Natural Dividend. However, for there to be any value to natural resources at all, human beings must first take possession of them.

Enclosure

The authors begin this section with a simple question: “who owns the Sun?”

Nobody can claim exclusive use of it. We can even capture its rays with solar panels or tomato plants. In so doing we take the free gifts of nature, enclose them, and commodify them into something new—a natural resource. Some natural forces, like sunlight and oxygen, are so abundant that everybody can take as much as they want and it’s fine because we’ll never run out. However, if one day someone found a way to monopolize the sun or the air and and secure their exclusive use, the rest of us would be utterly deprived and forced to pay exorbitant prices just to keep living.

Most of nature isn’t nearly as abundant and uniformly distributed as the Sun and the atmosphere. Consider farmland, oil, drinking water, or Norwegian fjords suitable for salmon aquaculture. These are all scarce in supply and unequally distributed across the earth. How do we decide who gets to use those, especially the best ones? There’s four different approaches: private ownership, common ownership, public ownership, and open access.

Private ownership is what we’re all familiar with—the resource in question gets parceled up and handed out to individuals for exclusive use. In common ownership, individuals enjoy non-exclusive access bounded by communal norms, traditions, and laws. With public ownership, the sovereign authority itself is both the owner and the decider. The final category is open access, which applies to any resource like air itself where no authority is really able to exercise any exclusive control at all.

The key thing to realize is that private, common, and public ownership—the three most common forms of ownership—all have their origin in the sovereign authority which backs them up. Moses and Brigham implore us to recognize the fundamental effects of government backing of property rights, and what that implies for how the Natural Dividend is captured.

Property Rights

Imagine yourself in an untamed prehistoric wilderness. There is no civilization or any form of human society. In fact, let’s say there are no humans at all—imagine yourself as a large prehistoric cat of some sort. Territorial as most animals are, you seek out a piece of turf to call your own, from which you can secure a ready supply of food, shelter, mates, etc. The only problem is that any territory you might want for yourself, you must fight for, and worst of all, the fighting never ends. You must police the boundaries constantly with credible threats of violence, deterring every animal who challenges your claim. You will spend a significant amount of your resources and bodily energy in this way, and if you ever stop you risk giving up your territory and even your life.

Now imagine you are a human being, and you live in a society. Wouldn’t it be great if we could stop fighting all the time? We could take all that energy we’ve been wasting hurting people and breaking things and put it into making ourselves rich instead. A lawmaker nods his head in agreement and erects some big stones, with durable property rights carved right at the top of the list. Now if someone chases you off your land, you just call the Law, and a bunch of heavily armed men will swiftly beat up the interlopers and hand you back your property.

This changes everything.

Simply by putting a fence around a piece of property, saying, “this is mine,” and having your words backed up with the State’s irresistible monopoly on violence, you massively increase the market value of your property. For starters, you no longer have to pay the ongoing costs of defending your claim, and enjoy those savings immediately. Even better, you can now rest assured that today’s investment will still be there tomorrow, so you can harvest future growth. This both frees up more resources, but also creates a durable incentive to invest them, which in the short term makes everyone in your society wealthier.

Make no mistake, Moses and Brigham agree with all these arguments for privatization for precisely those reasons. However, they further assert that even if we accept that privatizing Nature increases efficiency and raises productivity, it does not logically follow from that premise that “therefore, we should hand over a monopoly on our scarce and precious natural resources to Some Guy.”

Efficiency and Justice vs. Some Guy

The authors make their argument on two grounds: economic efficiency and moral justice.

Economic efficiency

Isn’t competition supposed to be the magic sauce that makes capitalism so unreasonably effective? Why then do we hand out monopoly rights to natural resources, an act which fundamentally limits competition, which invites inefficiency, corruption, ecological damage, and waste? After all, if we hire Some Guy to develop the resources for us, who’s to say the first guy will be the best? What if Another Guy could have done it cheaper and more efficiently?

Moral Justice

Nobody created nature itself, so what moral claim does Some Guy have to the Natural Dividend? If he claims that it’s because of his labor and investment, that seems false. In a competitive market, returns to labor and capital tend to equalize over the long run. The fact that natural resource production so often entails durable windfall returns is a giant blaring warning sign that an unacknowledged Natural Dividend is in play. When the community is excluded from something fundamentally scarce that nobody created, they should be compensated for that exclusion. Therefore, the Natural Dividend rightly belongs to the people, not to Some Guy.

Some Guy

Moses and Brigham anticipate a response from critics, that natural resources are worthless in their natural state until humans work them, and that unless and until we hand over all our natural resources in perpetual fee simple title to Some Guy, they will forever remain worthless. Per this line of thinking, the only incentive sufficient to motivate Some Guy to develop our precious natural resources is an exclusive and durable monopoly. Sure, he might enjoy windfall gains from this, but he also takes a lot of risk and sunk costs, and only the lure of those outsized gains can sufficiently motivate an entrepreneur to bring that necessary labor and capital to bear.

This is what I like to call a “testable hypothesis.”

Moses and Brigham bring over a century of empirical evidence, drawn from Norway’s long history of natural resource management. They show conclusively that indeed, you can have both economic efficiency and distributional moral justice, without handing over the Natural Dividend.

Norway’s petroleum management system is a particularly compelling example of this, an example which is impossible to explain under the critic’s model of the world. Norway’s effective tax rate on oil profits is a staggering 78 percent, and yet Norway is widely considered to have one of the most sophisticated and technically adept offshore and subsea petroleum sectors in the world. One can’t say it’s because the oil is cheap and easy to find, because in Norway “it is much more difficult to get to the oil; it lies deep in the ground, far offshore, covered by deep waters and whipped by terrible weather conditions,” with costs of production per barrel nearly three times as high as in Kuwait. Norway has had no trouble attracting foreign direct investment, building up local competency, selling boatloads of oil, and making everyone involved filthy rich. They did all this, and at the same time captured the bulk of the very windfall profits that critics insist must be privately captured to motivate investment.

Eat the Risk

Moses and Brigham point out one key concession that makes this work: search costs and risk. This sticking point was famously raised in 2012 by Caplan and Gochenour, who argued that Land Value Tax and all related policies make for bad incentives because entrepreneurs need the possibility of windfall gains to sufficiently motivate them to cover the costs of risk and discovery. Ironically, they specifically invoked oil exploration as an example of a domain in which Georgist taxation systems could definitely never work.

All that’s necessary to resolve the contradiction is a small dose of pragmatism. If we start with the premise that the people are the rightful owners of the resource, and risk is a barrier to private investment, how can we get the private sector to efficiently develop the resource and secure the Natural Dividend for the people?

Simple. Let the people underwrite the up-front risk, by having the State eat the cost:

This was done without alienating investors or undercutting their right to a fair return on investment. By minimizing the risk that is always associated with this sort of resource market, Norwegian governments were able to secure a much larger share of the Natural Dividend, relative to other countries. In return, investors receive a more stable, and less risky, investment environment.

Instead of handing out perpetual concessions at cheap rates to foreign companies, Norway set up a carefully crafted system of leaseholds combined with generous R&D exemptions to kill up-front risk for private investors.

A well-designed RRT [Resource Rent Tax] is neutral (as opposed to distortionary) in the sense that the tax will not affect investment and business decisions or entail economic losses. When natural resource investors/producers are driven to maximize the value of their productive activities, a tax on that value will not affect the producers’ (or investors’) decisions. Quite simply, investment and operational decisions that are profitable before the tax will also be profitable after the RRT (only the profit will be redistributed). When the RRT also allows investors and producers to deduct all relevant costs against gross sales income (regardless of whether it employs an accrued profit-based or a cash flow tax), then the state becomes - in effect - a co-investor in these projects and ends up saddling much of the risk. In this way, RRTs reduce the risks that investors/producers face by promising a solid return before the RRT kicks in. By sharing information and ensuring that all the investors’ costs (including a fair return) will be covered, both the government and the investor become better off. In substantially reducing the risks, without distorting her investment and/or operational decisions, the investor can be satisfied with a much lower rate of return.

In other words, if you try to hire Some Guy and ask him to invest a ton of his own resources in a risky operation that might not pan out, he’s going to ask for a huge upside. However, if you cover that downside yourself, he’ll happily accept a much smaller (but much more certain) rate of return.

The Resource Curse

Okay, but what’s the worst that can happen if you’re a bit sloppy with the Natural Dividend and Some Guy winds up with it? Well, the worst that can happen is that your country becomes a playground for rapacious foreign interests, or else your own society gets hollowed out from the inside and stagnates.

We covered this in a previous article, which I’ll reproduce a section from here:

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The resource curse is a phenomenon where a bounty of natural resources leads not to prosperity and wealth, but instead to stagnation, corruption, conflict, and even authoritarianism. According to the national resource governance institute:

Political scientists and economists argue that oil, mineral and gas wealth is distinct from other types of wealth because of its large upfront costs, long production timeline, site-specific nature, scale (sometimes referred to as large rents), price and production volatility, non-renewable nature, and the secrecy of the industry.

Because resource-rich governments get their money from extracting natural resources rather than the economy at large, they don’t have as much incentive to build a well-developed and diversified economy in the first place.

When the productive power of the people themselves is no longer the source of the government’s wealth it becomes easy to either ignore them entirely, or to exclude everyone except a favored in-group. A subset of the resource curse is called Dutch disease, where resource extraction can have negative effects on the rest of the economy:

Dutch Disease, named after what the Netherlands experienced in the 1960’s, is when windfall gains from natural resources become “too much of a good thing”, and crowd out other sectors of the economy, leading to a weird kind of stagnation. The direct cause of this is the sudden influx of wealth which drives up local currency values, making everything more expensive for the non-resource sectors of the economy, which become less competitive as a result. In the Netherlands, this resulted in increased unemployment and decreased investment, and an overall decline in their manufacturing sector.

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Lessons from the Norwegian Tradition

The book covers a lot of different case studies, but the two cleanest examples relevant to our discussion are the Norwegian hydropower sector in the early 1900’s, and the petroleum sector in the latter half of the 20th century.

Hydropower

For most of its history, Norway’s beautiful and pervasive mountain ranges were actually an economic liability, as they left the country with the smallest amount of arable land in all Scandinavia. This handicap became an asset in the 20th century when the potential for harnessing the country’s numerous waterfalls for hydropower was discovered. Given that Norway had just achieved its independence in 1905, the chief concern was not just how to keep this windfall from falling into private hands, but also foreign hands, who were eager to buy it all up.

Given this was the early 20th century, the relevant policymakers were directly influenced by a particular American economist:

It was this desire to secure the Natural Dividend that prompted the Norwegian government to introduce a hydropower concession regime, inspired by the work of Henry George, and specifically designed to capture the Natural Dividend for local and national authorities.

Three policies were enacted. The first was a windfall gains resource rent tax, which allowed for a “healthy” return on investment by private interests, but which taxed any excess profits above that threshold. Second was a mandate that 5-10% of the produced energy be distributed for free to the surrounding community. The third and final policy was the principle of hjemfallsrett, meaning escheat, ensuring that Norwegian hydropower sites would revert to public ownership over a 40-60 year time period. This time table is significant because it is past the point where typical investor discount rates push the net present value of future returns nearly to zero. That is, it’s so far off that the investor doesn’t really care what happens by that point in any way that would affect their investment decisions today.

In this way the Norwegian people secured the Natural Dividend for themselves, and at the same time provided handsome rewards for Some Guy to build up their hydropower resources. The net result is that for the last century, Norway has provided essentially the entire country’s domestic energy needs on hydropower alone.

Petroleum

We’ve previously covered the case of Norway’s petroleum management system in our previous article, which you can read in full here:

Norway's Sovereign Wealth Fund

To briefly summarize, Norway made a massive discovery of offshore oil in the latter half of the 20th century, but lacked the in-house expertise to fully develop it. Thanks in part to the expert advice of an Iraqi immigrant and petroleum geologist named Farouk Al-Kasim (now a knight of the order of St. Olav), and building on the established tradition of Norway’s own experience with hydropower resource management, Norway worked out a novel system for attracting and rewarding foreign investment without selling out the Natural Dividend.

The key insight was that windfall monopoly rights were not a necessary inducement for investment. Instead a pragmatic and flexible policy was worked out where the state covered up-front risk, and at the same time employed careful regulations to not only limit environment damage, but also to ensure technology transfer, competition, and innovation. There’s a lot more detail than I have room to go into here; for a full treatment, I recommend reading the above article, as well as Moses & Brigham’s book.

Norway’s system stands in stark contrast to the two most common models for natural resource management—the “capitalist” approach of letting private companies do whatever they want to and run off with the Natural Dividend, and the “socialist” approach of nationalizing everything with no regard for incentives, causing competence to flee and investment to dry up, when they’re not setting the ocean on fire.

Recommendations

Moses and Brigham fall short of making super strict policy templates, preferring to instead provide an outline of various approaches. Their only hard prescription can be summarized thus:

The correct policy is whatever incentivizes efficient and ecologically sustainable development of the people’s resources, while also returning the Natural Dividend to the community.

Nevertheless, there are several common patterns that emerge from the Norwegian model:

• Resource rent (severance) taxes

• Ground rent leases

• LVT-like holding taxes on resource sites

• Technology transfer agreements with foreign companies

• Direct concessions, such as requiring private companies to hire and train from the local population, or distributing some share of the produced resource to locals at free/discounted rates.

The main question is whether Norway’s success can be reliably replicated. A few things suggest it isn’t a fluke:

A century-long tradition with multiple successes
Norway has been doing this for a long time, first in hydropower, then in petroleum. In recent times similar policies have even been rolled out in response to the enclosure of Norwegian fjords for salmon fishery sites. This suggests Norway’s experience wasn’t just a lucky happenstance, but the result of a deliberate and principled program.

Nevertheless, whenever I bring this up, I always get at least one comment to the effect that “sure, Norway can pull it off, but that’s only because they’re special, so we can’t learn anything from them.”

Northern European Exceptionalism vs. Dutch Disease
If all it takes to avoid the resource curse is to be a nation full of tall, pale, blue-eyed, protestant northern Europeans with high social trust and a historical connection to the Hanseatic league, how does that explain what happened to The Netherlands when their Oil & Gas windfall famously backfired on their whole economy so hard we named the phenomenon after them? It seems like specific policy choices are a much better way to explain these different outcomes than vague generalizations about genetics and culture.

American experiments
Two American states, Alaska and Texas, famously secure a notable chunk of the Natural Dividend from their Oil & Gas sectors on behalf of their people. Alaska distributes theirs as a direct dividend to all citizens equally, and Texas somewhat less equally (for instance, as a way to buy-down the property taxes of landowners). But these aren’t the only two states that employ natural resource wealth funds, there are many others as well. To be fair, these programs capture a far smaller portion of the Natural Dividend than the Norwegian system, and are often blunter instruments which tax gross revenue, as opposed to the carefully tailored, risk-neutral Norwegian instruments. Nevertheless, they establish a strong precedent sufficient to refute a simple dismissal of “we can’t do that here.” Of all the American severance taxes, Alaska’s is the closest to the Norwegian model, and there’s no reason that the other systems couldn’t move in a similar direction with sufficient political will. The chief thing that’s lacking is a coherent theory of what we’re even trying to do with our natural resources in the first place, a gap that Moses and Brigham have now filled.

Going Further

All that said, I do have one critique of the book, and it’s that the most detailed examples of successful implementations are drawn almost exclusively from Norway. This is understandable given the researchers’ background—I’d rather they stick to what they know best rather than go out on an unfamiliar limb—but it does invite the above critique of how well we should expect this all to generalize.

Nevertheless, more and more countries are turning to the Norwegian model, and I’d like to know more about other countries that have supposedly done similar things. For instance, the African nation of Botswana² is often singled out for having outperformed its neighbors, thanks in part to a large severance tax deal on the diamond mining industry and a public-private partnership with DeBeers. I would have loved to see a detailed analysis of these non-Norwegian resource management regimes, and what lessons we can learn from them.

All in all, I found the book to be inspiring, rigorous, and eminently practical. Like all great wizards, Moses and Brigham understand the necessity of calling a great power by its True Name. Doing so causes what was previously mysterious and invisible to take clear shape, and gives us the understanding to contend with it. Mike Bird did us the same favor with his book, The Land Trap, and with The Natural Dividend, Moses and Brigham rightly earn their place on the shelf alongside it—and dare I say, even Progress and Poverty itself.

1. I couldn’t help but notice that this parable bears a striking—though likely unintended—resemblance to the Biblical parable of the wicked vinedressers, in which the vinedressers represent humanity, the estate represents the world, and the owner represents God himself.

2. I kid you not, just as I was editing this exact paragraph, my kids were watching an episode of Netflix’s new Carmen Sandiego adaptation across the room, during which I overheard one of the characters extolling the virtues of Botswana’s natural resource management regime.