The recent re-discovery of the ivory-billed woodpecker, long thought to have gone extinct, was a rare bit of good news in an otherwise gloomy time for conservationists. Like everyone, ecologist Gretchen Daily at Stanford University was thrilled--"this bird is a legend in my life"--but it also confirmed her belief that efforts to preserve endangered species are "doomed to failure" unless conservationists embrace free-market capitalism. Specifically, she thinks that we should view an ecosystem not as vacant land for development, but as a capital asset that must not be squandered, even if that means compensating landowners for keeping forests green. Daily, director of Stanford's tropical research program at the Center for Conservation Biology, talked with NEWSWEEK's Fred Guterl. Excerpts:

NEWSWEEK: Why are traditional conservation efforts doomed to fail?

DAILY: So far, conservation has been done with biodiversity as the major objective--protecting other life forms. But now, increasingly, people are worried about our basic life-support systems. Ecosystem assets, like water and forests, are becoming scarce. That's motivating people to reconsider how we allocate these resources. There's no God-given answer--there are trade-offs in everything. What my work's about is informing ourselves of what the trade-offs are.

Can you give some examples of these trade-offs?

A lot of the flooding that we see today can be attributed to converting native forests or wetlands into farmland or housing. Also, it turns out that two thirds of the crop strains that we grow require a little bee to buzz around and transfer pollen from one plant to another. Pollinators, though, are at an all-time low. In a study of coffee growers... we found that farmers within one kilometer of rain forest enjoy a 20 percent increase in yields--that's $60,000 a year of income to a farmer with 60 to 100 hectares. Pollinators [bees] need the forest to nest. The crops tend to bloom all at one time, but bees need to eat every day, so you need a forest to provide them food all year-round.

How do we preserve these assets?

Traditional approaches have been [for government and environmental groups] to buy up land, [which become] little islands of wilderness floating in a hostile sea of development. But it doesn't have to be a hostile sea. There's a heck of a lot worth protecting on farmland. We need to make development more biodiversity-friendly. Some people at one extreme in the environment movement don't like to hear that. They want all the effort focused on the last bits of wilderness.

This approach really captures the imagination of people who have long wondered what the heck conservation is good for. What lights people up is the idea of seeing ecosystem assets as working-capital assets that provide a stream of benefits, and then figuring out, using standard business and economic approaches, what an optimal investment strategy would look like. Costa Rica has set up a pioneering system of payments for watershed services--drinking-water quality, maintaining sediment-free water supply to hydropower dams. Perrier-Vitel in France pays farmers to maintain water quality, and other places in Europe are trying to figure out ways of doing something about flooding.

What about the United States?

There's work being done now to orient the farm bill [in 2007] to optimize the delivery of benefits to communities in the countryside and to the nation as a whole. This goes way beyond producing or overproducing traditional commodities. There's work going on now to figure out how to target really economically valuable services that come from farmland, and ensure that they're protected, and that farmers are paid for supplying them. In controlling the dead zone [in the Gulf of Mexico], for instance, a lot of money could be channeled to farmers to help plant strips of forest along open waterways, which would trap excess nitrogen that's causing the dead zones.

You're also seeing a lot of places where water quality is dipping below minimum standards. Our water infrastructure is badly in need of repair. Should we invest in filtration plants to purify water? Or should we rely on ecosystem approaches?

As in the Catskills, where New York repaired the watershed rather than build a plant?

Yes. The question is, can we scale up from those instances where people out of enlightened self-interest have worked out a system to make conservation mainstream?

Is it possible to trade ecosystem assets?

On March 31, the ecosystem marketplace was launched. It's the world's first clearinghouse for ecosystem assets, for buyers and sellers to get together.

What assets do they trade?

Right now they trade in carbon credits, but also endangered species, through "species banks." For example, suppose you have land that supports the red-cockaded woodpecker. To offset the impact of development in an area where this woodpecker lives, developers can buy woodpecker families on your land. A pair of woodpeckers recently sold for $100,000. In California, where any incremental development can tip a species into oblivion, about 50 banks are set up.

How does this help the woodpeckers?

It forces investment in the conservation of habitat.

So people are basically selling shares in woodpeckers?

Yeah, that's right. There's a market created, and woodpecker credits come up for sale. People who want to develop in sensitive habitat make these investments to offset their impact.

Looking at it cynically, it's like saying, "OK, we'll slaughter woodpeckers over here as long as we protect a few of them over there." The net effect, from an ecological point of view, isn't ideal, because you might be further endangering the species by allowing the development. At the same time, development is just marching on, despite the Endangered Species Act. And these flexible, voluntary schemes are much more likely to be followed than the sledgehammer approach. It's better for the woodpecker because something is being done.

Why do developers have to buy these credits?

To abide by the Endangered Species Act, which says that if an impact is likely to occur, it has to be offset somehow. Tons of endangered species live on private land. How do you get landowners to get involved? The magic solution is to come up with some way of compensating them for protecting these species. You don't buy title to the land, you buy the woodpecker on it. The landowners are happy, because they still have the land.

Are you an activist?

I consider myself more of a problem solver.

Is this a question of science or social policy?

It's not like there's rocket science to figure out if there's value here; that's pretty well understood. The rocket science is needed to get people together and say, "OK, these are the values, and if we want to maintain them, here's how we invest in them."