Essays
Private Ownership: People Will Be More Industrious and Use Resources More Wisely When Property is Privately Owned
By James D. Gwartney and Richard L. Stroup 1
Men always work harder and more readily when they work on that which belongs to them…It is surely undeniable that, when a man engages in remunerative work, the impelling reason and motive of his work is to obtain property and thereafter to hold it as his very own.
Pope Leo XIII (1878)
Private ownership of property involves three things:
- the right to exclusive use,
- legal protection against invaders, and
- the right to transfer.
Property is a broad term that includes labour services, ideas, literature, and natural resources, as well as physical assets like buildings, machines, and land. Private ownership allows individuals to decide how they will use their property. But it also makes them accountable for their actions. People who use their property in a manner that invades or infringes upon the property rights of another will be subject to the same legal forces that were set up to protect their own property. For example, private property rights prohibit me from throwing my hammer through the screen of a computer that you own, because if I did, I would be violating your property right to your computer. Your property right to your computer restricts me and everyone else from its use without your permission. Similarly, my ownership of my hammer and other things that I own restricts you and everyone else from using them without my permission. The important thing about private ownership is the structure of incentives that emanate from it. There are four major reasons why this incentive structure will promote economic progress.
First, private ownership encourages wise stewardship. If private owners fail to maintain their property or if they allow it to be abused or damaged, they will bear the consequences in the form of a decline in the value of their property. For example, if you own an automobile, you have a strong incentive to change the oil, have the car serviced regularly, and see that the interior of the car is well kept. Why is this so? If you are careless in these areas, the car’s value to both you and potential future owners will decline. Alternatively, if the car is well maintained and kept in good running order, it will be of greater value to both you and others who might want to buy it from you. With private ownership, wise stewardship is rewarded.
In contrast, when property is owned by the government or owned in common by a large group of people, the incentive to take good care of it is weaker. For example when housing is owned by the government, there is no owner or small group of owners who will pay a dear price if the property is abused and poorly maintained. Therefore, it should not surprise us when we observe that, compared to privately owned housing, government owned housing is generally run down and poorly maintained in both capitalist countries like the United States and socialist countries like Russia and Poland. This laxity in care, maintenance, and repair simply reflects the incentive structure that accompanies government ownership of property.
Second, private ownership encourages people to develop their property and use it productively. With private ownership, individuals have a strong incentive to improve their skills, work harder, and work smarter. Such actions will increase their income. Similarly, people have a strong incentive to construct and develop capital assets like houses, apartments, and office buildings. When such developments add more to revenues than to costs, the wealth of the private owners will increase.
Farming in the former Soviet Union illustrates the importance of property rights as a stimulus for productive activity. Under the Communist regime, families were permitted to keep and/or sell all goods produced on small private plots ranging up to an acre in size. These private plots made up only one percent of the total land under cultivation; the other 99 percent was cultivated by state enterprises and huge agricultural cooperatives. Nonetheless, as the Soviet press reported, approximately one fourth of the total Soviet agricultural output was raised on this tiny fraction of privately farmed land.
Third, private owners have a strong incentive to use their resources in ways that are beneficial to others. While private owners can legally “do their own thing” with their property, their ownership provides them with a strong incentive to heed the wishes of others. Private owners can gain by figuring out how to make their property and its services more attractive to others. If they employ and develop their property in ways that others find attractive, the market value of the property will increase. In contrast, changes that are disapproved of by others—particularly customers or potential future buyers—will reduce the value of one’s property.
Your ownership of your labour services provides you with a strong incentive to invest in education and training that will help you provide services that are highly valued by others. Similarly, owners of capital assets have an incentive to develop them in ways that are attractive to others. By way of example, consider the situation of an apartment complex owner. The owner may not care anything about parking spaces, convenient laundry facilities, trees, or well kept “green” open spaces accompanying the apartment complex. However, if consumers value these things highly (relative to their costs), the owner has a strong incentive to provide them because they will enhance both his earnings (rents) and the market value of his apartments. In contrast, those apartment owners who insist on providing what they like, rather than the things that consumers actually prefer, will find that their earnings and the value of their capital (apartments) will decline.
Fourth, private ownership promotes the wise development and conservation of resources for the future. The present development of a resource may generate current revenue. This revenue is the voice of present consumers. But, higher potential future revenues argue for conservation. The potential gain in the form of an increase in the expected future price of the resource is the voice of future users. Private owners are encouraged to balance these two forces.
Whenever the expected future value of a resource exceeds its current value, private owners gain if they conserve the resource for future users. This is true even if the current owner does not expect to be around when the benefits accrue. For example, suppose a 65 year old tree farmer is contemplating whether to cut his Douglas fir trees. If growth and increased scarcity are expected to result in future sales revenue that exceeds the current value of the trees, the farmer will gain by conserving the trees for the future. When ownership is transferable, the market value of the farmer’s land will increase in anticipation of the future harvest as the trees grow and the expected day of harvest moves closer. Thus, the farmer will be able to sell the trees (or the land including the trees) and capture their value at any time even though the actual harvest may not take place until well after his death. 2
For centuries, doomsday commentators have argued that we are about to run out of trees, vital minerals, or various sources of energy. In sixteenth century England, fear arose that the supply of wood would soon be exhausted as that resource was widely used as a source of energy. Higher wood prices, however, encouraged conservation and led to the development of coal. The “wood crisis” soon dissipated. In the middle of the nineteenth century, dire predictions arose that the world was about to run out of whale oil, at the time the primary fuel for artificial lighting. As whale oil prices rose, pressures for a substitute energy source heightened. This led to the development of kerosene, and the end of the “whale oil crisis.”
Later, as people switched to petroleum, doomsday predictions about the exhaustion of this resource arose almost as soon as the resource was developed. An idea about the extent to which early estimates of petroleum supplies underestimated consistently the potential supply can be gathered from the presidential address of Dr. Campbell Watkins to the International Association for Energy Economics in 1992. Watkins notes that the estimates of Alberta’s total gas reserves in 1957 were 75 trillion cubic feet. By 1985 the estimated reserve remaining, in spite of the intervening consumption, was 149 trillion cubic feet. In 1987 the reserve estimated was further adjusted to 170 trillion cubic feet and the 1992 figure was nearly 200 trillion cubic feet. In other words, far from “running out” of natural gas, Canada is actually discovering more gas as time passes.
Doomsday forecasters fail to recognize that private ownership provides people with a strong incentive to conserve a valuable resource and search for substitutes when there is an increase in the relative scarcity of the resource. With private ownership, if the scarcity of a resource increases, the price of the resource will rise. The increase in price provides producers, innovators, engineers, and entrepreneurs with an incentive to
- conserve on the direct use of the resource,
- search more diligently for substitutes, and
- develop new methods of discovering and recovering larger amounts of the resource.
To date, these forces have pushed doomsday further and further into the future. For resources that are privately owned, there is every reason to believe that they will continue to do so. 3
People who have not thought the topic through often associate private ownership with selfishness. This is paradoxical since the truth is nearly the opposite. Private ownership both
- provides protection against selfish people who would take what does not belong to them and
- forces resource users to fully bear the cost of their actions.
When property rights are well defined, secure, and tradeable, suppliers of goods and services will have to provide resource owners with at least as good a deal as they can get elsewhere. Employers cannot seize and use scarce resources without compensating their owners. The resource owners will have to be paid enough to attract them away from alternative users.
In essence, securely defined private property rights eliminate the use of violence as a competitive weapon. A producer that you do not buy from is not permitted to burn down your house. Neither is a competitive resource supplier, whose prices you undercut, permitted to slash your automobile tires or threaten you with bodily injury.
Private ownership keeps power dispersed and expands the area of activity that is based on voluntary consent. Power conferred by private ownership is strictly limited. Private business owners cannot force you to buy from them or work for them. They cannot levy a tax on your income or your property. They can acquire some of your income only by giving you something that you believe to be more valuable in return. The power of even the wealthiest property owner (or largest business) is limited by competition from others willing to provide similar products or services.
In contrast, as the experience of Eastern Europe and the former Soviet Union illustrates, when government ownership is substituted for private property, enormous political and economic power is bestowed upon a small handful of political figures. One of the major virtues of private property is its ability to check the excessive concentration of economic power in the hands of the few. Widespread ownership of property is the enemy of tyranny and the abusive use of power.
Thus, it is clear what the former socialist countries need to do. As Nobel laureate Milton Friedman recently stated, the best program for Eastern Europe can be summarized “in three words: privatize, privatize, privatize.” 4 Private property is the cornerstone both of economic progress and of personal liberty.
1 Reprinted with the permission of The Fraser Institute, Vancouver, B.C. From James D. Gwartney and Richard L. Stroup, What Everyone Should Know About Economics and Prosperity (Vancouver: The Fraser Institute, 1993), pp. 33-40.
2 The conservation function of private ownership is also illustrated by examining alternative property right systems that are applied to animals. Animals like cattle, horses, llama, turkeys, and ostriches that are privately owned are conserved for the future. In contrast, the absence of private ownership has led to the excessive exploitation of animals like the buffalo, whale, and beaver. Contrasting approaches to the conservation of elephants in Africa also provide instructive evidence on the importance of private ownership. In Kenya, elephants roam unowned on unfenced terrain. The Kenyan government tries to protect elephants from poachers seeking valuable ivory by banning all commercial use of the elephant except tourism. In the decade that this policy has been in effect, the Kenyan elephant population has declined from 65,000 to 19,000. Other Eastern and Central African countries that have followed this approach have experienced a similar decline in the size of their elephant population. In contrast, Zimbabwe allows the open sale of elephant ivory and hides, but provides rights of private ownership to local people on whose land the elephant roams. Since assigning private ownership rights to elephants, Zimbabwe has seen its elephant population grow from 30,000 to 43,000. Elephant populations in the countries adopting a similar approach—Botswana, South Africa, Malawi, and Namibia—are also increasing. See Randy Simmons and Urs Kreuter, “Herd Mentality: Banning Ivory Sales Is No Way to Save the Elephant,” Policy Review (Fall 1989), pp. 46-49, for additional details on this topic.
3 The empirical evidence indicates that, adjusted for inflation, the prices of most natural resources have actually been falling for decades, and in most cases, for centuries. The classic study of Harold Barnett and Chandler Morris, Scarcity and Growth: The Economics of Natural Resource Availability, (Baltimore: The Johns Hopkins University Press, 1963) illustrates this point. Updates and extensions of this work indicate that resource prices are continuing to decline. In 1980 economist Julian Simon bet doomsday environmentalist Paul Ehrlich that the inflation adjusted price of any five natural resources of Ehrlich’s choosing would decline during the 1980s. In fact, the prices of all five of the resources chosen by Ehrlich declined and Simon won the highly publicized bet. A recent study found that of 38 major natural resources, only two (manganese and zinc) increased in price (after adjustment for inflation) during the 1980s. See Stephen Moore, “So Much for ‘Scarce Resources’,” Public Interest (Winter 1992).
4 Milton Friedman, “Economic Freedom, Human Freedom, Political Freedom,” lecture delivered November 1, 1991 at California State University, Hayward. A booklet containing the lecture is available from the Smith Centre for Private Enterprise Studies of California State University, Hayward.