Wednesday, 4 November 2015

Why We Need Private Property to Deal with Scarce Resources

Guest post by Patrick Barron

Why We Need Private Property to Deal with Scarce Resources We always have less than we want. This need to produce what we want exists in many forms and is the central problem in economics.* If all goods already existed in greater quantity than we wanted, there would be no need to ‘economise’—no need for economic activity. The superfluity of our wants over what we can each command is true of all resources (such as time, human energy, and natural resources).

It is not necessarily intuitive however that allowing resources to be owned privately is the solution to this problem. It requires some contemplation to grasp it.

Consequently, collective ownership of resources may appear superficially attractive to many who resist that contemplation, and they decide we should have all resources owned collectively for the “common good.” Unfortunately, a society which spurns private property — and hands resources over to government planners instead — often learns the terrible lessons of central planning and especially of the tragedy of the commons, i.e., that commonly-held resources will be plundered to extinction. After all, what real disincentive is there to me to take the last commonly-owned tree when I really, really need that tree to make a fire?

If society spurns the private ownership of resources, it soon finds it must develop some other means to prevent the tragedy of the commons and to ‘allocate’ existing goods. Historically, the main means chosen by rulers has been the use of force and central planning. Throughout history, most of mankind has been divided into a hierarchical system of masters and slaves with some gradations between the two extremes. The masters (pharaohs, emperors, kings, sultans, warlords, etc.) devised complex rules-based systems and plans for resource distribution that were ultimately decided not by markets, but by a small number of people who held the power of life and death over others. And ultimately, these systems depended upon pure terror for enforcement.

But this alleged solution to the problem of so-called scarcity* — restricting people’s liberty through the use of force — does not work. It doesn’t make possible the production of the economic goods we need.

Problem 1: We Can’t Economise Without Effectively Ordering Our Preferences First

The gradual growth in the understanding of what we now regard as basic economics eventually ended thousands of years of subsistence existence for the masses in the West. [And continues to end it worldwide – Ed.] We each have our own set of preferences of what we need and most value—ranking these preferences in order would give us each a unique list of our “ordinal preferences.” Modern economics explained that without private ownership of resources, there was no mechanism for observing or acting on people’s ordinal preferences--no way of discovering and communicating what all those preference scales look like, or could mesh together cooperatively. Without a way to produce and distribute goods according to ordinal preferences, there is no rational means to economise for the betterment of society.

In other words, without markets and prices, there is no way to know what people really want or need, so the masters never really knew what to order the slaves to produce, what technical means to use, what alternative materials to use, the quality desired, or how much to produce. Thus, the pharoahs of Ancient Egypt forced the living to build pyramids for the dead, and the commissars of the Soviet Union forced the production of insufficient quantities of shoddy, inefficiently-produced goods. Russia is blessed with vast natural resources and an industrious population, yet the Soviet empire collapsed. Meanwhile Hong Kong, with only the latter, flourished. Clearly, there is more required than simply resources and hard work.

Problem 2: Few Raw Materials Are Ready to Consume

A second fatal problem with common ownership of resources is that few readily-available consumable resources actually exist. There are no resources on the planet that do not require at least a minimum of effort to transform into a consumable product. Even edible berries growing in the wild must be harvested, meaning that someone must transport himself to the berries’ location and pull them from the bush at just the proper time. The cost of doing so is the value one places on forfeiting his leisure. Of course, other natural resources require much more effort to convert to consumable products, passing through many stages of production.

For example, timber and minerals must be extracted, harvested, etc. and then moulded into something that can be consumed. Consider a hiker lost in the wild. It matters not at all to him that great stands of timber lie within easy reach or that valuable minerals lie under foot. These natural resources require great effort over very long time periods to be converted into something consumable, as is the case with converting timber into a shelter or crude oil into gasoline. A lost hiker does not have the knowledge, time, or previously produced means to convert these basic resources into consumable products to ensure his survival. All this is far beyond anyone's autarkic abilities.

Now let us assume that someone did harvest trees by felling them, transporting them to a lumber mill, milling them, storing them in a ventilated and dry place for many months before kiln-drying them (all processes that are required to turn trees into useable lumber), advertising their availability to contractors, keeping sales records, sending out bills, and collecting the bills, only to have a socialist call him a plunderer and confiscate his lumber for free distribution to whomever the masters deemed to be politically advantageous to their continued privileged position. No one other than the favoured cronies of government would ever harvest another tree—and most certainly no-one would have any incentive to plant more!

In other words, production of usable lumber would be monopolised, and as with all cases of monopolies, prices would increase and quality would decline. Moreover, with no voluntary market at work in timber and forest land, there would be no means of knowing if these resources were being used in a way valued by those who valued them most.

At the same time, the central planners could not let just anyone harvest the trees or access the land. If the trees had no owners, great forests would be denuded in short order because there would be no social mechanism to prevent what would amount to a tragedy of the commons by order of the state.

Problem 3: We Need Private Property to Build Capital

Capital—a structure of economic goods used for production--is built up over generations. Yet without the ability to profit from privately-owned property, there would be no incentive to provide or withhold capital for any future endeavour. Also, a system of private ownership is necessary to determine if that capital is being used in a way the consumers actually value. The consequences of ignoring this fact of economic science is most evident today in China's ghost cities, where resources, both natural and human, have been expended for no observable benefit except to advance the careers of politicians who can claim to have met the requirements of the latest Five Year Plan. Timber and other resources were provided to build ghost cities, not because the owners of the resources sought to be economical with their resources, but because government edicts required that timber, concrete, gasoline, and more be used to produce what are now empty cities.

The opposite case of resource waste comes from special interest groups who capture the political apparatus of the state and prohibit exploitation of resources by private individuals. In the name of protecting Mother Gaia from being plundered, modern environmentalists have convinced the political class that most progress is unsustainable, dangerous to our health, or any number of other specious claims. Society is prevented from benefiting from the conversion of these existing resources to consumable products—and from creating more resources from which we could all benefit. The poor suffer the most from these policies as the prices of raw materials — and thus finished consumer goods — are relentlessly driven up.

Unlike the tragedy of collective ownership, in which we each have the individual incentive to “take that last tree,” private property rights create “mirrors” that reflect back our own actions. Instead of taking that last tree, we ensure we plant others first for our future benefit. Private ownership insures that valuable resources will never be plundered to extinction, because their value will have been capitalised. Instead, private owners will seek to make resources as widely available as possible without endangering the long-term prospects for future harvesting of resources. The process of determining a resource’s capitalised value is impossible absent free-market capitalism with strict defences of property rights.

Despite both the theoretical and empirical evidence to the contrary, socialists tell us the opposite; i.e., that state ownership of all resources will prevent their plunder and ensure prosperity for all. As Ludwig von Mises explained, though, socialism is not an alternative economic system of production. It is a system of consumption only, and a system of economic ignorance and economic plunder.


Patrick BarronPatrick Barron is a private consultant to the banking industry. He has taught an introductory course in Austrian economics for several years at the University of Iowa. He has also taught at the Graduate School of Banking at the University of Wisconsin for over twenty-five years, and has delivered many presentations at the European Parliament.
A version of this post appeared at the Mises Daily.

* [Editor: Some economists, including this post’s author, call this situation “scarcity”—a sort of Garden-of-Eden premise that all we want should be here now for the asking, if only we weren’t fallen people. But the reality is, all we want has to be produced. As Carl Menger points out, we are bathed in an abundance of free goods, for which there are more than our requirements, and in need of producing economic goods, for which there is presently less than our requirements. The identification and transformation of free goods into economic goods is the economic story.]

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