“People come here to see the desert elephants, the magnificent scenery and wildlife, the black rhino, and the local people. We have stopped poaching because people value wildlife and see what tourism can do.”
Texas Ranchers Help
One other remarkable piece of the story of protection of African wildlife through private ownership deserves mention.
The scimitar-horned oryx, sadly, went extinct in Africa some time ago. And yet it is thriving under careful management and protection … in Texas. A variety of African exotic species, including the critically endangered addax and the dama gazelle, thrive today, privately owned, on sprawling ranches given over to wildlife instead of cattle. The ranchers have made the switch from cattle to African wildlife guided by profit: Hunters are willing to pay as much as $50,000 for a hunt in which those animals are the trophies.
Providing habitat for exotic animals began years ago when Texas ranchers bought surplus animals from zoos. Under the careful stewardship of their private owners, more than a quarter million such animals now range largely free in the hill country.
And yet, distressingly, these animals are now endangered. They are vulnerable to the good intentions of misguided individuals and animal rights groups who have won a judgment in federal district court for the District of Columbia under the Endangered Species Act.
The decision limits the property rights of the ranchers that own them—and that limitation is dangerous for the animals. Ranchers are now required to get permits from the U.S. Fish and Wildlife Service in order to hunt the three endangered antelope species. According to economist Terry Anderson,
Everyone agrees that obtaining these permits will be virtually impossible—based on past experience, they’re very hard to get, and they’re also subject to objections by groups like the Friends of Animals. As a result, Charly Seale, a fourth-generation rancher and the executive director of the Exotic Wildlife Association, speculates that there will be half as many of these antelope in five years and none in 10 years.
If the ranchers cannot benefit from maintaining the antelope on their land, they lose the incentive to do so.
Elephants, antelope, and other resources, natural and otherwise, should be left in private hands or put into private hands with strong property rights. Governments should sell or give away government-owned resources to private-sector individuals, villages, or groups as the case may warrant, in order for us all to take advantage of the healthy incentives and profit-and-loss guidance of the market process.
Private Ownership Leads to Good Performance
As the story of elephants demonstrates, private ownership rights (even partial rights) give owners strong incentives for good stewardship. Owners look after their property so that it can be a source of profits and other benefits to them year after year. There is yet another benefit of private ownership: Owners also have strong incentives to perform well in their interactions with others because their income depends on the quality of that performance. Just as owners are accountable for the protection and enhancement of what they own, in free markets they are accountable to those they interact with for fulfilling their part of a bargain. Where enterprises are government-owned, by contrast, performance of obligations tends to be more hit-or-miss. Leaving behind the exotic story of elephants, we take up the more mundane matter of package delivery. For illustration, consider the following thought experiment.
Package Delivery
Suppose you have a package you want delivered overnight, whose safe and timely arrival matters very much to you. Suppose your choice is to pay a little less to ship it via the Post Office or to pay a little more to ship it with FedEx or UPS. How would you send it?
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In my experience asking this question to many classes and lecture audiences, the results are always the same. A substantial majority always say they would choose FedEx or UPS even though they would have to pay a little more. The reason they give is that FedEx and UPS are more reliable. But why is that? Are the people who work for FedEx genetically more reliable, intelligent, and dedicated than those at the Post Office? Surely not. So why does FedEx outperform the Post Office so consistently?
Surely it is a matter of the different incentives facing the two enterprises. FedEx is privately owned and faces robust competition. Its funding depends on its performance. The better the people of FedEx please their customers, the more money they make; the more they disappoint, the more their customers go elsewhere. The connection between their performance and their funding is direct and tight. Hence, FedEx employees throughout the enterprise have strong incentives to perform well.
Employees of the United States Postal Service face much weaker incentives to perform well. Even though they lose billions of dollars on operations in a typical year, they don’t go out of business—the government makes up the losses with taxpayers’ money. There are no owners pushing managers to cut losses. In fact, there are no owners at all (apart from U.S. citizens as a whole, and are we really owners if we can’t sell our shares?). This is a big part of the problem. Also, the Post Office’s legal monopoly on delivery of regular mail shields a large portion of their funding from competition. Because Post Office employees are part of a bureaucracy with no owners’ profits at stake and with a protected income flow, their funding is little affected by their performance; hence they have a relatively weak financial incentive to perform well.
To generalize the point, under private ownership, enterprises (e.g. FedEx) face a connection of performance and funding that gives them a strong incentive to perform well. Under government ownership, enterprises (e.g. the US Postal Service) face a disconnection of performance and funding that gives them a weaker incentive to perform well.
To improve mail delivery in the U.S., the Post Office’s assets—buildings, trucks, equipment, everything—should be sold off to the private sector, and the delivery of first class mail should be opened up to free competition. I would expect a variety of companies, probably including FedEx and UPS or subsidiaries they would set up, to jump into the business. I would also expect Post Office employees in many areas to set up their own local delivery and collection companies. They might even buy the buildings where they have been working and the trucks they have been using. Entrepreneurial innovation would generate more enterprises than I am clever enough to imagine, and profit and loss would select from all those trials the companies and networks of companies that serve the public best. Wouldn’t it be fascinating to watch the performance of mail delivery improve, not without some initial problems, presumably, as the incentives of private ownership and the discipline of profit and loss were applied to mail?
Social Services
Let’s look at the consequences of this connection or disconnection of performance and funding for another pair of enterprises in a very different field of endeavor—providing funds to the needy:
When I was a student in Scotland years ago, on returning to classes one September, I was greeted by my friend Donald Henry. “Howard,” he said with a twinkle in his eye, “I have a story for you.” I wish I could capture his wonderful accent. “After classes this summer I didn’t have a job, so I signed on.” (That is, he signed on to “the dole,” the British unemployment compensation system.)
“Then, before I went to collect the first time, I got a job,” he said. Donald went on, sheepishly, “but I kept my appointment anyway. I felt guilty about it, standin’ there in line. Then, when I got up to the window and the lady started countin’ out the pound notes, I couldn’t stand it any longer. I said to her, ‘No, I don’t desairve it; I have a job.’ Guess what she said to me?” Here he gave me a you-won’t-believe-this look.
What do you think the lady did?
“She pushed the notes out to me and said, ‘Oh, go on, dearie! Everybody does it!’”
How’s that for careful husbanding of scarce resources? The purpose of the Scottish unemployment system is to get money to the unemployed, not the employed. In handing money out indiscriminately to
unemployed and employed alike, the woman was performing poorly. But how strong an incentive does she have to perform well? If she performs badly, will the organization lose funding? Not at all. The British taxpayers must provide that funding or face jail for tax evasion. With the British dole, as with the US Postal Service, funding and performance are disconnected; hence the incentive for good performance is dramatically weakened.
Contrast that with privately-owned enterprises that provide funds to the needy. Consider, for example, Children’s Scholarship Fund (CSF) Baltimore, on whose board I was privileged to serve for a decade. With money raised from private sources, CSF Baltimore provides tuition assistance to low-income Baltimore families, with which parents send their children to private and parochial schools of their choice. Without CSF Baltimore’s support, many of these children would be trapped in dreadful government schools.
How careful do you suppose the staff at CSF Baltimore is in making sure that only eligible, low-income families get scholarships? Very careful, of course. They require families to document their income every year; they go over every tax return; when families become income-ineligible, no additional scholarship support is awarded.
Again, what’s the difference? Why does the CSF staff take more care than the woman in the Scottish dole office to make sure recipients qualify for grants? They do so because CSF Baltimore’s funding depends on how well the organization uses the funds it raises. The trustees and staff of CSF Baltimore understand that their donors make contributions based on the quality of the service the organization provides the community and on its operating efficiency. Those dollars are hard to raise. CSF Baltimore has a strong incentive to be very careful with them. If they don’t perform well, they lose their funding, as they should. Not so the tax-supported unemployment office.
The principle here is that the close connection of performance and funding in private-sector institutions gives them a strong incentive to perform well. The funding of privately-owned institutions depends on their performance because they cannot force their funders to pay or contribute. This is true for both for-profit and non-profit enterprises. FedEx must earn its funds by pleasing its customers; CSF Baltimore must earn its funds by pleasing its donors. They must perform well or go out of business. In short, market forces—in the broad sense of forces at work on voluntary exchange —regulate strictly the performance of these privately-owned enterprises.
By contrast, the US Postal Service has a government-enforced monopoly on first-class mail; its customers are trapped. And when it doesn’t earn enough to cover its expenses, Congress gives it taxpayers’ money. The Scottish dole office, like all government-provided unemployment compensation, raises funds through taxes. If the taxpayers who fund it are dissatisfied with its performance, tough. They must keep paying regardless. In the public sector, performance and funding are largely disconnected; hence public-sector institutions have a far weaker incentive to perform well. With no market forces to regulate them, these institutions perform poorly. (Of course there are other layers of government that are supposed to regulate the USPS and the Scottish unemployment system. But those government regulators are also publically owned and tax-supported, so they perform badly, too. We discuss the need for private-sector regulation in Chapter 6.)
Private ownership is not a flawless institution—nothing human is flawless. Owners often use bad judgment, make mistakes, neglect their property or even abuse it. But one of the great things about the system of private ownership is that, in such cases, ownership tends to change hands: The market value of the property tends to drop, and others who know better how to use and care for the property buy out the incompetent owner. Market forces tend to move property into the hands of the careful and competent.
How much better is this situation than one of government ownership! Public officials also use bad judgment just as often; they are people, too. They make mistakes, neglect or even abuse the public property under their charge, just as private owners do. But in a system of government ownership and bureaucratic management, the forces that tend to correct this situation are weak. Think of the Tongass, of the Post Office, of the Scottish dole office.
Government ownership surely must be well-intended most of the time, but it does not work well. Neither does interference with freedom of exchange. To that we turn in the next chapter.
Chapter Five
Government Regulation Gets Captured by Special Interests
How you would answer the following question, and how do you think most others would answer it?
Should competent adults be allowed to exchange freely with one another? That is, should we be legally permitted to exchange our property and services with one another on mutually agreeable terms?
Most of us answer yes to the question when it’s asked this way. In principle and in general, we believe in freedom of exchange—people should be allowed to do as they see fit with their own as long as they don’t harm anyone else, and they should be allowed to decide the terms on which they interact with others. Of course.
But though most of us support freedom of exchange in principle, many reject it in practice: they support particular restrictions on exchange. They support occupational licensing to protect people from incompetent practitioners, zoning restrictions to foster better-planned communities, minimum wage laws to raise incomes, anti-trust regulation to prevent monopolies, Food and Drug Administration restrictions on the sale of pharmaceuticals to assure their safety and effectiveness, and so on. All of these restrict freedom of exchange. They prevent competent adults from exchanging their property and services on mutually agreeable terms.
Most people, I find, when they hedge their commitment to freedom of exchange by supporting some restriction of it, do so because they believe the restriction will make people better off; they believe unrestricted freedom of exchange would harm people.
This chapter and the next argue that this belief has it exactly backward. In practice, given the principles we discussed in Part I, restrictions on freedom, even when well-intended, almost always make people worse off; that’s the subject of this chapter. And unrestricted freedom of exchange—so long as it’s peaceful and not fraudulent—unleashes powerful market forces that regulate very effectively in the public interest; that’s the subject of the next chapter.
Please note at the outset the important distinction between regulation and restriction. To regulate means to make regular. In the present context it also means to control or assure the quality of a good or service. To restrict means to limit one’s freedom of action. As we will see, governments can and do restrict without regulating (in the sense of assuring quality); free markets can and do regulate without restricting.
Let us begin with an illustrative example, government restrictions on our freedom to exchange money for a haircut.
Hairdresser Licensing
In every state in the U.S., in order to cut or dress somebody’s hair for pay a person must first obtain a license (a “cosmetology” license) from that state. Generally one must go to beauty school or serve an apprenticeship and then take a qualifying test. Once one has the license, one may practice; without it, one may not. Consider two questions before reading on:
What is the purpose of hairdresser licensing? Do you suppose there is a difference between the avowed, official purpose and some other actual purpose?
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The avowed purpose of hairdresser regulation is “to protect the public health and safety.” Although hairdressing is not a particularly dangerous business, I am told that sometimes misused chemicals can burn the scalp or even make people’s hair fall out. And of course, hairdressers use scissors and curling irons which can cause cuts or burns.
Hairdresser licensing interferes with freedom of exchange. It is not enforced by invitation and polite request. Like all regulations, it is enforced by the police. If someone is caught dressing hair (in the licensing-law jargon, “practicing beauty culture”) without a license, or in an unapproved location such as
a home, the practitioner can be fined and have her license suspended or revoked. This is so even if the hairdresser and the customer both desire the transaction. They are not free, under the law, to exchange money and hairdressing services as they see fit.
Now apply our quick public-choice analysis (from Chapter 3) to hairdresser licensing. What groups are most affected by licensing? And what are their incentives? Hairdressers themselves are the group most affected, of course. Let’s illuminate their incentives with a story.
In the mid ’80s I was invited to speak at Bryn Mawr School, a fine prep school for girls in Baltimore. To an eighth grade history class I had been describing some of the problems with occupational licensing that Walter Williams describes in The State Against Blacks. As I was explaining Williams’s claim that hairdresser licensing is often stacked against low-income people, a black student in the third row raised her hand and thoughtfully shared, “That happened to me.”
Her name was Sharissa. She told us that one of the five-year-olds in her neighborhood was having a birthday party, and the girls going to the party wanted their hair done in gold braid. That involves braiding the hair close to the scalp, weaving gold thread through the braids in decorative patterns, and then curling the bangs in front. Sharissa was good at it, and there was a new outfit she wanted to buy, so she dressed the hair of some of the little girls for five dollars each. In all, she did the hair of about ten children, some at her house and some at the children’s houses. She estimated her income at about $50.00 and her expenses, for gold twine and styling gel, at about $6.75. Her net was enough to buy her new outfit.
But that’s not the end of the story.
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