Tuesday, May 8, 2012

GTN Tory Classics No. 7: Production, Limits, and Private Property

There are nine words in the following essay, the fourth in the seven-part series of economic essays that I wrote in 2009, that I wish I had not included. Those are the words “The latter is not particularly relevant in this context” in reference to Dr. Garrett Hardin’s “Lifeboat Ethics”. What Dr. Hardin had written in “Lifeboat Ethics” is in fact very relevant to the subject matter of this essay.

This essay is both an economic and an ecological essay. It begins with the basic economic argument for growth – that a company by producing larger quantities of its product can sell its product at a lower cost per unit to the consumer and increase the wages of its employees while increasing its profits. It then moves to the ecological question of the sustainability of growth. The kind of economic growth where consumer and producer, employer and employee, all benefit from increased productivity cannot be sustained forever because we live in a finite world with finite resources. In the final part of the essay, I contrast Ronald Wright’s approach to the subject of limited resources with Garrett Hardin’s as expressed in “The Tragedy of the Commons”.

The point I was arguing towards was the goal of the conservation of resources is better served by private rather than collective ownership. Both of the Garrett Hardin essays I mentioned are on the subject of the conservation of resources. “The Tragedy of the Commons” speaks directly to the question of private resources vs. common resources. “Life-boat Ethics” does so in a less direct manner. In the late 1960’s, Kenneth Boulding had written an essay about limited resources and conservation in which he compared people living on this planet to the crew of a spaceship, who must co-operate with each other, and conserve their limited resources, for their voyage to be a success. The “spaceship earth” metaphor caught on and had become popular among ecologists when Hardin’s “Lifeboat Ethics” was published by Psychology Today in 1974. Hardin suggested that a more appropriate metaphor was that of lifeboats, adrift at sea, each with room and resources for a limited number of people. There are people in the sea surrounding the lifeboat, and the compassionate thing to do would seem to be to bring those people onto the lifeboat. If the boat is already at its carrying capacity, however, this will cause the boat to capsize. If that happens, then an act of compassion, intended to take people who are in a place of peril in the sea and put them in a place of safety in the boat, will have the opposite result of putting everyone on the lifeboat into the same perilous situation as those they intended to but failed to rescue.

Hardin applied this metaphor by criticizing liberal immigration and foreign aid policies. While I agree with much of this criticism I did not see it as relevant to the point I was trying to make by referring to Hardin’s other essay. It occurred to me, however, as I re-read my essay in preparation for posting it here, that there is another aspect of Hardin’s lifeboat metaphor which does speak to the matter of the conflict between growth-fuelled prosperity and limited resources. In Boulding’s original “spaceship” metaphor, the entire planet is one spaceship and ecological problems are global problems. In Hardin’s “lifeboat” metaphor there is not one lifeboat but many, every first world country being considered a lifeboat. This suggests that problems which the “Spaceship Earth” metaphor treats as global problems are better thought of as local problems and addressed on a smaller scale.

Economic growth is like biological growth. The division and multiplication of cells is necessary for good health, but only up to a point. When cells multiply past that point they cause harm rather than health. We call this cancer. Likewise, economic growth can be good and necessary or it can be harmful. When economic growth results in lower prices to the consumer, higher wages to the worker, and more profits for the company this is good. At some point, however, growth becomes harmful. Economically, that point is when more of a product is produced than there is demand for. When growth passes this point it ceases to be beneficial to everyone – sales drop off, profits decline, production has to be slowed down or halted and there are massive layoffs. This is also the point where growth necessarily becomes ecologically harmful – to produce more of a product than there is demand for is wasteful, although it is possible for growth to become ecologically harmful at an early point if demand for a product is greater than the available resources.

There is a tendency among ecologists to blame private ownership and freedom for the problems of excessive growth. This is unfortunate because, as Hardin has shown, privately owned resources are better maintained and conserved than publicly owned resources. Or, more accurately, resources are best maintained when the person who profits from their use is also the person who pays the cost for their use. The “tragedy of the commons” occurs because in a commons, people privately profit from their use of commonly owned resources in which the cost of use is divided and spread out. A person or company could try to export the cost of use of his or their privately owned resources, and it is human nature to try and do just this, but it is easier to accomplish this, especially on a large scale, with the collusion of government. Just as a private bank can inflate currency and cause an economic bubble and recession, but a large central bank can do so on a much larger scale, so a company looking to pass its costs off onto other people will find it easier to do so by making use of taxpayer funded public utilities and infrastructure and with the help of the people who make and enforce bylaws. At the heart of most if not all of the economic and ecological problems caused by excessive growth that we experience today you will find a large, heavily centralized, state.

Production, Limits, and Private Property

By Gerry T. Neal
June 21, 2009

Here’s a question: Can a business at the same time a) increase its profits, b) increase its wages/salaries, and c) lower the price of its profits?

The answers that probably spring to mind are either “Yes, if it wants to go broke” or “No, you idiot, where did you learn your math?”. Without information as to how a company would go about doing this these answers are both reasonable. After all, lowering your price lowers your revenue, while increasing wages increases your costs. How can both exist simultaneously with an increase in profit? Something doesn’t add up.

Actually, however, there is a way to do it. Let’s say you have a company that is producing 1000 units of its product an hour and selling them at $5.00 a unit. Your revenue then, after selling an hour’s worth of your product, is $5000. From this you pay the costs of that hour of production (including wages) and after costs what remains of the $5000 is your profit.

Now let’s suppose you take that profit and re-invest it in a capital-improvement project that increases your company’s productivity so that with the same labor force you can now produce 5000 units per hour. Since you are now producing more you decide to lower the price of your product by half to $2.50 a unit. At this lower price, the revenue from selling an hour’s worth of your product is now $12,500. That is 2 ½ times more than you made previously. From that you can increase the wages of your employees, which you should be doing as their productivity has gone up making their labor more valuable to you. You will still be able to make a greater profit than you did before.

When a company improves production, then, it benefits everybody – the owner/shareholders, the employees and customers of the company. They are all better off than before.

What works for a company can also work for a country. If a country’s leaders wish to improve the standard of living of their people what is the best way to do it? Pass minimum wage laws? Set price controls? Create safety nets of social benefits to create a “floor” beneath which your citizens theoretically cannot drop? No. Each of these methods is known to backfire making things worse than they were before.

A government that wishes to increase its people’s standard of living should encourage the improvement of production so that there is more material wealth being generated. Recognizing this fact, governments have attempted to do just that in one of two ways.

Lenin and Stalin in the Soviet Union attempted to increase industrial production with their New Economic Policy and Five Year Plans. Mao in Red China attempted to increase agricultural and industrial production in his “Great Leap Forward”. Both of these experiments in central, state-planned economic development, proved to be catastrophic failures. So has every other attempt to do it this way.

In contrast, in Western countries like the United Kingdom, Canada and the United States, production was left in the hands of privately owned companies that were allowed and encouraged to compete with one another in a free market. This is the method that has always worked. Improved production generated higher profits and wages and lower costs for the consumer increasing the standard of living in general.

Of course a large part of the benefit of improved production has been eaten up by our governments. They have raised taxes to an obscene level and generated inflation by printing more money to support their projects, most of which are wasteful and useless. Raising taxes takes money out of production in the private sector where it can be more useful. Inflation decreases the value of money which in term decreases the benefits to the consumer of lower costs in the marketplace brought about by improved production.

Now we come to another question. That question is this: Can the improvement of production go on forever?

A lot of people seem to think the answer to this is yes. These people believe that history is marching ever upwards and that human ingenuity will always find newer, better, more efficient ways of making newer and better products, causing today’s luxuries to become tomorrow’s necessities, as the standard of living keeps rising higher and higher. The name for this belief is “progress”. It is what progressives, aka liberals, used to believe before they switched over to believing in the infinite capacity of the state to bring out the natural goodness in people and morally improve society through social programs.

The answer, however, is no. While production can be improved, generating high profits, high wages, low costs and a general improved standard of living, this can only be done within certain limits. For we humans are finite, limited creatures, living in a finite, limited world. We forget this to our own peril.

What are the limits in question? Well, if we wish to have our three-fold benefit of improved production, the obvious first limit to come to mind is that of demand. Demand refers to how much of your product people are willing to buy. It is the other criteria determining market price. Remember that you and your employees only benefit as producers from improved production if you are able to sell enough of your product at the reduced price to generate more in revenue that you did prior to the improvement. Whether you are able to do this or not depends entirely on how much demand there is for your product.

A company that ignores that limit will generally harm only itself. The same cannot be said for the next limit. That limit is the availability and cost of raw materials and energy. These are limited resources. Some raw materials are renewable resources, like wood for lumber and paper companies, but being renewable does not mean being infinite. Trees take a long time to grow after all. Other raw materials, such as metals and useful stone like granite and marble, exist only in set quantities. These may be recyclable or reusable but they are not renewable. Yet other raw materials exist only in set quantities, are not recyclable or reusable, and can be used up. The obvious examples of these are petroleum and coal, which are used both as raw materials and as sources of energy.

Ecologists remind us of these limits, even if economists are often prone to forget them. Unfortunately, their recommendations for conserving resources are generally less than helpful. Ronald Wright, for example, in his 2004 Massey Lectures published as A Short History of Progress, tells of how human societies in the past have got carried away with production and ignored the limits of their resources, falling into “progress traps” that led to tremendous human suffering when the resources were depleted. He warns, in the alarmist fashion of the typical environmentalist, that we are doing the same thing today on a larger, global scale, that we are almost at the point of no return, and that this is our last chance. He is very vague in his recommendations as to how to go about fixing things, however, although one quickly picks up on the fact that he is sympathetic to socialism over the free market.

An ecologist who was helpful, on this subject, was the late Dr. Garrett J. Hardin. Apart from Hardin’s Law – “you cannot do only one thing” - his most famous contributions to ecological thought were the concepts of “The Tragedy of the Commons” and “Lifeboat Ethics”. The latter is not particularly relevant in this context but “The Tragedy of the Commons” deals with the heart of the matter.

“The Tragedy of the Commons” is a story of a medieval commons – a pasture owned collectively by a community in which each member of the community was allowed to keep his sheep. Since the cost of maintaining the commons was shared but the profit from raising the sheep was private, everyone who kept their sheep there had a stronger motive to increasing their own number of sheep at the public expense than to try and conserve the resource. As a result the pasture became overgrazed.

The point of all this, Hardin argued, was that a system where costs were shared, but profits were private, was the worst possible system for preserving limited resources. The other options are to make the profits collective (socialism) or to privatize the costs by privatizing the resources.

The privatization of resources, Hardin argued, was the best way of conserving them. Observation easily bears Hardin out on this. Domesticated animals are never on the endangered species list. Paper and lumber companies make sure that plenty of trees are replanted. If you want to see well kept houses, green lawns, and beautiful gardens, you go to neighborhoods where people own their own homes, not to rental districts.

Conversely, if you want to find litter the best place to look is in ditches and public parks. Pollution is a problem primarily in rivers, lakes, seas, and the air, all of which are resources which are held in common.

To put it simply, people take care of their own property, and are much more likely to take a long-term view of resources which are their own, than resources that are held in common with others.

Private property, then, is the foundation of both true ecology and sound economics. Private property owners competing in a free market are the best producers. They are also the best conservers of resources. The companies that are most likely to deplete resources rather than conserve them are the companies that try keep their profits private while throwing their costs onto the public. That is accomplished through collusion with government.

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