James d. Gwartney

Video:
Economics of Private Property Rights
Consider the following examples. The owner of a dying tree has an incentive to cut it
down before it falls into a neighbor’s house. Dog owners have an incentive to leash or restrain
their dogs if they are likely to bite others. A car owner has a right to drive his car, but will be
held accountable if the brakes aren’t maintained and the car damages someone else’s property.
Similarly, a chemical company has control over its products, but, exactly for that reason, it is
legally liable for damages if it mishandles the chemicals.
Fourth, private ownership promotes the conservation of resources for the future, as well
as wise development. Using a resource may generate revenue, which reflects the desires of
present consumers who want what the resource can provide. But future consumers also have a
voice, thanks to property rights. An owner of a resource, say a woodlot or small forest whose
trees could be harvested now or later, faces a decision. Will the timber be more valuable later?
In other words, will the expected value of the trees when they are more mature be greater than
if they are logged today? And will that value exceed their value if harvested now by more than
the cost of holding and protecting them for future use? If so, the owner has an incentive to
conserve—that is, hold back on current use—to make sure that the resource will be available
when it is more valuable.
Private owners will gain by conservation whenever the future value of a consumable
resource is expected to exceed its current value. This is true even if the current owner does not
expect to be around when the benefits accrue. Suppose a sixty-five-year-old tree farmer plants
a crop of Douglas fir trees that typically take fifty years to grow to their optimal harvesting
level. Does the elderly tree farmer have an incentive to conserve the trees for future use? With
private ownership rights, the answer is clearly “yes.” As long as the growth of the trees is

---

71
expected to enhance future revenue as much as alternative investments would, the farmer will
gain by conserving the trees for the future. With private ownership, the market value of the
farmer’s land will increase as the trees grow and the expected day of harvest moves closer. So
even though actual logging may not take place until well after his death, the owner will be able
to sell the trees (or the land including the trees) at any time, capturing their increasing value.
For centuries pessimists have argued that we are about to run out of trees, critical
minerals, or various sources of energy. Again and again, they have been wrong because they
failed to recognize the role of private property. It is instructive to reflect on these doomsday
forecasts. In sixteenth-century England fear arose that the supply of wood—widely used as
heating fuel—would soon be exhausted. Higher wood prices, however, encouraged
conservation of wood and led to investment in the discovery and better use of coal. The wood
crisis soon dissipated.
Even when a specific resource is not owned, the market for other resources that are
owned can often solve problems. In the middle of the nineteenth century, dire predictions arose
that the United States was about to run out of whale oil, the primary fuel for artificial lighting
at the time. No one owned the whales, which were being hunted to excess on the high seas. If a
whale hunter failed to take a whale when the opportunity arose, someone else would probably
do so in the near future. As whale oil prices rose, the incentive for individuals to conserve
whales for the future was missing because private ownership rights were absent. No one
limited whale hunting even though the whale population was declining.
However, the higher whale oil prices strengthened the incentive to find and develop
substitute energy sources. If entrepreneurs could develop a cheaper new energy source, they
could earn substantial revenues. With time, this led to the discovery of commercially profitable
sources of petroleum, the development of relatively cheaper kerosene, a resulting drop in the
price of whale oil, less whale hunting, and thus the end of the whale oil crisis.
Later, as people switched to petroleum, predictions emerged that this resource, too,
would be exhausted. In 1914 the Bureau of Mines reported that the total U.S. supply of oil was
under six billion barrels, about what the United States now produces every forty months. In
1926 the Federal Oil Conservation Board estimated that the U.S. supply of oil would last only
for another seven years. More recently, a study sponsored by the highly influential Club of

---

72
Rome made similar predictions for the world during the 1970s.
Understanding the incentives that emanate from private ownership makes it easy to see
why such doomsday forecasts of resource depletion have not materialized. When the scarcity
of a privately owned resource increases, the price of the resource will rise. The increase in
price provides consumers, producers, innovators, and engineers with incentives to (1) conserve
on the direct use of the resource (such as turning off lights when the room is empty or wearing
a sweater instead of turning up the heat for consumers and tuning up cars and machinery for
both consumers and producers); (2) search more diligently for substitutes
(?)
(such as buses
instead of cars for consumers or wind, hydro, or nuclear power to replace oil); and (3) develop
new methods of discovering and recovering larger amounts of the resource (such as horizontal
drilling and fracking). To date, these forces have pushed doomsday ever further into the future,
and there is every reason to believe that they will continue to do so for resources that are
privately owned. If you want to see this difference in a stark manner, consider the difference
between the cow and the American buffalo. No two animals could be more similar in size and
meat value, yet while the commonly owned buffalo was hunted almost to the point of
extinction, no one could possibly claim that there is a shortage
(?)
 of privately owned cows.
(22)
A legal system that protects property rights and enforces contracts in an evenhanded
manner provides the foundation for gains from trade, capital formation
(?)
, and resource
development, which comprise the mainsprings of economic growth. In contrast, insecure
property rights, uncertain enforcement of agreements, and legal favoritism
(?)
 undermine both
investment and the productive use of resources.