James d. Gwartney

Insurance
(?)
, while important as will be discussed later, also creates such an incentive
for “misuse.” This is known as a moral hazard
(?)
, where an individual deciding how to use an
asset knows that someone else will pay the price for any bad outcome. Drivers who know that
the insurance company will replace their car if it is stolen may be less careful about where they
park or forget to lock their cars. Skiers without health insurance will be less likely to risk black
diamond slopes.
Second, private ownership encourages people to use and develop their property in ways
others value highly. 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 others
dislike—particularly if the others are customers or potential future buyers—will reduce the
value of one’s property.
Private ownership also affects personal development. When people are able to keep the
fruits of their labor, they have a powerful incentive to improve their skills, work harder, and
work smarter. Such actions will increase their income. Why are college students willing to
endure long hours of study and incur the cost of a college education? Private ownership of
labor services provides the answer. Because they have an ownership right to their labor
services, their future earnings will be higher if they acquire knowledge and develop skills that
are highly valued by others.
Similarly, private ownership provides the owners of land, buildings, and other physical
assets with an incentive to use, protect, and develop them in ways that are beneficial to others.
Further, those who fail to do so will bear the cost in terms of a lower value of their assets.
Consider the owner of an apartment complex who personally cares nothing about having
parking spaces, convenient laundry facilities, a nice workout room, or an attractive lawn and

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swimming pool within the complex. If consumers value these things highly (relative to the
costs of producing them), the apartment owner has a strong incentive to provide them. Why?
Consumers will be willing to pay higher rents for apartments with the highly valued amenities.
Thus, apartment owners who supply such amenities will be able to improve the well-being of
their customers and increase their own net earnings (and the market value of their apartment
complex). In contrast, apartment owners who insist on providing only what they like, rather
than the things that consumers prefer, will find that their earnings and the value of their capital
(their apartments) will decline.
Interestingly, private ownership influences productivity even in socialist countries.
Farming in the former Soviet Union illustrates this point. Under the Communist regime,
families were permitted to keep or sell the goods they produced on small private plots, which
ranged up to less than half a hectare in size. These private plots made up only about 2 percent
of the total land under cultivation; the other 98 percent consisted of huge, collectively owned
farms where the land and the output belonged to the state. As reported by the Soviet press,
approximately one-fourth of the total value of Soviet agricultural output was raised on that tiny
fraction of privately farmed land. This indicates that the output per acre on the private plots
was about sixteen times that of the state-owned farms.
Even a modest move away from state ownership toward private ownership can produce
impressive results. In 1978 the Communist government of China began a de facto policy of
letting farmers keep all rice grown on the collective farms over and above a specified grain
quota that had to be given to the state. The result was an immediate increase in productivity
(?)
because farmers had an incentive to produce efficiently. Once the quotas were met, the farmers
were permitted to keep all of their additional output. When the word got out and the
government ignored the official policy against such “privatization,” the practice spread like
wildfire, leading to rapid increases in agricultural output and freeing farmers to move into
nonagricultural sectors of the economy.
(21)
Third, private ownership makes owners legally responsible for damages imposed on
others as the result of how their property is used. Courts of law recognize and enforce the
authority granted by ownership, but they also enforce the responsibility that goes with that
authority. Private ownership links control with responsibility. Owners are held responsible

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precisely because they are in a position to exercise control. In turn, this accountability provides
owners with a strong incentive to use their property responsibly and take steps to reduce the
likelihood of harm to others.