They Solve Tomorrows Problems

Mr. Summers is s member of the staff of The Foundation for Economic Education.

My neighbor Joe is a friendly chap with a sharp eye on current affairs. Thus, one Saturday morning after I had mowed the lawn, I strolled over to get his considered views on the state of the world.

“This country faces a lot of problems,” he told me as he slid under his car to change the oil. “Everything seems to be falling apart. Last night I was an hour late getting home because the subway broke down. I don’t know why they can’t maintain those trains any better.”

“You seem to be doing a pretty good job maintaining your car,” I observed.

“Sure,” he said. “I have to keep this car in good condition. I want to sell it next year.”

“Too bad we can’t sell the subways.”

“What?” he asked, poking his head from under the chassis.

“Suppose you held a share in a privately owned subway. Wouldn’t you want the managers to maintain the value of your share by keeping the trains in good working order?”

“Sure. If they didn’t, I would sell my stock.”

“Of course. and as people sold their shares, the price of the company’s stock would fall. This could lead to a stockholder revolt or corporate takeover. Either way, management would be compelled to fix the trains. As a general rule, when things are privately owned, people try to maintain their value by anticipating future maintenance problems.”

“What about the apartments across town?” he asked as he reached for an oil filter. “Why don’t the owners maintain them?”

“Rent controls have destroyed the incentive,” I answered. “The owners know that controls will keep them from getting higher rents, even if they make extensive repairs. Furthermore, they can’t get full market value if they try to sell. Who wants to buy a rent controlled apartment building, even if it is in perfect condition?”

“A free market may encourage people to maintain their own property,” Joe allowed, “but this country faces some bigger problems. We are running low on natural resources. Each year, for instance, loggers cut down more trees.”

“Yes,” I agreed, “but each year forest product companies plant more trees. They try to maintain the value of their land, the same as you try to maintain the value of your car. Here again, private ownership is the key to heading off tomorrow’s problems.”

“What about the energy shortage?” he asked as he opened a can of oil. “Private owners don’t go around planting more oil.”

“Yes, but with price controls being lifted, they do go around looking for more oil. And you and I may be helping in the search.”

“How is that?”

“When we save our money, we make more capital available for private investment. The money you put into your bank may help provide the loan capital oil companies need to lease equipment.”

“I never thought of it that way. I am just trying to make some investments to provide for my retirement.”

“Sure. But by trying to provide for your own future, you help solve tomorrow’s problems.”

“Come again?”

“Well, consider your mutual fund. The fund’s managers try to anticipate tomorrow’s problems, and try to invest in the corporations most likely to profit by solving these problems. For instance, some of your money may be furnishing equity capital for an oil exploration firm.”

“You make it sound as if free enterprise will solve all our problems.”

“No, people will have problems under any social system. But we should examine the incentives inherent in each system. Some incentives tend to create problems; others will solve them.”

“This is all very new to me,” Joe said as he closed the hood. “I’ll have to think about it.”