Understanding How Scarce Resources Are Utilised for the Benefit of Man

A neighbour kindly gave me some back copies of National Geographic Magazine (NGM), and I found several of the articles to be of interest to me as an economist. Yes, as an economist. The magazine seems to be very concerned with the depletion of natural resources. It had recent articles about over-fishing of tuna (June 2009), the scramble by governments to claim sovereignty over the arctic in order to secure oil fields (May 2009), and the water shortage problems of Australia (April 2009), just to name a few.

All of these problems can be understood and solved through an understanding and application of proper economic theory, namely those of the Austrian School. All of these problems that NGM so clearly and entertainingly outlined are the result of and exacerbated by the lack of property rights.

A key economic concept, and one accepted by most schools of economic thought, is the theory of the “tragedy of the commons”, which explains that all valuable resources held in common will be plundered to extinction. Since all have an equal claim, all must grab as much as possible. This concept explained why sheepherders quickly denuded “common” grazing areas of grass in Britain. The grass was free, so herders grazed as many sheep as possible as long as the grass lasted, which wasn’t very long. Later the “enclosure” movement, which was opposed by the sheepherders, restored the commons. The lesson was clear—common resources would be plundered to extinction.

But, private property is not plundered; instead its owners capitalise it in order to secure the most value over the longest period of time. For example, it may be a challenge technically, but the over-fishing of the world’s oceans, of which the depletion of tuna is just one symptom, will be solved only when private property rights are secured over the fishes, their habitats, or both. Just as a cattle farmer does not slaughter his calf-bearing cows or his prize bull, an owner of schools of tuna would not fish them to extinction. Theoretically, the schools of tuna could be managed into perpetuity much as are herds of domesticated animals.

But how does one secure these rights of tuna or any other resource that is now commonly owned or has yet to be exploited? The Austrian School of Economics explains how private property becomes so. No, it is not through a grant by a king or government, but rather by homesteading. John Locke explained the concept over three centuries ago—that when man mixes his labour with formerly unexploited physical resources of the earth, he thereby secures them as his private property.

The scramble for control of potential oil reserves in the arctic is, perhaps, a better application for this principle today than the more difficult one of gaining control over schools of fish. Much as the European powers fought—literally—for control of colonies for centuries, there is a real possibility of a shooting war over control over arctic oil. But the world’s governments could avoid all potential conflicts if they recognised the right of anyone or any company to secure private property in arctic resources by the simple act of exploiting them. It matters not whether the oil is obtained by a Russian, an American, or an international company. All of us benefit from the new resource so secured for the world market. Worldwide oil supplies increase, driving down the price for the benefit of all. Isn’t this what we all want, whether we are an American, a Russian, or any other citizen of our shared planet?

Only the lure of a profitable return on invested capital will entice such exploration. Furthermore, there is an ethical issue at stake. Undoubtedly it will require billions of dollars to exploit the oil and bring it to market, and there is no guarantee of success for those engaged in wildcat drilling. But if they are successful, the profits should accrue to those who put their treasure at risk to realise their vision and dedication.

As for the seemingly intractable problem of parched Australia, the government has taken almost total control of the water resource with predictable results. The NGM article about supposed water shortages there repeatedly chronicled how some farmers and businessmen were robbed of their livelihoods by governmental decisions to greatly reduce their water allocation. Government takeover of a resource does not remove it from the risk of plunder through the aforementioned “tragedy of the commons” – quite the contrary. Instead of the co-operative actions of individual owners ensuring that water goes to its most urgent need, government allocates it politically, making near life and death decisions based upon…what?

Without a free market in water, seeming water shortages will forever plague Australians. Let us make clear that water is a scarce resource everywhere. Its abundance or lack thereof is purely relative. It is still a scarce resource. It still must be allocated in some manner and only freely acting individuals, making assessments as to costs, benefits, and sustainability of the resource, are able to act rationally. Without a free market in water, Australians will continue to suffer the socialist dilemma explained by Ludwig von Mises in his century old masterpiece Socialism. Absent economic calculation, those who control the water resource will not know how to allocate it for its most urgent need; in fact those who desired the water often were not even allowed to pay a higher price for it. Under the unpredictable conditions of government control of water, farmers do not know what crop to plant. In fact, they do not know whether they should plant a crop at all.

Although the government of Australia may “sell” the water, it has no way of knowing whether its price is too high or too low. So, of course, it keeps the price low and allocates it to the interest group that cries out the loudest at the moment. It cannot do otherwise.

The risks of farming will become more readily understood when water becomes a commodity controlled by freely acting individuals. Water is just one more scarce resource that entrepreneurs must secure in order to plan for an uncertain future. The Australian economy must adapt as best it can to its scarce water availability, and it will approach equilibrium of supply and demand only under a free market.

Author: Patrick Barron has been a consultant to the banking industry since 1985. He teaches Bank Management Simulation at the Graduate School of Banking, University of Wisconsin, Madison and Austrian Economics at the University of Iowa. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Free Market Foundation.

FMF Feature Article / 04 August 2009