Myths of the rich man
By Joseph S. Fulda
When privatization is contemplated for such necessaries as potable water or the streets, the discussion is often clouded by fear of what "the rich man" who provides the resources might or might not do. The rich man might acquire all the drinking water and let no one else drink, or all the streets and let no one emerge from his house. Or the rich man might charge a small fortune for a glass of water or an afternoon walk on the streets, with none to stop him, since he is the owner. The rich man, it is further feared, might provide no water and build no streets. If the state does not provide for us by marketing these resources, perhaps no one will, and society will perish.
These fears are little more than myths. After all, there are plenty of other things we need -- food, clothing, shelter -- and yet none of the fears people have of the rich have materialized in any free market system. Economics teaches us why these fears are fallacious, and since they are nevertheless so prominent in discussions of privatization among the general public, it is well to review those teachings here.
Society is not at the mercy of the malevolent rich man controlling its necessities. A man who holds vast reservoirs of water or large parcels of land and makes no economic use of it out of spite (and it is fear of spitefulness that is behind this myth) will soon find the management costs of his properties causing him to lose all. The water will lose its potability, the pipes will become rusty, and the whole system will become worthless; the streets will fall into disrepair and require endless reconstruction. Certainly that is not how the rich man acquired his wealth!
But, still, what if? All that will happen is that large holdings of real estate will be converted to streets and reservoirs by others, rich or poor. As long as free entry -- competition -- is allowed, the rich man who has but will not market spites only himself and will lose his fortune. Someone else will see the need, convert his property to the now-moremarketable use and take the rich man's erstwhile profits away.
Nor can the rich man buy up all the streets or reservoirs and charge arbitrarily large sums for these necessaries. As he raises the price, conversion of other resources to these purposes becomes more attractive. Furthermore, substitutes, once far too expensive to be even contemplated let alone developed, begin to become attractive as well. All it takes is one person with a vision -- be he rich or poor -- and the consumer demand for a water-substitute or a street-substitute will be satisfied. As Julian Simon demonstrated in The Ultimate Resource, the human mind, throughout history, has been uniformly able to find alternatives which satisfy the very same need as some resource previously thought to be indispensable.
Finally, we must remark that the situation itself -- a malevolent rich man monopolizing all but providing none or providing only at impossibly steep prices -- is most artificial. People are not like that. Besides, empirical studies have shown that as capitalist society progresses, the distributions of resources and funds for capital tend to become more diffuse and mobile. It is therefore doubtful on both psychological and economic grounds whether (without state grants of monopoly power or the equivalent) the scenarios that underlie the myths of the malevolent rich man could ever come to pass. But the freedom-lover may rest assured that even if such concentrations of wealth and malice somehow did befall society, all that would occur is adjustment -- the redistribution and reallocation of natural resources, capital, labor, and entrepreneurial talent -- a temporary inconvenience for the masses, coupled with special opportunities for those who would turn the situation to their advantage.
Nor does society, to consider the opposite fear, depend on the beneficence of the rich man to provide its necessities. Were none of the rich interested in providing water or streets, the poor aspiring to become rich would provide, although perhaps not in large quantities mediated through big corporations.
Perhaps water would be sold by local vendors. Perhaps streets would be owned by the homeowners and shopkeepers on the block, in small lots. Or perhaps workers would acquire streets in their neighborhood with their union pension funds, an investment linked to the general economic performance of the area, much like stocks or bonds. I repeatedly say "perhaps," for no one can know just how the market arrangements for, say, water and streets would work out.
But work out they would -- the price system guarantees it. As water and streets become scarcer their prices will rise. As prices rise, the opportunities available for entrepreneurs will become increasingly irresistible. In a society with an economy in which everyone is free to take advantage of the available opportunities, one need not worry about the do-nothing rich any more than the spiteful rich.
Again, of course, the situation is artificial. Those with the most capital acquired their riches by taking advantage of opportunities, not by ignoring them. But even if somehow the rich will not provide, things would work out as new entrepreneurs replace the old rich and exercise their resolve to provide and thus be provided for.
Copyright (c) 1988 by Foundation for Economic Education, Inc. Reprinted with the permission of the FEE.
© 1996-2013, Enter Stage Right and/or its creators. All rights reserved.