To Each His Due; T. Bethell

The argument can be illustrated by an apart ment building in Washington, D.C., in which the author lived. In one significant respect, the living arrangement resembles Plymouth colony. It is a condominium building of approximately 300 privately owned apart ments, bought and sold on the free market. Its total population is perhaps twice as large as that of Plymouth in the 1620s. Owners are assessed a condo fee, arrived at by adding up all expenses jointly incurred, and dividing them by a formula that takes into account the size of the apartments. But for the sake of simplicity, it is here assumed that all units are the same size and that all owners are charged the same condo fee. The key point is that there are no individual utility meters. The entire building is "master metered" as an undivided whole. The utili ties-gas, water, fuel oil, and electricity make up about one-third of the building's Tom Bethell is the author of The Noblest Triumph: Property and Prosperity Through the Ages (St. Mar tin's Press, 1998), from which this is excerpted with permission ofthe author. Copyright © Tom Bethell.

6 million-dollar annual budget. In the consump tion of energy, then, great opportunities for free riding occur. How are property rights to utilities allocat ed in the building? All apartment owners (or their tenants, for many units are rented) may use as much water, electricity, and heating oil as they like, without limit. Each owner is then assessed approximately one three-hundredth of the building's total utility bill. In short, it would be a miraculous coincidence if con sumption and billing were proportional. In the absence of separate meters, it is very difficult or impossible to achieve such proportionality. This leads directly to the following scenarios. Both are hypothetical, but plausible. Meticulous Mary Consider first Mary, a resident who consci entiously turns off her lights and turns down her thermostat. By the end of the year, she will have reduced the building's overall energy consumption by a small amount, and will personally "recapture" only one three hundredth of her own saving. She will export to everyone else in the building the benefit of her frugality, but will herself experience the full cost of that frugality (in terms of dimmer lights, hotter summers, and chillier winters).

And she will receive a bill only fractionally lower than it would have been if she had been an "energy hog." Let us assume that by her frugality, she saves $150 in utility consump tion in the course of a year. That saving is then spread over the entire building. As a result, her condo fee-and that of everyone else will be reduced by 50 cents per annum. Now we come to Tom, her neighbor (whose resemblance to the author is entirely coinci dental). At the supermarket, he buys high wattage light bulbs, and when he goes out in the evening he carelessly leaves lights on; he turns up the heat in the winter and lets the air conditioner run in the summer. But he will bear only one three-hundredth of the cost. Master-metering and equal division of the bill permits him to saddle everyone else with the consequence of his extravagance, and yet to enjoy the benefits himself. He lives comfort ably and makes others pay for it.

Consider what happens when he goes away for a week in August. He briefly considers, in a moment of public-spiritedness, turning his air conditioner off. Then he thinks again: He will have to return to a hot apartment, which will take hours to cool down. So he leaves the unit running. Let us say that the additional cost of this extravagance is $15. Consciously or subconsciously, he may have performed the following calculation: He will pay only one three-hundredth of this increment, which is to say five cents. But so will everyone else. His cost of enjoying a cool apartment during the few hours that it would otherwise be hot is a nickel; but everyone else in the building will be unjustly burdened with an additional nick el as well. Such an arrangement obviously encourages wasteful consumption. Historically, the build ing's utilities bills have slowly risen, as a per centage of overall expenditures, despite the gradual replacement of inefficient electrical equipment by more modern hardware. When you drive past the building at night, it is a Christmas tree of blazing lights. A spokesman for the Potomac Electric Power Company reports that when individual meters are installed in such buildings, energy consump tion usually drops by about 25 percent.

Separate Meters The corrective mechanism is readily at hand-separate meters for each apartment. The condo equivalent of separate checks, 7 meters would effectively privatize utilities within the building. Thanks to the walls sepa rating one unit from another, energy con sumption within the building is already priva tized. The role of meters is to permit billing in proportion to consumption. The utilities in the building would then be converted from com munal to private property. But the internal politics of the building make such a remodeling change difficult to carry out. The rewiring is expensive. Admit tedly, the energy saving is large enough to permit the cost to be recaptured, perhaps within ten years; but the condo board is reluc tant to consider such an expenditure, mainly because the owners of the units (which is to say, the people who elect the board) generally do not consider their investment in the build ing to be a long-term one. The building's future may not be in their future. Most are planning to sell and move out within a few years, and do not want to finance improve ments that may benefit the next generation of occupants more than it will benefit them.

Admittedly, separate meters would increase the value of the building, and the sale price of apartment units would rise commensurately. A persuasive board could possibly prevail on the membership to approve such an expense. In reality, however, the problem of free riding in utilities is virtually invisible. When the great scope for free riding was brought up at a board meeting, one member responded that less energy would surely be used in a situation where everybody "took in" everybody else's consumption. He was persuaded otherwise, but this showed that the free-rider problem is not intuitively clear, even to those elected to an office in which they are expected to hold down costs. The inconspicuous nature of the problem, and the visible upfront cost of cor recting it, ensures that the issue is perennially postponed. (The problem may eventually be solved by the development of less-expensive metering technology.) Let us take the logic of communal utilities one stage further. Suppose that board mem bers do conclude that the single-meter system is intolerable. But they resist installing sepa rate meters, let us assume, not just because of the expense, but also because the board mem8 THE FREEMAN/IDEASON LIBERTY • MARCH 1999 bers share a philosophical aversion to privati zation. They recognize that free riding in util ities results in winners and losers-good peo ple subsidizing bad peopleand they decide that this must be corrected. So they declare a goal of "eliminating energy selfishness," and "achieving energy justice" within the build ing, but without privatizing. How can they do this?

First, they try exhortation. Slogans are posted in elevators and along corridors, circu lars are slid under doors, THINK OF OTHERS! TURN OFF LIGHTS WHEN NOT IN USE! A big sign is placed along the roof (as in Soviet Moscow): "Another Building Dedicated to Energy Fairness and Justice!" But within a few months, it is clear that this is not having the desired effect. Tom ignores the signs, Mary is more frugal than ever. Now the condo board adopts a sterner mea sure. "Energy monitors" are hired, and they spend their evenings patrolling the corridors and knocking on doors. "Is anyone at home? The weather just turned cooler. Did you tum down your air conditioning?" But after a few months the occupants learn to ignore the knock. Mary has already been doing the right thing. Tom remains unregenerate. Energy consumption remains at its old level. Then a more drastic step is taken. The ener gy monitors are provided with apartment keys. It is explained to all occupants that the invasion of privacy will be minimal, because the monitors may enter only after knocking and receiving no reply. That way, they will only enter apartments when people are not at home, "and when people are away, they shouldn't have their lights and air condition ers on anyway." After a while, however, it is discovered that some apartment owners, who are in fact absent, learn to reply to the knock with prerecorded "decoy" messages. Others bribe monitors to stay away.

Meanwhile, the board has saddled the building with a considerable new expense: wages for the energy monitors. And so it goes. Nothing seems to work. Eventually the moni tors are given full police powers and may enter any apartment at any time. How does the board justify this final, draconian step? They cite a twentieth-century authority on the subject. It was Lenin who said, in 1918: "We rec ognize nothing private." The scenario is fanciful, of course, because the membership would have elected a new board long before the conflict escalated to such a level; or the members would have sold their apartments and left the building. Nonetheless, it is useful in suggesting that if private property is banished, and exhortation (or "education") is put in its place, both eco nomic efficiency and justice will prove elu sive. If coercive measures are introduced, pri vacy must be swept aside. The Morality of Private Property According to Gresham's Law, bad money drives out good. According to the logic of the commons, bad people drive out good. Consid er an example that may appear unrelated to energy consumption: the federal budget. The budget can be thought of as a common pool of money replenished every year with approxi mately 1.7 trillion dollars from taxpayers.

Gathered around the pool are 435 congress men and 100 senators. What gives them power and influence is that they have exclu sive "siphoning rights." They are subject to the constraint that siphoning operations can proceed only if a majority participates simul taneously. When this constraint is satisfied, money can be siphoned out and channeled back to constituents within the congressional districts. The necessary majorities may be achieved by "logrolling": one congressman votes for a proj ect in a colleague's district, in return for a reciprocal favor for his own, and so on. Federal spending keeps on rising for the same reason that utility consumption keeps on increasing in master-metered buildings. Con gress itself is "master metered," because the taxpayers, like the residents of our apartment building, are all "billed" at the same rate, whether or not federal projects are financed in their districts. The point is that the federal tax code is the same in all states. This encourages all legislators to behave like energy hogs-to siphon from the common pool as fast as they can (that is, to vote for most spending bills).

Suppose that a candidate campaigns on the promise that, unlike his opponents, he will be cautious with the taxpayers' money. He will dare to vote "no" on spending bills when he gets to Washington. The problem is that his restraint, meritorious though it may be, will not encourage a like restraint in others. On the contrary, it will leave more money for them to siphon back to their districts. It is unlikely, then, that such a candidate will be elected. But let us assume that he is. Having arrived in Washington, he figures out something that he hadn't quite visualized on the campaign trail: If he votes "no" on spending bills, he will frequently deprive his constituents of an opportunity to get back from Washington what they put into the com mon pot (in taxes). So, instead of voting to hold down spending, he joins in the general logrolling, teaming up with other big spenders to form majorities (some of the money being earmarked for his district).

Some voters back home, recalling his cam paign promise, may think that he "sold out." In reality, it was the institutional arrangement of Congress that encouraged his change of heart, not weakness. The analysis of the budget as a "commons" helps to explain why voters tend to elect both big-spending legislators and fiscally conserv ative presidents. Armed with the veto power, and with influence over tax proposals, the president (unlike the separate legislators) is in a position to hold down the size of the overall "pool." It also helps to explain why voters will tend to support limits on congressional terms. They give voters an opportunity, not available in regular congressional elections, to effec tively vote against all the other legislators the ones who are siphoning dollars away to remote and unknown places. The budgetary equivalent of individual meters would be to change the tax code so that the income-tax rate would be adjusted up or down in each congressional district, depending on how much the Congressman from each district voted to spend in the previ ous year. Big spenders would then impose high tax burdens on their own constituents. It is a safe prediction that this reform would bring about a rapid decline in federal spendTo EACH HIS DUE 9 ing, and all talk of the budget deficit would be a thing of the past. Needless to say, no such reform of the tax system is contemplated....

To return to the condo case, readers will no doubt agree that the installation of individual meters in an apartment building will reduce energy consumption: that is, that it will be economically efficient. But the more impor tant point is that such a change will also intro duce the missing ingredient of justice. When Tom leaves his air conditioner running in the summer, knowing full well that it will cost "the building" dollars but him only pennies, the waste may be bad but the injustice is worse. Systematic injustice within a society will introduce a far greater sense of discord than systematic waste. In his Summa Theologica, Saint Thomas Aquinas argued that "the act of justice is to render what is due.... " On another page, Aquinas said that "justice, property so-called, is one special virtue, whose object is the per fect due, which can be paid according to an exact equivalence. But the name of justice is extended to all cases in which something due is rendered." By seeing to it that something due is rendered (high utility bills to the squan derers of electricity, low bills to careful users), private property helps to establish jus tice in the economic realm.

In the condo, then, the effect of privatizing the utilities corresponds exactly to the tradi tional definition of justice. The great blessing of private property, then, is that people can benefit from their own industry and insulate themselves from the negative effects of oth ers' actions. It is like a set of invisible mirrors that surround individuals, households, or firms, reflecting back on them· the conse quences of their acts. The industrious will reap the benefits of their industry, the frugal the consequences of their frugality; the improvident and the profligate likewise. They receive their due, which is to say they experi ence justice as a matter of routine. Private property institutionalizes justice. This is its great virtue, perhaps dwarfing all others. We may say with the economists that private property "internalizes the externalities," or with the philosophers that it gives rise to "social justice." D Just Deserts by Charles W Baird T he AFL-CIO has a Web site, www.pay watch.org, dedicated to condemning what it considers to be "runaway CEO pay" in pri vate corporations. It claims that high executive pay damages all other "stakeholders" in cor porations, especially workers and stockhold ers. In other words, the AFL-CIO asserts that excessively paid executives and other stake holders are locked in a zero-sum struggle.