Freedomnomics: Why the Free Market Works and Other Half-Baked Theories Don't John Jr. (the dot read aloud .txt) 📖

main problems with eminent domain is that the fair market value is typically too low. If people only valued their homes at the market price, they would have already sold them before receiving the developer’s offer. The fact that they haven’t means that they value their abodes more than what is being offered on the free market. The real difficulty lies in figuring out how much more.

Fortunately, there is a solution that businesses used for years before they gained access to eminent domain. Whether they seek to build a pipeline, a road, or a building, companies almost always consider multiple possible locations. Koch Industries, the largest privately owned company in the United States, built 4,000 miles of natural gas and oil pipelines across the country without using eminent domain until relatively recently.24 Instead, it typically offers a contract to property owners along different possible routs; the deal goes to whichever complete set of property owners signs the contract first. The owners might be offered, for example, 25 percent above the fair market value. If they value their property more than that, they don’t have to sell. But this approach discourages people from indefinitely holding out for better offers. If homeowners don’t really value their property much more than the market value, they risk losing this 25 percent profit. The government should consider this market-based approach as an alternative to forced sales at prices that, in reality, are anything but “fair.”

Bill Dougan, former chairman of the Economics Department at Clemson University, devised a similar solution to a problem plaguing many academic departments.25 When a department is hiring a new professor, there will often be several candidates who are roughly equally good. The risk is that when the job is offered to one candidate, he many take weeks to decide whether to accept, often using the offer simply to try to get a better deal from another school. If the candidate ultimately signs on with a different school, the department may be left with nobody, since the other candidates may have already taken jobs elsewhere. Dougan’s solution? Offer the job simultaneously to all the top candidates, stipulating that the position goes to whomever accepts first. It’s a good thing these kinds of free market solutions are developing before someone suggests imposing eminent domain on hiring practices.

University of Washington professor Jonathan Karpoff recently provided another striking example of how inefficient government enterprise can be. Karpoff studied the thirty-five government-sponsored expeditions, along with the fifty-seven privately funded voyages, that explored the Arctic, the Northwest Passage, and the North Pole from 1818 to 1909. Arctic exploration, like space missions, is an excellent example of a public benefit that many would assume could not be achieved privately. Much of the exploration is similar to pure scientific research that offers no immediate commercial benefit. Compared to their private counterparts, government expeditions to the Arctic enjoyed much better funding, bigger ships, and crews that were over four times larger (averaging seventy members versus seventeen for private voyages). Nevertheless, public expeditions were more likely to end in tragedy—an average of nearly six crewmen died on government voyages, compared to fewer than one on the average private trip. Furthermore, government expeditions lasting over a year suffered scurvy rates that were four times higher, while the chance of losing a ship was over double that of private expeditions.26 Despite their smaller crews and lower funding levels, the private teams accomplished five of the six major Arctic discoveries.27

Karpoff elaborated some of the reasons behind these results. Government expeditions had to operate by committee and political factors played a role in dictating their crews’ composition. Private expeditions, in contrast, were more efficient and much faster at learning from past experience. Perhaps most importantly, private voyages were more responsive to incentives for success—their decision makers directly bore the costs and reaped the benefits of their own actions.

These kinds of inefficiencies plague government efforts in realms ranging from welfare to education. Private charities ensure that 80 to 90 percent of donations get to those in need, while only 30 percent of government welfare spending actually reaches the intended recipients.28 Likewise, non-teacher costs make up over 40 percent of the budgets in public schools compared to less than 20 percent in private ones.29 Overall, the per pupil costs of public schooling are about twice as much as for private schools despite the fact that children typically learn much faster in private institutions.30 These statistics indicate that private charities and schools can provide better service than public ones even if they receive just half the funding.

The market isn’t perfect, of course. But the government is usually much further from perfection. Even when the state intervenes in the economy with the best intentions, it frequently only succeeds in making things worse.

Diversified Stock Holding: A Free Market Approach to Keeping Corporate Peace

So what makes the free market superior to government planning? Part of the answer is that the market creates stronger incentives for people to consider the effects that their actions have on others. A clear example of this is seen in the growing practice of diversified stockholding. Some 5,000 stock mutual funds in the United States hold over $5.2 trillion in assets.31 It has become common knowledge that investors should hold a well-diversified stock portfolio, but most people do not realize that this practice also encourages cooperation among competing companies.32

Consider a simple example I came across when I was teaching at the Wharton Business School. Albert J. Wilson, then vice president and secretary for TIAA-CREF, a huge teacher’s retirement fund, gave an informal talk to some faculty in December 1992. Texaco and Pennzoil had previously been locked in a protracted, costly legal battle. Owning stock in both companies, TIAA-CREF was hurt by the litigation, which reduced the value of both firms. If one firm eventually won the dispute, it would not have benefited TIAA-CREF, since the result would just move a lot of money from one firm to the other. Lawyers were