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Sen. Warren’s Tragedy of the Commons

Here’s a letter to Project Syndicate:

Simon Johnson praises Sen. Elizabeth Warren’s proposed legislation, which is titled “Accountable Capitalism Act” (“Saving Capitalism from Economics 101,” August 31).

Alas, despite Sen. Warren’s intentions, passage of her bill – by giving non-owners of capital a legally enforceable say in how capital is used – would dramatically weaken, rather than strengthen, the accountability of corporate decision-makers. Accountability for using property wisely is destroyed by divorcing decision-making authority over that property from the effects that decisions on how to use that property have on its market value. The certain result would be a precipitous fall in the market value of invested capital and a corresponding drying up of investment.

If you doubt me, ask yourself what would happen to the market value of your home if the state dramatically dilutes the decision-making authority of every homeowner by giving to all residents of each neighborhood a detailed say in how each home in that neighborhood is used. A majority coalition of your neighbors might decide that your garage will from now on be used as a public storage facility – or that your children must now sleep in the same bedroom as you so that the room that was formerly theirs can serve as guest quarters for neighborhood visitors – or that you may not sell your home because your “stakeholding” neighbors fear that they will dislike whoever might buy it from you.

Isn’t it clear that the value of your home both to you and to potential buyers would plummet? Isn’t it plain that no amount of speechifying about “stakeholding interests” and “collective responsibility” would prompt you to continue to care for your home as well as you did before your decision-making authority over it was so diluted? Isn’t it evident that your “stakeholding” neighbors – each with a say in how your home is used but none whose net worth will change with changes in the market value of your home – will themselves have no good incentives to treat your home with respect? And isn’t it obvious that the amount of new home building – and even the amount of maintenance of existing homes – would all but vanish?

What is true for property in homes is no less true for property in business firms.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

(I thank Richard Campo for alerting me to Johnson’s article.)