The Privatization Presentation-- An Underwhelming Response.

A mockery of the proposition to privatize.

"I think I realized why Jacob's trying to change the system."

"Why?"

"I think he's just trying to make a system where he doesn't have to do anything at all."


Numerous questions followed my blog post last week-- "Privatizing the Dorm: A Practical Application of Economic Theory" (If you haven't read it- I recommend you read that first before you proceed). At the request of many inquisitive dormmates and friends, I collected a presentation to illustrate what a fully private dorm might look like, and why it would be more efficient than a dorm with collective ownership of scarce resources.

I was thoroughly mocked.

Conversations like the one above were made commonplace, along with post-it notes labeling supposed ownership of various items throughout the dorm-- sometimes with a ridiculous price tag for its usage.

This Dormmate has claimed ownership of my bed.

Absurd price tags were often attached to the various notes, reflecting the frequent complaint that we'd have to pay for things we've already bought.

My own coupon pack-- plastered with a dormmate's label.

There were several major recurring complaints, and I did answer them- each and every one. Since some of you may have had similar considerations, I'll pose them in a Question (the complaint)/Answer (my response) format.

The PRIVATE DORM FAQ

Q: Aren't we just paying for things we already bought?

A: Certainly not-- the system merely makes better use of them. To think of it on the basis of 'what you lose' and 'what you gain', consider that where before each dormmate essentially owned "1/6th" of each source of capital, be it the stove or the sink or the dishwasher, they will now own 100% of 1/6th of the sources of capital. While you might have to pay to use property owned by a dormmate, he'll end up paying you to use yours, so it's ultimately a zero-sum game (or pretty close) that simply encourages the efficient use of resources.

Q: Wouldn't this mean that every time one wants to use the sink, toilet, oven, couch, etc, they would have to find the owner to pay them? (Assuming they, themselves, don't own it of course) Doesn't that take too much time and cause too much hassle?

A: No, the owner would not have to be located each time you wanted to use what he owns. Instead, owners of capital- be they owners of the sink, the toilet, the oven or whatever, could simply leave a sign above what they own, describing the fee for using it. For example, if I own the sink, I would leave a paper on the wall behind it reading "wash three dishes, leave a dime", then I'd have a pouch beside the paper where customers could leave their payment. This way neither one of us would have to meet each other face-to-face each and every time the other wanted use of my property. Should I worry that the pouch be stolen in such an open location, I could always ask the customer to leave the dime on my desk down the hall.

Background for the next Question: In my presentation I described one of the benefits of privatizing the two showers, which is more accurately allocating their usage to those who obtain the most benefit from them. I posed the example where two dormmates wake up at the same time and make for the showers, but only one is open. Both want to use it, but one of them will have to wait. In the current system, the showers-- being community property-- are allocated in a "first come, first served" manner, and so the two dormmates would race to enter the shower and remove their clothing. The first one in gets the shower first, even if he has his next class in 2 hours, and the other, who must wait, has his own class in just 30 minutes.
Were the showers owned privately, imagine the owner standing at the doorway-- he being the one who allows either of them to enter. Rather than let them race, the owner-- being self-interested-- will use the opportunity to make the most money he can, and so will ask each of the customers how much they are willing to pay him for the shower. The customers will bid against each other, and the one who offers the most will go first. This is a more accurate representation of who has the greatest benefit from the shower's use, because all else equal- the man with 2 hours to wait would not be willing to pay as much as he with only 30 minutes of time.

Q: Your bidding scenario includes the shower's owner standing at the doorway, but it was said earlier that the owners and the customers would not have to meet face-to-face in order to make transactions. Assuming the owner could not be there when two men race for the shower, wouldn't your supposed benefit be lost, since a sign with a price tag has no ability to pose an auction?

A: Not so, because while a sign cannot pose an auction, it can list a price that corresponds to the demand of the consumers-- the market price. If the shower's owner overhears that men are racing to his shower every morning because everyone, even those who can wait 2 hours, is willing to pay the low fee, he will raise the price in order to increase his profits. In the case of a shower, since the demand is higher in the morning than the afternoon and evening, the profit-maximizing price would be structured around the time of day. The sign might read "6-9 am: x cents, 9:01am-12pm: y cents, 12:01pm-5:59am: z cents, where x>y>z. When one dormmate is rushing to his 8:30 class, he won't have to worry about dormmates with class two hours later, since said other dormmates can and will wait until the price is lower.

Q: How would these rules be enforced? Who's to say that people won't make use of other's property as they please without paying the ascribed fee?

A: Enforcement is an issue present in both the current system and the one I propose-- since no dormmate represents the United States government, we don't have enforcers with guns and prisons to ensure that everyone is playing by the rules. There are ways around this however, some of which have already been implemented. Rule-breakers can be shamed by the community, or be made to feel guilty, which, while more effective on some than on others, does impose a cost. If that cost is greater than the modest fee, it stands to reason that people will not break the rules. Additional costs to breaking rules can be imposed if rule-breakers are isolated. Individuals within the dorm can withhold trade, assistance and friendship to those who use their property without payment, and it would make sense for them to do so. In combination these costs can be very large, and while perhaps an imperfect means of enforcing rules, it is as best we can do in *any* system, and should work fine for this one.

Q: What is to stop the man with the sink from overpricing the use of his property? After all, there is only one kitchen sink, so doesn't he have a monopoly? Wouldn't the same would be true of the man with the dishwasher and the man with the toilet?

A: In each of these cases, the answer is no-- there isn't a monopoly. While there's only one kitchen sink, there is also a bathroom sink, which *could* be used for dishwashing. While there's only one dishwasher, there is dishwashing soap and a scrub brush, which could be used in its stead. While there is only one toilet in any given room, the building contains a toilet on the basement level that can be accessed at all times of day. Each of these options is sub-par, and should the system ever come to people using the bathroom sink to wash dishes it can be assumed that inefficiency abounds, but their existence means that they would never have to be used for such reasons. For example, the man with the kitchen sink knows that if he *were* to charge ridiculous prices, his customers would move to the bathroom and he would lose profits-- therefore he won't charge ridiculous prices, and his customers won't move to the bathroom.

Q: Suppose the man with the kitchen sink and the man with the bathroom sink collaborated with one another to fix prices. Since they are each other's only competition, couldn't they severely overprice their services together? Alternatively, and along the same lines, suppose that one man were to buy the sinks in both the bathroom *and* the kitchen. Would he not have a monopoly with ownership of both competing sources of capital?

A: The scenario described in the first part of the question, and others like it, are known as "trusts", which are highly unstable and unlikely to last. To see why, let's say Gary owns the kitchen sink and Jimmy owns the one in the bathroom-- they've formed a trust by agreeing to fix their prices abnormally high. When Gary leaves for class in the morning one day, Jimmy realizes-- just before he leaves-- that by quickly modifying his price sheet and charging a much lower fee, he could undercut Gary's business and steal all the customers for the entire day. When Gary returns to the dorm room later that night, his money pouch is empty and there's a party in the bathroom. Gary then cuts his prices to match the norm, and the trust is broken. Since Gary and Jimmy both know that at any time the other might break the trust, it's in their respective best interests to do it first, and so the trust will be broken relatively quickly, if not the following day. Furthermore, Jimmy might decide to change his price sheet and lower prices while Gary is gone, and then quickly change them back before Gary arrives home in order to maintain the "trust" while stealing customers. As soon as word gets out and Gary overhears Jimmy's trickery (he's likely already suspicious due to a newfound loss in revenue), he'll break off the trust and things will go back to normal.

This follows a commonly-known aspect of game theory called "The Prisoner's Dilemma", where even though two people, in this case the two members of the trust, are *both better off* if they made one decision (simultaneously accepting and keeping the trust), they will both fail to make that decision out of fear that they will be 'backstabbed', and obtain the worst of all outcomes.

The second part of the question is easier said than done, as is well known by players of the board game "Monopoly." If you own Park Place (the bathroom sink) and another player owns Boardwalk (the sink in the kitchen), when that other player asks you for Park Place, do you charge him the listed price you bought it for of $350? The answer is-- only if you like losing the game of Monopoly. And while it's true that in the board game people *do* obtain Monopolies at some point, it tends only to happen in a "wild west" format, where people claim properties by getting lucky and simply "landing" on them-- a concept that's impossible in a dorm room scenario. When each source of capital is auctioned off from the get-go, dorm mates are sure to be unwilling to let anyone obtain a monopoly in any given market, and that's the way things are likely to stay. Should one person somehow acquire a massive sum of money from some outside source (like landing on "Go"), and use it to buy out his market, I think he'll quickly find that he wants to sell it back-- for a couple reasons:
1. There will always be other forms of substitution
Even if someone owns the kitchen sink *and* the bathroom sink, the building is littered with dorm rooms, and customers can always go next door to wash their dishes in the sink of a neighbor, offering a little monetary compensation or a friendly favor. This means that even though the dorm's supposed "monopolist" can charge a little extra to prevent such a journey, he couldn't raise prices through the roof by threatening entirely your ability to wash a dish.
2. Management costs would be high
Management costs would rise for two reasons.
First of all, in order to maximize the benefit from a source of capital, a fair bit of work is involved. Demand for various goods may fluctuate with the time of day, the type of weather, the occasion, the proximity of a holiday or whatever else, and making sure you price things right takes some level of time or resources-- which would increase as you manage a larger share of the market.
To explain the second reason, first know that owners of capital can often increase their revenue through innovation. For example, the owner of the bathroom sink may come up with the bright idea to install a grate in the sink's pipeline-- not too much trouble to access from underneath-- thereby granting customers the ease of simply tossing their fee down the drain. This innovation makes customers more likely to pay when they use the bathroom sink, and the man with the kitchen sink may "free-ride" off this idea since, while he didn't think of it on his own, it still applies to his business. In this way, management costs are raised for industrialists in a market when the number of people who are busily thinking of ways to make revenue in said market are cut down.

Since the cost of obtaining this monopoly in the first place was so incredibly high, and likewise the price one is willing to pay to break the monopoly is great, the sink-monopolist would find his monopoly unprofitable, and choose to sell one of the sinks back to another dormmate. This ends the monopoly and reverts prices to their normal state.

Q: If a fully private dorm is such a great idea, why doesn't it exist?

A: People like tradition. Much as they might cry for a change in their life's quality, they are less likely want change in the specifics of a system they've lived in since they were born. To find the origin of the typical "household economy" we were all raised in-- where between the children and their parents people use resources as a community-- is not a difficult matter. Until people reach an age where they are rational, a private economy is dysfunctional. When children are so young that by pouring a liquid from one glass to another you convince them there's an increase in liquid (see below), 'extortion' becomes the name of the game, and the children end up losing everything.

However, by the time children reach the age of about 8 or 9 they gain the ability to discern what actions are in their best interest, and become rational creatures. Once this is the case a private economy works smoothly, and is the more efficient way to organize than a household economy.

Another reason is that children tend not to work in the home, thereby becoming charity cases that depend fully on the wealth of their parents. It creates a different sort of relationship between parent and child that is unfavorable to a private economy, because the concept of ownership is flawed when everything is *really* owned by the parents, who can confiscate the material possessions of their children at any time.

Neither of these issues exist in a college dorm room as its members are both rational and on equal footing. Sadly, with the idea of the 'household economy' still lingering in their mind, they are slow to change.


Alas, when all was said and done and the meeting had adjourned, my level of support was left in shambles. Only after the mockery had begun and the people at large had reaffirmed their belief in community ownership did a precious few confront me with serious interest-- agreeing with what I had to say, or at least willing to give it a try.

One can only hope that the numbers will grow.