Point of Beginning

On the Level: The Equilibrium Principle

June 17, 2008
Nature abhors a vacuum. What goes up must come down. For every action there is an equal and opposite reaction. These are principles of equilibrium we learned in high school physics and in daily practice.



We observe that the principle of equilibrium operates in the social world as well as the physical world. The equilibrium principle applies in war, in politics and in finance. Stronger countries have historically overrun weaker countries. Our own government vacillates between Republican and Democratic administrations as the electorate searches for balance.

For many years, the cost of gasoline at the European pump has been as much as four times the cost here in the United States. Since oil has an intrinsic value and in its raw state costs about as much here as it does there, why hasn’t the equilibrium principle applied? It is because of the higher level of taxes the European governments apply to the gasoline consumer.

The Europeans have been more concerned than we have been over such basic issues as the ultimate oil supply, the cost of production and air pollution. In convincing people to drive smaller, more efficient cars, European governments have also generated greater tax revenues for themselves. Now, with our gasoline prices exploding upward recently, the equilibrium principle seems to be working after all.

At the time of this writing, more than 200,000 U.S. properties were in the foreclosure pipeline, demonstrating the equilibrium principle at work in the financial markets.[1] By providing financing at rates below the prevailing prime rate, the banking industry attempted to put people in homes at monthly rates they could afford--for a while--until inflation and real-estate appreciation would force values higher, giving owners the ability to refinance before higher rates kicked in on their “subprime” mortgages. At least that was the strategy. Unfortunately, the law of gravity took over; the stratospheric increase in housing values leveled out just as those subprime loans reached the point of higher interest rates according to their variable-rate schedules. Homeowners could no longer make their monthly payments, and defaulting owners were forced out of their homes. Neighborhoods began to look bad, values fell even more and the housing industry--the backbone of the American consumer market--developed a slipped disk. The result is the so-called subprime crisis.

The surveying industry is well aware of the situation. Those of us who have been in the business for more than a dozen years realize the economy is cyclical in nature and expect a recession every 10 years or so. We are as sensitive to the equilibrium principle as anyone else, and the survivors among us have learned how to weather these periodic storms.

The equilibrium principle also applies in another area of the surveying profession: charge rates. We like to think that the fees we charge for our professional services are based on the value of those services. If that were true, there would be a lot more really wealthy surveyors around. In fact, our fees are set in the marketplace and bounce up and down according to the supply of and the need for surveying services.

It’s true that a provider of excellent services delivered on time can demand a higher charge rate than much of her competition. It’s also true that someone offering lower charge rates can attract a significant share of the business. The market for surveying in any community where there are several surveying companies seeks equilibrium in the cost of surveying services. Some firms will always earn a little more; some will always earn a little less. But to the exasperation of the proprietor who delivers excellence, there will ever be an eager competitor whose professional standards are delivered at a lower level. Fortunately, the equilibrium principle also tends to have a leveling effect on quality of services. One proprietor may have to lower charge rates when work is slow. Another proprietor will find that by raising the quality of his work, he can also raise his fee schedule.

Equilibrium tries to regulate everything from the planets in their orbits to the cost of debt to charge rates for professional surveying services. But in a market economy, there will always be room for the surveyor who gets the best return for her perfectionist approach to her work and for the courageous young surveyor/entrepreneur offering to contract at reduced rates. Any disparity in quality of services will be worked out by licensure regulation, by the civil courts in some cases and, eventually, by the preferences of the marketplace.

Reference

1 Gretchen Morgenson and Jonathan D. Glater, “Foreclosure Machine Thrives on Woes,” New York Times, March 30, 2008.