Sunday, October 21, 2012

Quote of the Day: Private Sector Infrastructure Investment and the Industrial Age

Any growth theory where government investment plays a crucial role in stimulating growth immediately runs afoul of the historical record, however.  The first countries to industrialize did not require extensive government involvement to make these investments.  In England, it was apparent that neither early capital accumulation nor social overhead investment depended heavily on the public sector, as Phyllis Deane (1979) notes when commenting on traditional explanations of growth that rely on government involvement to overcome lumpiness and externalities:

“The consequence is that social overhead capital generally has to be provided collectively, by governments or international financial institutions rather than individuals, and the mobilization of the large chunks of capital required is most easily achieved through taxation or borrowing.  The interesting thing about the British experience, however, is that it was almost entirely native private enterprise that found both the initiative and the capital to lay down the system of communications which was essential to the British industrial revolution.” [p. 73]

Private returns were, apparently, sufficiently high in the late eighteenth and early nineteenth century to induce the private sector to make the necessary infrastructure investment required by the Industrial Revolution.

(bold mine)

This excerpt is from John Wallis’s Chapter 13 of the 1994 essay “Government Growth, Income Growth, and Economic Growth,” of Capitalism in Context: Essays on Economic Development and Cultural Change in Honor of R. M. Hartwell (John A. James & Mark Thomas, eds., 1994) (link added) as quoted by Professor Don Boudreaux at the CafĂ© Hayek.

The above dispels the popular myth that only governments can provide the required infrastructure investment (e.g. roads, bridges, and etc…) for a society.

And an even more important point is that such initiative from the private sector came about when the world had been less economically prosperous.

In other words, the miraculous economic development, or the rags to riches story, or the magnificent transformation of human society from the medieval age--through the industrial age--to today’s information age, during the last 200 years as depicted by Hans Rosling in this video has been rooted from private sector’s infrastructure investments.

Costs are not benefits. Contrary to another popular misperception, capital does NOT just emerge out of nowhere. They are accumulated by the private sector through savings and investments. And that the resources that government has always accrue from, or have been coercively taken from, the private sector.

This means that outside the ambit of regulatory and political obstacles or interference, the private sector could have used these resources to finance and build the required infrastructure ala the industrial age.

The problem is that politicization of infrastructure investments emerges from its capacity to deliver votes.

It’s also a mistake to see the world as operating in a vacuum, such that only governments can make the “right” decision based on presumed "superiority" of knowledge, for infrastructure spending.

After all, the government is comprised of people too.

This means that politicians and bureaucrats have similar limitations like anyone else except that they have the privilege of using guns and badges against their constituents to meet their goal.

Yet any erroneous actions from centralized institutions will have far greater “externalities” or impact to the society than from the decentralized private sectors.

The entrenched belief that governments “know better” accounts for as one of the greatest myths of our time.

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