Quote of the Day: Infrastructure is the Effect of Economic Progress

Nor is it true that a substantial infrastructure is a precondition of development….  The suggestion that ready-made infrastructure is necessary for development ignores the fact that the infrastructure develops in the course of economic progress, not ahead of it.  The suggestion is yet another example of an unhistorical and unrealistic attitude to the process of development.

I am sharing Café Hayek’s or Professor Don Boudreaux’s quote of the day which is from the late Peter Bauer’s invaluable 1976 collection (page 111), Dissent on Development (Revised Edition); specifically, it’s from Bauer’s 1969 Scottish Journal of Political Economy essay

The popular notion where “infrastructure drives economic progress” which justifies for government interventions simply accounts for the fallacy of confusing cause and effects. This popular fiction has been peddled by media and politically captured institutions, which accounts for as either utter ignorance, political inculcation or propaganda aimed at brainwashing the gullible public.

In reality as recently pointed out, the industrial age had been largely driven by private sector infrastructure. This serves as evidence that growing economic activities motivates people to build and invest in infrastructure to augment their existing conditions with accumulated capital from earlier transactions.

As Professor Ludwig von Mises noted,

saving and the resulting accumulation of capital goods are at the beginning of every attempt to improve the material conditions of man; they are the foundation of human civilization. Without saving and capital accumulation there could not be any striving toward non-material ends

This means capital don't appear from nowhere!

The mystic of government’s supposed magical potency on the economy has not only been based on fallacies but on the poor understanding of capital, opportunity costs and the law of scarcity.

Moreover, such popular misimpression have been backed by the assumption that governments possess omniscience, which in reality they don’t.

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 Café 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.

Statistics Don't Reveal Extent Of The Evolution To The Information Age

Bespoke Invest gives a good account of the per industry weightings of the US S & P 500.

I think this conveys a very important message.

According to Bespoke Invest, (bold emphasis mine)

``Technology currently has the biggest weighting in the S&P 500 at 19.2%. This is the highest weighting the Tech sector has had since the Internet bubble burst in 2000. After falling all the way down to just 8.9% at the March 2009 lows, the Financial sector's weighting in the S&P 500 now ranks second at 14.4%. Health Care, Consumer Staples, Energy, and Industrials are the other four sectors with a weighting of more than 10%. The Consumer Discretionary sector is close to 10% at 9.8%. From 1998 to 2007, the Consumer Discretionary sector was bigger than the Consumer Staples sector. When the bear market hit in 2007, Consumer Staples overtook Consumer Discretionary, but the spread has tightened to about two percentage points recently. If the bull market continues, we'll likely see Discretionary overtake Staples once again. While the Materials sector gets a lot of attention in the media, especially because it has the gold stocks, it's important to remember that it only makes up 3.5% of the S&P 500. The Utilities sector is even bigger than Materials."

Taking a look at the charts of the S & P Information and Technology we notice that while indeed the sector has significantly outperformed it hasn't reacted in bubble like proportions similar to the late 1990s.

we can also see this in the behavior of the Nasdaq

What I am trying to say is that the contribution of the technology sector to the real economy could perhaps be more accurately reflected on the performance of S&P, however, such contribution may have been underrepresented by conventional statistical metrics.

Even during the aftermath of the dot.com bubble crash, the shift towards advancing high tech industries or high paying tech jobs has also been evident in the job market dynamics.

According to the CRA.org,

``Since 2000 (when trend data become available), there has been a shift away from low-wage jobs to high-wage jobs in the IT sector. The lower-paying IT jobs also have experienced higher unemployment rates and a greater number of job losses. These are the types of jobs that may show signs of being replaced by offshoring. However, the economy is in the midst of an unusual recovery: relatively fewer jobs are being created at the same time that average productivity growth is at the highest level recorded among post-World War II recoveries. This also appears to be playing a role in the lack of job growth in the IT sector."

``An industry-based definition of the IT sector shows a shift from lower-paid manufacturing jobs to higher-paid service jobs. In 1994, 33.4 percent of IT-sector employment were in services. In 2004, this had risen to 54.6 percent. Manufacturing jobs accounted for 70 percent of job losses in the IT sector from 2000 to 2004.

As Erik Brynjolfsson and Adam Saunders of the MIT Sloan writes, (bold highlights mine)

``The irony of the information age is that we know less about the sources of value in the economy than we did 25 years ago. GDP is a more accurate metric of value in industrial-age industries like steel or automobiles than in information industries, and can miss most of the value in information goods. However, there is one measure that economists have thought about for decades that may help us determine the value of these innovations: consumer surplus. Consumer surplus is the aggregate net benefit that consumers receive from using goods or services after subtracting the price they paid. While it can be difficult to measure directly, economists can infer consumer surplus using price experiments from purchase data, lab experiments or surveys. Consumer surplus can be enormous even if — in fact, especially if — the price is low or zero.

``Let’s go back to the recording industry. Suppose that for most people, the vast majority of the value of a CD comes from their three favorite songs on it. Those consumers will do much better paying $3 for those three songs on iTunes, rather than paying the $18.99 retail price for the CD. While most of the record company revenues disappear from GDP, consumer surplus increases enormously — but that amount is unmeasured. This is not a bug in the free market system. In fact, it is its essence. As Adam Smith noted more than 200 years ago, the invisible hand of competition drives producers to deliver ever more value to consumers at an ever lower cost. If the cost of producing a good is zero, then over time, the competition should drive the price to zero as well. The invisible hand has been particularly ruthless in information markets. As a result, consumer surplus has soared even if the contribution of information goods to GDP hasn’t."

In short, there is growing evidence that statistical GDP does understate the role of technology in the real economy.

A final note from Murray N. Rothbard,

``Technologically, history is indeed a record of progress; but morally, it is an up-and-down and eternal struggle between morality and immorality, between liberty and coercion. While no specific technical tool can in any way determine moral principles, the truth is the other way round: in order for even technology to advance, man needs at least a modicum of freedom to experiment, to seek the truth, to discover and develop the creative ideas of the individual. And remember, every new idea must originate in some one individual. Freedom is needed for technological advance; and when freedom is lost, technology itself decays and society sinks back, as in the Dark Ages, into virtual barbarism."

Freedom is progress.

Niche Versus Mass Marketing

Another splendid graphic from Jessica Hagy, which she calls "Ordinary Is Abundant".

From a marketing perspective, this chart/diagram basically illustrates on the distinction between mass marketing and niche marketing.

Marketing guru Seth Godin elaborates,

``Mass marketing works best when it assumes that everybody in the entire chain is just plain average. Or even a little bit less...

``Niche marketing, on the other hand, can thrive if it starts with the assumption that average products by average people for average people is just not your thing...

In short, general (mass) versus focused (niche).

As the world gets increasingly interconnected via the explosive improvements of technology, focus has been the intensifying trend of the markets.

So it would be a mistake to evaluate or discern events by simply basing on past paradigms when we have been segueing from the industrial age to the information age.