Infrastructure

Here's Alistair Walling:

There is a lot of talk afoot of the need to rebuild the nation’s infrastructure, and a favourite charge of anti-marketeers is that markets cannot provide complete, integrated networks of roads, bridges canals etc. However, while the market may not provide transportation networks as extensive as those built, subsidized, or sponsored by government, the market would be more likely to provide transportation infrastructure where it would bring the most benefit to the most number of people, while maximizing the efficient use of society’s scarce resources. Of course, those wishing their teeny village a multimillion dollar bridge would be fresh out of luck. Furthermore, the public would be denied admittedly impressive but value-destroying white elephants, such as the Channel Tunnel or the Big Dig.

He goes onto to provide historical evidence for the Public Choice implication that public infrastructure projects are most likely to benefit lobby groups rather than the general public. The reason why I think laymen overestimate the value of public infrastructure is the classic distinction between the seen and the unseen. Anyone can travel on the Eurostar and marvel at the engineering feat that allows you to travel direct from Central London to the foothills of the French Alps. It takes an inquisitiveness and understanding of counterfactual reasoning to realise that even more wonderful construction projects might have been created with the same capital. The bottom line is that in a world of scarcity "perfect" infrastructure is a waste of resources.

Comments

[Gabriel]

Oh, boy. Here's an idea:

The State will oversupply networks (in general) and do it at a higher cost and markets will undersupply them. Choose your poison. Implementing efficient allocations is not easy. Most likely impossible.

Finally, the seen and unseen line is nonsense. Unless you can point to specific foregone alternatives of higher value, it tells me nothing. -- It's a case of damned if you do, damned if you don't. Choosing not to do anything is also a choice, with its own opportunity cost and "unseen" consequences.

For example: Sure, tax cuts seem great, leaving money in the pocket of the private sector, but there's an unseen dimension to it, i.e. government debt and the foregone public spending. Ta da! Bastiat the socialist?

[aje]

The State will oversupply networks (in general) and do it at a higher cost and markets will undersupply them. Choose your poison. Implementing efficient allocations is not easy. Most likely impossible.

Oversupply and undersupply compared to what? The concepts of subjective value, willingness to pay, revealed preference etc. provide a standard so that you can determine whether something is "over" or "under" supplied - and it's not necessarily a Panglossian standard (what is is efficient). Similarly neoclassical economics provides an alternative (static and utilitarian) means to compare the real world to imagined alternatives. But let's not confuse the two - the reason we tend not to see private infrastructure is the fact that there's an existing monopoly provider. I don't accept the logic of the Public Goods argument, so you can't take it for granted the markets "undersupply".

Unless you can point to specific foregone alternatives of higher value, it tells me nothing.

It wouldn't be a counterfactual if it was empirically observable. Again, praxeology provides a means to enter the realm of counterfactual reasoning, I don't see the internal contradiction. The bottom line is (a) Would the investment have earnt a higher return if put to an alternative use? (b) If so, is there a mechanism to confiscate decision-rights from the decision-maker?

[Jim]

"value-destroying white elephants, such as the Channel Tunnel or the Big Dig."

I must have missed the bit where he backed this assertion up with, y'know, evidence. Or am I just not appreciating his inquisitive understanding of counterfactual reasoning?

[aje]

Maybe he just thought it was conventional wisdom and that the evidence was well known. I don't know - ask him.

[Jim]

But since neither he nor you are putting forward any way of actually assessing relative costs and benefits, it's all just assertion. Which is nice and all, just not of any use.

[aje]

neither he nor you are putting forward any way of actually assessing relative costs and benefits

The price mechanism.

[Jim]

Which tells us what about the Channel Tunnel?

[aje]

It tells us that it cost about £10bn to make, and has only just began to generate positive revenues. The economist can point out that there may have been better uses for the money, it's up to an engineer to suggest examples.

[Jim]

In other words, it leaves out a lot about the actual value of the project, since it doesn't take into account uncosted externalities and spillover effects.

[aje]

Quite possibly, but the "actual value of the project" is one of two things: (i) genuine added economic value that isn't captured due to incomplete/imperfect markets; (ii) illusionary value that isn't tied to willingness to pay. My fear is that public projects that operate under the remit of (i) end up satisfying (ii) due to even more incomplete/imperfect political markets. Therefore i'd say that capturing economic value is part and parcel of entrepreneurship, and policymakers can help by making markets as complete as possible (i.e. make it as unbureaucratic to build a tunnel between England and France as it is to build one between Eastleigh and the Isle of Wight (and indeed make that as unbureaucratic as building an elevator shaft)).

[Gabriel]

Oversupply and undersupply relative to a state of matters (across time and stats of nature) such that no one could be better off without someone else being worse off, in accordance with their own subjective evaluation.

Oversupply and undersupply can be established analytically, once a set of assumptions are spelled out. There's nothing empirical about, nor "utilitarian".

The reasons you think your sh*t don't stink is that instead of spelling out your assumptions and inferences, in the logical sense, you want to have your cake and eat it too.

The point is, in the presence of network externalities, *the price system is broken*, so you can't take market prices to be indicative of value since some markets are missing.

Finally, the counterfactual is not an empirical matter. That's a strawman on you part. It's enough to specify a model within which some policy is Pareto-dominated by some other. Simply hand-waving about potentially existing better alternatives is not helpful.

You're making the following argument:

"Whatever the government does, there is seen and there is unseen stuff, so don't evaluate it positively".

At which point I can take "the government" and replace it with "anyone".

Unless you specify some actual content re: "seen and unseen", it means nothing.

You might not buy the externalities involved in networks, in which case I have a deal for you... I'm going to sell you a telepathy headset. The thing is, no one else has one. :-) There, your preferences over consuming this good are a function of the market quantity... externality!

[Jim]

Your answer implies that there is always something that governments *can* and *should* do to reduce market imperfections, and that each imperfection can be treated independently, none of which need be true. If you accept that the price mechanism doesn't capture the real value or desirability of an action, then it can't follow that removing a particular aspect of 'bureaucracy' must be the best course of action just because it *looks like* that is the direction suggested by the price mechanism.