Michael,
Just in case you're not familiar with it, below is a short excerpt of
Proudhon's "Misery", presenting a most insightful account of why private
enterprise could never hope to recoup the costs of infrastructure
investment. HTH,
John V
"The principle that all labor should leave an excess, undemonstrable by
political economy, - that is, by proprietary routine, - is one of those
which bear strongest testimony to the reality of the collective person:
for, as we shall see, this principle is true of individuals only because
it emanates from society, which thus confers upon them the benefit of
its own laws. Let us turn to facts. It has been observed that railroad
enterprises are a source of wealth to those who control them in a much
less degree than to the State. The observation is a true one; and it
might have been added that it applies, not only to railroads, but to
every industry. But this phenomenon, which is essentially the result of
the law of proportionality of values and of the absolute identity of
production and consumption, is at variance with the ordinary notion of
useful value and exchangeable value. The average price charged for the
transportation of merchandise by the old method is eighteen centimes per
ton and kilometer, the merchandise taken and delivered at the
warehouses. It has been calculated that, at this price, an ordinary
railroad corporation would net a profit of not quite ten per cent.,
nearly the same as the profit made by the old method. But let us admit
that the rapidity of transportation by rail is to that by wheels, all
allowances made, as four to one: in society time itself being value, at
the same price the railroad would have an advantage over the stage-wagon
of four hundred per cent. Nevertheless, this enormous advantage, a very
real one so far as society is concerned, is by no means realized in a
like proportion by the carrier, who, while he adds four hundred per
cent. to the social value, makes personally less than ten per cent.
Suppose, in fact, to make the thing still clearer, that the railroad
should raise its price to twenty-five centimes, the rate by the old
method remaining at eighteen; it would lose immediately all its
consignments; shippers, consignees, everybody would return to the
stage-wagon, if necessary. The locomotive would be abandoned; a social
advantage of four hundred per cent. would be sacrificed to a private
loss of thirty-three per cent. The reason of this is easily seen. The
advantage which results from the rapidity of the railroad is wholly
social, and each individual participates in it only in a very slight
degree (do not forget that we are speaking now only of the
transportation of merchandise); while the loss falls directly and
personally on the consumer. A special profit of four hundred per cent.
in a society composed of say a million of men represents four
ten-thousandths for each individual; while a loss to the consumer of
thirty-three per cent means a social deficit of thirty-three millions.
Private interest and collective interest, seemingly so divergent at
first blush, are therefore perfectly identical and equal: and this
example may serve to show already how economic science reconciles all
interests. Consequently, in order that society may realize the profit
above supposed, it is absolutely necessary that the railroad's prices
shall not exceed, or shall exceed but very little, those of the
stage-wagon. But, that this condition may be fulfilled, - in other
words, that the railroad may be commercially possible, - the amount of
matter transported must be sufficiently great to cover at least the
interest on the capital invested and the running expenses of the road.
Then a railroad's first condition of existence is a large circulation,
which implies a still larger production and a vast amount of exchanges.
But production, circulation, and exchange are not self-creative things;
again, the various kinds of labor are not developed in isolation and
independently of each other: their progress is necessarily connected,
solidary, proportional."
Michael Perelman wrote:
Markets fail for many reasons. With all the attention to the current
financial crisis, the time has come to look at another part of market
failure -- the reluctance to invest in long-lived plant and equipment.
I'm not merely thinking about the deindustrialization of the US economy,
but a more general reluctance.
The commitment of funds for fixed capital entails taking a risk. In the
words of John Hicks, one of the earliest economists to win a so-called
Nobel Prize, pointed to the obvious problem: "an entrepreneur by
investing in fixed capital gives hostages to the future" (Hicks 1932, p.
183). Unfortunately, neither Hicks nor virtually any other economist has
explored this fear of investment.
The most popular response to this reluctance to invest came from a very
conservative Austrian economist, who once served as a socialist minister
of finance, before landing at Harvard. Joseph Schumpeter was indeed one
of the giants of 20th century economics. Here his reputation to his
personal brilliance, as well as a willingness to learn from Karl Marx.
I have attached the rest of the piece as a pdf at
http://michaelperelman.wordpress.com/2008/11/11/why-markets-fail/
It was written to help me focus my thoughts for my talk in San Francisco
tomorrow. Any comments will be appreciated.
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