Friday, November 11, 2005

Public Works Are Not Exempt from Market Forces

Unison (Irish Independent) carries an article “Accountants shouldn’t decide infrastructure” (10 November) making the case for public investment in infrastructure even though accountants (‘bean counters) would assert that it would not make an economic profit.

In the midst of putting the the case, the anonymous author asserts, without elaboration, the following reference to Adam Smith:

“Yet even the father of modern capitalism, Adam Smith, believed that public works should be exempt from market forces.”

I shall step over the incorrect attribution “the father of modern capitalism” (see previous posts) and examine what Adam Smith did say about what we know today as infrastructure projects. I suggest it was a bit deeper than ‘exempt from market forces’.

In Book V of “Wealth of Nations” (‘Of the Revenue of the Sovereign or Commonwealth’), pages 689-947, Smith regarded the ‘expence of publick works and public institutions’ as the third and last duty of the commonwealth (Defence and Justice being the first two duties).

He suggested that the commonwealth should erect and maintain those institutions and works

‘which, though they may be in the highest degree advantageous to a great society, are, however, of such a nature, that the profit could never repay the expence of any individual or small number of individuals, and which it, therefore, cannot be expected that any individual or small number of individuals could erect and maintain’ (p 723).

Though the above ought to be clear enough, some treat this as an absolute mandate for the public authorities to ‘erect and maintain’ all public works and institutions. This is not correct. Because at a particular moment ‘the performance of this duty’ requires ‘very different degrees of expence in the different periods of society’, different options are available when deciding how to fund particular public projects. As always, it all depends on a case-by-case basis.

Some public works are ‘necessary for facilitating Commerce in general’ (p 724). As the ‘annual produce in the different periods of society’ increases the expense of carrying out this duty. As the country grows more opulent it becomes possible to defray the expense of public works by different means, including ‘small tolls’, ‘lock-duties’, small ‘port-duties’, state-backed coinage (which ‘defrays its own expence’ or seignorage’) and state post-office services.

Smith also explored different forms of public or private management of infra-structure projects and their problems (indolence of public commissioners and cheating by private operators – ‘mean and improper persons’ - the ‘abuses of which … have in many cases been very justly complained of’, p. 726).

That the commonwealth should fund public works unquestionably is a duty of government use of taxation as long as no ‘individual or small number of individuals’ could make it profitable. That users of the public works should contribute to their expense is unquestionably an acceptable practice. How they should be managed is a matter of utility – which set of persons does it better? As society grows in opulence the private investment funds available for projects, including major public works, increase in their availability. The absolute need public funding becomes less mandatory. Markets re-assert themselves.

In more modern terms, the state may fund the erection and maintenance of an airport, but as air traffic grows beyond a point, the government may privatise the airport and hand the responsibility for erecting further runways and terminals over to private investors. This is perfectly consistent with good sense and Smithian market economics.

For this reason, I would severely qualify the assertion that “Adam Smith, believed that public works should be exempt from market forces.” He did no such thing.

What was a necessary source of funding in mid-18th century Britain was not an absolute rule for all time thereafter. Adam Smith’s legacy was not a set of cardinal rules, forever unchangeable and locked into 18th century circumstances. Those countries that are, relatively speaking, slowly emerging from 18th century conditions in capital accumulation (I am not referring here to Ireland!) should consider Smith’s assessment of the viable source of capital for their necessary public works; those well beyond such early and primitive sources of capital accumulation have more options for securing the funds from private or public sources.

In both circumstances, Adam Smith had something worth considering from his legacy, and he did not exempt for all time public infrastructure projects from market forces.

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