Thursday, May 27, 2010

Internal Improvements and Externalities in Dorfman

Joseph Dorfman (Murray Rothbard's dissertation advisor) wrote a seminal three volume history of The Economic Mind in American Civilization, covering the period from 1606-1919. I've been reviewing Dorfman's treatment of internal improvements recently, and found a good expression of the case for public works made in the early republic from an externalities perspective. He writes:
.
"Clay [Henry Clay], in amplifying this position of government aid, took to task the critics for following the visionary 'let alone' principle of the political economists and asserting that when the condition of society is ripe for internal improvements - that is, when capital can be invested in them with a prospect of adequate renumeration, associations of individuals will execute them without government aid. But this general maxim, Clay insisted, holds without exception only for old countries possessing a great accumulation of surplus capital. Greatest of the gainers from government aid for internal improvements would be the farmers, in cheaper transportation for their produce to market.
.
Lowndes [William Lowndes] accepted the general principle that the private direction of industry and capital would generally conform to the public good, but he did not admit that all public improvements must be supported exclusively by private subscription: Canals and roads are in every civilized country the object of government. Roads are usually supported by taxes. The policies flow from the general position that a public improvement would be profitable to the public, though not sufficiently profitable to private parties unless they receive government aid. The profits of a turnpike road are distributed among the stockholder, landlords, travelers; and, though a company constructing it might make only 5 per cent, the country might gain 10 percent."
.
Not surprisingly, the logic of externalities long pre-dates Pigou and formed the bedrock of early American support for public works and internal improvements. Dorfman goes on:
.
"The general measure was passed by Congress both in 1817 and 1818, but it was successively vetoed by two Virginia Presidents, Madison and Monroe, who now read the Constitution a little differently and more strictly than they had on previous occasions. They both expressed great sympathy for internal improvements but thought that Congress would have the power only through a constitutional amendment. Calhoun, on the other hand, said that he 'was no advocate for refined arguments on the Constitution. The instrument was not intended as a thesis for the logician' on which to exercise his ingenuity. It ought to be 'construed with plain good sense,' and he found accordingly that the power to raise money is not limited to the enumerated powers but to the achievement of the general welfare."
.
The last sentence stands out as a little odd, since the power to raise money for the achievement of the general welfare is the first of the enumerated powers (regardless of how you interpret the term "general welfare", there's no contesting the fact that the power to appropriate money for it appears as an enumerated power). This covers the territory discussed earlier on this blog about Madison's changing view of the Constitution with respect to public works.
.
Elsewhere, Dorfman considers Jefferson and Washington's advocacy of improvements of the Potomac River. Again, the argument is made on the basis of externalities - that the project will not just benefit shareholders, but that it will benefit all Marylanders and Virginians who will share in the Ohio trade. Indeed, it would benefit the Union itself, which would form a closer connection between East and West. Jefferson and Washington were both visionary men who found it reasonable to pursue the interests of the broader public and future generations. The point is, those interests aren't usually represented in the context of a market.
.
I think this question of the Constitutional amendment is worth exploring more. I'm personally still a little hazy on precisely what Madison and Monroe thought needed to be amended. What Jefferson thought needed amendment was quite clear: he was only concerned about state-level approval of federal public works. Jefferson's view was that the federal government did not have the authority to build in a state without the state's approval, not that it did not have the authority to appropriate money for approved public works. Is this all Madison and Monroe required? Or did they think (did they think in 1817 and 1818, that is) that the Constitution required even greater adjustment than that to accommodate federal public works?
.
And what is the practical difference between a clear majority that thinks the Constitution already provides authority to implement public works and a minority that wants the Constitution to provide that authority but doesn't think that it currently does? If the generations of Supreme Courts that have upheld public works projects and the preponderance of public understanding isn't enough on its own, isn't it reasonable to assume that if the skeptics like Madison and Monroe had been successful in proposing an amendment, it would have passed overwhelmingly? In other words - it seems to me the only reason why a more specific amendment isn't there is that so few considered it necessary, and those who did consider it necessary agreed in practice with those who didn't on the value and legitimacy of federal public works projects. Had more people considered the amendment necessary, is there any doubt that the amendment would have passed? So why should we be tyrannized by a very narrowly accepted interpretation of the Constitution which would have been amended into irrelevance if it had a been any less narrowly accepted?
.

Crozet's Map of the Internal Improvements of Virginia

20 comments:

  1. "In other words - it seems to me the only reason why a more specific amendment isn't there is that so few considered it necessary, and those who did consider it necessary agreed in practice with those who didn't on the value and legitimacy of federal public works projects. Had more people considered the amendment necessary, is there any doubt that the amendment would have passed?"

    Maybe ... or it could be an issue of concentrated benefits and dispersed costs. Something can be wrong or stupid, but if the pain from it is small then it can be hard to organize against.

    ReplyDelete
  2. Do you think it's likely that infrastructure has concentrated benefits?

    It's a reasonable point when you're talking about a more excludable good or something that's not a network good - but I think you might have to explain the concentrated benefit in this case in a little more detail. I'm not sure what would lead someone towards that conclusion. What made you think of that?

    ReplyDelete
  3. Yes, I think it is likely that infrastructure has concentrated benefits.

    Consider this argument about light rail: "One economic reason is that the benefits of light rail are highly concentrated, while the costs are widely dispersed. The direct benefits of a light-rail project can be quite large for a relatively small group of people, such as elected officials, environmental groups, labor organizations, engineering and architectural firms, developers and regional businesses, which often campaign vigorously for the passage of light-rail funding. These groups would benefit from light rail, not from the subsidization of cars and money to all potential riders of light rail."

    http://www.stlouisfed.org/publications/re/articles/?id=385

    ReplyDelete
  4. Well now wait a minute. Of course some people will experience concentrated benefits - that's not in doubt. The question is, are those the only benefits being enjoyed. Infrastructure is usually considered hard to invest in precisely because (in addition to the builders, architects, etc. who enjoy specific benefits) the people who enjoy the benefits of the infrastructure are quite dispersed. You can't just look at SOME of the benefits and say "the benefits are concentrated". That makes no sense, anonymous.

    What we're dealing with is:
    1. Externalities: the benefits extend beyond the people who build and manage the project and the people who directly use the project, and
    2. Coordination problem: very dispersed benefits (as well as dispersed costs).

    The fact that there are some parties that benefit particularly from the project doesn't say anything about the relative dispersal of all benefits to be considered, does it? I don't think it does.

    ReplyDelete
  5. Put it this way - I could look at ONLY the people in the Virginia, Maryland, and Ohio wilderness and say that all the benefits they get from internal improvements is dispersed, so we have dispersed benefits.

    Does that make sense to just look at them? Of course it doesn't. So why do you just look at the builders and architects when you make your assessment? (not a rhetorical question - I'm honestly curious about the reasoning).

    ReplyDelete
  6. "Infrastructure is usually considered hard to invest in..."

    It is? The vast majority of infrastructure in the U.S. exists because some private entity decided to create it, so that can't be the case. Also, there is really is no reason why private roads and bridges aren't doable (after all, you can exclude people from them, etc.) - other countries have lots of both.

    Anyway, it is more than just builders, etc. it is where a road is sited, etc. - this is not a neutral exercise in other words.

    ReplyDelete
  7. "It is? The vast majority of infrastructure in the U.S. exists because some private entity decided to create it, so that can't be the case."

    Relatively speaking, Anonymous. Why must every single statment be transformed into the most extreme version possible?

    Do you have a citation for that? That's interesting. I've never been one to claim that private infrastructure is some kind of impossibility - but I didn't realize/wouldn't have necessarily guessed that the "vast majority" of infrastructure was private. This probably largely depends on what we're calling "infrastructure".

    RE: "Also, there is really is no reason why private roads and bridges aren't doable (after all, you can exclude people from them, etc.) - other countries have lots of both."

    Absolutely not - I'm quite sure no one is claiming that there is a reason why they aren't doable. At least not here.

    ReplyDelete
  8. I ran into this same tendancy on Cafe Hayek the other day. Don wrote:

    "Nobel laureate economist Elinor Ostrom’s important work shows that people are very good at using voluntary action to solve problems that economics textbooks insist require the forceful hand of government."

    I asked Don what textbook could he possibly be thinking of that insists that things like infrastructure (he gets more specific later) "require the forceful hand go government". I've never heard that before. Like you, anonymous, he takes the argument and twists it to the point of ridiculousness.

    ReplyDelete
  9. Oh - and he never answered me.

    Perhaps he spoke without thinking and hadn't read that anywhere - just had always imputed it to people.

    ReplyDelete
  10. "Relatively speaking, Anonymous. Why must every single statment be transformed into the most extreme version possible?"

    I dunno, it seems rather extreme to state that "Infrastructure is usually considered hard to invest in..."

    "Do you have a citation for that?"

    Why? Consider the world that you live in. Most of the built environment that exists was built by some private entity.

    "...I'm quite sure no one is claiming that there is a reason why they aren't doable."

    Then why are private roads considered such a nutter idea even in cocktail party conversations?

    ReplyDelete
  11. re: "Why? Consider the world that you live in. Most of the built environment that exists was built by some private entity."

    Ok wait a second - are we talking about the "built environment" or are we talking about infrastructure? Stop changing the subject.

    Re: "I dunno, it seems rather extreme to state that "Infrastructure is usually considered hard to invest in...""

    What's extreme about that? What I said was clearly less extreme than your response which seemed to interpret me as saying that private industry doesn't build infrastructure. What in the world does the relative challenge of investing in infrastructure have to do with the public-private mix, anonymous???

    ReplyDelete
  12. If it makes you happier ...

    "Most of the built environment that exists was built by some private entity."

    "What I said was clearly less extreme than your response which seemed to interpret me as saying that private industry doesn't build infrastructure."

    No, I interpreted you as saying that private entities don't in the normal course of things build infrastructure.

    ReplyDelete
  13. I'm not sure where you got that idea, anonymous. I think they sub-optimally invest in infrastructure. To what extent they sub-optimally invest obviously depends on what infrastructure we're talking about.

    And the "built environment" is considerably broader than infrastructure. I'm thinking primarily of stuff with network externalities which may present some obstacles to exclusion and therefore some potential for free riding.

    I've got no clue how you got the idea that I was saying private entities don't invest in it. You really need to work on your penchant for building and attacking straw men.

    ReplyDelete
  14. Or alternatively, you need to tighten up your prose.

    "I'm thinking primarily of stuff with network externalities which may present some obstacles to exclusion and therefore some potential for free riding."

    I cannot think of a single human built structure which cannot be built so as to exclude free riders. The reason that roads, bridges, subways, etc. are open to the public in the way that they are has really very little to do with economics (indeed, most of the economic explanations seem to me to be so much ex post storytelling) - the reason they are they way they is a result of some cultural-historical process that has nothing to do with a rationalized plan, etc.

    ReplyDelete
  15. Anonymous -
    Again, WHY are you distorting what I'm saying to be the most extreme version? Why do you do that? "may present some obstacles to exclusion" is not the same thing as "cannot exclude".

    Besides - you're thinking about this like an engineer and not an economist. You can exclude me from a road, but I benefit from the increased economic activity that you bring to my community even if I never set foot on that road.

    If you think I'm only talking about actual physical access, you're not even understanding the argument.

    "indeed, most of the economic explanations seem to me to be so much ex post storytelling"

    OK, maybe you're not mommsen1625... are you russ roberts?

    ReplyDelete
  16. "You can exclude me from a road, but I benefit from the increased economic activity that you bring to my community even if I never set foot on that road."

    Yes, I understand this. Isn't that also true of a commercial building? Or even a residential housing complex? To me, simply on its face, the sorts of arguments made for certain goods being public goods don't make much sense to me at all. The claims made about them look like justifications after the fact.

    No, I am not Russ Roberts. I'm just a person.

    ReplyDelete
  17. It's true of just about any economic activity - it's called an agglomeration economy.

    Again - try not to think in such black in white terms. Yes, this is true of just about anything. But it's worth distinguishing between investments where 95% of the benefit accrue to parties to the market transaction vs. investmetns where 50% of the benefits accrue to the parties to the market transaction.

    Half of your disputes on here are due to the fact that you view things in black and white and you can't talk about these things on spectrum. When I say "there are obstacles to optimal investment and investment will be sub-optimal" you act like I'm making a case that private actors can NEVER make these investments.

    ReplyDelete
  18. If you say that they are sub-optimal that looks like a never statement to me.

    ReplyDelete
  19. If you're taking those sorts of liberties with the English language, I don't know what to tell you, Anonymous - you're probably better off commenting on other blogs.

    ReplyDelete
  20. Probably so, but not for the reasons that you state.

    ReplyDelete

All anonymous comments will be deleted. Consistent pseudonyms are fine.