Wednesday, March 28, 2012

Roads and Free markets

A really interesting post by Timothy B Lee:
Assembling the land needed for a long-distance road is prohibitively expensive without government assistance. Unsurprisingly, private roads almost never come into existence without extensive government assistance. And that means that the profitability of a "private" road depends crucially on how many competing roads the government allows to exist. 
It's unsurprising, then, that real-world privatization schemes are often explicitly protectionist. A 2004 GAO survey found that four of the five privately-funded toll road projects started or completed in the preceding 15 years included non-compete clauses that restricted the creation of competing freeways nearby. It's much easier to turn a profit when would-be competitors are barred from entering the market.  
Supporters of free-market roads point to the experience of the United States and Great Britain in the 18th and 19th centuries as the golden age of private roads, but those roads were only private in a limited sense. This history is detailed in Street Smart, an edited collection published by the libertarian Independent Institute. Daniel Klein and John Majewski write that in the United States, "turnpikes were encouraged by government, sometimes by granting of exisitng trails or public roadbeds to turnpikes, sometimes guarantees against new parallel routes, and typically the granting of eminent domain powers." They write that they "cannot say" whether these privileges were important to the success of these turnpikes.  
The basic pattern seems to have been the same for British toll roads. Most toll roads replaced previously-existing public roads; the book doesn't say if the new roads were built with eminent domain or other government privileges. Indeed, after thumbing through the entire 500-page book, I didn't find a single example of a country, now or in the past, where most roads were built using ordinary market transactions. The vast majority of "private" roads, around the world and throughout history, came into existence thanks to direct government assistance.
I think that is is important to recognize that some areas of human activity are inevitably going to have at least some degree of government involvement.  Roads are a classic public good -- without them we would be far less mobile and trade would be much more difficult.  But a single actor can block the development of roads, absent a government intervention. 

But the part that is the most interesting is how a public good can be turned into a vehicle for rent-seeking.  As soon as there is a hint of a "non-compete" or "guarenteed revenue" clause in a privatization, you can be absolutely sure that there is not a functioning free market present.  We do not grant non-compete clauses to restaurants or clothing stores.  The ability of these business to fail is part of the entire point of the private sector (creative destruction). 

Free markets in everything is now (and always will be) a myth, just like public markets in everything ended up as a terrible system.   Why are we so resistent as a society to the incredible success of mixed markets? 

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