What’s Infrastructure?

by Don Boudreaux on April 22, 2014

in Myths and Fallacies, Seen and Unseen

In my latest column for the Pittsburgh Tribune-Review I discuss the (ir)relevance of Pres. Obama’s (in)famous “you didn’t build that” blurt.  While I agree that Mr. Obama was referring, with this blurt, to the building of infrastructure – so that his statement is largely factually correct – I argue that the reality to which his 2012 blurt refers does not support the “Progressive” political conclusions that he draws from that reality.  Here’s a chunk from my column:

Fact is, a great deal of infrastructure is built privately. FedEx, for example, is infrastructure: It’s a combination of vehicles, warehouses, organizational knowledge and other specific capital that businesses and households rely upon to transport freight and packages. Without FedEx, many businesses would be less profitable or even nonexistent. Some online retailers, for example, might be unable to compete successfully against brick-and-mortar stores.

Of course, FedEx isn’t a road or a bridge. But so what? FedEx, no less than a road or bridge, enhances our abilities to pursue our private goals. When you start to reflect on what is infrastructure, you see that infrastructure isn’t only those things supplied by government.

And you then also see that our world is filled with lots of privately built infrastructure: FedEx, privately built oil and gas pipelines, private schools, private insurance companies, privately built skyscrapers. This list goes on and on.

All of these privately built and operated pieces of infrastructure are financed by the voluntary payments of the businesses and households that use them. When Amazon.com pays FedEx $11 to deliver a book to my home, both Amazon and FedEx gain. Each company gets value in exchange. And no one owes the other anything more.

FedEx has no grounds for lecturing Amazon founder and CEO Jeff Bezos that, because his company depends on FedEx, he owes FedEx more than what he already paid for FedEx’s service. The fact that Bezos didn’t build FedEx, yet relies upon FedEx for his company’s success, does not mean that Bezos owes his success to FedEx.

FedEx supplies an important input (package delivery) to Amazon. Yet even if it’s true that without this input, Amazon would go bankrupt, FedEx did not build Amazon. Jeff Bezos did. Amazon is the product of Bezos’ entrepreneurial vision. Had Bezos been less visionary, less willing to take risks or more lazy, Amazon would never have been created or would have failed. Nothing that FedEx does would have changed that.

The same is true for the government that builds roads and bridges. These structures might be very important, but their existence does not mean that government is responsible for business people’s successes.

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… is specially selected for this Earth Day; it’s from pages 104-105 of Pierre Desrochers’s and Hiroko Shimizu’s splendid 2012 book, The Locovore’s Dilemma: In Praise of the 10,000-Mile Diet (original emphasis; footnotes excluded; links added):

[T]hriving cities are not an environmental problem, but rather the best means to lighten humanity’s impact on nature.  To quote the applied scientists and policy analysts Peter W. Huber and Mark P. Mills, the skyscraper is “America’s great green gift to the planet” for it “packs more people onto less land, which leaves more wilderness undisturbed in other places, where the people aren’t …. The less real estate we occupy for economic gain,” they add, “the more we leave undisturbed the wilderness.  And the city, though profligate in its consumption of everything else, is very frugal with land.  The one thing your average New Yorker does not occupy is 40 acres and a mule.”

In the words of economist Edward L. Glaeser, “residing in a forest might seem to be a good way of showing one’s love of nature, but living in a concrete jungle is actually far more ecologically friendly … If you love nature, stay away from it.”

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Here’s a letter to Food Business News:

You report that the U.S. Department of Commerce is launching an “antidumping investigation” into U.S. sugar imports from Mexico (“D.O.C. initiates sugar dumping case against Mexico,” April 21).  The admitted purpose of this investigation is to protect American sugar producers from low-priced foreign sugar.  The deeper goal, of course, is to artificially bloat these producers’ revenues.

So, because Uncle Sam’s sugar-trade policy is really just corporate welfare, why go through the costly and confusing rigmarole of conducting such “investigations” as preludes to raising the punitive taxes imposed on Americans who buy imported sugar?  Why not dispense welfare more directly to sugar producers in the form of cash payments?  Let Uncle Sam annually cut each current U.S. sugar producer a check for the goo-gobs of extra money that he or she now gets as a result of being protected from foreign competition.  At least this way sugar prices in the U.S. would not be artificially distorted, the resources now used to produce sugar inefficiently in the U.S. would made available to produce other outputs efficiently, and the recipients of this corporate welfare would be more easily seen for what they really are: privileged parasites.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

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Below is the complete text of an e-mail that Barron’s Weekly’s Tom Donlan sent to me this morning.  Tom’s e-mail is inspired by the discussion going on here at the Cafe, and over at Steve Landsburg’s The Big Questions, on the social benefits (or not) of competition among high-frequency traders for market advantages.  (Tom’s e-mail appears here with his kind permission.)

Dear Don,

Here’s my contribution to the debate on “socially wasteful” competition:

It’s socially wasteful to spend much time debating whether a particular investment that creates competition is socially wasteful. As with most other allegations of market failure, nobody has sufficient knowledge to be sure of the results until after the new competitive investment re-arranges the marketplace in favor of the incumbents or the new entrant or both.

This is all the more true if the debate leads to a government regulation limiting such investments unless the would-be entrants prove to a commission that their entrance would serve the “public convenience and necessity” and that no incumbents in the process would be harmed. See, for example, the American experience in railroading, trucking, taxicabs, garbage collection, telegraph, telephone, radio, television, cable television, pharmaceuticals and so on, ad nauseam.

Regards,

Tom Donlan

Thomas G. Donlan
Editorial Page Editor
Barron’s Weekly

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Quotation of the Day…

by Don Boudreaux on April 21, 2014

in Politics

… is from page 335 of the 1996 Johns Hopkins University Press edition of H.L. Mencken’s 1956 collection, On Politics: A Carnival of Buncombe; specifically, it’s from Mencken’s November 2, 1936, article – published on the eve of the national election pitting incumbent president F.D.R. against challenger Alf Landon – “The Choice Tomorrow”:

For people in the mass soon grow used to anything, including even being swindled.  There comes a time when the patter of the quack becomes as natural and as indubitable to their ears as the texts of Holy Writ, and when that time comes it is a dreadful job debamboozling them.

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A Question

by Don Boudreaux on April 20, 2014

in Competition, Economics, Myths and Fallacies

Suppose that Jones stumbles upon the idea of pickling cucumbers.  It has never before been done.  Jones’s pickle company is spectacularly successful.  He soon invests $10 billion in a firm – land, factories, delivery trucks, worker training, brand-name development, the whole shebang.  At first Jones sees his investment pay handsome returns.  But Jones produces only one size pickle (large), one cut (whole), and one flavor (dill).  A few years later Smith decides to try his luck at selling pickles.  Smith invests a mere $6 billion and produces more varieties, cuts, and flavors.  Smith’s Pickle Co. is so successful that Jones’s firm goes bankrupt.  All but the scrap value of Jones’s firm is destroyed by Smith’s competitive entry into the pickle industry.

Is the destruction of the value of Jones’s firm a social cost caused by Smith’s entry into pickling?  Smith, we can be sure, did not – when he decided to enter the pickle industry – take account of (“internalize”) the prospective destruction of the capital value of Jones’s firm.  Is Smith’s entry into the pickle industry therefore socially wasteful?  Would your answer to this question be different if everything remained as described above except that the only difference between Smith’s pickles and Jones’s pickles is that Smith offers, not one or many, but two and only two flavors of pickles: dill and sweet?

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Warning: Wonky

Below the fold are yet further, very wonky reflections on Steve Landsburg’s claim that private investments by high-frequency traders to shave milliseconds off of the time required for price information to be transmitted from point A to point B are socially wasteful.  My argument – first advanced here – is that Steve has no good basis for his claim.

Read the full post →

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… is from page 96 of F. A. Hayek’s 1948 collection, Individualism and Economic Order; specifically, it’s from Hayek’s important 1946 article “The Meaning of Competition“:

The peculiar nature of the assumptions from which the theory of competitive equilibrium starts stands out very clearly if we ask which of the activities that are commonly designated by the verb “to compete” would still be possible if those conditions were all satisfied.  Perhaps it is worth recalling that, according to Dr. Johnson, competition is “the action of endeavouring to gain what another endeavours to gain at the same time.”  Now, how many of the devices adopted in ordinary life to that end would still be open to a seller in a market in which so-called “perfect competition” prevails?  I believe that the answer is exactly none.  Advertising, undercutting, and improving (“differentiating”) the goods or services produced are all excluded by definition – “perfect” competition means indeed the absence of all competitive activities.

In short, economists’ so-called “theory of perfect competition” is not at all or in any way a theory of competition.

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Warning: Wonky

A debate is now underway over at Steve Landsburg’s The Big Questions.  And this post here at the Cafe is the first of what will likely be two or more on this debate and the larger matter that it touches.  The debate involves the merits of high-frequency trading and private investments made by high-frequency traders to gain competitive advantages over each other.  Most of this post will be below the fold because it is, as I warn above, quite wonky.

First, though, a preface.  For the second time in as many weeks I find myself in disagreement with Steve Landsburg.  I do not exaggerate – or employ the following compliment as a disarming debate tactic – when I confess that such disagreement leaves me very uncomfortable.  Over the past 20 years, since first reading his The Armchair EconomistI’ve learned enormous amounts of economics from Steve.  And I continue to learn from him.  Steve has far more to teach me in a day than I could teach him in a lifetime.  Still, I believe that Steve’s suspicion that high-frequency share trading (“HFT”) and its associated investments are socially wasteful is unjustified.

Read the full post →

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Armen Alchian on Property Rights

by Don Boudreaux on April 19, 2014

in Economics, Property Rights, Video

In this video, Armen Alchian – one of history’s greatest economists – discusses, in this video from 2000, one of the many areas in which he made several signature contributions: property rights.  You legal scholars should be impressed that the first book Alchian mentions, and on which he heaps praise, is Frederick Pollock’s and F.W. Maitland’s classic and monumental 1898 study, The History of English Law before the Time of Edward I.

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