So far, the discussion – sparked by Michael Lewis’s Flash Boys – about the privately planned and financed construction of a tunnel in which a fiber cable is run from Chicago to New Jersey misses some important points. (I reach this assessment without having read everything that’s out there on the matter. It’s possible that I’ve missed some sterling blog posts or magazine essays on the matter.) The object of the tunnel’s builders is to shave a few milliseconds off of the time that it takes traders in New Jersey to get information on asset prices in Chicago.
(Paul Krugman, unsurprisingly, uses this project as yet another opportunity for him to perform as the hero of Upper East Side populistas – a species of populists who, ignorant of basic economics, gripe about the alleged predations of successful business people while on their way, not to NASCAR races, but to Milan for a few nights of opera at La Scala. The venues of the griping are more upscale for the populistas than they are for the populists, and that griping is lubricated with finer beverages, but the economic quality of the griping is the same: horrid.)
So here are some matters about this tunnel to consider.
- The tunnel is an example of privately constructed infrastructure. Even if you believe that this tunnel’s construction and use are socially wasteful, you cannot doubt that the tunnel and its fiber cable are hard evidence against the proposition that only government has the vision, incentive, and wherewithal to construct big and pricey physical pieces of infrastructure.
- One result of the tunnel and its fiber cable is to cause asset prices at point B to reflect more quickly than otherwise information about asset prices at point A. Prices are brought more closely into line with each other more rapidly. The law of one price holds in practice more closely to its theoretical ideal. The consequence is a pattern of prices across space and time that resembles more closely the results of perfect-information models. Curiously, many objections leveled by economists such as Joseph Stiglitz against real-world market processes is that in reality prices and information are not as perfect as they are in these economists’ favorite textbook models. This fiber-cable tunnel – by speeding market information more quickly across space – should be applauded by economists for shaving away from real-world markets some of the ‘imperfections’ that are frequently complained about and used to justify government intervention.
- In fact (as Tuesday’s Quotation of the Day noted) one of the finest features of the real-world market process is that it is an ongoing and decentralized orgy of experimentation (and resulting discovery). Private people spending their own money competing for market share, for profits, for access to consumer goods and services. No one possesses anything remotely close to perfect information. Therefore, the best way we can discover and use much more information than anyone could possibly come to learn through excogitation or isolated individual actions is to employ a system - or an “order” – that encourages countless individuals to act on their own pieces of information and hunches in competition and cooperation with countless other individuals. When each person does so with skin in the game – spending his or her own money (or money voluntarily entrusted to him or her by others) – prudence in acting on these individual pieces of information and hunches is encouraged. People are more prudent in these actions than they are when they are spending other people’s money.
The competitive process over time ‘selects’ and nourishes worthwhile projects as it identifies and starves wasteful projects. At no time is the array of existing projects perfect in any sense. And there’s no reason to believe that projects that are in fact worthwhile today will necessarily continue to be worthwhile tomorrow. So to identify after the fact – after the competitive process has performed one of its feats of discovery – a market action or a project that has failed is not to identify an example of some action or project that is wasteful in a larger sense. It is not to identify an action or project that could possibly have been known ahead of time by any mortal to be an action or project that should not have been allowed to move forward. That failed action or project was part of a competitive discovery process, funded and operated by individuals each with skin in the game.
The fiber-cable tunnel might or might not prove to be socially worthwhile. We simply do not know, and neither do Michael Lewis nor Paul Krugman. Of course it is costly – the resources used in it have alternative, valuable uses. But in our world of scarcity every decision is costly. (Cost is inseparable from choice.) It is a display of economic ignorance to object to the fiber-cable tunnel on the grounds that the resources used in it have other uses, or on the grounds that these resources have other uses that might prove later to have been more valuable than their use in the tunnel.
The best we can say about the fiber-cable tunnel now is that – because it is privately funded, built, and maintained for the purpose of enabling private market participants to enhance their prospects for earning profits in a competitive, largely private market – the resources used in the tunnel are more likely to prove to be productively used (that is, worth their costs) in this tunnel than in any other alternative ways known now to any mortal.