… is from page 86 of Robert Higgs’s important June 2004 Journal of Economic History paper, “Wartime Socialization of Investment: A Reassessment of U.S. Capital Formation in the 1940s” as this paper appears as Chapter 4 of Robert Higgs’s excellent 2006 collection, Depression, War, and Cold War (reference deleted; link added):
When private entrepreneurs make investments, they hazard their own property or the property that others have entrusted to them. Therefore, they must appraise carefully the prospect that the capital goods they purchase will give rise to an income stream sufficient to justify the present expense, the risks of loss, and the delays they anticipate before they can appropriate future income. Ultimately, the success of any private investment turns on the ability to use capital goods in a way that, directly or indirectly, consumers validate by purchasing final goods in the market.
Government officials follow different stars in making their investment decisions: Politics, ideology, and even personal vanity (“empire building”) have a much greater chance of carrying the day. As W.H. Hutt observed, “officials not only cannot have the necessary detailed awareness which market signals provide; but most important, they cannot be caused to lose property through error nor be rewarded by the acquisition of property through success.” For the government, no consumer-determined bottom line spells the difference between success and failure, because the government has the power to extract taxes from citizens in order to finance the investments initially and to subsidize money-losing projects afterward, in defiance of consumer preferences.
DBx: An earlier version of this paper by Higgs is available free-of-charge on-line here.