The Progress of Liberty

I offer the twentieth part of my response to Mr. Jetton’s critique of my essay, “How to Privatize the Roads: The Mechanisms and Benefits of Road Privatization.”

Mr. Jetton writes:

“In part 9 on his blog Mr. Stolyarov responds, saying that private road owners would have an incentive to own higher quality roads because they have customers and want to make a profit. I agree to a degree. The primary target of my rhetorical question was budgets. Some people are going to spend a lot less money on their driveways than others simply because they can’t afford more. Similarly, some private road owners will likely spend less money on a road simply because they can’t afford more. More importantly, a private road owner might choose to spend less on road X because it also wants to spend on road Y. The customer or revenue aspect Mr. Stolyarov addresses is an important one. So in order to improve my question let’s consider apartments rather than driveways. Are they all in great shape and made for high durability? I say no, landlords (and renters) have budget constraints. The law of diminishing returns is also relevant to building higher quality roads. This law says a producer will increase marginal costs (MC) only if marginal revenues (MR) are larger. (It works with negative numbers, too, i.e. if MC < MR < 0.) There is a caveat to add in regard to road building (less so to road maintenance). MC is near-term and MR is long-term, which makes the producer’s business more risky.”

With regard to apartments, I agree with Mr. Jetton that not all are of great quality and that some fairly glaring budget constraints are evident in many apartment buildings.

And yet, I must ask Mr. Jetton and my other readers to compare the quality today of most privately built and owned apartments and most governmentally built and owned housing projects. Which kind of building typically exhibits less wear, better infrastructure, a longer expected functional lifespan, less crime, less vandalism, and more devotion to its upkeep on the part of its inhabitants? Like private apartments, private roads will not be perfect in all ways and will not meet the criteria of all drivers simultaneously. However, they will be an improvement of the same order that private apartments are improvements over government housing projects.

Moreover, many of the poorer-quality private apartments can be directly attributed to burdensome government regulations and restrictions, such as rent control, building codes, zoning laws, and union shop laws in certain metropolitan areas (including, as I last heard, downtown Chicago) that make it illegal to even carry furniture into a building without hiring a union member. These laws make it much costlier to renovate and keep buildings at a level of quality that is most suited to their owners’ and residents’ needs.

Granted, budgets are an important issue in any economic venture, but they are just as important for governments as they are for private individuals, and governments virtually always are far over the threshold for the kind of financial management that chronically courts disaster. Private entities not only deal with budget constraints more responsibly than governments; they can also accomplish much more given the same budget constraints.  

The law of diminishing returns indeed helps private entities make decisions regarding how much to improve their assets – and these decisions generally result in the best possible outcome for all parties involved. Government officials, however, face different benefit-cost comparisons. The benefit of the private entity is necessarily aligned with the benefit of its customers; if its customers do not like the service, they will not pay, and the private entity will not get money. The cost for the private entity is necessarily aligned with its own expenditures. It must pay for any expenses out of pocket or convince venture capitalists or donors to help them. For government officials, the benefit may well be detached from any consumer experiences. Rather, the officials may be seeking publicity, promotion, reelection, political power, or the advocacy of the ideology of government control. That, and not road quality or the economic returns from the road, may be what concerns them. Likewise, government officials’ costs are not incurred out of their own pockets, but rather out of the pockets of taxpayers. Government officials do think in terms of diminishing returns to them, but this makes them extremely likely to make decisions that conflict with what the law of diminishing returns would result in if road users were to be maximized.

Sincerely,
Gennady Stolyarov II

Editor-in-Chief, The Rational Argumentator: http://rationalargumentator.com

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