A Glimpse of What Privatized Roads Could Look Like

Posted by Wealth Wire - Tuesday, May 22nd, 2012


Is it possible to privatize roads?

This question often weighs heavily on those who see the competitive market as the best means of achieving a wide distribution of resources at the lowest cost to the consumer. Like money, roads have become crucial to facilitating transactions in a global economy marked by a deep division of labor. But since land isn’t terribly abundant, orthodox economics would suggest that roads are best left to the public sphere. Since neighborhood streets are often looked at as common property, the prospect of their privatization appears detrimental to commerce. These arguments are wrong on both counts. Not only is the state and its merry band of robbers incapable of producing as efficient of results as the private sector but privatized roads would be more capable of expatiating smoother, more expansive travel than their socialized counterparts.

To understand the inefficiency of the public sector, it becomes necessary to understand what wealth generation actually is. Success in the private sphere is equated with achieving a profit. Success in a government bureaucracy is fundamentally different and can be simple to gauge if using the right metric. If task completion is all that is necessary to assume that benefits outweigh costs, then any activity performed by government officials can be deemed a de facto success. With the U.S. unemployment rate at 8.1%, say Congress passes another fiscal stimulus with a price tag of $1 trillion that would instantly “get people back to work.” Millions are employed to dig holes around the country and then fill them back up for one year. The unemployment rate plummets and the President declares victory. Mission accomplished, right?

Even blue collared Joe Public would see such a “jobs” program was a waste and likely a political buy off. $1 trillion was just spent paying people to produce virtually nothing. Yet, the original goal to bring down the unemployment rate was technically met. It was a redeeming success by all accounts and worthy of a lavish vacation in Las Vegas. But it was clearly not an optimal use of resources.

In his recent speech before the Subcommittee on Domestic Monetary Policy and Technology Committee on Financial Services in Congress, economist Jeff Herberner defined what the production of wealth really entails:

It must be shown that resources have greater value when used to produce a good to satisfy the preferences of some people than when they are used to produce a different good to satisfy the preferences of other people. Production left to the market satisfies the profit-and-loss test of socially beneficial production.

Should a company fail to cover its costs by selling its wares, this constitutes a wasteful use of resources.  Businessmen don’t risk their capital to lose money. Profits signal that resources are being employed effectively and that buyers are content in their purchases. Losses serve as a warning to adjust production or face bankruptcy.

It is because the public sector doesn’t operate on a profit-and-loss basis that the private sector is necessarily more efficient. And it is in the operation and maintenance of roads and highways that government inefficiency is really highlighted.

Recently in Hawaii, private residents set about repairing a road in disarray after the state refused to do so citing a lack of funds. From CNN:

Their livelihood was being threatened, and they were tired of waiting for government help, so business owners and residents on Hawaii’s Kauai island pulled together and completed a $4 million repair job to a state park — for free.

Polihale State Park has been closed since severe flooding destroyed an access road to the park and damaged facilities in December.

The state Department of Land and Natural Resources had estimated that the damage would cost $4 million to fix, money the agency doesn’t have, according to a news release from department Chairwoman Laura Thielen.

Ivan Slack, co-owner of Napali Kayak, said his company relies solely on revenue from kayak tours and needs the state park to be open to operate. The company jumped in and donated resources because it knew that without the repairs, Napali Kayak would be in financial trouble.

So Slack, other business owners and residents made the decision not to sit on their hands and wait for state money that many expected would never come. Instead, they pulled together machinery and manpower and hit the ground running March 23

And after only eight days, all of the repairs were done, Pleas said. It was a shockingly quick fix to a problem that may have taken much longer if they waited for state money to funnel in.

This outcome shouldn’t be surprising considering the financial futures of many of these business owners was a stake. They pooled their resources together and financed the repairs in what was likely a faster rate of time than it would have taken the state government and its union buddies to accomplish. This instance was a glimpse at the possible achievements of road privatization.

Most considerable was the reluctance on the part of the Department of Land and Natural Resources to even attempt to fix the road. The profit incentive just wasn’t there. It isn’t hard to imagine that had the road and park itself been the private property of one or more owners, the repairs would have been completed with the expectation of summer tourism. Such a prospect certainly weighed heavily upon the profit-minded businessmen who voluntary invested their capital to ensure the road’s repair.

The lesson here is that the reason that public roads tend to be in such horrid shape is precisely because they are under the control of the public sector. “Fee for usage” charges hardly occur as roads and highways are presently socialized. The pricing mechanism that guides private sectors of the economy is unable to ensure adequate distribution of service since roads are looked at as “one size fits all.” Though it would be impossible to foresee what arrangements road privatization would lead to, speculation would suggest entrepreneurial innovation would take hold. Time-variance pricing may develop to charge more for peak traffic hours such as early morning rush hour.  This would cut down on congestion and help smooth out the everyday driver’s commute. San Francisco is already attempting this type of pricing arrangement with parking spaces. At the same time, the high price for peak usage incentivizes further innovation to cut costs and attract market share by competitors. As economist Robert P. Murphy points out:

Do you ever go to a movie theater — even for a popular film on opening night — and have someone try to squeeze into your seat? Of course not: the theater owners don’t allow patrons to crush each other. But that happens all the time with government subways.

Additionally, it isn’t hard to conceive of a network of private streets acting as a type joint-stock venture between various owners. Those who disagree with the ways roads are run are then able to sell their shares at any time.

Then there is always the question of whether a home owner can be trapped by an ill-hearted street owner who refuses to let him proceed past his front door. But as road privatization expert Walter Block explains:

Under present institutional arrangements, before you buy a house or any piece of property, you get title insurance. You want to be protected against anyone else claiming he really owns the house you just bought. Well, in an era of private roads, you would also buy access insurance. You wouldn’t want to be trapped on your own property. No one would buy any real estate at all unless he were sure that this sort of entrapment couldn’t happen to him. Indeed, it is in the financial interest of the owner not to do this, since he wants to attract, not repel, people from living adjacent to his road, so that he can make more profit from them.

Governments will always lack the allurement to creative invention and enterprising because they are sustained by forceful taxation. Why innovate to satisfy when the threat of being dragged off and locked in a cage brings in the same amount of revenue? And it is through the nature of taxation, also known as theft in the private sphere, that the wealth distributors of the state are unable to direct resources efficiently.

The reactionary disregard of privatized roads is a response conditioned by decades of state controlled highways.  Because the political class, whether at the state, local, or federal level, has had their grubby mitts on road maintenance for seemingly all of the industrialized era, it is hard for the public to imagine how the market and strict protections of private property would really provide for better, more efficient road organization. With today’s major advancements in technology, it isn’t the spontaneous order of the market that holds back the road and highway privatization; it is the government’s monopoly.

Private roads used to be prevalent in the history of many Western countries. There is no reason they shouldn’t be today.

*Post courtesy of James E. Miller at Miller's Genuine Draft. He is an editor and contributor to the Ludwig von Mises Institute.


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