Government, Science, and Residual Claimancy: A Response

Yesterday, on The Mendenhall’s social media accounts, I shared an opinion piece by Jenny Beth Martin in The Hill on Elon Musk and his many government-subsidized endeavors. The editorial decries Musk’s constant receipt of ever more taxpayer dollars in support of unprofitable projects, and in posting it I endorsed its message. Thereafter, a commenter responded with an answer that, while wrong, was better thought out than many, and whereas I usually leave comment sections to readers or offer a brief note of response, I thought that this one merited a bit more of a reply for the ways in which it exemplifies common thinking on this subject. I won’t cite the author by name, as I don’t know him personally, but here is what he wrote:

 The trans-continental railroad required massive government subsidies. It transformed the American economy, made natural resource extraction a viable driver for a century plus, permitted the population of vast tracts of land, unlocked the agricultural might of the American heartland transformed commerce into make-anywhere/consume-anywhere, and made the trans-continental telegraph viable. I would argue that there are times where transformative technologies emerge that are not immediately viable economically, but that have so much potential, that is would be criminal for the government not to catalyze their birth. Many of the technologies that we all enjoy and even overlook: radio, television, magnetic storage, the internet, spread spectrum radio, encryption, plastics, adhesives, advanced magnets all emerged from massive government subsidies of research that was nominally driven by the military but that could readily have been predicted to have consumer and commercial application. Just because it’s a subsidy doesn’t mean it’s bad.”

I’ll start with the particular example the author gives. It’s true that the transcontinental railroads were publicly funded and required that funding to be constructed just as surely as Musk’s projects require government funding in order to be viable, but it’s not unambiguously clear that it was an engine of great prosperity, and there is indeed reason to doubt it. Richard White’s book on the transcontinentals shows them to be disconnected from American trade centers and, contrary to their lore, not the cause of the West’s economic prosperity, which was already well underway without them. The railroads, in fact, were argued for as a matter of military necessity because there was no apparent economic justification for them and credit markets viewed the project as too risky to finance.

Indeed, Ryan McMaken, in a great article that describes the railroads’ lack of economic justification, notes that

“The transcontinentals set the stage for the corruption and corporate capitalism that now defines the Gilded Age in the minds of many. While much of the American economy of that era was characterized by very free markets, the railroad markets west of Missouri were anything but. In the end, the railroads constituted a huge transfer of wealth from taxpayers, Indians, Mexicans, and more efficient enterprises who found themselves competing with these subsidized behemoths.

It was the same old story of using the state to socialize costs while privatizing profits. As one opposition Congressman declared in response to the Railroad Bill, the enterprise was “substantially a proposition to build this road … on Government credit without making [the railroads] the property of the Government when built. If there be profit, the corporations may take it; if there be loss, the Government must bear it.”

Bringing into full view how wasteful the project was, Mark A. Pribonic, in another valuable article, notes how the contractors building the Union Pacific and Central Pacific lines, which were supposed to meet, toiled to make them do anything but:

“It has been well noted in history that these two railroads were given land grants, low interest-rate loans, and direct subsidies by the federal government. The subsidies were graduated according to the difficulty of the terrain being traversed with $16,000 paid for construction over an easy grade and up to $48,000 for grades in the mountains. Additionally, changes to the Pacific Railroad Act allowed payment of subsidies for grading which could extend as far as 300 miles ahead of the tracks being laid.

… the perverseness caused by the subsidies was in full view. At that moment we were standing on the grade built by the Central Pacific and there less than fifty yards below was the grade built by the Union Pacific. The grades did not meet but ran parallel to each other and had continued that way for 250 miles — almost a year’s work. It was also noted in the guidebook that the work camps for the two groups were literally separated by a hillside.

… these two railroads had no intention of meeting. The purpose of grading and laying tracks was not to meet the demand for transcontinental passenger service, but simply to collect, risk-free of any market forces, the federal subsidies.”

Legislators, facing pressure of their own, would eventually have to force the contractors to make them meet at Promontory Point, Utah, to bring the fiasco to an end. Similar experiences were had in the northwest, where the great industrialist James Jerome Hill built his fortune in private railroad construction only after he purchased the required lands from state legislators and their friends who had, for years, used the public management of railroad construction to line their own pockets and keep the progress of construction at a crawl. The transcontinentals and the railroad debacles in Wisconsin and Minnesota, like so many government projects, appear to display all of the hallmark traits of the worst government boondoggles that we read of in the news and that we are constantly reassured are just one-off anecdotes with no broader lesson to be gleaned about the logic of government production.

Contrary to such palliatives, however, there is a deeper lesson to be learned here, and it is that publicly funded projects like these involve no system of residual claimancy. That is, no investors stand to profit or lose if they succeed or fail. The result is that government engages in a broad mix of investments that are chosen according to their political salability. A few of these may succeed and are endlessly heralded as proof of the need for government subsidies and controls, as if science and markets could never have done as much without the state’s involvement. Many, however, are buried and never revisited because they are utter failures. A defender of government science will likely then respond, “Yes, but private investors fail as well!” He is surely correct. The difference, however, is that when private investors play with their own money, they face the consequences. They are gambling on their own ideas, and a wealth of evidence shows us that betting on a claim sharpens people’s thinking on it and makes them more conscientious in their assertions, more cautious in undertaking impetuous endeavors. Government bureaucrats, by contrast, face little to no personal risks in the event of failure. Indeed, a much greater risk to them is not spending all of their annual budget and it being cut in the following year, which leads them to burn up their budgets on projects whether or not they have even a hope of being successful or valued by markets.

This is not to say that government science won’t succeed on occasion, but it does mean that we should expect it to succeed much less often, to often produce unneeded or unvalued products when it does succeed (see: Musk’s 800 mph “hyper loop” and his home battery product for guilt-ridden millionaires), and to bear little to no regard for the cost of succeeding. When a top official in the Office of Science and Technology Policy who served under both Bush and Clinton left office, he spoke of their efforts to try to anticipate ideas and “help” private business by figuring out where the next technological frontier lay before private firms did and providing this information to them. He said that in all of his years and countless projects, they never succeeded. He said that at every turn, by the time government found a new idea, private, profit-motivated firms already knew it and were pursuing it. This claim is consistent with a 2007 B.L.S. working paper that found the returns from R&D investment in the United States to be almost entirely driven by private investment and the returns to government R&D to be near zero!

The defender of government science will then say “But what about radio, television, plastics, etc., all produced by government?!” Aside from checking one’s history on the true origins of some of those products, we must remember that even government’s successes in science and technology, while not insignificant, are not necessarily produced in anything resembling a cost-effective way because government bureaucracy lacks a price system and can only approximate its own costs using private sector prices (what Richard Wagner rightly calls “parasitical pricing”). And the notion that valued products could not possibly have emerged in the absence of government programs not only engages in arbitrary theorizing about alternate histories but, crucially, fails to ask whether the prior absence of those products was, itself, an answer from the market that they were not sufficiently valued at that time to make their production worthwhile. A thousand miles of transcontinental railroad through uninhabited lands wasn’t a market failure; it was an answer: there’s no one here to demand train rides! In 2017, the market is saying, “No one needs to travel across the U.S. on an 800 mph train at the price that would be required to make it possible!” For government, however, with an unlimited reservoir of tax dollars and public debt, the market value of such a project becomes irrelevant and speechwriters in Washington start preparing politicians for bold proclamations about big nations needing to do big things, complete with all of the nationalistic grandeur that always accompanies the most egregious wastes of money.

What of the alleged shortcomings of private scientific investment? Our commenter above is echoing lines often heard in discussions on this subject—namely, that private investors cannot or will not invest in projects with long time horizons in which returns will only be realized many years in the future. This is a claim frequently heard from politicians, but in this as in other matters the claims of market failures to this effect are flatly untrue. Investors have very clever ways of dealing with long-horizon investments. The U.S. Treasury issues 30-year bonds and used to issue 50-year bonds; private corporations issue 100-year bonds; and British consols were perpetual bonds issued in 1751, the last of which were only fully redeemed in 2015. If the value is there to be had, long term debt and equity instruments can be crafted to capture it. When the project undertaken is clearly unprofitable, however, no private investor will wish to invest in it, and that is where the desire for political profits will step in to fill the void and promote reckless public investment.

There will always be glory-seeking politicians who want attention and campaign donations and will eagerly throw money at every flashy new idea under the sun (appealing to which is really Musk’s great talent) and there will always be rent-seeking businesspeople eager to receive the next handout on a project that, of course, they will declare to be in the public interest. They will plead that investors are just too short-sighted, ignorant, stupid, narrow-minded, self-seeking, luddite, and backwards to see their genius or that markets are flawed, inept institutions that don’t know how to recognize and elevate value when it arises.

Maybe you believe some part of that. But doesn’t it seem more likely that in light of government’s unlimited reservoir of funds to tax and borrow, some people will find ways of expropriating to themselves more than their ideas are really worth? And if we believe in limited government, shouldn’t the merit of ideas be proven and tested, as they are on markets, rather than simply assumed on the off-chance that one day, maybe, somehow, some way, they could be profitable? And, in the last case, in a moral sense, by what right does a collective arrogate to itself the power to expropriate the wealth of Americans and redistribute it to projects which consumers clearly do not value enough to pay for them voluntarily? Surely the arbitrary assumption that any invention, investment, product, or service which is not supported by markets is unsupported because the masses are incapable of recognizing value is itself evidence that statism, root and branch, begins and ends with the lowest estimation of individuals and individual rationality.

For further explorations of the relationship between government and science, see:

“Government and Science: A Dangerous Liaison?” by William N. Butos and Thomas J. McQuade

“Science as a Market Process” by Allan Walstad

“State Science, State Truth” by Wendy McElroy

 

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