Front Page Titles (by Subject) VIII: Planning vs. Choice - Literature of Liberty, January/March 1978, vol. 1, No. 1
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VIII: Planning vs. Choice - Leonard P. Liggio, Literature of Liberty, January/March 1978, vol. 1, No. 1 
Literature of Liberty: A Review of Contemporary Liberal Thought was published first by the Cato Institute (1978-1979) and later by the Institute for Humane Studies (1980-1982) under the editorial direction of Leonard P. Liggio.
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Planning vs. Choice
The concluding set of summaries surveys the nature and consequences of abridging human liberty through regulation in various spheres of human action (e.g., economics, education, and ecology). Regulation and centralized government planning are set in opposition to individual voluntary choice. The series ends with the benefits of private “planning” over public planning based on bureacracy and master plans. This set of summaries concretely recapitulates the contrast between spontaneous and nonspontaneous order and the conflicts in paradigms of human freedom.
Origins of Planning
“Regulation in America: A Review Article.” Business History Review (USA), 49 (1975): 159–183.
McCraw's survey studies economic regulation by state and federal commissions in the extensive literature of four disciplines—history, political science, law, and economics. The collection proposes a confusing number of alternative explanations for the regulatory behavior. These studies call into question cherished views of business-government relations and the true nature and actual results of Progressive and New Deal reforms, as well as the wisdom and efficacy of planned interference with market forces by the state regulators. The ill-defined notion of “public interest” so often invoked by regulators serves as no more than a slippery touchstone to guide their interventions.
The “public interest” model (which stressed the benign role and public-spirited motivation of the regulatory agencies) fails to adequately characterize all of American regulation. Similarly, the “capture” thesis (proposed by socialist Gabriel Kolko and various free market economists of the “Chicago school,” who claimed that the regulators were the agents of the “regulated”), is deemed inadequate.
Despite the vast literature on regulation, scholars still have only a vague idea of what went on inside the commissions. Their puzzlement arises from the complex interplay of contending interest groups, the relationships among commissioners and career staff members, and especially the connections between regulatory policy and perceived bureaucratic imperatives.
Commissions seldom followed paths that would diminish their own power or importance. Instead they pursued policies that would promote their institutional growth and survival. The inconsistent regulatory policies over the last 100 years suggest that the commissions' highest loyalties sometimes were neither to the “public interest” nor to the regulated industry (as the capture thesis would hold), but to regulation itself. Regulation was the regulators' job, and they did not intend to close up shop. Regulation promoted as an end in itself begot an independent social force which may have had substantial cumulative influence. But this area remains largely unexplored by scholars and may require concerted interdisciplinary research.
“The Expanding Public Sector: Wagner Squared.” Public Choice (USA), 31 (1977): 147–150.
Morris Beck in a recent article, “The Expanding Public Sector: Some Contrary Evidence,” National Tax Journal 39 (1976): 15–21, claims that the real growth of the American public sector adds up to less than the public sector's 31% share of gross domestic product would imply. But contrary to Beck's claim that, “in real terms the era of public sector growth in most developed economies may have ended,” the actual data suggest that the public sector runs out of control.
During the last 20 years, the jump in the salaries of civil servants caused most of the rise in the government price index. However, civil servants were not earning less than nongovernment workers in 1950. How then, do we explain the relative rise in government salaries?
We can find the answer in the political power of civil servants themselves. At first, when bureaucracies are relatively small, bureaucrats employ their efforts and votes to expand the physical size of the public sector. This policy continued until the early 1950s. However, once bureaucrats reach some critical size, they then use the political power (i.e., votes) to vote themselves higher salaries. While the share of the population employed in the public sector may be reaching a limit, this does not imply that the government budget itself is reaching a maximum.
Insofar as government spending continues to expand without increasing productivity in the public sector, we will witness a mixture of lower wages in the private sector, inflation, and unemployment where there exist downward wage rigidities. Hence we can partially explain the “stagflation” of the 1970s by the growth of the public sector salaries relative to private sector salaries.
Prediction and Control
“Technology Assessment from the Stance of a Medieval Historian” (Presidential Address to the American Historical Association). The American Historical Review (USA), 79 (1974): 1-13.
In 1972, a new federal bureau, the Office of Technology Assessment was established to advise Congress on legislative problems related to new technology and its probable impact. This is a political response to such crises as energy, population, and food supply. Government systems analysts will assess proposed technological change chiefly by cost-benefit calculations. Unfortunately, such a quantitative approach fails to ask about wider social and other immeasurable costs and benefits. The limits of knowledge or ignorance of history vitiates this approach which is blind to the complexity and unforeseeable ramifications of the effects of technological changes in the past.
To illustrate the limitations of government central planning and predictions in assessing technology, we can survey a few Western medieval innovations and their unforeseeable impacts. Even the most prescient medieval government futurologist could not predict certain developments. For example, brandy-alcohol was at first welcomed as a boon, a medicinal aquavitae without forebodings about its social harm. Shortsighted cost-benefit analysis, based on limited knowledge, would have woefully misassessed the new medieval crossbow, longbow, artillery, and gunpowder weapons. Who, also, could foresee that chimney flues by providing separate private sleeping and living rooms would promote such seemingly remote and unrelated consequences as the art of love and the spirit of individualism with all of its enormous social impact? How far into the future can the sharpest eye look and trace the sequence that leads in intricate steps from the invention of the spinning wheel to linen rags and paper, which in turn allowed cheaply produced books and the disturbing consequences of disseminating radical ideas and creating social unrest and revolution among the masses?
Other case studies such as the invention of eyeglasses and knit textiles (promoting infant longevity which led to the cult of children) show the limits of central planning and forecasting. Technology assessment must be based not simply on measurable elements but more so on the imponderables and unexpected. Systems analysis must become cultural analysis with a deep sense of history and its sense of the unexpected.
“Corporate Planning versus Government Planning.” Public Interest (USA), 46 (1977): 59–72.
Advocates of national economic planning who equate corporate planning with government planning are misleading. One can recognize a fundamental distinction between members of a society forecasting and reacting to the future, on the one hand, and the government of that society trying to regulate or to control it, on the other. Further distinctions arise between the two types of planning. Usually a restricted group, notably the company's officers, employees, and shareholders feel the consequences of errors in corporate planning. However, everyone in the society, both in their roles as taxpayers and as consumers, suffers from errors in government planning. Also, the information and analysis of corporate planning, which typically focus on individual sectors of the economy, are far less formidable than government planning which, of necessity, must encompass the entire economy.
We can also study the historical record to evaluate the planning experience in private corporations. Surveys of the growth of corporate planning conclude that relatively few companies have in fact developed effective planning operations although many have tried in vain. Many of the same corporate constraints that have limited the success of business planning will also frustrate efforts to expand the scope and success of government planning. Thus, not only have advocates of national economic planning erred in equating corporate planning with government planning, they have also considerably overestimated the actual success of planning efforts within the private sphere.
Long-range planning efforts within private corporations have achieved very mixed results. But the government, with formal long-range planning systems, has experienced even more dismal results. In particular, when Lyndon Johnson introduced the Planning, Programming, and Budgeting System (PPBS) in 1965, some people hailed it as “a very new and very revolutionary” system. It soon proved abortive and subsequently the White House dismantled it. Given the government's failure to implement longrange planning with regard to its own activities, how can we reasonably expect it to plan the activities of an entire economy?
The crux of the national economic planning debate rests not on planning versus no planning but rather on who should plan: the government, or all the participants in the economic process?
“Economics, Economists and Economic Policy: Modern American Experiences.” History of Political Economy (USA), 9 (1977): 48–88.
What do working economists serving as government policy advisers and analysts actually do?
The results of interviewing some 60 government economists (most of whom were academicians on temporary government assignment), debunk a myth. The typical government economist does not live up to the glamorized image of a high powered technician employing the panoply of sophisticated tools of modern economic science to grind out welfare-maximizing policies divorced from political pressures. The interviews asked: What does the government economist do? Under what circumstances? For what specific audiences? Pressured by what constraints? With what economic methods? And with what observable impact?
Not unexpectedly, the interviewer found that the government economists did not devote most of their time to calm academic meditation on the larger questions of the universe, nor to constructing elegant econometric models. Instead, these economists tend to become “quick-draw specialists.” The scant time at their disposal creates their major problem: insufficient time to think through the policies they must devise. Deadlines of only a few hours constantly loom over their hastily scribbled memos and pronouncements. They find little time to analyze existing data on any subject; it is quixotic to dream that one can add anything new through original research. Living off their intellectual capital, government economists go stale after a very few years.
In addition, the constraints of working within the existing career bureaucracy and of hewing to party lines to keep their politicized jobs attenuate their impact. To maintain their “credibility” for the major battles, many accept “small” compromises of their integrity on issues they judge unimportant. When the compromises demanded became too enormous, some have no alternative but to quit.
What kinds of theoretical tools did the interviewed economists wield in their government jobs? Rarely did they employ anything more sophisticated than basic economic principles. More elegant models and techniques were simply not usable for the daily rough and ready decisions; they would have been unsuitable for advising their primary audience: noneconomists and politicians who demanded simplified, elementary explanations and policies. They did not consider this a great defect, however, since even elementary economics has much to teach such noneconomists.
Such is the demythologized governmental world and its limits within which the government economist labors. A moral is permissible for conjecture on how to improve governmental decision making, or the advising of decision makers. We suspect we might increase social welfare by “minimizing” the number and scope of governmental activities upon which government economists expend their scanty hours.
Useless Usury Laws
“Usury: Utilitarian or Useless.” Florida State University Law Review (USA), 3 (1975): 169–235.
Debtors pay the direct and indirect costs for complex usury statutes. To determine this, we can survey the current system of credit regulations, including the historical development of modern credit transactions, the escalated use of credit cards, and the contemporary hodgepodge of legislative and judicial exceptions to the usury laws. We can also examine the methods used to avoid usury laws.
Current usury laws constrict certain types of credit. Supporters of these regulations have often based their arguments on myopic views of society and its needs. They have devised hypothetical arguments to justify a system of ad hoc regulations detrimental to the financial and social structure. Neither the educationally and economically deprived (the supposed beneficiaries of protective or low-rate usury laws) nor those sophisticated enough to avoid the pitfalls, benefit from the present arrangements.
One can develop five models of a credit system: (1) organized inaction (a stopgap arrangement that ideally would unify all rate ceilings, rates, exceptions, and complexities into a single comprehensive statute); (2) loan sharking plus (a system that traditional usury laws have stimulated rather than restricted); (3) public utility (increased regulation would be a drastic error because of the constant tug of war between consumer groups for lower rates and industry for higher rates); (4) free market system (which opts for maximum competition); and (5) compromise (which would allow parties to agree but would give courts retentive power to declare contracts usurious if excessively harsh).
The free market model would best fit the needs of the general population. The goal should be to stimulate competition among lenders. All institutions should be free to enter and compete in the lending area with little government intervention. The present system should be revamped in the direction of the free market model.
“Industrial Mobilization in World War I: The Prussian Army and the Aircraft Industry.” Journal of Economic History (USA), 37 (1977): 26–51.
The Imperial German wartime experience with mobilizing the aircraft industry reveals how wartime controls distort the nature of the economic system. One control inevitably leads to the need of others. The final step is complete nationalization if we pursue the full logic of intervention.
During World War I the Prussian army increasingly intervened in controlling the nascent German aircraft industry to guarantee an adequate supply of military aircraft. Even before the war, the Prussian Army effectively monopolized the aviation consumer market by strangling sport aviation to assure the industry's concentration on military planes. This military monopoly allowed the Army to control competition within the industry and to expand more stringent controls for the construction and type of military planes.
From the beginning of the war, the German government substituted non-market controls for market price signals. Attempts to mobilize the industry laid bare the scarcity of human and nonhuman resources as well as the competing claims of other wartime uses of the same resources.
In its attempt to hold prices down and preserve a pool of skilled labor within the aircraft industry, the Prussian War Ministry found itself interfering in management-labor relations and mandating wage increases. Paradoxically, it also found itself compelled to ratify price increases even while aiming at preventing these increases. Such interference in labor relations escalated state involvement in economic activity generally. Efforts to control raw material prices for aircraft were doomed because the relevant department was controlled by the same industrialists who stood to gain from rising raw material prices.
Officially, the War Ministry's policy had been to free competition among producers as a means of holding down prices. But successive wartime interventions led to forced syndication (Zwangssyndizierung) of the entire industry. Controls were piled on controls, but ambivalence in the War Ministry gave no coherence to these controls. Despite the success of the army's mobilization of the aircraft industry, military regulation of the German economy in general was inefficient.
The illogic and contradictions of the controls is illustrated in the wartime Euler-Siegert debate. One “gadfly” manufacturer, August Euler, refused to enter the government-sponsored industry syndicate because it was inefficient, illegal, and violated free enterprise. Euler was denied military contracts for his defiance. The military inspector, Major Siegert, argued that “law is powerful, necessity is stronger.”
In the Euler-Siegert controversy, the entrepreneur Euler correctly pointed out that the government's military plans, which spawned an unwieldy number of bureaus, were impotent to remedy the underlying shortages of men and material. On the other hand, Major Siegert's militarist position insisted that, given the previous government intervention, the existing Army systems of controls and their consequent shortages required mandatory rationing and allocation. Otherwise Germany could not continue its war production.
The Army, given the logic of intervention, could not abandon its economic controls. However, it failed to take the final logical step of nationalizing the German economy because of restraining economic and social attitudes. The Army was caught on the horns of a dilemma that it could not solve in the context of contradictory interventionist and noninterventionist sentiment within Imperial Germany.
“Financing Government Through Monetary Expansion and Inflation.” Federal Reserve Bank of St. Louis Review (USA), 57 (1975): 15–23.
Inflation or monetary expansion primarily benefits the Federal Government. Monetary expansion, whether or not accompanied by actual rises in the price level, taxes the wealth of money holders. Such inflation dilutes the purchasing power of money.
Unanticipated price rises further reduce the real value of monetary assets and liabilities. This activity transfers wealth from net monetary creditors to net monetary debtors. Inflation decreases the real value of government debt and thus transfers wealth from bondholders and money holders to taxpayers and to beneficiaries of government spending programs. Correct anticipation of inflation would tend to reduce such transfers. Furthermore, reforms such as (a) removing the ban against paying interest on demand deposits (checking accounts), and (b) indexing income taxes and security prices to reflect the workings of inflation would reduce the degree to which inflation and monetary expansion contribute to government finance.
Monetary expansion and inflation, like income and other taxes, redistribute purchasing power from the private sector to the public sector (government spending) and among some privileged members of the private sector. Unlike other taxes, however, inflation is not legislated specifically, but results from the actions of the Federal Reserve.
“The Relevance of The Wealth of Nations to Contemporary Economic Policy.” Scottish Journal of Political Economy 23 (1976): 171–182.
A new synthesis of areas of economic policy, (e.g., commercial policy, public finance, and the general role of governmental intervention in economic life), which had been influenced by The Wealth of Nations now varies considerably from Adam Smith's classic. The synthesis comes both from the “theory of second best” (from which one invariably concludes that we need governmental intervention) and from “first best” considerations (once one assumes that “externalities” and “public goods” are all-pervasive). The shapers of the new synthesis adopt a philosophical rationale: the market is guilty until proven innocent; while government is never guilty, however criminally or irresponsibly particular governments may have behaved.
By design, much of the terminology and conceptualization in public finance justifies the extension of the role of government, e.g., “merit goods.” But once the state reaches the commanding dimensions which it does in some countries, the market, as a basis for valuing factors used by the government, ceases to have any real meaning. Thus the question of evaluating the efficiency of taxation and public expenditure, and of controlling their magnitude is beyond the bounds of Adam Smith's concept of public finance.
In the sphere of commercial policy, mercantilism has again emerged. It has two aspects. One—the naive—relates to the establishment of a favorable balance of trade. The other—sophisticated—forms the policy to develop an export surplus in “technologically sophisticated” products. We witness the contemporary tendency to replace the mercantilist fallacy (that wealth consists of gold and silver) with the neomercantilist fallacy (that it consists in the possession of high technology). This suggests one of the main reasons why the leading industrial countries have moved a long way toward freedom of trade in industrial but not in agricultural products. These countries recognize that trade interventions have become crude methods to influence resource allocation compared with more effective fiscal alternatives. Moreover, because of its “public goods” character, technological superiority holds the promise of monopoly gains. To maximize these gains requires the largest negotiable market area of ostensibly free competition.
Economists have remained backward in evaluating the evidence on the actual economic effects of governmental economic regulation. This is because (1) the economist of today, in contrast to Adam Smith, has a vested interest in the extension of power of the state—even if only as a convenient reference point for teaching his subject; (2) economists have come to prefer the methods of governmental decision making to those of the individual operating in a competitive market; (3) economists assume better educated (than in Smith's time) public servants upgrade the quality of governmental decision making.
From these considerations, Adam Smith's views against government intervention are not likely to command much of a hearing nowadays.
“From Universalism to Usurpation: An Essay on the Antecedents to Compulsory School Attendance Legislation.” Review of Educational Research (USA), 47 (1977): 499–530.
A number of conditions made possible the passage of compulsory school attendance legislation. We can explore those structural conditions. We do not investigate the actual political maneuvering involved in passing the specific legislation. We rather pull together analyses of these underlying conditions to show the economic, social, and educational bases for the legislation.
The movement toward compulsory school attendance involved three stages. Schooling had become universal by the first half of the nineteenth century. The prevailing attitude in the colonies and the postrevolutionary era supported self-development. Increasingly that tended to mean schooling. Literacy rates for adult males generally ranged from 70%-100%. Enrollment of students between the ages of 5 to 16 exceeded 90% in many areas. In other areas the percentage enrolled at any given time dipped below 90%. However, this reflected students rotating in and out, rather than complete education for some and none for others. (Many educators today look at open-entry and open-exit as a desirable but utopian goal.) A diverse group of individual teachers and schools provided the schooling.
By the middle of the nineteenth century, states were becoming increasingly involved in the support of education. Many teachers welcomed this state involvement since it freed them from the needs to attract students and collect fees. Over a period of time the public schools' competitive edge due to tax support allowed them to prevail over most of their private rivals. We can attribute the triumph of the public schools to the working of a number of interest groups. Many upper and middle income people feared the immigrant, Catholic, and increasingly urban groups of low income people. They wanted to impose middle class American values. Educational bureaucrats wanted to build their organizations. Teachers were freed from the demands of the market. As a result of compulsory school legislation, parents and students no longer could choose where to go to school, only whether and how long.
Traditional historians have seen compulsory school legislation as supporting and supplementing child labor laws. This is clearly false. Schools were overcrowded; laws frequently had no enforcement mechanisms; and when they did, officers rarely used those mechanisms. Rather the laws reflected America's mood, which had shifted to one of compelling goodness. Also the elites used the legislation as a symbolic tool to control the problems of social change. A new majoritarian mood stood for molding low income students into a form preferred by the elites. They feared an impending loss of their status and identities. Of course this could not have occurred unless the public school system had been in place. Additionally, the elites had come to view private schools as narrow and discriminating.
It is clear that a market mechanism in education was working and was developing along lines that we consider desirable and even utopian today. But that was not understood. An enormous increase in the need for schooling was taking place. Elite groups used this along with an ideological base to provide schooling for their children at public expense while shaping low income and immigrant children into a preferred mold.
Planning in Nonprofit Agencies
“L'Université, organisme à but non lucratif” (“The University as a Nonprofit Organization”). Revue d'économie politique (France), 87 (1977): 574–590.
We cannot trace the distinction between nonmarket organizations (such as nonprofit universities) and commercial, profit making enterprises to the different traits of individuals within each organization. Rather, the differing constraints or “rules of the game” motivate the individuals involved in distinct ways. Between market and nonmarket institutions, significantly different systems of sanctions and rewards operate. A priori, we can predict that different results will flow from such different frameworks.
Those universities where nobody has an explicit right to the school's budget surplus, are nonprofit organizations. When, moreover, a nonprofit agency like a governmental university wields a certain measure of monopoly power, a surplus arises that can either dissipate in inefficiencies or show up in nonmonetary compensations. Many consequences follow from the curtailed competition in higher education. In general, Adam Smith's words still deliver a contemporary ring. They describe the decline in educational standards when teachers lack exposure to the discipline of consumer demand and market signals.
In some universities the teacher is prohibited from receiving any honorary or fee from his pupils, and his salary constitutes the whole of the revenue which he derives from his office. His interest is, in this case, set directly in opposition to his duty as it is possible to set it.... It is the interest of every man to live as much at his ease as he can; and if his emoluments are to be precisely the same, whether he does, or does not perform some very laborious duty, it is certainly his interest, at least as interest is vulgarly understood, either to neglect it altogether, or if he is subject to some authority which will not suffer him to do this, to perform it in as careless and slovenly manner as that authority will permit. If he is naturally active and a lover of labour, it is his interest to employ that activity in any way, from which he can derive some advantage, rather than in the performance of his duty, from which he can derive none.
If the authority to which he is subject resides in the body corporate, the college, or university, of which he himself is a member, and in which the greater part of the other members are, like himself persons who either are, or ought to be, teachers; they are likely to make a common cause, to be all very indulgent to one another, and every man to consent that his neighbor may neglect his duty provided he himself is allowed to neglect his own.
(The Wealth of Nations, Book V, part 3, article 2.)
More particularly, lack of competition in higher education arises when: (1) government restricts entry in the “industry”; (2) the consumer ignores the quality of educational services; and (3) the central planner has no way to evaluate the output and efficiency. of the education “producers” (i.e., the university teachers).
In nonmarket politicized schools, a “discretionary budget” exists, and the thorny question is to determine who appropriates it. Government bureaucrats succeed in appropriating a sizeable chunk. They transform this financial leverage into more power for themselves. In effect, they directly control and allocate resources among the different programs of a university, a task they have assumed more regularly during the past 15 years.
To the extent that government contents itself with indirect control of university performance, members of the university community take a larger share of the discretionary surplus. Since they exert little effective control over the “production” or teaching function, university administrators must share much of their discretionary budget with the relatively autonomous faculty. The right of academic freedom allows university teachers to organize the production of education around their own interests; they thereby appropriate in nonmonetary compensation a large part of the university's discretionary budget.
Professors not only dominate the university, they also dominate their “clients,” the students, as “consumers.” Students, who often do not pay directly for their education, exert little consumer power over decisions. In fact, education seems a unique economic sector where the consumer has to satisfy minimum requirements in order to continue buying. In this nonmarket situation, students have little consumer sovereignty and have little means to gain real power.
In short, the nonmarket aspect of most universities allows the teaching faculty to appropriate a large share of the discretionary budget and thereby advance its own self-interest. Like doctors in a nonprofit hospital, professors have no interest in making the institution efficient, that is, to minimize costs or adapt their services to the consumers' needs. The distinct system of nonmarket sanctions and rewards does not encourage agents in the more efficient ways of market forces such as consumer demand.
Private Capital and Education
“Imperfect Capital Markets as Barriers to Education.” Atlantic Economic Journal (USA), 5 (1977): 32–42.
Economists and laymen often assume that private capital markets are imperfect suppliers of loans for education. A parallel implicit presumption is that government-funded loans can correct this alleged imperfection in the market. Both views are empirically unverified hypotheses.
In order to support these hypotheses, one must first demonstrate that private market rates of interest for educational loans are excessively high (relative to some competitive rate), and second, that the government is able to charge lower rates on some economically justifiable basis. But even if we assume that private markets are imperfect in this area, it is doubtful that government could improve on the performance of the private sector, given the high and growing cost of supplying student loans in the public sector.
The high cost of student loans results mostly from the high risk of nonrepayment and default in a group that offers no collateral for their loans. Usually individuals who are too young to have established a reliable credit rating make up this group. Because the government does not cover such default costs out of the revenues from its loan program, it understates the actual costs of governmental student loans. To find the true costs of governmental student loans, the hidden shadow rate, we must calculate the rate the government would have to charge to cover all costs including the costs of default plus a normal return. When calculated, the shadow rate of interest approximates 17% for government loans. To be an improvement over the private market rate, private loans would have to exceed rates of 17%. In fact, by more carefully screening loan applicants, the private market probably could underbid by several percentage points the government rate of 17%.
Why then does the private market not provide student loans more frequently? Two reasons appear relevant. First, the government under prices its loans since it transfers the costs of defaults from the class of borrowers to the general taxpayers. Second, it may very well be that students find returns to education in general not sufficiently high to warrant borrowing at even these lower market rates.
The private market, then, is not imperfect in the sense that public policy can improve its operation. Rather it is inoperative because the supply curve for student loans rises so high that it never intersects the demand curve in the positive quadrant. The implication is that recent governmental subsidies to education in the form of low priced student loans has probably resulted in a misallocation of resources.
Choice and Spontaneous Order
“The Lighthouse in Economics.” The Journal of Law and Economics 17 (1974): 357–376.
Economists such as John Stuart Mill and Paul Samuelson have used the lighthouse as a symbol and example of an economic good that can only be provided by government planning rather than private choice and enterprise. They contend that a private company would find it unprofitable to build and maintain a lighthouse because it could not secure fees from those ships which benefit from the lighthouse. A detailed historical investigation of the British lighthouse system refutes this antimarket symbolism for the lighthouse.
On the contrary, if general taxation supported lighthouses as a substitute for light dues, government cost-efficiency would reduce the efficiency of the service. The general taxpayer is less interested in high quality lighthouse service than the shipowners, underwriters, and shippers who on the free market actually pay for additional services.
Economists need a comprehensive study of lighthouse finance and administration. Such a study would show the richness of social alternatives to state ownership or state administration of economic goods and services.
The early history of the British lighthouse service shows that, contrary to the belief of many economists, private enterprise can provide profitable lighthouses. In the early sixteenth century, shipowners and shippers could petition the King to allow a private entrepreneur to construct a lighthouse and to levy a specified toll on ships benefiting from it. The lighthouses were built, operated, financed, and owned by private individuals who could sell or dispose of them by bequest. The role of government was limited to enforcing property rights in the lighthouse. Agents for the lighthouses collected the charges at the ports. The problem of collection was no different for them than for other suppliers of goods and services to the shipowner. The lighthouse owners' property rights were limited only by price controls. The most celebrated British lighthouse, the Eddystone on a reef of rocks some 14 miles offshore from Plymouth, testifies dramatically to show how private interests promote “public” ends despite the opposition of storms and government agencies.
In the 1830s the provision of lighthouses in England and Wales was entrusted to Trinity House, a private agency with public duties. But tolls levied on ships continued to finance the service. The nonmarket system favored by Samuelson, financed by the government out of general taxation, has never been tried in Britain.
STUDIES IN ECONOMICTHEORY