Bryan Caplan  

EconLog Book Club: For a New Liberty, Chapter 11

PRINT
Linkfest... Open Source Forecasting...
Summary
In this chapter, Rothbard advocates the abolition of publicly-owned streets and roads:
Abolition of the public sector means, of course, that all pieces of land, all land areas, including streets and roads, would be owned privately, by individuals, corporations, cooperatives, or any other voluntary group ings of individuals and capital.
He begins by explaining that in a libertarian society, street-owners would take over many of the functions that governments now perform: security, cleaning, lighting, enforcing traffic rules, etc.  While it would be within owners' rights to impose any sort of crazy rule, market forces strongly encourage a high degree of uniformity:
Wouldn't some owners designate red for "stop," others green or blue, etc.? Wouldn't some roads be used on the right- hand side and others on the left? Such questions are absurd. Obviously, it would be to the interest of all road owners to have uniform rules in these matters, so that road traffic could mesh smoothly and without difficulty. Any maverick road owner who insisted on a left- hand drive or green for "stop" instead of "go" would soon find himself with numerous accidents, and the disappearance of customers and users.
He then accuses government of inefficiently subsidizing the quantity of highways while inefficiently underpricing their use.  The problem is especially acute, he notes, during peak times:
The fact that gasoline taxes are paid per mile regardless of the road means that the more highly demanded urban streets and highways are facing a situation where the price charged is far below the free-market price. The result is enormous and aggravated traffic congestion on the heavily traveled streets and roads, especially in rush hours, and a virtually unused network of roads in rural areas.
Wouldn't a giant network of toll roads be a major inconvenience?  Not so - Rothbard points to many now-familiar technological advances that take the pain out of toll collection.

The chapter ends with a brief discussion of the history of private roads in Britain and the U.S.

Critical Comments
This has always struck me as the least convincing chapter in the book.  Yes, Rothbard makes many points that most economists would accept: It's inefficient for government to heavily subsidize roads, then let people use them whenever they like at zero marginal cost. But he doesn't offer any remotely practical plan to privatize existing roads, much less explain how privatization would avoid severe monopoly problems.  (I propose one Rube Goldberg solution here, though even I have serious doubts about it).

Admittedly, if government had never gotten into the road business, the road network would have grown organically with the rest of the economy, and market forces would have kept monopoly problems in check.  Before people built homes, they would have made sure they weren't at the mercy of a single road supplier.  At this point, unfortunately, the owner of a privatized road would often be in a position to extract virtually the entire value of the surrounding real estate (minus a mountain of deadweight costs).

Of course, if new entry were feasible at a reasonable expense, any monopoly problems would only be temporary.  Indeed, the fear of potential competition might lead road owners to charge competitive prices from the get-go.  But Rothbard doesn't even mention the standard reason for skepticism about new road construction: The hold-out problem.  Stripped of the power of eminent domain, how could a private corporation build a major new highway in a developed area? 

I am aware, of course, that some libertarians argue that the hold-out problem has been greatly oversold.  Maybe they're right, but it's still odd for Rothbard to completely ignore the objection. 


Comments and Sharing


CATEGORIES: Book Club
Follow Bryan Caplan on Twitter



COMMENTS (20 to date)
Mark writes:

Bryan,

One major problem with private roads is that they can be essentially public goods. The cost of restricting access to non-payers is very high and therefore non-excludable. In fact, we did have private roads at one time in this country; Little River Turnpike near you is one example. What they soon came to realize, and one of the reasons it turned public (at least from what I remember years ago), is that the cost of preventing non-paying users became too great. People simply entered the road beyond the view of toll booths.

Surely we have better technology to observe free riders, but catching and prosecuting them is prohibitively costly.

Felix writes:

Obviously, it would be to the interest of all road owners to have uniform rules in these matters,...

That's not at all obvious. Personal experience says that the guy running a road would think last and least about spending time and energy making his road "uniform" with others. He'd be spending his time making his road unique, if for no other reason than pride. But also to make it less able to be substituted for. And, he'd spend a lot of time trying to take over neighboring roads to establish a larger monopoly. Making his road uniform with his neighbor's would undermine this goal.

Selfreferencing writes:

Roderick Long has argued that you can have public property in a libertarian society, that for instance, many businesses provided public roads just to increase traffic flow in centuries past.

Sergei writes:

Personal experience says that the guy running a road would think last and least about spending time and energy making his road "uniform" with others.

So each computer manufacturer uses unique incompatible components? Computer parts follow literally thousands of de facto standards that all work together and that companies privately agreed upon. The same is true with transactions standards - most companies just use Visa and MasterCard. Roads are no different.

By the way, for those interested, here's Walter Block on privatizing roads.

Zac writes:

Government road monopolies are an important source of wealth and influence. The political class will not give up their control. There is no other reason for government control of roads: the arguments for government ownership of roads have been thoroughly debunked over the last 40 or so years.

As is usually the case with Rothbard, he is good with the ideas but sloppy with his proposal for implementation. A better, and classic, discussion can be found in Machinery of Freedom (Ch. 15 "Sell the Streets"). An even better, and recent, discussion can be found in the Independent Institute's Street Smart (2007, includes chapters from the best thinker on private roads, Bruce Benson).

Robert Johnson writes:

With many small owners of road section, the transaction costs become very high for each motorist to exchange value with each owner. Though the problem is not insurmountable it does erode efficiency.

Natural choke points (for example when there are a limited number of practical bridge sites) may have interesting effects. To my mind, choke points are like naturally occurring market failures in the form of local monopolies.

Is eminent domain necessary? If I wish to build a new road, and I begin buying land, the transaction costs can make it impractical to simply unwind deals and reroute the road should a single landowner refuse to sell. The threat of holdouts in strategic locations may mean that many fewer road building projects succeed. Consequently, a large benefit to the public collective may be lost. The obvious answer to this is that the collective public can pay off the holdouts, at some market clearing price, but once again there are transaction costs in getting the public to recognize (and therefore to contribute to) the value of paying off the holdouts. So again, though this may not be insurmountable it does decrease efficiency.

RL writes:

We can't be at the mercy of monopoly roads going to our homes. We need to reinstitute the competitive system they used in Rome. I'm not familiar with the details, but I understand back then "all roads led to Rome," so it sounds like it was a system of perfect competition.
:-)

Mark Seecof writes:

There are hard-headed holdouts as well as "emotional" ones... e.g., the owner of the first (monopoly) road who buys up land in the path of any proposed second (competitive) road. Actually, we've seen some of this play out in real life; look at the great railroad-building era in America.

It is often the case that consolidating into a monopoly (or more-or-less solid cartel) will make competitors better off (at the expense of the public). Libertarian theory doesn't offer any clear answer to the monopoly/oligopoly problem. If property rights and contracts are freely exchanged/negotiated and strictly enforced, consolidation will likely produce monopolies (or cozy oligopolies) in any economic activity closely tied to physical resources. The standard answer (regulation or other politicized intervention) violates Libertarian principles.

Zac writes:

Mark Seecof wrote: "Libertarian theory doesn't offer any clear answer to the monopoly/oligopoly problem"

Well, I don't know about "libertarian theory" but economic theory has some ideas about monopoly. The fact is that collusion is very hard, since while it is collectively beneficial for firms to collude and form oligopoly's, the dominant strategy for any individual firm is to defect. Aside from some exceptional cases, government is the only source of monopoly because it can enforce the collusive effort and raise the barriers to entry by using (threat of) violence.

Where there is much confusion is that many times businesses do hold monopolies but invariably the source of the monopoly is government, who has typically captured all the rents. The history of the railroads in America is a perfect example of this. The idea of "natural monopoly" is just pretense, you will rarely find even an attempt to justify it empirically.

Mark Seecof writes:

Zac, I'm aware of the analysis you kindly provided, but I wrote "Libertarian theory" for a reason. I agree that government is the chief enforcer of cartels or monopolies, but that doesn't save Libertarian theory because in (the main line of) Libertarian theory, the chief job of government is to enforce private contracts-- all private contracts, including cartel agreements. (Libertarians sometimes argue over whether a contract to sell yourself into slavery should be enforceable.)

(As I also wrote, the problem is worst when physical resources are involved. Scattered manufacturers might defect from, say, a baseball-glove cartel. But once a road monopolist buys up strategically-located parcels of land to block economically-feasible alternate routes, that's it-- no one can spoil his monopoly by "defecting." The public will just have to wait until flying-car technology matures enough to compete with the monopolist's road.)

I think your assertion that all monopolies proceed directly from government, which "has typically captured all of the rents," is too strong. Consider "scotch" tape if you will. I could multiply examples, but I won't-- I agree that sustaining a monopoly requires (usually) government force. The Libertarian problem is that sometimes the force is deployed to protect what the monopolist plausibly claims as private property and is not, therefore, clearly anti-Libertarian.

As for who captured the rent from American railroads, look up the "Northern Securities" case sometime. Before government came along and dispossessed them, colluding railroad barons had formed a successful cartel, enforced by ordinary contract sanctions.

pedro writes:

"Before people built homes, they would have made sure they weren't at the mercy of a single road supplier."

I guess you've never worked in the real estate industry then. ;-)

Despite being a libertarian, I've never understood the argument that all land should be private. Clearly private ownership of the majority of land is efficient, but it strikes me as illogical that land is not a common good.

Johan writes:

Of course it can be an efficiency problem that the only way to get competition is to build several roads if one marginal-priced road would be sufficient.

Kurbla writes:

It appears that supposed advantages of the private roads and streets are not advantages of private over state property, but advantage of small or fragmented over big, centralized property. On the other side, exactly Rothbard's preferred society is one that cannot - and doesn't want to limit the size of the private property.

Al Abbott writes:

Mark said, "I think your assertion that all monopolies proceed directly from government, which "has typically captured all of the rents," is too strong. Consider "scotch" tape if you will. . . ."

There is a huge difference between ordinary market-share monopoly and coercive monopoly. A coercive monopoly gains and holds market-share by exercise of force (government regulation, decree, or intervention). Ordinary monopoly characterized by very large market-share can and does occur in a market-based system simply as the optimum arrangement and does not require the coercive force of government.

The supposed ill effects of attempts at predatory pricing, while often claimed, have not been demonstrated.

As for roads, in my experience (in Texas) the volume of traffic flow in cities between toll roads and public roads with HOV lanes seems to favor the toll roads. People seem more willing to pay to go from point A to point B than to share their vehicles with additional riders.

VangelV writes:

"The Libertarian problem is that sometimes the force is deployed to protect what the monopolist plausibly claims as private property and is not, therefore, clearly anti-Libertarian."

I think that you are totally confused about the meaning of the word libertarian. Libertarians have never argued against the initiation of force against others so there is no way for companies to use force to prevent outsiders from competing against them. Under common law it is perfectly legal for companies to eliminate competition between themselves by way of mergers or other business arrangements.

"As for who captured the rent from American railroads, look up the "Northern Securities" case sometime. Before government came along and dispossessed them, colluding railroad barons had formed a successful cartel, enforced by ordinary contract sanctions."

First of all, rates on the Hill-Morgan lines were declining and the government never made the case that there was any harm to the users of the railways. In a five to four decision, the Supreme Court ruled that the holding company must liquidate itself because it possessed too much power, even though it had not been established that it had used that power to harm the public. In a dissenting opinion, Justice Holmes pointed out that no attempt was ever made by the company to restrain outsiders from competing with it and as such it was perfectly within its rights to operate as it did. The ruling, like many other rulings in monopoly cases were political in nature and had nothing to do with the public being harmed by a restraint of competition.

I also find it ironic that you chose to use the railways as an example of monopoly because many of the railways were built because of government assistance being provided to well connected individuals. James Hill, who built the Great Northern Railroad without any public assistance, pointed out that the government was providing subsidies and capital to politically connected companies and enabled those companies to compete with private businesses that received no aid from the taxpayer.

The fact that some of his competitors got massive subsidies did not help them compete against Hill, who was an obsessive cost cutter and insisted on the most reliable and lowest cost operations. He began by purchasing a bankrupt Minnesota operation that was destroyed by the the government-subsidized Northern Pacific and transformed it into the best and lowest cost railway in the nation. While the subsidized competitors were encouraged to build longer lines because they were paid by the mile of track, Hill built his operation with an obsession towards lowest grades and the shortest, straightest distance possible. That made Hill's operations extremely profitable and he was able to keep reducing rates and still make profits while his politically connected competitors went out of business.

Because of the corruption in the subsidized railways the federal government created the Interstate Commerce Act of 1887, which prevented people like Hill from charging lower rates to bulk customers that provided him with most of the traffic on his railway. Effectively, Congress no longer permitted competitive railways to gain market share by cutting prices for very large customers.

In effect, most of the abuses that Congress was trying to prevent were created by Congress' meddling in the railway business in the first place. I think that most of the people who write against monopolies in a knee-jerk fashion are guilty of not knowing the facts or understanding how real world economics works. In a free market, which most critics seem to oppose, companies and individuals have to compete against others and cannot use force to prevent new entrants from going into business against them. The only way for them to stay in business is to convince consumers to purchase a company's goods or services and the best way to do that is to provide high quality goods at low prices. And if consumers decide to purchase so much from a particular company because it provides good services and products at great costs the government cannot claim an economic harm is being done. The reason why there are such claims is because there is a lot of money in using the monopoly power to protect inefficient companies that make generous political contributions.

The history of monopolies is very clear. Those companies that have monopoly status because they are protected from competition by government regulations harm consumers. Those that gain near monopoly status by providing consumers with what they want in a competitive market cause no harm to consumers.

For a good discussion on the topic I suggest that you look at the book Antitrust and Monopoly: Anatomy of a Policy Failure.

gnat writes:

Some thoughts on these interesting comments: the problem is to design a pricing scheme that associates appropriate returns with the amount of investments that users value. Monopoly property rights confers the power to tax (like government) rather than add value. A road is more like the factor "land" "fixed in nature" where supply is inelastic and price depends on demand. Like other "networks" roads confer powerful externalities (complementary effects, network effects, see, e.g., http://www.amazon.com/Bandwagon-Effects-High-Technology-Industries/dp/0262681382)which makes monopoly likely. In a network there are choke points (connect to a premise, bridges). There are norms or rules that might make private ownership work (the Internet backbone is an example).

Jon writes:

Mark:

Libertarian theory offers a very clear answer to the monopoly problem: do nothing. There is good reason to think this is a better option than "regulation or other politicized intervention".

Jeremy, Alabama writes:

I am sure Rothbard is right - but this is another policy that does no favors to the Libertarian cause.

I need to keep reminding myself, that this book is NOT a political strategy that describes how libertarianism might win an election. Obviously, it is pure philosophy.

Our problem is - leftists and especially leftist media will never link the left's agenda to their political philosophies of the far left. But they will never miss an opportunity to link a libertarian agenda to libertarian philosophy of legalized drugs, no social safety net/medicine/education, even privatized roads and privatized courts.

Although these are all defensible ideas, they are easy to demagogue negatively, and usually reflect badly on libertarians.

ShoreTower writes:

This is an interesting discussion, but I think considerably more attention should have been paid to the construction of railroads, which are an entirely private, continent-wide transportation system. Railroads have demonstrated that most of the objections to private roads are spurious. Without government involvement, railroads developed:

1) A standard track gauge
2) A set of mechanical standards that allow any railroad car or locomotive to run on any railroad track
3) "Interline" rates that permit shippers to move freight over multiple railroads between origin and destination

If railroads could do it in the 19th Century, why can't we achieve the same thing with roads in the 21st? Yes, there were cases where one railroad tried to block the construction of another in order to preserve a monopoly, but those disputes could be handled effectively within the legal system.

Public construction and ownership of highways has resulted in construction of more roads than necessary and in an inept pricing regime in which price does not equal marginal cost. The results are obvious, and disastrous. It is not necessary to privatize roads in order to implement road pricing, but there is reason to believe that privately operated roads would be more efficient.

MikeL writes:

Much is made of the economic forces that might prevent emergence of monopoly but little attention is given to the socio-psychological constraints that might prevent such an outcome. For instance, a road owner who obtains monopoly and imposes onerous fees would probably be treated like a pariah and ostracized. The monopolist would be hurting people after all, and while sociopaths may be able to endure such opprobrium most normal folks will relent under the social pressure. That is to say, self-interest is calculated in more than economic terms.

Comments for this entry have been closed
Return to top