The visible hand in economics

Government investment: Saviour or Villain?

Posted on: October 9, 2008

We have a guest post over at No Minister.

The conclusion:

Ultimately, I doubt that the government has a role in investing in large scale projects in the absence of “externalities”. The best thing the government can do is make sure that the economic environment is open and transparent – such that firms with greater technical knowledge, and a better understanding or the risk-return trade-off, can invest in the most efficient way possible. The purpose of government is to oil the wheels of commerce – not to build the cogs.


4 Responses to "Government investment: Saviour or Villain?"

You schooled him.

Spot on Matt

I don’t like the “the governemnt can borrow at a lower rate” argument at all. Projects should be evaluated based on their risks which determine the rate of return an investor would require to invest in the project.

Absent exeternalities (your main point), I can see abosultely no reason why the government should invest in something the private sector would not. If the private sector isn’t investing in a project it’s likely that return doesn’t compensate investors for the risk they would be bearing. Related to this is that if the government is taking on risks that it isn’t being properly compensated for, its cost of borrwing is likely to rise

so is broadband connectivity a cog, or oil? an interesting post for the future if ftth or the national bb network becomes a hot topic again.

“You schooled him.”

“Spot on Matt”

Glad to hear that economists agree with my typical economist explaination. Is that some sort of self-confirming bias?

“so is broadband connectivity a cog, or oil? an interesting post for the future if ftth or the national bb network becomes a hot topic again.”

Indeed. I think I would call it a cog – but a cog that may not be fully valued by the people putting it into the machine.

If broadband provides some type of positive externality (a situation where someone who is not involved in the market transaction surrounding the product also benefits from it) then there could be a basis for government investment. This is the justification for all sorts of investment such as roads and the such.

However, even if there is a positive externality, I think the signals from private investors are important – just because there is a positive externality does not mean we shoud invest, we need to quantify it (as well as we can) first.

To try and be transparent, in net terms I am NOT a supporter of the broadband plans in the current economic situation. But I can imagine situations where I could be convinced.

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