Hayek and Public Goods

Hayek approves of government regulation in controlling poisonous substances, regulating the work week, stopping monopolies, social safety nets, and externalities like deforestation and in some cases public goods like roads (pg. 86-87). He specifically says that public goods “provide, indeed, a wide and unquestioned field for state activity.” (pg. 88).

                Yet, on page 98, Hayek says that the famous German roads are evidence of misplanning. He says that, “so far as peace purposes are concerned, there was little justification for them.” Thus, it appears that although Hayek approves of government intervention in the case of public goods, he does not truly understand the importance of the government providing high quality public goods. High quality public goods, such as education and infrastructure, are main contributors to economic growth.

                Road quality:

                Better roads particularly infrastructure help cause development by either (1) improving the capital stock or (2) improving productivity. Most of the literature seems to include infrastructure as a part of the capital stock:

Y(t)=K(t)^αInf^αH(t)^β(A(t)L(t))^{1- α -β}  (Y – GDP; K – human capital; A – level of technology; L – labor force)

Ln(Y/L)=ln(A)+gt+(α/(1-α))ln(s1^k)+( β /(1- α)lnf-(α/(1-α))ln(n+g+δ)

It takes less time for a worker to sell a shoe if he doesn’t have to spend 3 hours in LA traffic taking it to market so improved infrastructure increases technology.

To that logic, Nagaraj et al. (2000) found, using instrumental variable estimation to make sure there was no reverse causality among 17 Indian states from 1970 to 1974, that a ten percent increase in the expansion of roads (kilometers of road per square kilometer of land) leads to a 3.4 percent increase in per capita income. In an OLS cross-country growth regression, Caledron and Serven found expansions in road and railways system expands by one standard deviation, which implies an increase from the levels displayed in Argentina (with 0.6 km. per sq.km. of area at the bottom quintile of the distribution) to levels in Korea and Taiwan (with 3 km per sq.km. of surface area at the top quintile of the distribution), growth rates would increase by 1.4 percentage points.

                Thus, although Hayek’s argument against over-planning may make sense in the historical context of WWII, extensive government planning, with regards to public goods such as infrastructure, fuels a healthy capitalist system.