• Entrepreneurial Action Providing for Society’s Future

    pdficon2

    John Brätland
    Adjunct faculty of the Mises Institute and independent scholar, Bethesda, Maryland
    Email: john.c.bratland@gmail.com

    Date of original submission: 4 March 2014
    Date of acceptance: 8 October 2014

     

    Abstract[1]

    In maintaining capital, private entrepreneurs play a crucial role in societal provision for the future.  Two societal concerns that are assumed to fall within the province of governmental responsibility: the threat of resource exhaustion and infrastructure neglect. But governmental ownership and existing legal institutions stifle entrepreneurial capital maintenance vital to extractive-resource conservation. Moreover, the institutions of government fail in terms of infrastructure maintenance. Governments cannot replicate the actions of entrepreneurs in maintaining infrastructure. Also, the self-seeking, career-oriented actions of legislators and bureaucrats can be impediments to infrastructure maintenance.  This study concludes that earnest efforts at privatization would allow entrepreneurial capital maintenance to provide for the future. 

    Keywords

    Entrepreneur, capital, extractive resources, infrastructure, government, legislators, bureaucrats, future

    Introduction

    Resource conservation and infrastructure maintenance are actions that provide for society’s future but are seen as being the inherent responsibility of the public sector.   Extractive resources are seen as being fixed but depleting aggregate stocks in danger of ultimate exhaustion.  This erroneous presumption seems to call for tighter governmental control over the exploitation of these resources.  Also, evident degradation of public infrastructure seems to demand major public ‘investment’ to maintain and replace public facilities.  But persistent public anxiety over resource exhaustion and infrastructure decay call into question the efficacy of government’s presumed role in these matters.  In both contexts, greater reliance on government intervention has been shown itself to be a failure.

    At the same time, market forces of the private sector would seem to offer a viable and preferable avenue for entrepreneurial solutions to these public concerns.  Privately controlled extractive resources are being renewed through entrepreneurial investments in exploration and development.  Also of note is the fact that privately held infrastructure, as opposed to public infrastructure, is routinely maintained, improved and replaced through entrepreneurial prospects of profitable return.   Why the contrast?   Can an expanded scope of entrepreneurial action be seen as a desirable and effective solution to the above described concerns?

    In free-market settings, the actions of private individuals have always played a critical role in providing for society’s future.  But what types of private actions provide for the future?  How is the success of these actions determined?  As expression of their time preference, individual members of society provide for the future in their acts of saving.  Private entrepreneurs employ the financial resources provided by savers to invest in ʽcapitalʼ to be committed to particular plans involving the production of goods and services.  But success or failure in these acts of provision for the future require monetary exchange that allows each acting individual human beings, including business entrepreneurs, to judge and rank the net future advantage of alternative courses of action.  This provision for the future is made possible by the fact that capital itself is denominated in money.  From the entrepreneur’s perspective, capital represents the entrepreneur’s ex ante calculational judgments of prospective net capitalized monetary worth of a planned employment of the enterprise’s capital goods.  But capital accounting eschews entrepreneurial expectations and plans; it must focus on the  contemporary net market monetary value of enterprise’s capital goods at a specified date.  Between two successive time periods, the net change in the accounting calculation of enterprise’s net market value yields a monetary calculation of the success or failure of the entrepreneur’s plan. In capital accounting, income is the net contemporary increase in the market value of the enterprise’s capital goods.  But it is also a reckoning of the extent to which entrepreneurial action has provided for the future.

    Private entrepreneurs are motivated to maintain capital by the urgency of sustaining future enterprise income (Mises. 1998 [1949], 512; Hayek [1941] 2007, 277-282).  To the extent that these actions are undertaken in competitive markets characterized by monetary exchange, private entrepreneurial actions can play a critical and decisive role in (1) staving off what some see as global resource exhaustion, and (2) maintaining what is currently viewed as public infrastructure.  But existing institutions impede the processes by which entrepreneurial actions could replenish exhausting resources and the maintain infrastructure.  For example, attenuated, constrained or governmentally circumscribed property rights represent impediments to entrepreneurial resource renewal.   Also, career oriented entrepreneurial activity of legislators and government bureaucrats play in diverting resources from infrastructure maintenance.   This paper explores the broader potential social benefits of private entrepreneurial capital maintenance activities and the institutional impediments that currently thwart the capacity of market activity to perform these beneficent roles.  The paper highlights the reality that provision for the future is contingent on the degree to which the relevant resources can become privatized and brought into the compass of entrepreneurial planning.  

    Resource exhaustion verses capital maintenance

    The role of extractive resources in the economy has been obscured by a mythology of exhaustion.  By looking at resources from a global perspective, the assumed certainty of exhaustion would seem to be self-evident.  Extractive resources are assumed to exist in fixed ultimate aggregates just as the crust of the earth itself is finite.  However, when viewed in the context of human action, different insights begin to emerge.  There is a replacement process that occurs as individual deposits are depleted.  But there has been little attention paid to the entrepreneurial nature of this process and the way in which it is a matter of capital maintenance for the enterprise.  A fuller understanding of this capital maintenance process highlights one of the ways in which the entrepreneurial action is critical to societal provision for the future. But it also highlights the extent to which man-made institutions are impediments to this particular aspect of capital maintenance.

    The neglected role of the entrepreneurial action in resource renewal 

    The economics of exhaustible resource availability is fundamentally entrepreneurial which means that the notion of an aggregate fixed stock of a resource has no coherent relevance to human action required for renewal.  Extractive enterprises are by definition entrepreneurial and the known extractive deposits under the enterprise’s management are among the capital goods employed by the firm to maintain or increase the firm’s income (Brätland 2008, 386-393).  Hence, feared aggregate exhaustion has no validity in a market environment in which entrepreneurs are able to maintain enterprise capital by replacing depleting deposits through investments in exploration and development.  The efficacy of this process is demonstrated by the fact that proven reserves of virtually all extractive resources are higher today than they were 50 years ago.  In instances in which reserves have not increased, the reason is found in the fact that the demand for the resource has declined.[2]

    In a free market, replacement of exhausting resources occurs routinely because gradual depletion of deposits reduces the operating revenue margins (Adelman 1993, 222).  Since capital maintenance is always about maintaining enterprise income, the firm is constantly replacing its depleting resource deposits through acquisition of exploration rights, discovery and development of new deposits.  Hence, in such a market, replacement of resource deposits is only contingent on the prospective profitability of doing so.  In this sense, the process of resource replacement is not dissimilar from the conventional replacement of depreciated capital goods.  But this reality means that anticipated shortages of extractive resources reflected in prices would be a principal inducement of deposit replacement.  The means by which resources are replaced emerges out of the entrepreneur’s judgment of how enterprise income is affected by alternative prospective replacement strategies. But this resource-replacement process is fundamentally dependent upon access to land and managerial flexibility in maintaining capital and entrepreneurial income.

    Entrepreneurial strategies of capital maintenance

    Social concern over so called exhaustible resources has been conditioned by the notion that there is a global stock that must eventually be gone forever. However, the idea of an existing global stock is meaningless.  The actual relevance of depleting stocks is found in the actions and strategies to maintain enterprise capital. Alternative strategies to maintain capital would include a comparison of the expected present worth of income that may accrue over differing time horizons. These comparisons are essentially subjective judgments of the respective risks and uncertainties associated with each strategy.  At any moment in time, the extractive firm has numerous investment opportunities that include deliberate speculative delay or immediate efforts to explore, develop and extract resources.  The following strategies are examples.

    Engage in entrepreneurial delay with respect to (a) acquisition of additional exploration rights (leases), (b) additional exploratory efforts on owned leases,[3] (c) investment in development on owned leases, and (d) production of the resource from developed leases already owned by the extractive enterprise;

    Extract deposits but maintain capital by reinvesting proceeds in competing capital goods offering a greater rate of return but which may not be directly related to the extraction of resources.

    As noted, these strategies must face an uncertain time profile of prospective revenues and financial outlays which means that choices made will involve due allowance for time preference and uncertainty.  Moreover, opportunity costs of these alternatives will be subjective and unique to the individual extractive firm.  In fact, for the extractive firm making a choice of one of these strategies, the opportunity costs will necessarily include a subjective reckoning of income thought by choosers to be obtainable from the next most profitable relinquished strategy (Buchanan 1969, 49-50).

    A few additional words of clarification may be important.  Firms engaged in extraction are always in search of new and more profitable deposits to replace depleting extractive-resource deposits.  In choosing a strategy, the extractive firm compares the marginal expected opportunity cost of finding, developing and exploiting new deposits with the marginal expected opportunity cost of more intensive development and extraction of an existing known deposit.  If the former costs are less that the latter, a decision to find new deposits promises a greater yield.  The extractive firm would be inclined to pursue this strategy if the lower cost of new deposits were superior to those already under the firm’s immediate control.  One important aspect of this strategy is that it would reflect a decision to deliberately delay exploration or development of the property and resources to which it already has access on existing leases.  In other words, the firm would be exercising latitude in the timing of exploration or development on its existing leases.  Also, the extractive firm could purchase from other firms discovered but undeveloped deposits and then immediately embark upon development and extraction of these deposits.  But again, such a strategy may reflect a decision to exercise delay with respect to prospects already under the firm’s control.

    The delay strategy would commonly be premised on an expectation that the capital value of a project would be greater if it were delayed until sometime in the future.   While such deliberate delay could be based on expectations of longer-term rising trends in the price of the resources itself, it may also reflect the extractive enterprise’s efforts to lower the financial outlays associated with the respective stages of investment in a planned project.  In particular, such delay may be helpful in avoiding cost increases from bottlenecks that are likely to be encountered in regulatory efforts to expedite exploration and development.[4]  In the context of capital maintenance, any reduction in cost may significantly enhance prospective entrepreneurial income and in the process make provision for the future by conserving resources.  But again, such delaying actions would be undertaken strictly on the basis of entrepreneurial judgments.

    But an enterprise may choose to delay, for reasons bearing on volatility in the price of the resource.  The different stages of the production process afford ownership of successive series of capital goods each of which represents a type of investment ‘option.’  Ownership of any investment option represents a right but not an obligation to proceed further with the next in a sequence of investment opportunities.  In this case, this sequence of capital goods includes (a) exploration rights for particular lands, (b) discovered resources (c) developed resources, and (d) extracted resources ready to be sold.  Each of these distinct capital goods are traded in the market and, hence, has a market price.  The statistically measured volatility in the price of the resource itself would be reflected in statistical volatility in the market value of each of these capital goods.  The volatility in the market price of the resource would enhance the market value of each of these four capital goods but this increase in value is contingent on the enterprise’s ability to delay action on each successive but distinct phase of investment.[5]  For example, in undertaking investment in exploration, the underlying asset or capital good sought would be discovered resources.  These discovered but undeveloped resources are marketable and have a price and represent a type of real option to acquire developed resources.  And, in turn, by committing to subsequent investment in development, the entrepreneurial enterprise would be seeking developed resources.  But as with any option, real or financial, the length of the period during which the option can be exercised enhances the value of the option. At each successive stage, the extractive firm will value the ability to delay any further commitment to the project until evolving market conditions reveal more information about the future and the potential profitability of the next investment option.[6]  This advantage is reflected in an enhanced market value of each of the capital goods and the extraction project as a whole (Dixit and Pindyck 1994, 4).  Hence, decisions to delay are critical in maintaining capital value and in conserving affected resources for the future. But as the discussion below will emphasize, institutions of leasing and land law tend to foreclose planned delay.

    The second strategy highlights the reality that capital maintenance requires investment in those capital goods that offer the greatest likelihood of attaining or maintaining profitability.  The strategy highlights the reason that cost minimization in the replacement of physical capital goods is not necessarily equivalent to capital maintenance.  The real motivation for investment to maintain capital is not to minimize cost of replacing particular capital goods but to increase income (Hayek 2007 [1941], 277-278).  The two may be quite different since ‘cost’ minimization (or expense minimization) does not take into account returns that could be achievable by investment that may not be directly related to the firm’s historical specialization.

    Shift in the physical composition of capital goods sought could be prompted by newly revealed changes or previously unrecognized entrepreneurial opportunities in other markets.  F.A. Hayek captures the motivations for such shifts: “… when we proceed to consider in detail the reaction of capitalists to unforeseen changes, … we go back to the rationale of maintaining capital intact, the quantity of capital drops right out of the picture as a directly relevant magnitude.  Its place is taken by a direct consideration of the size of the income streams that may be expected at different dates” (Hayek. 2007 [1941], 280): italics in the original text).  It is in this sense that a focus on the physical replacement of resource deposits conveys a misleading interpretation of the investments necessary to maintain capital.  But the converse is that investment within or outside of the extractive industries, will be sensitive to any anticipated higher returns that may be achievable as a consequence of anticipated scarcities of particular extractive resources.

    The extractive firm may be constrained in its choice of replacement investments by realities of ‘capital-good complementarity.’  A grouping of capital goods would normally be in the form of resource deposits or assets related to the extractive activity such as processing or transportation.   If the enterprise were to invest in capital goods not necessarily related to extraction, it would be mindful of the degree to which such capital goods were complementary to assets comprising its existing operations.  The most important issue would not be an issue of physical complementarity of capital goods.  Expected profitability would always establish economic complementarity and would supersede issues that may bear on physical complementarity of capital goods.  The central concern for the enterprise is the extent to which the particular investment alternative promises the largest addition to entrepreneurial income (Taylor 1970, 194).  But while the individual enterprise is focused on future income, the societal consequence is that resources are conserved for the future.

    Impediments to entrepreneurial capital maintenance by extractive firms

    Although capital maintenance refutes the exhaustion myth, this refutation is hinges on access to lands, entrepreneurial latitude in managing resources, and secure rights of private property.  But institutions of governmental control and jurisprudence definitely obstruct entrepreneurial actions of extractive firms striving to maintain capital.  These hindrances include: a) foreclosure of land access because of government control of mineral lands; b) curtailment of entrepreneurial latitude arising from claims of surface owners; and c) in the case of petroleum, the firm’s inability to acquire full control and ownership of reservoirs that it has discovered.[7]  The first of these impediments bears on access to land and the latter two impede extractive firms’ ability to manage resources as capital assets.

    a)         Land access by entrepreneurs foreclosed by government ownership

    Maintenance of entrepreneurial income requires a replacement of the capital goods critical to continued operation within the same industry.  This entrepreneurial process requires access to new resources that may be extractable at lower cost.  Resource replacement is usually dependent upon leasing arrangements between surface owners and enterprises seeking to find and develop new deposits.  The one obstacle facing the extractive enterprise is that surface owners can exercise claims that totally foreclose access rights to extractive firms.  These owners are invariably governments that have nationalized lands through acts of political power without actions that establish legitimate, ethical ownership (Bradley 1996, 76).  Once these lands are under the political control of governments, access is governed by political processes.  In modern democracies, this conflict is manifested in political struggles of self-appointed, politically active stakeholders to induce legislatures to assure politically popular uses of lands.

    This political choice of popular uses of nationalized lands is one of the more pernicious features of democratic processes.  Once lands are nationalized, alternative uses of these lands are chosen with the intent of appeasing ‘stakeholders.’  For the purposes of this inquiry, the important question is: who is a stakeholder with respect to the use of public lands?  Unfortunately, political self-selection establishes who has a ‘legitimate stake’ in decisions concerning alternative uses of government lands.  Stakeholders are constituents with diverse and subjective views on what for them constitutes an environmental amenity and the way in which they are affected by its presence or absence.  Hence, this political process motivates allocative decisions on the basis of the political placation of certain self-selected political constituencies (Lopéz 2002, 211-213).  This participatory process has little to do with ʻefficientʼ environmental policy or the commitment of resources to their highest valued use.

    Political advocates of policies that foreclose access are unencumbered by the opportunity costs of such sanctions.  In this sense, choosing and hence forsaking the value of the next most highly valued opportunity never impinges upon the actions of non-owning bureaucrats, politicians or environmentalists seeking to foreclose certain uses of government lands.  Failure of firms to replace resources deposits can arise from the fact that political constituencies bear no opportunity costs in foreclosing lands to exploration and development.  In bearing little of the opportunity costs of political foreclosure of access, self-selected stakeholders have incentives to become extremists in exaggerating preferences and overstating claims.  Whatever the benefits of foreclosing exploration and development may be, these benefits are provided as a ‘free good’ through the process of political control.

                            b)         Conflicting property claims solved by discoverer’s ownership of discoveries

    The preceding discussion also highlights the fact that the enterprise must have ample timing latitude if resource replacement is to be successful.  But an early juridical declaration of surface owner rights has tended to preclude this entrepreneurial latitude in maintaining capital.  An interpretation of the land surface owner’s rights to subsurface minerals was first enunciated by the British jurist, William Blackstone: “land hath also, in its legal specification, an indefinite extent, upwards as well as downwards….downwards, whatever is in direct line between the surface of any land and the center of the earth….if a man grants all his lands, he thereby grants all mines of metal and other fossils” (Blackstone. 1983, 18; also quoted in Bradley 1996, 70).

    Uncertainty and economic change mean that entrepreneurial latitude is always critical in managing capital goods including mineral leases.  The management of mineral leases as capital goods requires timing of lease activities so that capital value of entrepreneurial income is maximized (Brätland. 2001, 694-695).[8] But surface owners’ financial interests demand expedited recovery which is inherently detrimental to the maintenance of capital.  But the surface owner’s financial rights are protected by court-imposed implied covenants that foreclose any action or lack of action that delays or diminishes the surface owner’s receipt of royalties.[9]  Hence, by foreclosing latitude in the timing of these activities, the covenants reduce the net present value of mineral resources and impede the ability of the extractive enterprise to maintain capital.

                            c)         Inability of the enterprise to acquire full ownership of discoveries

    In the case of petroleum lands, the application of Blackstonian Principles has not meant that the owner of the surface also owns subsurface petroleum (Bradley 1996, 60-62).  However, it does mean that the surface owner has the power to impose claims on a percentage share of gross production.  The consequence is that the surface owner’s interests preclude the management of petroleum resources as capital assets and retard the entrepreneurial replacement of the resource.  As a consequence, the claims of the surface owner dissipate the capitalized value of the resource.  Moreover, mandates to undertake these activities at an earlier moment in time means that the opportunity cost associated with these activities will, in almost all cases, be increased (Mead, et. al. 1985, 110-112).

    These conflicts would not exist if the discovered petroleum deposit were to become the sole, exclusive property of the discovering enterprise.  A Lockean principle of ‘original appropriation’  would supplant the Blackstonian perspective on the scope of the surface owner’s property rights.[10]  Of course, in this situation, some consent to surface access would still be required from some surface owner to make exploration possible.[11]  Court-imposed covenants would no longer impinge on the discovering firm’s ability to engage in entrepreneurial timing in the scheduling of investments in the project.  In this case, the surface owner would have no contingent claim on production.  This situation would represent the normative ideal from both an allocative and ethical perspective.[12]

    Secure access to exploratory prospects is impeded that by governmental regulation and control of lands.  While governmental constraints on land use are rationalized as actions required to address the environmental interests of the public, their imposition is a key stumbling block to this entrepreneurial role of resource replacement. With full rights of legitimately acquired private property, those parties motivated by environmental concerns could pay a price for committing lands to alternative uses.  Such parties may purchase lands in question or may pay owners of resource properties to refrain from exploration and development.  In either case, the party pursuing environmental objectives would be paying an amount at least equal to the opportunity cost of forsaking development.[13]

    Government v. private entrepreneur in infrastructure maintenance

    One of the fallacies of infrastructure maintenance is the implicit presumption that a major part of this infrastructure must be publicly controlled and maintained by government.[14]  Having made the financial outlay for the facilities that comprise public infrastructure, government takes on the responsibility of maintaining public infrastructure.  Unfortunately, there is a pattern of historical inevitability to the neglect of public infrastructure that is endemic to its governmental provision and management.  But, save for the occasional business failure or the deliberate scrapping of obsolete capital goods, there is clearly no such pattern of neglect with respect to private infrastructure.  What accounts for the contrast in patterns of maintenance?   One answer may lie in the unexamined presumption that the facilities comprising public infrastructure can be viewed as public capital and that a government can act in a sufficiently unified, coordinated way to somehow mimic the action of private entrepreneurs in maintaining this ‘capital.’  If not,  a compelling case can be made that this public capital should be privatized and maintained by private entrepreneurs.  But a second but related answer is that legislators and bureaucrats who are instrumental in providing and expending funds for infrastructure maintenance may employ their own entrepreneurial strategies in assuring the attainment of their own career ambitions (Loasby 1976, 190).  These entrepreneurial actions may well divert attention and resources away from infrastructure maintenance.  These officials include legislators and bureaucrats who view their own capital maintenance as those entrepreneurial actions that strengthen and promote their own careers. 

    Viability of government action to mimic entrepreneurial maintenance

    Assume that the government is able to act as a unitary entity making decisions with the intent of ‘maintaining total public benefits.’ The adjective ‘unitary’ is used here simply to mean that the government’s plans are formulated and undertaken as though prompted by ‘one mind.’ In other words, the government is not comprised of individual bureaucrats and legislators with self-seeking but frequently conflicting aspirations.  Rather, the government is assumed to act in a unified way to maintain public infrastructure on the basis of some attempted imputation of the net benefits that accrue to the public. The emphasis on maintaining net public benefits is critically important because it represents the only legitimate analogue of the entrepreneur’s income.

    Given the above assumption, can public infrastructure be legitimately viewed as ‘public capital?’  Is this label apt?  In an economic sense, the legitimate concept of capital is premised on the ability of an acting entity to manage a combination of resources with the intent of earning an income for an enterprise as whole.  Private property and monetary exchange afford the entrepreneur this ability.  Hence, the aptness of the label, ‘public capital,’ hinges directly on the extent to which public infrastructure can be managed in a way that is functionally analogous to the maintaining of private capital.  For the private entrepreneur, capital maintenance is ultimately about actions undertaken to maintain or enhance expected enterprise’s income.  But what would be the counterpart of enterprise income for a government in attempting to requisite maintenance of public infrastructure?

    Metaphorically, the income counterpart would be the total benefits yielded by all components of infrastructure as a totality.  The maintenance problem arises from the fact that the benefits of infrastructure yield no appropriable sales revenue that would serve as guide to maintenance. Hence, the absence of a comprehensive and appropriable future monetary income means that the government is left without a unified guide in planning maintenance expenditures for the disparate facilities under its purview.[15]  The government is left with no means of reckoning a rational tradeoff between maintenance projects. Another aspect of this problem is that there is a ‘disconnect’ between marginal intended use of infrastructure by the public and any planned maintenance that may be considered by government.  Users of individual facilities and the governmental entity responsible for maintenance are necessarily different acting entities.  To summarize, the following inferences highlight the inability of governments to mimic entrepreneurial maintenance and, hence, underscore the misleading nature of the ‘public capital’ label for public infrastructure:

    a)     No non-political means are available for a government to weigh the relative tradeoffs of investment in new total infrastructure and maintenance of existing infrastructure as a whole.

    b)    Also, the benefits of total infrastructure maintenance are not appropriable by those bearing the economic burden of total outlay.

    c)     Scientifically legitimate means are unavailable to reckon the changing tradeoffs between current investment in infrastructure, as a whole, and the prospective future benefits (Buchanan 1969, 60).

    d)    In general, means do not exist for government decision makers to reckon the relative tradeoffs between maintenance of some existing facilities of public infrastructure as opposed to maintenance of other facilities.

    e)     Maintenance decisions for public infrastructure are based largely on physical deterioration with little rational reckoning of benefits or opportunity costs involved; the result is that some complementary facilities are inadvertently neglected that should be maintained while other facilities that should be abandoned are maintained.

     

    An implicit concern is the maintenance of the functional complementarities that exist between different components of the infrastructure.  If tolls are not collected for each such facility, the government is left with an imputation problem that would tend to preclude a balanced maintenance that preserves these complementarities.  No calculational means of charging tolls that would account for the complementarities existing between the services yielded by groupings of such facilities.  The critical issue is the fact that even with the collection of user fees or tolls on some facilities, physical wear and tear would be the only inducement for the maintaining complementarities (Brätland 2010, 41-42).   Hence, there is no reason to believe that government could ever replicate the actions of private entrepreneurs in the maintaining of infrastructure.

    Neglect arising from bureaucratic and political entrepreneurship

    If governments, considered as institutions, are unable act as unified decision making entities in maintaining infrastructure, how effective are the actions of individual legislators and bureaucrats in achieving this objective?  Evidence suggests that legislators and bureaucrats act in an entrepreneurial manner in fostering their own careers (Lopéz 2002, 211–228; Niskanen (1971, 38; Anthony Downs (1967, 2).  In other words, for legislators and bureaucrats, careers become the capital they maintain or enhance by the personal maintenance strategies they pursue.  But what are the consequences of such behavior for the maintenance of infrastructure?  Since bureaucratic and political entrepreneurs are endemic to the workings of government institutions, the maintenance of bureaucratic and political capital can become a source of infrastructure neglect.

    For the legislator, entrepreneurship refers to the time-structured strategies employed in pursuit of political careers.  “Capital maintenance,” in this context, refers to the actions that legislators take to maintain their power, influence, and job satisfaction. In maintaining this metaphorical capital, legislators may direct their actions toward objectives largely or totally divorced from public-infrastructure maintenance.  In their pursuit of personally chosen ends, they must husband tools or metaphorical capital goods to implement their plans. The metaphorical capital goods that legislators and bureaucrats must employ depend directly on the respective constituencies they must serve and on their own career aspirations.  These capital goods may be intangibles that involve subjective judgments about the future actions required to achieve career ends.

    Neglect of public infrastructure may arise from the legislator’s failure to consider the complementarities between the two political capital goods—power and re-electability (Brätland 2010, 45). This neglect may be reflected in the legislator’s failure to assure budget funding for the maintenance of existing public infrastructure in his district. For example, such neglect may be prompted by a legislator’s focus on the well-publicized construction of new infrastructure.  Although the legislator may neglect budget funding for existing infrastructure maintenance, he may have established sufficient power and re-electability to remain in office and pursue legislative objectives unrelated to maintenance of existing infrastructure.  But such neglect may also arise from the legislator’s shortage of political power, reflecting his failure or inability to generate support in the legislature for budgets that will finance infrastructure maintenance in his home district.  This absence of power may be manifested in a failed logrolling negotiation or a lack of sufficiently strong alliances in the legislature.  The consequence may be the neglect of highways, streets, sewerage systems, and bridges in the legislator’s home district.  Moreover, if the legislator lacks seniority in the legislature, this neglect may occur even though he is a well-intentioned champion of efforts to maintain these infrastructure facilities.

    A legislator’s time preference is also critical in the timing and allocation of his two political capital goods—power and re-electability. One consequence is that any time-structured resource allocation for maintenance that derives from his actions may be totally divorced from any time cycle of deterioration or loss in usability that the public infrastructure facilities may sustain (Brätland 2010, 46).  Hence, in the absence of an overt threat to his reelection, the legislator’s actions over time may well result in chronic neglect of such facilities.

    Like political capital, bureaucratic capital is a metaphor that can shed light on public officials’ entrepreneurial actions or inaction over the course of time. The entrepreneurial bureaucrat of concern here is the senior executive with some direct or indirect responsibility for public infrastructure and with the power to affect how a bureau allocates its resources. As in the case of the legislator whose capital takes the form of a career, in this case the metaphorical capital in question is the bureaucrat’s career. The bureaucrat’s view of his career may take into account several subjectively defined sources of appeal.[16] In any case, the career is the overarching metaphorical capital that governs the bureaucrat’s entrepreneurial actions and the use of the resources at his disposal. This metaphorical capital suggests a time structure of maintenance that may be at odds with concerns over the maintenance of public infrastructure.

    Although the bureaucrat is not an elected official, he must realistically face his own benefactors, constituencies, and power blocs in managing the capital defined by his own career ambitions. These parties include: appointing officials to whom the bureaucrat reports; sponsoring legislators; subordinates in the bureau;[17] that segment of the public most sensitive to the bureau’s activities (that is, self-selected “stakeholders”); and prospective future nongovernmental employers. The latter group in this list would especially concern appointed executive bureaucrats whose long-term career objectives may lie outside of government.  The bureaucrat’s ability to deal with and satisfy these constituencies’ determines the nature of the metaphorical capital goods he must employ in managing the capital represented by his own career.

    What are these metaphorical capital goods? The question pertains to the resources he must employ to succeed. The capital goods required to give the bureaucrat at least the appearance of success include: budgets, reputation, and control. Although these aspects of employment do not necessarily include everything that the bureaucrat might want in a particular governmental position, they comprise the resources required to establish the appearance of success.  These metaphorical capital goods present the bureaucrat with both complementarities and trade-offs in defining and constraining the actions that best enhance his longer-term career aspirations (Brätland 2010, 46-47). In considering these actions, how will infrastructure maintenance weigh into the bureaucrat’s employment of these metaphorical capital goods?  The bureaucrat will employ these capital goods to foster the maintenance of public infrastructure if such action maintains or enhances the prospects of attaining the goals that define his career ambitions. Otherwise, passive neglect of infrastructure may well be ‘rational’ for the bureaucrat.

    But there would be mitigating concerns for the bureaucratic entrepreneur.  The senior bureaucrat must be sensitive to the general public in considering programs of infrastructure maintenance that the bureau might undertake. Infrastructure neglect might conceivably draw unfavorable press, affecting the bureaucrat’s reputation among the general public. However, unless the affected infrastructure involves roads or bridges, public reaction to neglect may well be tepid or nonexistent. In short, given the bureaucrat’s possible motivations, larger government and expanding public budgets do not necessarily imply the availability of more resources for maintenance of depreciating infrastructure.  If the relative neglect of existing infrastructure occurs without significant negative feedback from the public, the bureaucrat may perceive greater career advantage in pursuing ventures that are more likely to draw favorable reaction from appointing officials and sponsoring legislators.  For example, new infrastructure may offer the bureaucrat more reputation-enhancing ways of dealing with his constituencies.

    Although new infrastructure projects find favor with the constituencies that the bureaucrat must please, they tend to crowd out funding for maintenance of existing infrastructure. The bureaucrat may not be particularly concerned with the net social benefits of one infrastructure project as opposed to another competing project (Brätland 2010, 48).  As Randall Holcombe has noted “[i]n undertaking actions with respect to infrastructure maintenance, ‘efficiency in resource allocation.’ is not likely to be a prominent consideration” (Holcombe 2002, 148-149).  The bureaucrat will not reckon opportunity costs in terms of forgone or relinquished social benefits associated with another competing project. Moreover, as he chooses his action, he is unlikely to employ a planning horizon congruent with the realization of any benefits afforded by publicly supported maintenance projects.

    Private entrepreneurs in maintaining hitherto public infrastructure

    Entrepreneurial privatization of infrastructure would have several implicitlyinterrelated but critically distinct features.  For example, entrepreneurial enterprises would not be dependent on the vagaries of governmental appropriations in attempting to allocate investment funds for maintenance of facilities.  Also, private enterprises would not have maintenance plans stifled by officials beholding to political pressures and aspirations of public officials.  Choices between competing investments in infrastructure would not be prompted by the influences of certain politically powerful constituencies.  Moreover, schedules of infrastructure maintenance would not be disrupted by the legislative and bureaucratic delays common in political decision-making.

    We can glean an important insight into public-infrastructure maintenance from the process by which a business firm maintains its own infrastructure. Private property and monetary exchange would enable the entrepreneurial enterprise to use market prices to subjectively evaluate the prospective opportunity costs and benefits associated with alternative schedules of maintenance for its privatized infrastructure facilities.[18]  Implicit in this reckoning would be the entrepreneur’s ability to distinguish capital and income.  Income is a way of looking at capital in terms of its expected return over the entrepreneur’s planning time horizon.  At the same time, capital, as the enterprise’s judgment of net present worth, is a way of looking at the totality of future income from the point of view of the entrepreneur’s reaction to market uncertainty and of his time preference, or rate of discount.  For the enterprise, income would be the amount that could be consumed within a definite period without lowering the expected or desired investment worth of capital as reckoned by the entrepreneurial enterprise (Mises [1949] 1998, 261; Hayek [1941] 2007, 277–78).

    For the entrepreneurial enterprise, investment in maintenance would not necessarily be focused on particular resources, but rather on how the entire complementary combination of owned facilities would affect the enterprise’s profitability (Mathews 1996, 88-90).  The resources at the business entrepreneur’s disposal would be capital goods that could take the form of buildings, equipment, tools, goods of any kind and order, claims, receivables, cash reserves (Mises [1949] 1998, 262). The critical distinction is that specific infrastructure facilities (its capital goods) would not in themselves constitute capital, and their existence would not necessarily assure income or imply anything with respect to their maintenance of affected facilities. These things would become an aspect of capital only when they were owned, deployed, and maintained in the coherent pursuit of a single, unified plan undertaken by a specific enterprise.  Hence, within the context of the enterprise’s planning function, capital would emerge as an entrepreneurial reckoning of the net present monetary worth of the enterprise’s own plan to employ its own facilities or capital goods (Lachmann [1956] 1978, 13).

    Within this calculational context, the entrepreneurial enterprise would be able to make rational choices to maintain its capital as reflected in changes in the enterprise’s prospective worth. Hence, for the entrepreneurial enterprise, depreciation would be always a matter of entrepreneurial judgment with respect to its effect on future capitalized income (Lachmann 1986, 66–67).  Maintenance of capital would always be focused on a desired stream of future income.  Therefore, depreciation would always be judged within the context of the complementarities between various facilities.  Maintenance decisions would focus on a facility’s effectiveness in serving the complementary function of attaining the desired level of current and future profitability.  Each maintenance decision ultimately would relate to the most profitable complementarity within a chosen combination of facilities employed in pursuing an entrepreneurial business plan (Hayek [1941] 2007; Lachmann 1986, 63; Mises [1949] 1998, 512).  Hence, with respect to maintenance, the privatization of infrastructure would have the following implicitly interrelated but critically distinct features: 

    a)    Prospective monetary benefits of maintenance would be appropriable by the entrepreneurial enterprises (that is, costs and monetary benefits would be borne by the same entity).

    b)     Business entrepreneurs would be able to evaluate the anticipated, yet uncertain, monetary trade-offs between current investments in maintenance and the desired future income return earned by providing infrastructure services.

    c)     The entrepreneurial enterprises would be able to integrate plans for the maintenance of their infrastructure facilities into a comprehensive business plan focused on the maintenance of a desired time profile of future net revenue earned from the provision of services (Hayek [1941] 2007, 277).

    d)     Physical deterioration of a particular infrastructure facility would be of concern only to the extent that it is judged to reduce the future monetary income yielded by the complementary combination of facilities that it owns.

    e)     Business entrepreneurs would be able to rank maintenance priorities and assess the extent to which total revenue productivity of its infrastructure facilities as a complementary combination is affected.

    f)      Maintenance plans for particular facilities would be unique to individual entrepreneurial enterprises, reflecting the enterprise’s market expectations and the particular complementarities that would be sought in its chosen combinations of infrastructure facilities.

    g)    Because maintenance would be tied to a monetary income, the enterprise would be able to link its maintenance investments to the demand for its infrastructure services as expressed by its transactions with customers.

     

    Privately held infrastructure would be maintained by profitable entrepreneurial business enterprises that own them.  With the elements of public infrastructure in private hands, entrepreneurial owners would be able derive an income stream from the provision of their services.  Maintenance of this privatized income stream would constitute capital maintenance for the firms owning infrastructure facilities.  Individual entrepreneurial enterprises owning infrastructure would be acting on their own behalf but in the process would be serving the interest of society as a whole in undertaking the maintenance of its own capital.  These judgments of entrepreneurial success would be made with a degree of rationality that would be impossible in the absence of private property and monetary exchange.  While the maintenance of privatized infrastructure would be a form of action that would provide for the future, its success but would be reckoned only in the context of individual entrepreneurial efforts to profitably serve users of owned infrastructure facilities.

    Conclusion

    Resource exhaustion and infrastructure neglect are perennial social concerns that do not have    economically rational governmental solutions.  But, the institutions most capable of dealing with these issues are to be found in the incentives that are faced by private entrepreneurs availed of privatized resources.  Extractive resource renewal and infrastructure maintenance are activities that could become routine by according private entrepreneurs a much less restricted role in societal provision for the future.  However, this process is stymied by the institutional constraints imposed by government.  These constraints include foreclosure of land access, regulatory encumbrances to entrepreneurial management of resources, and, in the case of petroleum, an inability to acquire full property rights in resources discovered by the enterprise.  While entrepreneurial action is crucial to warding off resource exhaustion, these impediments mean that the entrepreneur’s role in resource replacement can be only partially fulfilled.

    Neglect of what is labeled public infrastructure seems to be endemic to government’s assumed responsibility with respect to maintenance.   First the absence of secure ownership rights and the nonexistence of a privatized revenue stream from the sale of services mean that governments are unable to mimic the actions of private entrepreneurs in maintaining in maintaining private infrastructure.  The reason is that although public infrastructure ostensibly yields benefits, the absence of secure ownership and an integrated income stream mean that governments cannot implement a calculational program of maintenance.  Second, career oriented entrepreneurial behavior on the part of legislators and bureaucrats undermine the governmental function of maintaining infrastructure.  While maintenance of public infrastructure may, in some instances, be congruent with the career aspirations of legislators and bureaucrats, their self-interested goals may intervene in the allocation of public funds.

    Governmental failures with respect to infrastructure maintenance offer grounds for privatizing what has been public infrastructure.  As private property, the services of infrastructure would be marketed thus placing the process of maintenance under the discipline of entrepreneurial capital maintenance.  The marketing of infrastructure services would allow the owning enterprise to focus on the maintenance of an integrated income stream.

     

    References

    Alchian, Armen. 1959. “Costs and Output.” In The Allocation of Economic Resources. Moses Abramovitz ed. Stanford, California: Stanford University Press.

    Adelman, Morris. 1993. TheEconomics of Petroleum Supply.  Cambridge, Massachusetts: MIT Press .

    Blackstone, William. 1983 [M. DCC. LXVI]. Commentaries on the Laws of England, Volume 2. New York, NY: Legal Classics Library.

     

    Block, Walter. 2009. The Privatization of Roads and Highways. Auburn, Alabama: The Ludwig von Von Mises Institute.

    Bradley, Robert L. 1996. Oil, Gas and Government: The U.S. Experience. Lanham, Maryland: Rowan & Littlefield Publishers, Inc.

    Brätland, John. 2012. Timing ‘Externalities’ Imposed by Mineral Ownership Law: Coasean Versus Lockean Remedies.  The Journal of Private Enterprise 28(1), 2012, 61–77

    Brätland, John. 2001. Economic Exchange as the Requisite Basis for Royalty Ownership of Value Added in Natural Gas Sales. Natural Resources Journal 41, no. 3: 685-711.

    Brätland, John. 2004. Externalities, Conflict and Offshore Lands: Resolution through the Institutions of Private property. The Independent Review 8, no. 4: 527-548.

    Brätland, John. 2008. Resource Exhaustibility: A Myth Refuted in Entrepreneurial Capital Maintenance. The Independent Review 12, no. 4: 375- 399.

    Brätland, John. 2010. Capital Concepts as Insights into the Maintenance and Neglect of Infrastructure. The Independent Review 15, no. 1: 35- 51.

    Buchanan, James M. 1969. Cost and Choice: An Inquiry in Economic Theory. Chicago, Illinois: University of Chicago Press.

    Dixit, Avinash and Robert Pindyck. 1994. Investment under Uncertainty. Princeton, New Jersey: Princeton University Press.

    Downs, Anthony. 1967. Inside Bureaucracy. Boston, Massachusetts: Little Brown.

    Epstein, Richard. 1985. Takings: Private Property and the Power of Eminent Domain. Cambridge, Massachusetts: Harvard University Press.  

    Foldvary, Fred. 1993. Public Goods and Private Communities: The Market Provision of Social Services. Brookfield Vermont: Edward Elgar Publishing Company.

    Hayek, F. A. 2007 [1941]. The Pure Theory of Capital. Chicago, Illinois: University of Chicago Press.

    Holcombe, Randall. 2002. Political Entrepreneurship and the Democratic Allocation of Resources. Review of Austrian Economics. 15 2/3.

    Hoppe, Hans-Hermann. 2006 [1993]. The Economics and Ethics of Private Property: Studies in Political Economy and Philosophy. Auburn, Alabama: The Ludwig von Mises Institute.

    Lachmann, Ludwig. [1956] 1978. Capital and Its Structure. Menlo Park, California: Institute for Humane Studies.

    Lachmann, Ludwig. 1986.  The Market as an Economic Process. Oxford, U.K.: Basil Blackwell Ltd.

    Loasby, Brian J. 1976. Choice, Complexity and Ignorance: An Inquiry into Economic Theory and the Practice of Decision Making. Cambridge, UK: Cambridge University Press.

    Lopéz, Edward. 2002. The Legislator as Political Entrepreneur: Investment in Political Capital. Review of Austrian Economics. 15 2/3.

    Lowe, John S. 1995. Oil and Gas Law. Minneapolis, MN: West Publishing Company.

    Mathews, John A. 1996. Strategizing, Equilibrium and Profit. Stanford, California: Stanford University Press.

    McDonald, Stephen L.  1971. Petroleum Conservation in the United States: An Economic Analysis. Baltimore, MD: The Johns Hopkins Press; Baltimore.

    Mead, Walter, Asbjorn Moseidjord, Dennis Muroaka, and Phillip Sorensen.  1985. Offshore Land: Oil and Gas Leasing and Conservation on the Outer Continental Shelf. San Francisco, California: Pacific Institute for Public Policy Research.

    Mises, Ludwig. 1998 [1949]. Human Action: The Scholar’s Edition. Auburn, Alabama: The Ludwig von Mises Institute.

    Mises, Ludwig. 2006 [1962]. The Ultimate Foundation of Economic Science. Indianapolis, Indiana:The Liberty Fund, Inc.

    Niskanen, William. 1971. Bureaucracy and Representative Government. Chicago, Illinois: Aldine Atherton Publishing Company.

    Rothbard, Murray N. 1998 [1982]. The Ethics of Liberty. New York, NY: New York University Press.

    Rothbard, Murray. 2004. Man, Economy and State with Power and Market, The Scholar’s Edition. Auburn, Alabama: The Ludwig von Mises Institute.

    Smith, Adam.  1982 [1976]. Wealth of Nations.  Indianapolis, Indiana: The Liberty Fund, inc.

    Taylor, Thomas C. 1970. Accounting Theory in Light of Austrian Economic Analysis. Ph.D. Dissertation. Louisiana State University.

    Williams, Howard R. and Charles J. Meyers, Oil and Gas Law: Abridged Edition 203.1-203.3. (1993).

    Wilson, James Q. 1989. Bureaucracy: What Government Agencies Do and Why They Do It. New York, NY: Basic Books. 

    Wollstein, Jarret B. 1974. Public Services Under Laissez Faire. New York, NY: Arno Press.

     

     


    [1]            A reviewer reminds the author that society cannot be treated an actor.  Of course, only individual human beings act.  The term ‘society’ is used here only for rhetorical  convenience.  Mises notes that “society does not exist apart from the thoughts and actions of individuals” (Mises [1962] 2006, 71).

    [2]             The statement is simply a praxeological deduction.  Relevant examples are hypothetical; demand for petroleum could be destroyed by interventionist mandates imposed globally.   In such a case, reserve replacement would cease even though in a free market exploration and development would otherwise continue to be profitable.  Obviously, some policy makers are attempting to bring coal to such a fate.

    [3]                   An exploratory effort can be viewed as successful if the firm making the discovery considers it to be a profitable candidate for eventual development and production.

    [4]                 [4]  As this reality applies to production in general, see Alchian (1959, 23-40).  Alchian’s insight is evident in the research on leasing of Federal offshore lands on the Outer Continental Shelf (Mead et. al. 1985, 110-112).

    [5]              The investment valuation described here treats these distinct phases of resource exploitation as distinct ‘real options’ as opposed to stock call options and in which a higher statistical volatility in the price of the underlying asset enhances the value of both the stock option and the respective real options.  See Dixit-Pindyck (1994).

    [6]             Interestingly enough, each successive stage of investment in the project imparts a successively higher investment value to the project itself since these properties are traded between firms.

    [7]             Currently, petroleum law stipulates that the resource is not owned until it is captured at the wellhead (Williams and Meyers 1993, 203.1-203.3).   See also: Lowe (1995, 29).  Discovery does not establish any ownership claim.  Because of the fact that petroleum ‘migrates’ within reservoirs and, hence, across property boundaries, a ʻrule of captureʼ at the wellhead has been adopted.

    [8]         The surface owner’s economic interests are defined by the attainment of a rate of revenue recovery that maximizes the present value of the royalty-receivables revenue stream.  Delay only diminishes this present value of royalties receivable (Brätland 2001, 694-695).

    [9]             Historically, these implied court-imposed covenants were thought to be necessary because lease agreements did not usually set explicit requirements for operation of the lease or marketing of the product.  But, in fact, these covenants are enforced by the courts for the financial benefit of surface owners as the owner of the fixed percentage royalty.  The one covenant in question is referred to as the ‘diligence requirement.’ Its purpose is to stymie any speculative discretion in timing of operations.  But as Mises emphasized, speculative discretion is critical in dealing with market change (Mises 1998, 253; see also: Brätland 2012, 61-62; and McDonald 1971, 83-84).  In fact expedited production works to the financial detriment of the extracting firm and blocks what would ordinarily be considered ‘economic conservation of the resource’ and entrepreneurial provision for the future.

    [10]           This proposal was first put forward by Murray Rothbard (1998 [1982], 71-72).  A version of the Rothbard proposal has been provided by Robert Bradley (1996, 69-74).  Rothbard’s focus is on the acquisition subsurface ownership rights as would be achieved through an act of being the first discoverer of petroleum deposit.  He describes a form of Lockean original appropriation or ʻhomesteadingʼ (i. e. first use of an unowned resource secures ownership).  Ostensibly, current jurisprudence around the world prohibits this form of original appropriation.   Robert Bradley has developed these ideas brilliantly in the work cited.

    [11]            Directional (slant) drilling would be permitted such that a particular subsurface structure could be accessed from a multiplicity of surface locations.  Competition between surface owners would weaken the bargaining power of any single surface owner (Bradley 1996, 72).

    [12]            It would absurd to conclude that a party owning and using the surface, for whatever purpose also comes to own something about which he/she is ignorant or which the party has undertaken no action to establish a legitimate Lockean property claim.  Ownership in this case must be premised on some form of action and expenditure of resources to establish a legitimate ownership claim (Epstein 1985, 61).  The Blackstone concept defining the scope of property ownership is simply obsolete and dysfunctional.

    [13]             This argument is congruent with Mises’ discussion in Human Action (1998, 650-651).  A failure ʻto buyʼ property for its use or a failure to pay for its use is the source of externality.  The act of buying or paying are the actions by which the actor takes responsibility for his actions.  Hence, externalities are avoided.  

    [14]           The assumption of government’s maintenance responsibility no doubt arises from the notion that the services these facilities yield are ʻpublic goodsʼ that cannot be provided privately.  However, evidence suggests that public infrastructure’s services can be provided through private entrepreneurial undertakings; see:  Niskanen 1971; Wollstein 1974; Foldvary 1993, 1–15; Rothbard 2004, 1029–41; Hoppe [1993] 2006, 7; Block 2009, 232).

    [15]             While in some narrow instances, tolls can be collected for marginal use of some facilities, the problem of imputing maintenance tradeoffs for all components of public infrastructure still remains.

    [16]           William Niskanen (1971, 38) and Anthony Downs (1967, 2) offer similar lists.

    [17]           Although the bureaucrat has managerial authority over subordinates, he is unlikely to experience sustained success in his position if he ignores the career aspirations of those under his organizational control.

    [18]         The task of economic calculation for the individual, according to Mises, “is to adjust his actions as well as possible to his present opinion concerning want satisfaction in the future” [1949] 1998, 215)  Mises also notes: “The question . . . is whether a certain course of conduct increases or decreases the productivity of our future exertions” ([1949] 1998, 511).