Capital concepts as insights into the maintenance and neglect of infrastructure.

• Author: Bratland, John

In this article, I focus on the root causes of failure to maintain the components of "public infrastructure" once they are in existence. Although entrepreneurial enterprises routinely maintain privately owned infrastructure, public infrastructure is notably and typically neglected. Evidence of neglect is apparent and easily highlighted in the condition of bridges in the United States. Prior to the 2007 bridge collapse in Minneapolis, Minnesota, the National Transportation Safety Board reported that "one-quarter of all bridges in the U.S. are considered structurally deficient, and 80,000 bridges across the country need some sort of reconstruction or rebuilding" (Avien 2007). The flooding of New Orleans, which was apparently a consequence of failures to maintain levees and flood walls, heightened public unease over such neglect. This pattern suggests a systemic failure to maintain existing public infrastructure, including roads, bridges, water mains, sewerage systems, streets, and schools.

How should we interpret this pattern? What lessons should we glean from these and other examples of apparent infrastructure neglect? In his recent book Bold Endeavors, Felix Rohatyn advances his own answers: "These tragedies ... are only harbingers of many national disasters that are to come.... America needs to rebuild its infrastructure. It is a critical national priority, a costly long-term investment, and a visionary enterprise.... [T]he federal government has traditionally been the indispensable investor in our nation.... [T]his book is an appeal that we treat the renewal of our infrastructure as a necessary federal capital investment" (2009, 1-5). Is Rohatyn right? Or is the neglect inherent in the very fact of public provision of such infrastructure? Is the neglect of public infrastructure endemic to its governmental provision and management and thus inherently inevitable? The answer to the latter two questions is yes. We can understand the neglect of public infrastructure most directly by focusing on two essentially metaphorical concepts of capital.

One prevailing but misleading concept of capital is the presumption that public infrastructure may be viewed as "public capital." Is this label apt? In an economic sense, the legitimate concept of capital is premised on an entrepreneur's ability 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 management of private capital. Capital maintenance ultimately pertains to the entrepreneur's ability to maintain or enhance an enterprise's expected income. What would the counterpart of enterprise income be for a government in attempting to reckon requisite maintenance of public infrastructure? (1) Metaphorically, the income counterpart would be the total benefits yielded by all components of infrastructure as a totality. The maintenance problem arises from the absence of ownership of public infrastructure and the fact that the infrastructure's benefits yield no appropriable sales revenue that can serve as a guide to maintenance. (2) Hence, neglect appears to be inherent in the fact of government provision. Labeling components of infrastructure as public capital is simply a metaphor that misleads the electorate into thinking public infrastructure can be successfully maintained.

A second concept of capital accounting for neglect manifests itself in the actions of public officials seeking to enhance the "political and bureaucratic capital" represented by their own personal career objectives. We may expect that various forms of self-defined, time-structured strategies used by elected and appointed public officials will thwart what some may view as a more rational maintenance of infrastructure facilities. Career, whether focused on selfish or humanitarian aspirations, becomes the metaphorical capital that public officials maintain as they deploy the means (metaphorical capital goods) at their disposal. Action undertaken to maintain political and bureaucratic capital may entail, in some instances, that neglect of public infrastructure is a rational course of action for officials who bear direct or indirect responsibility for maintenance. In other words, infrastructure maintenance's time stream of public benefits is not the principal motivational consideration for officials responsible for budget formulation and the allocation of outlays.

Capital concepts point to a sharp distinction between the processes by which private and public infrastructure are maintained. Although the facilities that constitute public infrastructure are commonly viewed as a form of public capital, evidence suggests that government cannot maintain this infrastructure in a manner analogous to the maintenance of private infrastructure. (3) The nature of governmental institutions necessarily entails neglect of public infrastructure and implies that private ownership and market incentives are critical to the maintenance of all infrastructure.

Private-Infrastructure versus Public-Infrastructure Maintenance

We can understand the neglect of public infrastructure better by comparing the process of private capital maintenance and the process that characterizes maintenance of so-called public capital as embodied in the countless disparate components of infrastructure that range from schools to sewerage systems. Assume that the government is simply an analogue of the entrepreneurial enterprise in implementing a plan for the use and maintenance of infrastructure facilities. To view the government in this way, one must treat the components of public infrastructure as counterparts of the capital goods that enterprises deploy in the implementation of business plans. In essence, the entrepreneur invests in the maintenance of capital to obtain a desired time stream of income. The question is, Can a government do the same?

Income as the Focus of Private-Infrastructure Maintenance

We can glean an important insight into public-infrastructure maintenance from the process by which a business firm maintains its infrastructure. Private property and monetary exchange enable the entrepreneurial enterprise to use market prices to evaluate subjectively the prospective opportunity costs and benefits associated with alternative schedules of maintenance. (4) Implicit in this reckoning is 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 horizon. In contrast, capital, as a 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. Income is the amount that can be consumed within a definite period without lowering the expected or desired investment worth of capital as reckoned by the entrepreneur (Friedman 1957, 10; Mises [1949] 1998, 261; Hayek [1941] 2007, 277-78).

For the entrepreneurial enterprise, investment in maintenance is not necessarily focused on particular resources, but rather on how the entire complementary combination of resources contributes to the enterprise's profitability. The resources at the business entrepreneur's disposal are capital goods, which may take the form of "pieces of land, buildings, equipment, tools, goods of any kind and order, claims, receivables, cash or whatever" (Mises [1949] 1998, 262). The critical distinction is that capital goods do not in themselves constitute capital, and their existence does not necessarily assure income or imply anything with respect to their maintenance. These things become an aspect of capital only when they are owned, deployed, and maintained in the coherent pursuit of a single, unified plan that a specific entrepreneurial enterprise undertakes. Capital, in distinction, emerges as the entrepreneur's reckoning of the net present monetary worth of his own plan. By attending to the distinction between capital and capital goods, we understand that without cohesive entrepreneurial plans, the things that would otherwise be capital goods would not even be capital goods (Lachmann [1956] 1978, 13).

Within this calculational context, the entrepreneur can make rational choices to maintain capital as reflected in changes in the enterprise's prospective worth. Because of market changes and the uncertain success of entrepreneurial objectives, actions taken to maintain capital are fundamentally speculative. Hence, for the entrepreneurial enterprise, depreciation is always a matter of entrepreneurial judgment with respect to its effect on future capitalized income (Lachmann 1986, 66-67; Osterfeld 1992, 23-30). Investment in the maintenance of capital, as distinct from the maintenance of capital goods, protects the prospects of a desired stream of future income for the enterprise. Therefore, depreciation must always be judged within the context of the complementarities between various capital goods, and a maintenance decision is never focused necessarily on "wear and tear" sustained by particular capital goods as such. Rather, the focus must always be on the capital good's effectiveness in serving the complementary function of attaining the desired level of current and future profitability. Each maintenance decision ultimately relates to the most profitable complementarity within a chosen combination of capital goods employed in pursuing an entrepreneurial plan (Hayek 1941; Lachmann 1986, 63; Mises [1949] 1998, 812). The maintenance of private capital under conditions that allow economic calculation has the following implicitly interrelated but critically distinct features:

* Prospective monetary benefits of maintenance are...