Hammond’s Soviet-style rail policies

When Transport Secretary Philip Hammond announced last week that the government would procede with three big rail projects – High Speed 2, Crossrail and Thameslink – it was a bit like a Soviet commissar boasting how many new tractors he would be sending to favoured collective farms.

These schemes are almost entirely state-directed: taxpayers will pay for the infrastructure and officials will determine the details of the routes. And like so many socialist grands projets, the returns on the “investment” are likely to be negative, since taxpayers will in all likelihood have to provide substantial operating subsidies to support the new train services (as has been the case with High Speed 1). In addition to these direct costs, there will also be significant deadweight losses resulting from the associated taxation.

As well as imposing enormous costs on taxpayers to fund uneconomic rail schemes, it is also telling that the government has actively prevented major private-sector investment in new transport capacity through its airports policy and its prohibition of Heathrow expansion.

Students of Austrian economics will not be surprised that the misallocation of resources by the state is endemic in the transport sector. Transport is subject to a very high degree of central planning by politicians and bureaucrats, with new rail schemes representing just one example. And Austrians have explained why central planning authorities are incapable of making efficient resource allocation decisions.

In particular, central planners are hampered by the absence of relevant market prices and therefore find it very difficult to calculate accurately costs and outputs (see Mises, 1949, p. 696). While there are prices on Britain’s railways, these are severely distorted as a result of huge government subsidies, the regulation of many fares, the imposition of an artificial structure on the industry, planning controls and so on. A scheme that appears to have positive economic benefits may only do so as a result of other layers of harmful state intervention.

Moreover, since government decision-makers do not own the capital they are allocating they have less incentive to act responsibly or show initiative. They lack the “commercial mindedness” of entrepreneurs (see Mises, 1935). It is also worth mentioning the insights of public choice theory on the behaviour of politicians and bureaucrats – in particular how decision-making processes tend to be captured by concentrated interest groups such as the rail lobby at the expense of dispersed taxpayers.

If the government wishes the UK to have an efficient and competitive transport sector that does not burden taxpayers and which fosters prosperity by lowering the costs of trade, it should reject the central planning mentality, remove distortions, and shift the supply of infrastructure to the private sector.

1 December 2010, IEA Blog

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