Private Investment is Best

Mr. Roeder is an advertising and merchandis­ing counselor in Webster Groves, Missouri.

Capital investment was, until recently, considered to be the con­cern of private interests; it has now become very much the con­cern of government. Government has taken over, so the theory goes, of necessity. It is rightly claimed that capital investments are need­ed for material progress and result in public benefit. So if private capital cannot or will not make an investment, there is no course open but for government to step in and take over. On this theory the government has spent and pledged—not millions and millions—but billions and billions of the taxpayers’ money. But, to what end?

This government intervention is based on the triple supposition:

—that private capital invest­ment either ignores or works against the public good;

—that all government capital in­vestment is solely for the public good ; and

—that the government can pro­vide unlimited capital investment funds.

All three suppositions are false.

The capital structure of a na­tion consists of the plant and dur­able goods with which industry and agriculture operate, plus the transportation, banking, and com­munication systems. The capital structure of a nation determines the material welfare of the people and sustains their living standard.

The spread between the low liv­ing standard of many Asiatic countries and our own is attribu­table almost entirely to the differ­ence in the production plant. In the backward countries, what can­not be accomplished by a pair of hands and a strong back is largely left undone. In our country, we have provided the worker with abundant tools and mechanical horsepower that multiplies man­power many times. The resultant high productivity supplies prod­ucts in abundance at low unit cost. Instead of a one-sided gain for the so-called capitalistic class, the building and maintaining of a suf­ficient and efficient production plant benefits all the people and is the only road to a high general living standard.

A constant flow of investment funds is necessary to meet the needs of a growing population, to increase the efficiency of produc­tion tools, and to maintain the production plant in working order. Though we sometimes speak of capital goods as permanent pos­sessions, this is not true. They are durable, but not everlasting. Often an investment simply re­places tools and equipment that have become obsolete; a new structure replaces one that has been destroyed by the elements or has outlived its usefulness. Much of the apparent capital investment is actually replacement and main­tenance which does not add to the total capital plant.

Capital Depends on Prior Production

Every capital investment must come out of prior production. To increase the size of the produc­tion plant, there first must be a surplus production above imme­diate consumption and above the replacement and maintenance of the present capital plant. That surplus production capacity is comparatively small—very small. Additions to the capital plant can come only slowly and gradually. There will always be more to be done than can be done—a problem of deciding that certain capi­tal investments are to be made and that others are not to be made. Even the richest nation must exercise wisdom in its choice of capital projects and apply effi­ciency in the execution—or else pay the penalty in lack of prog­ress. There never is enough sur­plus production capacity to put in­to operation all desirable capital projects.

Our capital plant is a part of our wealth and has been accumu­lating since our colonial days—some three hundred years. The estimates of the total wealth in our nation tell how very gradual is the real increase of our capital plant. Our national wealth is esti­mated at between six hundred and seven hundred billion dollars. This takes in all public and private material possessions and includes all lands, buildings, railroads, communication facilities, facto­ries, machinery, tools, livestock, homes, furniture, inventories of goods, all property, everything. This accumulated wealth of three hundred years amounts to less than two years of output at cur­rent rates of production. There is no room for waste. The record be­speaks emphatically the constant need to direct the ever-limited capital investment fund to the greatest possible utility.

The surplus production avail­able for capital projects is the re­sult of privately conducted pro­duction. The government is not a producer and consequently cannot add one iota to this fund. The only way government can obtain prop­erty is to take it away from pri­vate sources. This taking from private funds may enlarge the government investment fund, but at the same time it diminishes the amount private interests can invest. From the standpoint of public interest this leaves but one question: “Is the public best served through capital invested by private sources or by govern­ment?”

Private Profit and Public Interest

Let’s consider the assumption that private capital investment ig­nores or works against public in­terest. It is quite true that the ac­tuating motive of private capital investment is profit. However, the public benefits because of, and not despite, that motive. The profit motive itself surrounds private capital investment with checks that work to the advantage of the public.

There is no question that the most needed capital projects are those producing maximum public good. They are the ones that pri­vate capital investment will seek because they promise the best re­turn and the greatest security.

The personal whims of private investors do not really determine their capital investments. They make those that the public wants them to make. Not only must their investments produce a product or a service that the public wants, but they must produce at a price the public will pay. It boils down to this: The public is boss. Pri­vate investors serve themselves best by serving the public best. So, regardless of motive, private capital investment does work for the public good.

Political Allocation of Resources

The assumption that govern­ment capital investments, subsi­dies, and guarantees work solely for public good is pure fancy. Government is not an economic but a political institution: politi­cal motives underlie all govern­ment action. Successful politics is not always good economics. Politi­cal expedience is far too often op­posed to public good.

Government is in the hands of politicians. Politicians are mere men, always with an eye to their own interests. So it is that most government capital investments are made, not where they are most needed, but where they will best serve political purposes.

The “pork barrel” is tapped at every session of Congress, con­gressmen dipping into the multi­million-dollar kitty for more or less useless projects to put on a show for the folks back home and help Mr. Congressman retain his seat.

We often find government de­partments working at cross pur­poses. For instance, while one de­partment is taking fertile land out of production at government expense, another department is putting arid land into use through costly government support. Through government investment, millions and billions have been di­verted from economic good to po­litical use—and such diversion is a waste that no nation can afford.

The Unseen Waste

The third supposition that the government has unlimited funds also is entirely without founda­tion. We have already observed that the government has no re­sources; whatever resources the government obtains are taken away from the people. But do we realize what this means to our na­tional welfare? A useless “pork barrel” investment by govern­ment means that a useful and needed production operation must be denied, a waste multiplied thousands of times and measured in billions of dollars. This is a serious waste at all times and is particularly devastating now when our rapidly growing population demands a greatly expanded and highly efficient capital plant.

That capital investment con­fined to private sources is an ef­fective builder of the nation’s capital plant is not only sound theory but also solid fact. During the first century and more of our national existence, capital invest­ment came almost entirely through private investors. Under this policy, and starting from scratch, the people of this nation achieved the industrial leadership of the world and provided a general liv­ing standard unequaled in all his­tory.

How far have we now moved toward government investments, subsidies, and guarantees? No one knows the exact extent of these financial obligations. We do know that the government has pledged its credit for an astronomical amount. The financial obligations assumed by the government have been estimated at a thousand bil­lion dollars.* This includes the na­tional debt, the direct liabilities such as social security, and the myriad government guarantees. If a private organization had liabili­ties exceeding assets, it would probably be called bankrupt. The government has assumed financial obligations, direct and contingent, that exceed the entire national wealth by at least 50 per cent.

A Day of Reckoning

For a while, and only a while, government can skate along on this thin ice by the device of money and credit manipulation—monetizing the debt and increas­ing taxes that already are confis­catory. But the government, like a person or a private organiza­tion, must eventually come to a day of reckoning. And what then?

Government obligations are either worthless, or they are a mortgage on private property. What, then, has happened to pri­vate ownership in the United States if government has mort­gaged all private property up to the hilt and beyond?

The old-time medicine man peddled his nostrums with high promise but sad result. It was a swindle. And they are swindlers today who would have us believe that “government must make capi­tal investments because the greedy private interests will not.” If pub­lic good is the objective, the gov­ernment can best serve that pur­pose by restoring and leaving capital investment where it be­longs—in private hands.

Footnotes

*See “What Is the National Debt?” by Medford Evans, THE FREEMAN, October 1957. p. 37.