misallocation

there follows a classic case study of misallocated capital through taxation funded ‘investment’. the story is to be found in Bill Bryson’s account of New York State's canal west. He explains that it ‘made’ new york the industrial capital of the then united states and that in turn the industrial capital of the northern hemisphere.

But Bryson also states that Canada was better positioned to take that position and it had a huge river going deep into its heartlands of natural and agricultural resources.

So, would it not have been better, ignoring the artificial boundaries of states, for the capital that was taxed to fund the NY state canal to have been naturally invested into more promising opportunities in Canada where a pre-existing water bourne transport route was?

Or to put it another way – if you had a million dollars ot invest in the north American continent – would you;

A – build a massive and expensive canal across NY state and then put a factory at the end of it with what meagre funds remained? Or…

B – invest the whole 1 million dollars into a massive factory or number of factories at any number of points along this canadian river?

It’s not a question that needs definitively answering. It’s not a question of which should the gov have spent the cash on. It doesn’t even matter what everyone’s personal opinion is. The only thing that matters is what the aggregate outcome of the free market would be. That is to say what would have been the overall result of the many decisions by countless entrepreneurs as to where to invest. Indeed it may have been the case that the NY canal would have been built perhaps bigger better and faster. Or perhaps both Canada and NY. No one can know and that is the point. No single agency can possibly pick a winner. No hyper computer, or learned council exists or has existed that could consider all the infinite information that is collated and transmitted by the price mechanism and acted on by individuals motived by their own self interest and acting upon their own specialist knowledge.

Government can never pick a winner and it should not be in the business of doing so