There have been two very serious train accidents in Spain in the past few days with a significant loss of life. I do not wish to discuss these specific events at this time as it is a time of mourning. The aim of this article instead is to discuss, from an Austrian economic perspective, the argument that is being presented within the context of these accidents. Underfunding is the constant complaint of public services.
Funding
The first question is, what is funding? Basically, funding consists of the resources that need to be in place for production to happen. This would include money, land, capital goods, and labor. It would also include capital as a lot of resources need to be paid for before production is finished and revenue is obtained. The obvious example is labor, as entrepreneurs will need to pay labor “as they go,” normally either weekly or monthly, well in advance of any production being finished and revenue obtained in a typical company.
Public funding is quite different. Public funding is provided by government “revenue” which includes a mixture of taxes, debt, and monetary inflation, all forcefully taken from the private sector. The main difference is that revenue is taken coercively, then budgeted to a public secretary entity to accomplish a task, disconnecting revenue from service. Even if a price is levied on users of the service, as is normal in public trains, it never covers the intended revenue and in many cases is waived. This ticket in effect is a small tax that direct users of the service pay. Further, there is no profit and loss.
Public versus Private
In a free market, an entrepreneur will need to allocate the correct amount of resources. A successful entrepreneur will need to estimate correctly the amount of demand there is for a good or service.
Consumers determine the value of goods and services by their individual subjective valuations. A diamond is not valuable in itself, for example. Some people demand it. To me, it is just another shiny rock, but to others it is a very valuable thing to have. It is individual subjective valuation that gives value to things. If you are still unconvinced, just ask yourself how much do gas lamps cost nowadays.
Consumers will determine if they value whatever the entrepreneur has produced more than what his inputs were. If the good or service produced are more valuable, then the entrepreneur will earn a profit, which also means he will have created value for the community. If not, he will earn a loss; he will have destroyed value. He created something less valuable from inputs that were more valuable.
The function an entrepreneur provides to the community is that they take resources that are less valuable to the community, combine them and produce new resources that are more valuable to the community. A successful entrepreneur provides net value to the community, represented by profits.
This is why accounting and economic calculation is so important for entrepreneurs. Without a profit-loss analysis, it is impossible for the entrepreneur to know if he is using the resources efficiently and creating value or if he is just destroying value.
But this is in a free market. An entrepreneur that produces profit will be able to continue creating value to the community. One that produces losses will either need to adapt or will go out of business. This constant strive for profit is what helps private, free markets regulate themselves and direct resources to the most efficient uses, those that create the most value to consumers as valued by those consumers. This is Adam Smith’s “invisible hand.”
Are Public Services Underfunded?
And this brings us to the public sector. The quick answer to the above question is that they are not underfunded. Why? Because it is impossible, in a public enterprise, to know how many resources to allocate or how much funding is needed.
A public service has no consumers, only users. This means that all funding is provided by government which appropriates resources from the private sector. Similarly, revenue is also provided in the same way. There are no consumers because a public good or service is charged at whatever “price” the public sector decides and taken from the private sector by force.
Basically, it is government bureaucrats which decides what people pay for the inputs and what people pay for the outputs. The would-be “consumers” pay for these things regardless and have no say on what a service “costs.” This means there are no real prices in a public setting, just allocations of government budget decided by the government itself.
This is the famous “impossibility of economic calculation” that Austrian economist Mises formulated. Without real prices—voluntary exchanges between supply and demand, expressed in monetary terms—it is impossible to calculate if there is a loss or a profit. Without that, there is no rational way to allocate resources. A public enterprise has no way of knowing if it is wasting resources. It has no way to calculate if it is creating value to the community or destroying it.
Why Underfunding Is Argued
Without the possibility of calculation, if resources are being wasted, inefficiencies will occur. These will mount over time. As inefficiencies mount the only way to maintain output is to pour more resources in.
Coupled with this is the lack of incentives caused by the lack of a profit motive. When there is no profit possible, and wages are determined by the political system, the way to improve one’s situation is to work less. That will mean an increase in remuneration. And a way to reduce work without reducing output is again to require more resources from the politicians—more labor and more capital goods.
So every single public department and public enterprise will always push for more funding. This is why the underfunding argument is used so much. This is not a glitch, this is what a public system is. When you make people pay forcefully for something, you lose their individual valuations. Things do not have intrinsic value, it is individuals that give them value.
Without the input from individuals, one cannot value things. If we lose that information, we also lose the information about what is scarce—what supply is too low or too high. Without real supply and demand, production is blind. We are just wasting resources and destroying value for the community. This is why all pure communist systems always fail. If everything is public, there cannot be any kind of rational allocation of resources.
It also explains why an increase in public expenditure does not produce better public services.
Conclusion
We still don’t know what particularly caused the train accidents and we may never know. But we can answer other questions. Is the public railway network in Spain underfunded? No. Is it mismanaged? Yes. Can we solve its problems with more extracted money or resources? No.
The issue with Spain’s railway network is that it is public. Public services are always and everywhere more expensive and of lesser quality than a free private market system. Unless someone can come up with a real solution to the calculation problem and the incentive problem which are features of all public enterprise, we must consider public services worse than private ones, always and everywhere.
The solution to a bad public service is not more money or “better” managers, it is to scale back the public monopoly and allow private enterprise to provide that service. The freer the system, the better and cheaper the goods and services will be.
I fear that these horrible events will be used for the opposite agenda—to increase public intervention and expenditure, which will continue to destroy resources without providing a better or safer service.
But there is another way. We can all work together to make a better system. But this needs to be done by voluntary transactions in a free market. That is the only way to rationally fund services. We as individuals can come together to select and develop a better way of doing things.
