If You Build It – Privately – They Will Come

Ideas on Liberty
Economics on Trial
August 2000

by Mark Skousen

“Government provides certain indispensable public services without which community life would be unthinkable and which by their nature cannot appropriately be left to private enterprise.” – PAUL A. SAMUELSON

If you take a course in public finance, you will invariably encounter the “public goods” argument for government: Some services simply can’t be produced sufficiently by the private sector, such as schools, courts, prisons, roads, welfare, and lighthouses.

The lighthouse example has been highlighted as a classic public good in Paul Samuelson’s famous textbook since 1964. “Its beam helps everyone in sight. A businessman could not build it for a profit, since he cannot claim a price for each user.” 1

Really? Chicago economist Ronald H. Coase revealed that numerous lighthouses in England were built and owned by private individuals and companies prior to the nineteenth century. They earned profits by charging tolls on ships docking at nearby ports. The Trinity House was a prime example of a privately owned operation granted a charter in 1514 to operate lighthouses and charge ships a toll for their use.

Samuelson went on to recommend that lighthouses be financed out of general revenues. According to Coase, such a financing system has never been tried in Britain: “the service [at Trinity House] continued to be financed by tolls levied on ships.”2

What’s even more amazing, Coase wrote his trailblazing article in 1974, but Samuelson continued to use the lighthouse as an ideal public good only the government could supply. After I publicly chided Samuelson for his failure to acknowledge Coase’s revelation,3 Samuelson finally admitted the existence of private lighthouses “in an earlier age,” in a footnote in the 16th edition of his textbook, but insisted that private lighthouses still encountered a “free rider” problem.4

Private Solutions for Public Services

The lighthouse isn’t the only example of a public good that can be provided for by private enterprise. A privately run toll road operates in southern California. Wackenhut Corrections manages state prisons. Catholic schools provide a better education than public schools. The Mormon Church offers a better welfare plan than the USDA food stamp program. Habitat for Humanity builds houses for responsible poor people.

And now, for the first time in 38 years, there is a privately built major league baseball stadium-Pacific Bell Park, new home of the San Francisco Giants. After Bay area voters rejected four separate ballot initiatives to raise government funds to replace the windy and poorly attended Candlestick Park, Peter Magowan, a Safeway and Merrill Lynch heir, teamed with local investors, to buy the club and, with the help of a $155 million Chase Securities loan, built the new stadium for $345 million. The owners also got huge sponsorships from Pacific Bell, Safeway, CocaCola, and Charles Schwab.

So far the private ballpark has been a super success, selling a league-leading 30,000 season tickets for the 41,000seat stadium. The team’s 81 home games are nearly sold out. Other team owners, whose stadiums are heavily subsidized, were skeptical, but a dozen team owners have visited the new operation to study what they’ve done. They include George Steinbrenner, who is considering a $1 billion new Yankee stadium.5

Economists Attack Public Financing

Perhaps private funding of major league sports facilities has been influenced by two recent in-depth studies by professional economists attacking publicly subsidized sports arenas. In Major League Losers, Mark Rosentraub of Indiana University (and a big sports fan) studied stadium financing in five cities and meticulously demonstrated that pro sports produce very few jobs with little ripple effects in the community, take away business for suburban entertainment and food venues, and often leave municipalities with huge losses.6

A Brookings Institution study came to similar conclusions. After reviewing major sports facilities in seven cities, Roger G. Noll (Stanford) and Andrew Zimbalist (Smith College) found they were not a source of local economic growth and employment, and the net subsidy exceeded the financial benefit to the community.7

These empirical studies confirm a longstanding sound principle of public finance: Beneficiaries should pay for the services they use. In my free-market textbook I call this “The Principle of Accountability,” also known as the “benefit principle.” It’s amazing how often politicians violate this basic concept. For example, John Henry, a commodities trader worth $300 million and owner of the Marlins baseball team, is pushing through the Florida state legislature a bill to tax cruiseship passengers to help fund a new Miami ballpark. (Fortunately, Governor Jeb Bush just vetoed the bill.)

Please, will someone send Mr. Henry a copy of my free-market textbook, Economic Logic?

1. Paul A. Samuelson, Economics, 6th ed. (New York; McGraw Hill, 1964), p. 159.
2. Ronald H. Coase, “The Lighthouse in Economics” in The Firm, the Market, and the Law (Chicago: University of Chicago Press, 1988), p. 213. Coase’s article originally appeared in The Journal of Law and Economics, October 1974.
3. Mark Skousen, “The Perseverance of Paul Samuelson’s Economics,” Journal of Economic Perspectives, Spring 1997, p. 145.
4. Paul A. Samuelson and William D. Nordhaus, Economics, 16th ed. (New York: McGraw Hill, 1998), p. 36n.
5. Peter Waldman, “If You Build It Without Public Cash, They’ll Still Come,” Wall Street Journal, March 31, 2000, p. 1.
6. Mark S. Rosentraub, Major League Losers: The Real Cost of Sports and Who’s Paying for It (New York: Basic Hooks, 1997).
7. Roger G. Noll and Andrew Zimbalist, Sports, Jobs, and Taxes: The Economic Impact of Sports Teams and Stadiums (Washington, D.C.., Brookings Institution, 1997).

What It Takes to Be an Objective Scholar

Economics on Trial
IDEAS ON LIBERTY
April 2000

What It Takes to Be an Objective Scholar
by Mark Skousen

“It was the facts that changed my mind.” -Julian Simon (1)

During the 1990s we watched the Dow Jones Industrial Average increase fourfold and Nasdaq stocks tenfold. Yet there were well-known investment advisers-some of them my friends-who were bearish during the entire period, missing out on the greatest bull market in history. (2)

How is this possible? What kind of prejudices would keep an intelligent analyst from missing an overwhelming trend? In the financial business the key to success is a willingness to change your mind when you’re wrong. Stubbornness can be financially ruinous. When a market goes against you, you should always ask, “What am I missing?”

Over the years, I’ve encountered three kinds of investment analysts: those who are always bullish; those who are always bearish; and those whose outlook depends on market conditions. I’ve found that the third type, the most flexible, are the most successful on Wall Street.

Confessions of a Gold-Bug Technician

A good friend of mine is a technical analyst who searches the movement of prices, volume, and other technical indicators to determine the direction of stocks and commodities. Most financial technicians are free of prejudices and will invest their money wherever they see a positive upward trend, and avoid (or sell short) markets that are seen in a downward trend. But my friend is a gold bug and no matter what the charts show, he somehow interprets them to suggest that gold is ready to reverse its downward trend and head back up. Equally, he always seems to think the stock market has peaked and is headed south. As a result, throughout the entire 1990s he missed out on the great bull market on Wall Street and lost his shirt chasing gold stocks.

I also see this type of prejudice in the academic world. Some analysts are anti-market no matter what. Take, for example, Lester Brown, president of the Worldwatch Institute in Washington, D.C., who puts out the annual State of the World and other alarmist surveys and data. He gathers together all kinds of statistics and graphs showing a decline in our standard of living and the growing threat of population growth, environmental degradation, the spread of the AIDS virus, and so on. For example, despite clear evidence of sharply lower fertility rates in most nations, Brown concludes, “stabilizing population may be the most difficult challenge of all.” (3)

Too bad Julian Simon, the late professor of economics at the University of Maryland, is no longer around to dispute Brown and the environmental doomsdayers. Simon was as optimistic about the world as Brown is pessimistic. Simon’s last survey of world economic conditions, The State of Humanity, was published in 1995. That book, along with his The Ultimate Resource (and its second edition), came to the exact opposite of Brown’s conclusions. “Our species is better off in just about every measurable material way.” (4)

Yet Julian Simon was not simply a Pollyanna optimist. He let the facts affect his thinking. In the 1960s, Simon was deeply worried about population and nuclear war, just like Lester Brown, Paul Ehrlich, and their colleagues. But Simon changed his mind after investigating and discovering that “the available empirical data did not support that theory.” (5)

Scholars Who See the Light

The best scholars are those willing to change their minds after looking at the data or discovering a new principle. They admit their mistakes when they have been proven wrong. You don’t see it happen often, though. Once a scholar has built a reputation around a certain point of view and has published books and articles on his pet theory, it’s almost impossible to recant. This propensity applies to scholars across the political spectrum.

We admire those rare intellectuals who are honest enough to admit that their past views were wrong. For example, when New York historian Richard Gid Powers began his history of the anticommunist movement, his attitude was pejorative. He had previously written a highly negative book on J. Edgar Hoover, Secrecy and Power. Yet after several years of painstaking research, he changed his mind: “Writing this book radically altered my view of American anticommunism. I began with the idea that anticommunism displayed America at its worst, but I came to see in anticommunism America at its best.” (6) That’s my kind of scholar.

1. Julian L. Simon, The Ultimate Resource 2 (Princeton, N.J.: Princeton University Press, 1996), preface.
2. See the revealing article, “Down and Out on Wall Street,” New York Times, Money & Business Section, Sunday, December 26, 1999.
3. Lester R. Brown, Gary Gardner, and Brian Halweil, Beyond Malthus (New York: Norton, 1999), p. 30.
4. Julian L. Simon, The State of Humanity (Cambridge, Mass.: Blackwell, 1995), p. 1.
5. Simon, The Ultimate Resource 2, preface.
6. Richard Gid Powers, Not Without Honor: The History of American Anticommunism (Free Press, 1996), p. 503.

Greed Is Good — NOT!

Personal Snapshots

Forecasts & Strategies, February 2000

Greed is Good — NOT!

“Unbridled avarice is not in the least the equivalent of capitalism, still less its ‘spirit.'” — Max Weber

Recently I heard free-market economist Walter Williams speak at a local college about capitalism. He quoted approvingly from Gordon Gekko, the fictional character of the film Wall Street, “Greed is good.”

I normally agree with most everything Walter Williams says, but not this statement. Too often, defenders of capitalism go overboard in defending pejorative phrases, such as “greed is good” or, in the case of Ayn Rand, her book title The Virtue of Selfishness. But selfishness is not a virtue, nor is greed, whether in business or finance. Selfishness leads to unethical behavior — deceptive advertising, fraud, and even theft. It often means taking advantage of another person. Greed and selfishness could land you in jail.

Adam Smith’s Model of Enlightened Self-Interest

Adam Smith, the father of free-market capitalism, did not write approvingly of selfishness or greed. He favored enlightened self-interest and industriousness. He believed that his “system of natural liberty,” his phrase for capitalism, would actually reduce greed, selfishness and fraud. Commercial society, he said, encourages people to be educated and industrious. It “cultivates patience, industry, fortitude and application of thought.” The fear of losing customers “restrains his frauds and corrects his negligence,” Adam Smith wrote in The Wealth of Nations. In contrast to political societies, which depend on flattery, favoritism and deceit, capitalist societies foster self-control, cooperation, punctuality, benevolence and deferred gratification.

Financial Advice: Don’t Get Greedy!

In the financial field, we know that the two greatest enemies to profits are fear and greed. Contrarians take advantage of inexperienced investors who panic when prices are dropping and often sell out in desperation at the bottom. Unseasoned investors also tend to buy heavily at the top, only to see their investments disappear. In short, greed is a disaster for investors. This is a vital lesson given the high-wire act Wall Street is following these days, especially with regard to Internet stocks.

The Real Significance of the Millennium

A friend of mine wrote me saying that the year 2000 was no big deal, and this new millennium was nothing unusual in terms of other calendars: For Moslems, it was 1420, for Jews it was 5760, for Buddhists it was 5119, etc. Well, he’s wrong. There is no universal celebration of the Moslem, Jewish or Buddhist calendar, yet on New Year’s Eve, what did we witness on television? Magnificent celebrations across the globe even in China, Israel, Africa and other places that are not Christian. Why? Western capitalism, which uses the Christian calendar, has captured the world — in business, in dress, in culture.