Are Government Services Underfunded?

Our government service is underfunded by Carlos Bosch.

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.

And 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 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 to 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.

Our public service is 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 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 situation is to work less.

That will mean an increase in remuneration.

And the 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 supplies 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 number?

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.

For more content like this, visit mises.org.