Investment projects in infrastructure or research, which can be carried out by employees of the State or by chosen suppliers, differ from ongoing services in two important ways:
· They come to an end when the project is delivered.
· Some projects may yield wider economic benefits later.
Investment projects should be assessed on the basis of whether they deliver future benefits. That is what businesses do when deciding whether to buy new machinery, for example. The government’s role in making investments was acknowledged by Adam Smith, in his book An Inquiry into the Nature and Causes of the Wealth of Nations:
“According to the system of natural liberty, the sovereign has only three duties to attend to; three duties of great importance, indeed, but plain and intelligible to common understandings: … thirdly [the first two were defence and law and order], the duty of erecting and maintaining certain public works and certain public institutions which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expence[sic] to any individual or small number of individuals, though it may frequently do much more than repay it to a great society.” (Book IV, chap. 9, para. 51)
Government investment in infrastructure and research should be based on a prudent medium to long-term view of the needs of the whole economy. A government can do things that private enterprise is unable to do:
· It can build infrastructure, making compulsory purchases of land where necessary. If it fails to meet this requirement, private enterprise can be seriously inhibited – as in the example of Renewable energy projects worth billions stuck on hold because of lack of capacity in the electrical grid.
· It can directly fund research to help the economy to develop – as described in an article by Robert Skidelsky for example: Now austerity is over, let’s commit to investment—and build a national bank to do it. Government research programmes have helped to set the direction of the economy in several countries, including America with its funded research in advanced technologies for its military and space exploration – which had later spin-off benefits that were the foundation for its dominance in computing.
· The need to respond to climate change, as described later (3.5.7), has created huge opportunities in what has been referred to as Jobs for the green transition: “In recent years, the concept of green jobs has been the focus of increasing attention from both policy and research circles. At the EU policy level, the green transition is seen as an opportunity to create jobs in existing and emerging economic sectors.” America and China are both also competing to create ‘green jobs’. It is prudent to invest now, to reap the benefits later and gain competitive advantage. As noted by Simon Wren-Lewis, The case for increasing government debt to green the economy is greater than for increasing debt during the pandemic.
· A government can time its investments to act as an economic stimulus to an economy that is moving into recession (3.3.8.2). In these circumstances it isn't crowding out private enterprise, which can otherwise be a problem – as described later (3.2.3.4).
· It might want to assist less developed regions of a country – which is the purpose of the European Regional Development Fund (ERDF), for example. Aside from the political value of helping poorer areas, the total economic output of the country can be increased as a result.
Government investment in infrastructure and research can be funded by government borrowing. As described later (3.3.8.1), it is imprudent for governments to borrow to pay for day-to-day expenditure – but it is equally imprudent for a government to fail to make necessary investments for the benefit of the economy.
(This is an archive of a page intended to form part of Edition 4 of the Patterns of Power series of books. The latest versions are at book contents).