Essential white elephants?

I recently finished re-reading Brett Frischmann’s (2012) Infrastructure: The Social Value of Shared Resources. It’s very interesting although I don’t entirely agree with his conceptualisation. The reason for going back to it is a convergence of two issues I’ve been thinking about.

One is the idea of social infrastructure. This was centre stage in Eric Klinenberg’s book Palaces for the People, on which we had an excellent Bennett Institute event. A report on The Value of Social Infrastructure by my colleagues Michael Kenny and Tom Kelsey aroused a lot of impact across the UK government and beyond. I’ve been writing about the health system as social infrastructure – am currently writing a handbook chapter as a follow-up to this paper (revised version forthcoming in NIER). So the questions concern definition and measurement: what is social infrastructure, can it be intangible as well as tangible, how does it relate to the older concept of social capital? etc.

The second is the puzzle about infrastructure in general: what to invest in and what are its (spatial) economic impacts? Bent Flyjberg has amassed a great deal of evidence that major projects generally fail – they are over-budget, late and have disappointing impact. (See eg this paper on how far projects fail their cost benefit analysis assumptions.) And the examples of white elephant projects are legion. Yet the economy must have infrastructure to function at all. How to reconcile the paradox? And why has construction (which includes infrastructure) itself been so low productivity?

Frischmann’s book is helpful in thinking through the questions. One key point is that demand for infrastructure is derived: people want it to be able to carry out activities that feed into final demand. And infrastructure is a social good that will change context and social relations. It’s generic – can be used for many purposes. Spillovers are inherent, and large – and difficult to measure. Infrastructure also creates private and social option value.

He defines infrastructure as being identified by the following characteristics:

–Non-rival over certain portion of demand (although congestion possible)

–Provides stream of services over time

–Demand is derived, for infrastructure capital services as productive inputs into other activities

I think this omits universal service need/obligation as a key aspect. I find his classification of types of infrastructure (commercial, public, social) a bit odd too. That said, the book is very useful in thinking about the ‘essential white elephant’ paradox.

Resolution of the paradox will require finding a way for policymakers or investors to judge whether a project is a white elephant worth having. I was discussing this with David Cleevely, a successful Cambridge investor, in the context of a forthcoming paper of mine in an issue of the Oxford Review of Economic Policy on major projects. Why, I asked David, did the Victorians manage to build so much infrastructure that we in the UK are still using after 150 years? He made the powerful point that the advantage the Victorians had (compared to economists today deploying cost benefit analysis) was that they could imagine a future in which the infrastructure they were going to build would have transformative effects. Applying this thinking now, for example, we know the future will be renewable energy-based, so projects need to be evaluated in the light of this transformed world.

I don’t know how much infrastructure investment we need altogether in the UK, but definitely more, and social infrastructure definitely counts too. To be continued….


Where *is* the internet?

I’m not sure ‘read’ is the right verb for Networks of New York by Ingrid Burrington, but I looked at it this week. It’s a sketchbook of various bits of internet kit from cables below ground to antennae on rooftops, with notes about the physical kit that makes up the system getting people online, and about the ownership of the kit. I’ve been growing  slightly obsessed by how little is known about the physical internet. So far, James Ball’s The System and Andrew Blum’s Tubes are the only entries on my list of books about this. I was pleased to find out about Ingrid Burrington, who has a number of articles on this and related subjects. But if anybody knows of other books or papers about the physical infrastructure of the internet and the ownership of it (especially for the UK) I’d love to know.



More palaces for the people, please

The titular Palaces for the People in Eric Klinenberg’s latest book are libraries, so described by Andrew Carnegie as he built 2,800 of them in a lasting act of philanthropy. The book is a hymn of praise to libraries in particular but also all the other components of ‘social infrastructure’, places where people meet face to face and form relationships that are the warp and weft of a resilient society. This includes school playgrounds, local sports pitches, some bookshops and cafes, parks – the locations of community. The book starts with Klinenberg’s earlier work, reported in the excellent Heatwave, which explored why certain apparently similar communities experienced very different ‘excess’ death rates in the 1995 Chicago heatwave.

Palaces for the People: How to Build a More Equal and United Society picks up from this, pointing out near the start that having strong social capital in the heatwave was equivalent, in terms of mortality outcomes, to having an airconditioner in every home. One of the aspects of the new book I like is its emphasis on the interactions between different kinds of wealth – not only social but also conventional ‘grey’ infrastructure and the natural too. It’s long been obvious to me that there is no point in investing in concrete if you don’t think about natural capital alongside it, flood defences being the canonical example: green infrastructure such as downstream wetlands can be far more effective. Klinenberg points out they can also be designed as social infrastructure – put a park there, make a feature of the green space for enjoyment and also people’s physical and mental health, and the benefit of community relations.

The book distinguishes the social infrastructure from the social capital it enables to be built on top of it, a distinction I haven’t thought about a lot. Another point is that this lens puts the focus on place-based policies, rather than on individuals. In the heatwave example, all the individual characteristics an economist would typically control for on the right hand side a regression would have led you to predict the same mortality outcomes in all the deprived areas of Chicago, whereas it was the place they lived rather than their level of education or criminal record that affected people’s probability of succumbing to the heat.

As the book concludes, there are two reasons to think seriously about reinvesting in social and natural as well as conventional infrastructure. Climate change is one reason – New York City is going to end up under the sea. Concrete alone won’t prevent that. When a crisis hits, the only thing left to help people cope – is other people. The other is the all-too-evident impact of deindustrialization. The chickens of the 1980s and 90s have come home to roost, and they turn out to be monsters. Yet governments on both sides of the Atlantic are still cutting the facilities that make it possible for people with not much money and little hope for the future to cope: parks, playing fields – and libraries. The book doesn’t actually answer the ‘how’ of it’s subtitle, but it’s well worth a read.

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A land built by economists?

Last week I took part in a workshop organised by the National Infrastructure Commission on the economics of infrastructure and growth. It was fascinating, and particularly for illuminating a dilemma for economists thinking about the newly-prominent issue of infrastructure investment. It’s a Good Thing – but how much is needed, and which investments? How should the NIC advise on the choices most likely to increase economic welfare and growth?

There is some well-understood machinery for answering such questions, in the form of appraisals (or post hoc evaluations) using cost-benefit analysis. The trouble is that although the technique, firmly embedded in policy advice, is useful for assessing relatively small changes, it is next to useless in the context of big investment projects that involve externalities such as environmental costs and benefits or network effects, might change people’s behaviour significantly, or might have non-linear impacts which accelerate beyond a point of critical mass. These are, of course, situations that might often arise with big infrastructure projects. And the challenge is all the greater because different kinds of infrastructure will affect each other (transport and communications networks will be complementary, natural capital and flood defence schemes will interact). To cap it all, there is an economic geography dimension to this, and infrastructure will affect the distribution of economic activity over space, which will also affect the distribution of economic opportunities and incomes.

So these questions are difficult, and nobody thinks economics can answer them. What was interesting about the discussion and subsequent emails was the emergence of a basic dilemma. One of the strengths of the conventional economic approach is the intellectual discipline it enforces. Cost benefit analysis looks at the direct benefits of a project to users, and converts them into a single unit of measurement, money (although it could be owls, or happy faces). It is a powerful brake on wishful thinking.

Economics also sets out the circumstances in which wider benefits might need taking into account: when there is good reason to believe that resources are misallocated so the investment might lead to a more efficient outcome (land use in the UK would be an example – the planning system enforces many inefficiences); when there is good reason to expect a project will bring about agglomeration externalities, the additional productivity arising from there being more people in one area because there is a deeper pool of labour and skills, and know how can spread more easily; when there is reason to be confident there will be non-marginal benefits that private investors will not capture; and when infrastructure can act as a mechanism to co-ordinate private investment decisions. The latter is interesting because it suggests the prospect of multiple equilibria depending on which place or project is selected as the focal point for co-ordination.

I would add another complication, which is the scope for small changes in transactions costs or frictions to bring about big changes in behaviour. In some contexts a time saving of 10 minutes will be marginal but in others it might tip a lot of people changing their commuting or house purchase patterns. A past example is the switch from dial up internet to broadband; many economists thought this would be a small change, but it turned out to be revolutionary. The behaviour change point makes post hoc evaluations tricky, because the behaviour is endogenous to the infrastructure choices.

Everybody in the workshop broadly agreed about the basic intellectual framework (well, we were almost all economists) but the dilemma is whether it is ever feasible or sensible to allow consideration of the wider benefits. The case against – and in favour of sticking to narrow, conventional cost benefit analysis – says stick to situations where there are clear signals from market prices. For example, is there a big difference in land prices indicating resource misallocation? Otherwise, there is a danger of the kind of mistakes that have always come with ‘picking winners’ in the past. The opposing case for being more open to trying to estimate wider benefits is to ask: what would the country look like if built by economists? It would be a dreary place of functional concrete boxes in a mesh of motorways. The Victorian infrastructure we still rely on would never have been built if subject first to a cost-benefit analysis. Britain used to be considered a world leader in infrastructure but then the use of cost-benefit analysis spread widely, and now we are clearly laggards.

I’m firmly in the camp that we should be looking to develop new techniques and data to inform a wider approach. The UK economy needs infrastructure investment that will make a big difference to productivity and growth, given the self-inflicted economic headwinds we face. We need faster growth in the great provincial cities, and significant investments that will make a step-change difference in the economic well-being of people around the country in terms of air quality, flooding etc. The NIC faces quite a challenge, but also a tremendous opportunity.

My favourite books about infrastructure are Brett Frischmann’s Infrastructure: The Social Value of Shared Resources; and my colleague Richard Agénor’s (more wide-ranging) Public Capital, Growth and Welfare. Ricardo Hausmann has written about the distributional impact of infrastructure (along with natural capital, the most significant capital people on low incomes have access to).

Standards, interoperability and innnovation in infrastructure

A request via Michelle Brook on Twitter: what has been written about the relationship – in the context of large scale infrastructure – between standards/interoperability and innovation? A quick search via Google Scholar revealed a few papers, mainly about communications networks. Other than that, all I could think of was Pierre-Richard Agenor’s [amazon_link id=”0691155801″ target=”_blank” ]Public Capital, Growth and Welfare[/amazon_link]. Oh, and also business history case studies such as Bernard Carlson’s terrific [amazon_link id=”0691165610″ target=”_blank” ]Tesla[/amazon_link] biography, Jon Gernter’s [amazon_link id=”1594203288″ target=”_blank” ]The Idea Factory[/amazon_link], or maybe [amazon_link id=”0787971545″ target=”_blank” ]Fast Second[/amazon_link] by Geroski and Markides. But if others have other suggestions, please do add them – or let Michelle, @MLBrook, know.

[amazon_image id=”0691155801″ link=”true” target=”_blank” size=”medium” ]Public Capital, Growth and Welfare: Analytical Foundations for Public Policy[/amazon_image]  [amazon_image id=”0691165610″ link=”true” target=”_blank” size=”medium” ]Tesla: Inventor of the Electrical Age[/amazon_image] [amazon_image id=”1594203288″ link=”true” target=”_blank” size=”medium” ]The Idea Factory: Bell Labs and the Great Age of American Innovation[/amazon_image]  [amazon_image id=”0787971545″ link=”true” target=”_blank” size=”medium” ]Fast Second: How Smart Companies Bypass Radical Innovation to Enter and Dominate New Markets (J-B US non-Franchise Leadership)[/amazon_image]