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The price isn’t just a number

  • Published at 09:55 pm June 18th, 2018
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How expensive is it to build roads?BigstockHow expensive is it to build roads? Bigstock

Prices are telling us something, and we should listen

Something we all need to grasp about prices -- they’re not just random numbers assigned to the things we desire to buy. 

They’re information to us and everyone else. Once we grasp this, the problem identified by the Roads and Highways Department (RHD) rather goes away. As, sadly, do many of their desired road projects as a result of land costs.

We should agree that we’re not talking about entirely market-determined land costs here. The basic system is that if the RHD wishes to build a road, construct a bridge, or an overpass, then it has the ability to force landowners to sell the necessary land. In my native Britain, we call this “compulsory purchase” and the American equivalent is “eminent domain.” 

We need the land for some great public purpose and we can’t just accept that one or another landowner can hold the entire project to ransom by refusing to sell or holding out for a very high price indeed. We can force the sale, but we’ll offer a fair price when we do.

The Americans are so sincere about this that it’s in the constitution -- although that hasn’t stopped more than a few abuses. In Bangladesh we say that the land will be bought at three times the market price for that mouza but we will force that sale of the land required.

It’s not a perfect solution, but it is about the best balance we’re going to be able to achieve between civil and property rights, public interests and the specific problems of rights of way and so on.

The complaint being voiced -- sotto voce, quietly, perhaps --  is that this can mean that projects don’t get built. On some projects the land acquisition costs are 80% of the total budget. Even, in the case of a connecting road in Laksmipur, 95% of that total budget. At which point everyone agrees that this was ridiculous and the project didn’t - or at least isn’t so far - going ahead.

But this is to look at prices simply as those random numbers which we have to pay. To complain that land is too expensive to build roads upon is also to make that same mistake. Think, instead, about prices as information to us. That land is too expensive to build roads upon is useful information, isn’t it? Information telling us that other uses of land have more value than for roads.

The important concept here is the economists’ favourite, opportunity cost. Whenever we do something, we lose all of the other things which we could have one instead. Therefore, the cost of something is not what we pay directly, it’s the value of those other things that we didn’t do. The price of building a road isn’t just the cost of building it, it’s also the cost of not growing rice on that same land we’ve just covered with tarmac.

The market price of land -- and yes, this isn’t perfect because we do pay, by law, three times that market price -- is the value of land in any and all of those alternative uses. That’s just the information contained in the price of it. If we can’t do very much with it then the land will be cheap. If it’s pure and fertile land just ready for a nice expensive and profitable crop then it will be expensive. 

One very profitable crop could be housing, say, or a garment factory. That’s, again, just how prices are arrived at. People look at it, think about what they could do, and the profit they’d make, they’re willing to pay up to that price for it. And no more, obviously.

Thus the price of land to build a road upon is extremely valuable information to us. For in that price is the value of the other things we could be using that land to do. If that land is worth more than the value of the road, we don’t want to drive the tarmac through it, do we? But if it’s worth more then we do.

For that’s the basics of our getting richer. Whenever something is moved from a lower value use to a higher, then we’ve all, collectively, got richer. We move labour from making Tk2,000 a month in the field to making Tk5,000 in a factory, we’re richer. 

For those higher wages come from the higher productivity of the labour in that new occupation. The same is true of capital moving to a more profitable business. Or using water to drink and keep humans alive instead of growing rice with it. Moving an economic asset to a higher valued usage is the very definition of the entire society getting richer.

Roads very definitely have a value. They allow us to move around, they allow us to move other things around, they contribute to that economic growth. But we also have other things we’d like to devote our economic resources to. Thus, we need a system of deciding between which resources to use for what purposes. Which is exactly what those prices are telling us.

If land’s too expensive to build a road upon, the correct reaction isn’t, well, it’s too expensive to build a road. Or perhaps the reaction is, but the information we’re being told isn’t quite that. Rather, what prices are telling us is that the land -- or any other resource of which this is true -- is more valuable doing something else instead of being used to build a road.

We shouldn’t complain that prices are too high, stopping us from doing as we wish. Rather, prices are information, telling us what we should be doing. If some resource, in this case land, is too expensive for us to build a road, again in this case, then this isn’t something to rail against. It’s the universe’s way of telling us not to use this land to build a road -- information we should be grateful for and also take account of. 


Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.