Any growth theory where government investment plays a crucial role in stimulating growth immediately runs afoul of the historical record, however. The first countries to industrialize did not require extensive government involvement to make these investments. In England, it was apparent that neither early capital accumulation nor social overhead investment depended heavily on the public sector, as Phyllis Deane (1979) notes when commenting on traditional explanations of growth that rely on government involvement to overcome lumpiness and externalities:
“The consequence is that social overhead capital generally has to be provided collectively, by governments or international financial institutions rather than individuals, and the mobilization of the large chunks of capital required is most easily achieved through taxation or borrowing. The interesting thing about the British experience, however, is that it was almost entirely native private enterprise that found both the initiative and the capital to lay down the system of communications which was essential to the British industrial revolution.” [p. 73]
Private returns were, apparently, sufficiently high in the late eighteenth and early nineteenth century to induce the private sector to make the necessary infrastructure investment required by the Industrial Revolution.
– John Wallis
(H/T: Cafe Hayek)
