Principles of Economics with Applications to Practical Problems

<h2>CHAPTER 53</h2> <h3>PUBLIC OWNERSHIP OF INDUSTRY</h3> <h4>§ I. EXAMPLES OF PUBLIC OWNERSHIP</h4> <div class="sidenote">The kinds of political units</div> <p>1. <i>Local political units generally acquire only industries whose products must be used in the place where produced.</i> The word industry is used here in a broad sense, including agents of psychic income not usually so classed, such as public parks. The grouping of publicly owned industries according to the size and importance of the political units cannot be exact, because some classes of industries are owned by several kinds of political units. Yet, especially with application to American conditions, an approximate classification may be made on this principle. Federal states consist of three main groups of political units: national, provincial, and local. Provincial units are the largest subdivisions, as the American "states," or commonwealths, the German states, and the provinces in other countries. The term local political unit is more complex and may mean county, township, village, city, and school or sanitary district; but most of what is to be said of local ownership refers to cities or to incorporated villages.</p> <div class="sidenote">Municipal ownership of parks, libraries, &amp;c.</div> <div class="sidenote">Of bridges, markets, waterworks, &amp;c.</div> <p>Nearly all public parks and recreation grounds are owned by cities. As population has become more dense, private yards of any extent become impossible, in cities, for all but the wealthy. Public ownership of parks insures recreation grounds to the common man in the most economical way. Of late the movement for large and small public parks and playgrounds has gone on rapidly in American cities. Related<span class="pagenum"><SPAN name="Page_515" id="Page_515">[Pg 515]</SPAN></span> to parks are public baths, public libraries, art collections, museums, zoölogical gardens, etc. Some have declared that such a policy stops little short of a paralyzing socialism for the masses. Reason and experience fail to reveal any such danger so long as the things supplied gratify the higher tastes&mdash;as art, music, literature, innocent social recreation. Not until the necessities of life, as bread, clothing, and houses, are supplied, is encouragement given to the increase of improvident families and to the breaking down of independent character. The means of local communication&mdash;streets, roads, bridges&mdash;were once owned largely by private citizens. Here and there still are found toll roads and toll bridges built under charters granted a century ago, but tolls on public thoroughfares are for the most part abolished. A public market, where the producer from the farm and the city consumer can meet, is an old institution that is now being established anew in many cities. The providing of apparatus for extinguishing fires is always a public duty; the conveyance of waste water is increasingly a public function; and the supply of pure water, while often a private enterprise in villages, and sometimes in large cities, is increasingly undertaken by public agencies. Public ownership of gas and electric lighting is less common, as the utility supplied is not so essential and the industry is somewhat less subject to monopoly; but the difference is one of degree only. Street-railroads are often under public ownership in Europe; but there has thus far been no case of the kind in the United States, and only one in Canada.</p> <div class="sidenote">American failures in state industry</div> <p>2. <i>The American state owns and conducts industries mainly whose products have a wider territorial use.</i> The American commonwealth has retired from some fields where once it was engaged in industry. Students of American history know that between the years 1830 and 1840 some states engaged largely, even wildly, in the building of canals and undertook to construct railroads, to start banks, and to engage in other enterprises. The undertaking of these industries<span class="pagenum"><SPAN name="Page_516" id="Page_516">[Pg 516]</SPAN></span> was determined often by political and by selfish local interests, and their operation often was wasteful. A few enterprises succeeded, the most notable of these being the Erie Canal in New York. The unsuccessful ones remained worthless property in the hands of the state or were sold to private companies, as in the case of the Pennsylvania railroad. This reckless state enterprise was a bitter lesson in public ownership, and even after seventy-five years is not without effect on public opinion. For a long time no proposal for public ownership could have a fair hearing in America. But railroads and canals are publicly owned, and more or less successfully operated, in many foreign countries, as in Prussia and other German states, in Switzerland, and in the new states of Australia.</p> <div class="sidenote">State ownership of various kinds</div> <p>There has been recently a rise of interest in forestry in America. This is especially likely to be a state enterprise wherever the forest tracts are entirely within the limits of the state, as is the case of the Adirondacks in New York. Most of the forests in Germany are either communal or state-owned. The schools, a great industry for turning out a product of public utility, are largely conducted by the American state and by local units rather than by the nation or by private enterprise. The state encourages researches in the arts and sciences, and gives technical training. A variety of minor enterprises have been undertaken by states to supply salt, phosphate, banking facilities, even some manufactures. In the prisons and public institutions, states, such as New York, that have adopted the system of labor on public account engage in agriculture and manufacturing on a large scale, the products, amounting to millions of dollars annually, being used almost entirely by public agencies.</p> <div class="sidenote">National ownership of various kinds</div> <p>3. <i>The nation owns and controls many industries of the widest use and most general interest.</i> Some industries grow out of the political needs of government. Established as a means of communication with military outposts, the post became a convenient means of communication for merchants<span class="pagenum"><SPAN name="Page_517" id="Page_517">[Pg 517]</SPAN></span> and other citizens and grew into a great economic institution. In most countries the telegraph is publicly owned and has been annexed to the post, to which it is very closely related in purpose. The national improvements connected with rivers and harbors were first political&mdash;that is, they were for the use of the governmental navy; they became, secondly, commercial&mdash;for the free use of all citizens engaged in trade; and they continue to unite these two characters. Forestry is most largely undertaken in this country by the national government, doubtless because the large forest areas in the West extend over state boundaries, and because large tracts of public lands were still unsold at the time public attention was attracted to the subject. Since 1890, the policy of reserving great areas for forests, and picturesque districts for national parks, has developed greatly. In some countries mines are thought to be peculiarly fitted for national ownership and control. In Germany, the state owns some coal, salt, and other mines. Coinage and banking are everywhere looked upon as a function of sovereignty, and yet it is no more necessary for a nation to own its own mint in order to control the monetary system than for it to print the bank-notes in order to regulate their issue. The American government has its own printing office and therewith its share of troubles with organized labor. The fish commission, and the various branches of the department, coöperate with private industry in many ways. In Germany, compulsory insurance is provided for the workingman. This hasty survey suggests that the industries undertaken by government are both varied in nature and large in extent, although small in proportion to the mass of private industry.</p> <h4>§ II. ECONOMIC ASPECTS OF PUBLIC OWNERSHIP</h4> <div class="sidenote">The primary need of public ownership</div> <p>1. <i>Public ownership is primarily to control the essential agencies of government.</i> A large part of public ownership and activity in industry develops from political functions.<span class="pagenum"><SPAN name="Page_518" id="Page_518">[Pg 518]</SPAN></span> As society evolves, what was unessential to political life becomes essential. Civilized government requires the use of a number of material agents. Buildings for legislative and executive officers, custom-houses, post-offices, lighthouses, can be rented of private citizens, as post-offices usually are in small places; but it is obviously economical and convenient in large cities for the government to own the public buildings. Government can reduce to a minimum its employment of labor by "farming out" the taxes, as all countries once did to some extent, and as France continued to do up to the French Revolution. It is now the settled policy for government to own or control its essential agencies, but this does not involve in every case the employment of day-labor direct to clean the streets, to collect garbage, etc. The more simple political functions shade off into the economic. To coinage usually are added the issue of legal-tender notes and certain banking functions; the post carries packages, transmits money, and in some cases performs the function of a savings-bank for small amounts. The only open question is as to the proper limit to this development.</p> <div class="sidenote">Conflict of public and private interests</div> <p>2. <i>Public industry expands to supply as free goods many essentials of good citizenship, and to insure cheaper and more bountiful supplies of others.</i> It is the ideal of Herbert Spencer and of a small surviving group of <i>laissez faire</i> philosophers that government should confine itself exclusively to the most essential political functions, leaving the economic functions absolutely alone. It should keep the peace, prevent men from beating and robbing each other, and preserve the personal liberty of the citizen. They assume that all of the economic needs will be provided by competition, in the best way humanly possible, in quantities and at the rate needed. In many cases, however, the general interest fails to harmonize with that of the individual. The forest has an immediate utility to the consumers of lumber, and it has also a diffused utility in its influence on industry, on climate, and on torrents and floods. Yet, as the private owner cannot<span class="pagenum"><SPAN name="Page_519" id="Page_519">[Pg 519]</SPAN></span> control enough of the forest to affect the climate, and could not sell climate even if he could affect it, he will cut down the tree whenever he can gain by doing so. In this situation either government control or government ownership of forests is essential.</p> <div class="sidenote">Social economy of some public industry</div> <p>In some cases the difficulty of private ownership is in the excessive cost of collecting for the service. The cost of maintaining tollhouses at short intervals on a turnpike sometimes exceeds the amount collected. Collection in other cases, as for the service of lighthouses to passing ships, is impossible. Public industry secures, through the economy of large production, a cheaper and more efficient service, the benefits and costs being diffused throughout the community. The benefits of the work of experiment-stations for agriculture are felt immediately by the farmers, but are diffused to all citizens. A manufacturer able to keep his methods secret, or to retain his advantages for a time, can afford to undertake experiments in his factory, but the farmer seldom can. The public ownership of parks for the use of all gives a maximum of economy in the production of the most essential utilities&mdash;fresh air, sunshine, natural beauty, and playgrounds in the midst of crowded populations. Municipal ownership of waterworks is an extension of the same idea. Not only because large amounts of water are used by the public, but because cheap, pure, abundant water is an essential condition to good citizenship, speculation should in every possible way be eliminated from this industry.</p> <div class="sidenote">Monopolistic nature of localized industries</div> <p>3. <i>Public ownership tends constantly to include the industries of a monopolistic nature, locally supplying general necessities.</i> This is no abstract principle; it is merely a statement of what is seen to be happening. Some industries are of such a nature that they drift inevitably into monopolistic control. Waterworks, gas, electric lighting, street-railways, telephone systems, are among these. However fierce may be the competition for a time, sooner or later either one company drives out the other or buys it up, or both come<span class="pagenum"><SPAN name="Page_520" id="Page_520">[Pg 520]</SPAN></span> to an agreement by which the public is made to pay higher prices.</p> <div class="sidenote">Localized production favors monopoly</div> <p>A feature favoring the growth of monopoly when such industries are left to private enterprise, is the need to produce and supply the utility at a given locality. While two street-railways can compete on neighboring streets, it is physically impossible for two or more to compete on the same street. Two systems of water-mains or gas-mains can be put down, as sometimes is done, but this is not only a great economic waste, but the tearing up of the streets is an intolerable public nuisance. This difficulty is less marked in the case of telephones and electric lighting, and some persons still cling to faith in competition to regulate the rates in those industries; but faith in competition between water-companies and between gas-companies has been given up by nearly all students of the subject.</p> <div class="sidenote">Gains from large production favor monopoly</div> <p>4. <i>A second feature favoring monopoly in such industries is the marked advantage of large production in them.</i> These industries are usually spoken of as "industries of increasing returns." This advantage is enjoyed in some degree by every enterprise, but it is gradually neutralized and limited (as has been noted elsewhere). The need to extend an expensive physical plant to every point where customers are to be served, and the very much smaller cost per unit of delivering large amounts of water, gas, electricity, transportation, etc., on the same street, offered a greater inducement for one competitor to crowd out or buy out the other at a more than liberal price. Even then, larger net dividends and correspondingly larger capitalization are secured than were before possible to both companies combined.</p> <div class="sidenote">Uniformity of products favors monopoly</div> <p>5. <i>A third feature favoring monopoly is uniformity in the quality of the product furnished.</i> It is a general truth that competition is most persistent where there is the greatest range of choice open to the customer, and consequently the most individual treatment required in the enterpriser. An artist, even a storekeeper, attracts about him a body of patrons<span class="pagenum"><SPAN name="Page_521" id="Page_521">[Pg 521]</SPAN></span> who like his product (for the merchant's manner and method of dealing are a part of the quality of his goods), and who cannot be tempted away by slight differences in price. Rival companies in the stage of competition are seen to claim superiority for their particular goods and to improve their service in every way possible. A new telephone company, entering where a monopoly has held the field, works at once a wonderful betterment in rates, courtesy, and service. But as the product of all competitors attains the highest technical standard possible at the time, the rivalry is reduced to one of price, and it is usually a "fight to the finish."</p> <div class="sidenote">Franchises favor monopoly</div> <p>6. <i>A fourth feature favoring monopoly in these enterprises is the necessity of making permanent and exceptional use of the public streets and alleys.</i> If this right were granted by a general law to every citizen, this feature would be sufficiently implied in the foregoing discussion. As it would be intolerable to allow private interests to use public property in whatever way they wished, the legislative body makes special grants in such cases in view of the circumstances. Not only is the legislature (or council, or county board of commissioners, etc.) induced by the economic difficulties to withhold a charter to a second company, but it is exposed to the greatest corrupting influences by the one already established. The knowledge of the opposition to be encountered in getting a franchise must keep competitors out, even though monopoly prices are maintained.</p> <p>In view of these several features, which are so closely related that they form a common character, more or less fully shared by various industries, and especially in view of the necessity for the formal granting to them of peculiar privileges in the form of a public franchise, the public, in order to protect the general interest, is forced to undertake an exceptional control of these industries.</p> <div class="sidenote">Modes of controlling public utilities</div> <p>7. <i>Several courses are open to the public, acting in its political capacity, to retain these monopoly advantages for the general welfare.</i> First, it may do nothing, trusting<span class="pagenum"><SPAN name="Page_522" id="Page_522">[Pg 522]</SPAN></span> vainly to competition to regulate the rate, or consciously leaving the result to be worked out by the monopoly principle; this is what in most cases has been done in the past in America. Second, in granting the franchise it may attempt to fix near cost the charge for the service or product, so that the franchise will be worth little or nothing. Third, it may leave the rate to be fixed by the monopoly principle, but charge for the franchise so much that the value of the monopoly is appropriated into the public treasury. Fourth, it may have public officials carry on the business, either selling the product at cost or making monopoly profits that go into the public treasury. Various combinations of these plans are followed in practice, the most common plan being the fixing of maximum rates which, with improved methods, generally become ineffective. It is difficult to fix a uniform rate that is equitable, because conditions change, and, further, because a uniform rate must be applied to all parts of the town, although the cost of service varies greatly. It is difficult to sell the franchise for near what it is worth, because of the uncertainty, of the political blackmail, and of the limited number of competent bidders. There remains only the policy of public ownership to secure the profits of monopoly to the public, either directly or in a diffused manner.</p> <div class="sidenote">Economic basis of public ownership</div> <div class="sidenote">Cost under public or private ownership</div> <p>8. <i>Public ownership is economically justified when it secures a utility of widespread consumption, otherwise impossible, or insures the public a better quality or a lower price.</i> The question of public ownership is not exclusively an economic question. There are incidental problems, such as its effects on enterprise and on political integrity, with which it is not possible here to deal. In the main, however, public ownership is simply a business proposition which must be justified by its economic results. In the case of a general social benefit not to be secured without public ownership, as popular education or the climatic effect of forests, the only question to answer is whether the utility is worth the cost. In<span class="pagenum"><SPAN name="Page_523" id="Page_523">[Pg 523]</SPAN></span> the case of industries already in private hands, as waterworks, gas and electric lighting, there is needed, to make a wise decision possible, a knowledge of the effect a change to public ownership will have on value. If public officials can furnish some goods cheaper than they are furnished by private enterprise, it is because of the wide margin of monopoly profit, not because there is any magic in public ownership. The same general items of cost must be met. The first cost of the plant and the annual interest payments are much the same. Experience shows that, because of political influence, wages are likely to be higher under public ownership, but salaries of officials are higher under private ownership. On the whole, public industry in these respects probably has no advantage. Some items of cost may be less under public management. Public collection of dues along with taxes is an advantage not enjoyed by private companies. Several public officials sometimes share the same office and thus reduce expenses. In small towns the public electric lighting and waterworks have been operated more economically under one roof. Public industry does not have to meet the cost of lobbying and blackmail which are often forced upon private companies. But the greatest source of saving in public ownership is the value of monopoly privileges that, under private management, go into private pockets.</p> <div class="sidenote">Character of public officials</div> <div class="sidenote">Limits and effects of public ownership</div> <p>The temptation to political corruption may be more insistent when a large force of men is constantly employed, and when large supplies are constantly purchased, by public officials, but the temptation is not so strong or so centralized as it is in the granting of franchises to wealthy corporations. Public industry is weakened by the absence of certain motives to excellence that are present in private business. The income of public officials not being dependent on the economy of management, the spur and motives of competitive industry are lacking. No social discovery has made individual honesty and civic virtue useless to good government.</p> <p>The decision in any specific case is one dependent on local<span class="pagenum"><SPAN name="Page_524" id="Page_524">[Pg 524]</SPAN></span> conditions, and the exact limits of public ownership are not fixed. Industry is changing so rapidly that new experience is needed each year. The main outlines of public ownership, however, are now in large part determined. Some industries do well, others ill, under public management, and between these lie many debatable cases. Waterworks and probably electric lighting, because of the comparative simplicity of their operation, are more suitable for public ownership than are gas-works. No absolute line divides the one group from the other. But whatever the changes, the student of the theory of value must never overlook the fact that the increase of public ownership is altering in manifold ways the prices of goods, and is reacting also on the production, distribution, and consumption of incomes.</p> <hr class="chap" /> <p><span class="pagenum"><SPAN name="Page_525" id="Page_525">[Pg 525]</SPAN></span></p> <div style="break-after:column;"></div><br />