Modern Economic Problems Part 36

(1) Among the practices in the first group are discriminatory rates and rebates from railroads, favoritism in matters of taxation, undue influence in legislatures, special manipulation of tariff rates through powerful lobbies, or paid agents, undue influence in the courts through the employment of lawyers of the highest talent, who often later became judges.

(2) Among the unfair practices toward customers are discriminations among them by the various forms of price cutting, grants of credit, and kinds of service. The liberty of retail dealers is limited in a variety of ways, such as fixing resale prices, requirement of exclusive dealing, and full-line forcing.

(3) All the methods just mentioned as employed in dealings with customers are likewise unfair toward compet.i.tors. Many other methods are used to the same end, such as: enticing away their employees, or corrupting and bribing them to act as spies, paying secret commissions, false advertising, misrepresenting compet.i.tors, imitating their patterns in goods of defective workmanship, shutting off their credit or their supplies of materials, acquiring stock in competing companies, malicious suits, infringement of patents, intimidation by threats of business injury or of scandalous exposures, operation of bogus independent companies.

-- 16. #Growing conception of fair compet.i.tion.# Any industrial trust that was able to gain domination and monopoly power only by the use of such practices, or any part of them, can hardly be deemed the result of a "natural evolution." If "artificial" means the use of artifices surely this development deserves the adjective. Yet even if not natural, this development may be thought to be "inevitable," human nature being as it is. But the bald fact is that while the great trust movement was in progress no effort worthy of the name was being made to enforce even the then existing laws and to oppose this artificial development. The same allegation of inevitableness was once commonly made of discriminatory railroad rates and rebates, evils which have been in large part remedied only since the period 1903-1906, when at last intelligent action was taken.

To those that came to see the problem in this light, acceptance of industrial monopoly with its complex task of fixing by public commission the prices on innumerable kinds and qualities of goods seemed at least premature. Rather, the first step toward a solution seemed to be the vigorous prevention of unfair practices, and the next step a positive regularizing of "fair compet.i.tion."[19] The fundamental idea in this is the enforcement of a common market price (plus freights) at any one time to all the customers of an enterprise.

By this plan potential compet.i.tion would become actual, and small enterprises that were efficient might compete successfully within their own fields with large enterprises that maintained prices above a true compet.i.tive level. Even general lowering of prices by a large enterprise with evident purpose of killing off smaller compet.i.tors is unfair compet.i.tion under this conception. It was for years recognized that the realization of this policy required legislation regarding uniform prices and the creation of a commission for the administration of the law.

-- 17. #The trust issues in 1912#. The campaign of 1912 presented in an interesting manner the three policies above outlined. The Republican party led by President Taft stood for the policy of monopoly-prosecuted; its program was the vigorous enforcement of the Sherman law. The Progressive party, led by Mr. Roosevelt, stood in the main for the policy of "monopoly-accepted-and-regulated"; its program called for minimizing prosecution and for developing a system of regulation of trust-prices. The Democratic party, led by Mr. Wilson, stood for the policy of compet.i.tion-maintained-and-regulated, and the problem was to find means to strengthen and regularize the forces of compet.i.tion.

In practice these programs doubtless would be less divergent than they appear. All alike proposed the retention of the Sherman law. The two proposals to go further were presented as mutually exclusive alternatives, whereas they necessarily must supplement each other in some degree. The Progressives did not expect all industries to become monopolies, and the Democrats tacitly conceded to monopoly-accepted the large field of transportation and local utilities it already had occupied. But there was a real difference in the angle of approach and a real difference in emphasis. The Democratic program (the somewhat unclearly) showed greater distrust of monopoly and greater faith in the possibilities of creating fair conditions of compet.i.tion (which never had fully prevailed) in which efficiency would be able to prove its merits and monopoly would work its own undoing. It was the more logical for the country to give this policy at least a trial before adopting irrevocably the policy of general industrial monopoly.

In either case compet.i.tion actual or potential is the fundamental principle by which prices have to be regulated. Where compet.i.tion is enforced it is by applying some general rules that create a general market price instead of discriminatory prices, but the fixing of the price is left to the compet.i.tors. Where monopoly is accepted prices must be fixed with reference to an estimated compet.i.tive standard, that which under hypothetically free conditions would just suffice to attract and retain private enterprise and capital.

-- 18. #Anti-trust legislation of 1914#. The anti-trust legislation of 1914, pa.s.sed by the Democratic party to carry out its program, is embodied in two acts: the Clayton Act, laying down new rules; and the Federal Trade Commission Act, mainly to provide an agency with administrative and quasi-judicial functions to deal with unfair practices. This displaced the Bureau of Corporations, established in 1903. The Clayton Act forbids discrimination where the effect may be to lessen compet.i.tion, or tend to create a monopoly. Due allowance may be made for difference in the cost of selling or transportation, but a difference is not required in such cases. It forbids contracts to prevent dealers from handling other brands. It forbids corporate ownership of stock in a competing corporation, forbids interlocking directorates in large banks and in other competing corporations, with capital, surplus and undivided profits aggregating more than $1,000,000. The Trade Commission Act in addition to its administrative provisions for investigation, reports, and readjustment of the business of companies upon request of the courts, declares that "unfair methods of compet.i.tion in commerce" are unlawful, and both empowers and directs the Commission to prevent their use (banks and common carriers subject to other acts being excepted).

These acts are too new to have been given a fair test. They have, however, given evidence of exercising at once an influence upon the situation. They are imperfect in some details that will require amendment; but they mark the beginning of a new policy toward industrial monopoly, the results of which will be watched with the deepest interest.

[Footnote 1: See Vol. I, especially pp. 74 and 75.]

[Footnote 2: See Vol. I, pp 59, 68, 70-71]

[Footnote 3: See Vol. I, pp. 66, 67.]

[Footnote 4: 77 Miss., 476. Cited by Bruce Wyman, "Control of the Market," p. 137.]

[Footnote 5: 19 R.I., 255.]

[Footnote 6: 115 Ga., 429.]

[Footnote 7: Mogul Steamship Company v. McGregor (L.R. 23 Q.B.D.

598).]

[Footnote 8: Bruce Wyman, "Control of the Market," p. 22. In 1914 (216 Fed. 971), a federal court granted an injunction restraining the use of fighting ships by a combination, and in 1915 (220 Fed 235), the court indicated a willingness to grant a similar injunction if necessary. Similarly "fighting brands" of goods have been recently prohibited.]

[Footnote 9: See below, sec. 15.]

[Footnote 10: Averrill v. Southern Railway (75 Fed. Rep. 736).]

[Footnote 11: 107 Minn. 145.]

[Footnote 12: Arnott v. Pittston and Elmira Coal Co., 68 N.Y. 558 (1877).]

[Footnote 13: See ch. 27, sec. 16.]

[Footnote 14: At the same time the rights of injured individuals are better safeguarded by sec. 7 of the Sherman law, permitting the recovery of threefold damages and attorney's fees.]

[Footnote 15: See ch. 28, sec. 9.]

[Footnote 16: See further, ch. 30, secs. 5-9.]

[Footnote 17: See ch. 27, sec. 15, on state commissions.]

[Footnote 18: A few among the most important sources are the Report of the Industrial Commission, 1898-1901, 19 volumes; reports of the Bureau of Corporations on the petroleum and tobacco industries; U.S.

Supreme Court decisions, e.g., the Addystone Pipe case (175 U.S. 211), given in Ripley, Trusts, Pools, and Corporations, p. 86; the Standard Oil case (221 U.S. 1), and the Tobacco Trust case (221 U.S. 106); and the very comprehensive volume on "Trust Laws and Unfair Compet.i.tion,"

by Joseph E. Davies, Commissioner of Corporations, Washington, 1916.]

[Footnote 19: John B. Clark, the distinguished professor of economics in Columbia University, has been the foremost and clearest exponent of this idea, in his "The Control of Trusts," 1901, 2d ed., 1912, and in other works.]

CHAPTER 30

PUBLIC OWNERSHIP

-- 1. Waves of opinion as to public ownership. -- 2. Primary functions of government favoring public ownership. -- 3. Economic influences favoring public ownership. -- 4. Forms of munic.i.p.al ownership. -- 5.

Localized production favoring monopoly. -- 6. Economies of large production favoring monopoly, -- 7. Uniformity of products favoring monopoly. -- 8. Franchises favoring monopoly. -- 9. Various policies toward local public service industries. -- 10. State ownership of various kinds. -- 11. National ownership. -- 12. Economic basis of public ownership.

-- 1. #Waves of opinion as to public ownership.# Opinion and practice in the matter of the public ownership of wealth and the direct management of enterprises has moved in waves. In feudal times, when government was practically identical with the personal ruler, and the private "domains" of the lord or king were the sole source of his public revenues,[1] holdings of this kind were very large. Their public nature came to be more fully recognized, but they did not yield large revenues, and gradually were in large part sold or given away to private owners. This was particularly true in England, and in a less degree on the continent of Europe. The conviction grew that the state, or government, was an inefficient enterpriser, and that the sound public policy was to foster private industry and obtain public revenues by taxation. The ideal was embodied in the _laissez-faire_ philosophy 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.[2] Thus, it was believed, all of the economic needs would be provided for by compet.i.tion, in the best way humanly possible, in the quant.i.ties and at the rate needed. This policy attained its maximum influence in the first half of the nineteenth century in England, and in America probably just before the Civil War, in the decade of the fifties.

-- 2. #Primary functions of government favoring public ownership#. Some public ownership, however, is necessary for the exercise even of the primary political functions of the state. Civilized government requires the use of numerous material agents. Buildings for legislative and executive offices, 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 direct employment of officials 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 general policy for government to own or control its essential agencies, but this does not involve in every case the employment of day-labor direct as in cleaning the streets or collecting garbage. 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 most countries now performs the function of a savings-bank for small amounts. The social and industrial functions undertaken by public agencies have steadily increased since the middle of the nineteenth century, and the sphere of the state has been enlarging.[3] The question ever open is as to the proper limits to this development.

-- 3. #Economic influences favoring public ownership#. In some cases private ownership is difficult because of the excessive cost of collecting for the service. The cost of maintaining toll houses on a turnpike sometimes exceeds the amount collected. Collection in other cases, as for the service of lighthouses to pa.s.sing ships, is impossible. Public industry may secure, 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 method 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 goods,--fresh air, sunshine, natural beauty, and playgrounds in the midst of crowded populations. Munic.i.p.al 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.

The a.s.sumption is made in the _laissez-faire_ doctrine that the interest of the public harmonizes with that of the individual. But this proves often not to be the case. For example, the forest has an immediate value to its owners and to the consumers of lumber, and it has also a diffused utility in its influence on industry, on climate, on navigation, on water-power and on floods. Yet, as the private owner, unless a great land monopolist, does not control enough of the forest to appreciably affect any of these things, and could rarely sell them even if he could affect them, he will cut down the tree whenever he can gain by doing so. In this situation either governmental control or governmental ownership of forests is essential.

Each kind of political unit, or subdivision of government, develops characteristic kinds of public ownership and industry. 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, or school or sanitary district; but most of what is to be said of local ownership refers to cities or to incorporated villages.

-- 4. #Forms of munic.i.p.al ownership#. Local political units acquire ownership only in local industries and in wealth used locally by the citizens. Nearly all parks and recreation grounds are owned by cities.

As population has become more dense, private yards of any extent have become impossible, in cities, for all but the wealthy. Public ownership of parks insures a "breathing place" and 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 to parks are public baths, public libraries, art collections, museums, zoological gardens, etc. Some have seen danger in this policy, but the public sees no such danger so long as the things supplied gratify the higher tastes--as art, music, literature, and social recreation. These give no encouragement to the increase of improvident families and to the breaking down of independent character. The means of local communication--streets, roads, bridges--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 inst.i.tution. About two thirds of the cities of 30,000 population or more have public markets or scales, and fully one third have public markets of importance. New York City has six large retail and wholesale markets, for selling meat and farm produce, in which rents or fees are charged, and several open markets. There has recently been a large movement in this direction.

The providing of apparatus for extinguishing fires is always a public duty; the conveyance of waste water is increasingly a public function.

The supply of pure water for domestic and business uses, for fire protection and for street cleaning, while often a private enterprise in villages, and sometimes in large cities, is increasingly undertaken by public agencies. Most of the largest cities now own their own water supply systems. 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 have thus far been few cases of the kind in the United States and Canada.[4]

-- 5. #Localized production favoring monopoly#. A number of these enterprises have characteristics in common which appear to make inevitable their drift into monopolistic control. Waterworks, gas, electric lighting, street railways, telephone systems, are among these. However fierce may be the compet.i.tion for a time, sooner or later either one company drives out the other or buys it up, or both come to an agreement by which the public is made to pay higher prices.

A feature favoring the growth of monopoly when such industries are left to private enterprise is the need to produce and supply the commodity or service 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 compet.i.tion to regulate the rates in those industries; but faith in compet.i.tion between water companies and between gas companies has been given up by nearly all persons now, as it was long since by students of the subject.

-- 6. #Economies of large production favoring monopoly#. A second feature favoring monopoly in such industries is the marked advantage of large production in them. 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. 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, and transportation, on the same street, offers a greater inducement for one compet.i.tor 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.

-- 7. #Uniformity of products favoring monopoly#. A third feature favoring monopoly is uniformity in the quality of the furnished. It is a general truth that compet.i.tion is most persistent where there is the greatest range of choice open to the customer, and consequently the most individual treatment required of the enterpriser. An artist, even a storekeeper, attracts about him a body of patrons 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 compet.i.tion 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 compet.i.tors 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."

-- 8. #Franchises favoring monopoly#. A fourth feature favoring monopoly in these enterprises is the necessity of making permanent and exceptional use of the public streets and alleys. 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 circ.u.mstances. Not only is the legislature (or council, or county board of commissioners, etc.) led by the economic difficulties to withhold a charter from a second company, but it may be corruptly influenced by the company already established. The knowledge of the opposition to be encountered in getting a franchise must keep compet.i.tors out, even tho monopoly prices are maintained.