Front Page Titles (by Subject) CHAPTER 33: PUBLIC OWNERSHIP - Economics, vol. 2: Modern Economic Problems
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CHAPTER 33: PUBLIC OWNERSHIP - Frank A. Fetter, Economics, vol. 2: Modern Economic Problems 
Economics, vol. 2: Modern Economic Problems, 2nd edition, revised (New York: The Century Co., 1923).
Part of: Economics, 2 vols.
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§ 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 municipal 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. § 13. Sources of heat, light, and power.
§ 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 virtually 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 competition, in the best way humanly possible, in the quantities 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. Civilized government requires the use of numer-out material agents to make possible the exercise even of the primary political functions. The state may either own these agents or hire their use from private citizens who own them. It is now the general policy for government to own and control many of the more essential agencies, especially for the performance of the political functions; but a wide range of choice remains. Buildings for legislative and executive officers, customs-houses, post-offices, lighthouses, can be rented from 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.
A city may own the machines and wagons for cleaning the streets and for collecting garbage, and may hire day-labor directly, or it may have the work done by private contractors. 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 as to the proper limits to this development is ever open.
§ 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 passing 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. A manufacturer able to keep his methods secret, or to retain his advantages for a time, can afford to undertake expensive experiments in his business, but the farmers seldom can. The benefits of the work of experiment stations for agriculture are felt immediately by the farmers, but are diffused to all citizens. 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. 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, it is felt that speculation should in every possible way be eliminated from this industry.
The assumption 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 appreciably to 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 municipal 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 of “giving something for nothing,” but the public sees no such danger as 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.
Streets, roads, and 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. Public markets, where the producer from the farm and the city consumer can meet, are old institutions. 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 larger 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 competition between separate private companies 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 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 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 on the same street large rather than small amounts of water, gas, electricity, and transportation, offers 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.
§ 7. Uniformity of products favoring monopoly. A third feature favoring monopoly is uniformity in the quality of the product furnished. 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 of the enterpriser. An artist’s product is very distinctive. Even a storekeeper attracts about him a body of patrons who like his product (for the merchant’s manner and method of dealing are qualities 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.”
§ 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 circumstances. 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 competitors out, even though monopoly prices are maintained.
Because 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, they are monopolies. The public, in order to protect itself, is forced to undertake an exceptional control of these industries.
§ 9. Various policies toward local public-service industries. Several courses are open to the public, acting in its political capacity, to retain these monopolistic advantages for the general welfare. (a) It may do nothing, trusting 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. (b) 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; virtually this is selling the franchise at auction. (c) It may attempt, in granting the franchise, to fix near cost the charge for the service or product, so that the franchise will be worth little as private property. (d) It may leave the price to be fixed at cost, not definitely by law, but by an administrative commission having the power to regulate rates. (e)) 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.
After plan (a), rates fixed in the franchise (c) had wide vogue. But fixed maximum rates, even under the most favorable conditions, are rarely equitable, for a uniform rate does not apply justly to all parts of a town and to all conditions of service. Fixed maximum rates become too high in periods of stationary prices, when technical improvements are rapidly introduced, and from a different cause, when general prices are falling, as between 1873 and 1897. They became too low (unless offset by extraordinary technical improvements and economies of increasing output) in periods of rising prices. Since the nineties many public utilities have been brought to the verge, or quite into, bankruptcy, while many others have found their salvation in the administrative commissions, which had the power to increase the rates as well as to reduce them.
The plan of selling the franchise (b) is difficult to apply because of the limited number of bidders and because of the unpredictable character of the returns. There remain the policies of administrative rate-fixing (d) and of public ownership to secure the profits of monopoly to the public, either directly or in a diffused manner. In the recent period of rising prices the administrative state commissions have, like the Interstate Commerce Commission, performed very valuable services. But, on the whole, the general trend of municipal policy is everywhere toward public ownership of this type of local public-service industries.
§ 10. State ownership of various kinds. The movement toward public ownership by the American states has been much less marked than that by the municipalities. Many of the states have retired from some fields where once they were engaged in industry. Students of American history know that between the years 1830 and 1840 some states engaged largely, even wildly, in canal-building, railroad construction, banking, and in other enterprises. The undertaking of these industries was determined often by political and by selfish local interests, and their operation often was wasteful. A few enterprises succeeded for a time, the most notable of these being the Erie Canal in New York, though this too became almost worthless as a result of railroad competition. The unsuccessful ones remained in the hands of the state or were sold to private companies, as in the case of the Pennsylvania Railroad. These reckless state enterprises were bitter lessons in public ownership, and continued for three quarters of a century to have such an effect on public opinion that few proposals for public ownership could have a fair hearing in America. But railroads and canals are publicly owned, and more or less successfully operated, by many foreign states, as in Prussia and other German states, in Switzerland, and in the new states of Australia, and this policy is rapidly extending to other countries and to varied industries.
There has been recently a greatly increased interest in forestry shown by the American states. This is especially likely to be a state enterprise wherever the forest tracts are entirely within the limits of the state, as in the case in New York with 2,000,000 acres and Pennsylvania with 1,000,000 acres of state forests. At present at least thirty-three states have forestry departments. 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. One after another the states are adopting the “state use” system of labor in the prisons and public institutions, engaging in agriculture and manufacturing on a large scale, and using the products, amounting to millions of dollars annually, almost entirely for public purposes.
§ 11. National ownership. The national governments everywhere appear to be enlarging the field of their ownership. This policy has its roots far in the past. 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 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. National ownership of railroads is the rule, and our policy of private ownership the great exception in the world to-day. Many persons, some in railroad circles, have long believed that national ownership of railroads is sure to develop out of our present policy of regulation; and this opinion is gaining ground, since the passage of the Transportation Act of 1920, even with many that deplore the prospect.
The national improvements connected with rivers and harbors were first political—that is, they were for the use of the government’s navy; they became, secondly, commercial—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, partly because some forest areas in the West extend over state boundaries, and largely because large tracts of public forestlands 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 the United States. The national forest area contained in the various forests in twenty states (not including Alaska and Porto Rico) now covers about 282,000, square miles, equal in area to six states of the size of Pennsylvania, with all of New Jersey, Delaware, and Rhode Island thrown in for good measure; or to all New England and the middle Atlantic states, plus Ohio, Indiana, and West Virginia. There are, besides, fourteen large national parks, ranging in size from a few hundred acres up to over 2,140,000 acres (the area of the Yellowstone National Park), and aggregating 4,600,000 acres, nearly the size of Massachusetts or of New Jersey, besides numerous other national reservations for monuments and antiquities.
In some countries mines are thought to be peculiarly fitted for national ownership and control. In Germany the several states own coal, salt, and other mines. Coinage and banking are everywhere looked upon as functions 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. The fish commission, and the various branches of the department, coöperate with private industry in many ways. This brief 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.
§ 12. Sources of heat, light, and power. Next to the question as to the public ownership of the railroads, that as to coal mines and hydraulic power sites is most likely to become insistent for answer in America in the not distant future. The law of the conservation of energy expresses the fundamental likeness of heat, light, and power. The principal sources from which man derives these agencies are coal and falling waters, though wood is of importance as fuel in some localities. About 500,000 square miles of land (about 13 per cent of the area of the country) are underlaid with coal. These deposits are widely distributed, so that nearly every part of the country is within five hundred miles of a mine. The enormous deposits, if used at the present amounts per year, would last probably from two to four thousand years, but if used at the present increasing rate (doubling the product every ten years), they would, it has been estimated, last but one hundred and fifty years. What shall be the actual rate as between these extremes is a question the answer of which depends on our economic legislation as to ownership, exploitation, prices, use, and substitution. The experiences in the war, as well as the constantly recurring labor difficulties in coal-mining, verging upon civil war, have forced the public thought to recognize its dependence on the regular supply of coal, and the exceptional public nature of the coal industry.
The one great available substitute for coal as a source of heat and light and power is water-power. It is estimated that in 1908 but 5,400,000 horse-power was being developed from waterfalls, whereas about 37,000,000 primary horse-power5 was available; but, by the storage of flood-waters so as to equalize the flow, at least 100,000,000 horse-power, and possibly double that amount, could be developed. As it requires ten tons of coal to develop one horse-power a year in a steam-engine by present methods, there is here a potential substitute for coal equal to from two to four times our annual use of coal (above 600,000,000 tons).
But this does not mean that it would be economical, at present costs of mining coal and of building reservoirs, to make this substitution now. To determine when, how far, and by what methods to develop this water-power from lakes and rivers for the use of the people, and to make this substitution, is one of our great economic problems. The question is being daily decided, in numerous acts of legislation and administration, whether the water-power of the United States shall be more rapidly developed by becoming private property, or shall be developed more slowly as a part of the national domain.
§ 13. Economic basis of public ownership. The question as to the proper limits of public ownership is one most actively debated. The movement is progressing in accordance with the principle that public ownership is economically justified wherever it secures a product or service of widespread use that would otherwise be impossible, or insures the public a better quality or a lower price. 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 policy 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 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 upon cost and service. If public officials can furnish some goods more cheaply 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 and of public opinion, wages are likely to be higher under public ownership, but salaries for management lower. 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. Some items of cost may be less under public management, but, on the whole, public industry probably has no advantage in these respects. Public industry does not have to meet the costs 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.
The temptation of 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.
The decision in any specific case is one dependent on local conditions, and the exact limits of public ownership are not fixed. Industry is changing so rapidly that new adjustments are made every 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 fact cannot be ignored that the increase of public ownership is altering in manifold ways the organization of industry, and is reacting upon the production of wealth and the distribution of incomes.
[1 ]See above, ch. 17, § 5.
[2 ]See ch. 17, § 2, on the police function.
[3 ]See ch. 17, § 3 and § 4.
[4 ]See ch. 17. § 5, industrial revenues of governments.
[5 ]That is, “the amount which can be developed upon the basis of the flowage of the streams for a period of two weeks in which the flow is the least,” all the rest being allowed to escape unused. Van Hise, “Conservation of Natural Resources,” p. 119.