This section is from the "Elementary Principles of Economics" book, by Richard T. Ely and George Ray Wicker. Also available from Amazon: Elementary Principles Of Economics: Together With A Short Sketch Of Economic History
The principal advantages which are claimed for public ownership of such monopolies call for a brief discussion.
1. Increase of Public Prosperity. A general diffusion among the community of the great incomes now reaped by the private monopolies will tend to prevent an undue ' concentration of wealth while at the same time promoting general prosperity. Most of the enormous fortunes of our country have sprung directly from natural monopolies in private hands. It should be noted that if such private monopolies are taken over by the government, the income from them may be diffused in either of two ways. Charges may be placed so low that the price will simply cover cost without allowing for profits, the method pursued by our post-office, and by the English telegraph service; or a profit may be derived from the industries, and this used to lower taxes or to benefit the people in other ways.
2.Economy. How enormous is the waste of war in attempted competition in the field of natural monopolies may be seen on every side. Indeed, it has been estimated that, in the matter of railway construction and operation in the United States during the past fifty years, economic resources have been wasted which, had they been economically applied, would have been sufficient to build comfortable homes for all the men, women, and children now in the country. There is, therefore, a large basis of reason in the claim of those who maintain that public ownership of such monopolies would be more economical than the policy of private ownership and management has been.
When services of a monopolistic nature are performed by the public, great economies can often be secured by combining various services, such as water, gas, and electric lighting. Moreover, a better management is likely to result. It is only a popular superstition, now apparently passing away, that private enterprise is always and everywhere superior to public enterprise. The fact of the matter is that each should be superior in its own natural field.
Nor is it true that private enterprise always excels public enterprise in the matter of initiating improvements. The English government has introduced in the telegraph service improvements which our private telegraph companies have refused to adopt on account of the expense. The American post-office blazed the path for American express companies in developing the money-order business. The English Postal Savings Bank set a pattern for private savings banks in the establishment of branches and in the use of stamps posted on small cards for savings.
3.Purification of Politics.Private monopolies must be controlled by public authority; but control means interference with private business, and interference begets corruption. Not a year passes that the country is not shocked by the disclosure of bribery and corruption in connection with the granting or extension of franchises or in some one of the many ways by which monopoly in private hands seeks to secure privileges, to free itself from duties, or to escape from deserved punishment. A lawyer prominently identified with monopolistic concerns has declared in a recent public address that the "ante-natal tax " which such companies are obliged to pay, that is, the bribery necessary for securing franchises, constitutes a regular element in the expenses of their business. This is one reason why our city governments are expensive. With public ownership and management of such monopolies, public interests and private interests are identified, and the best citizens can offer undivided allegiance to the cause of good government.
4. Will overthrow Injurious Social Monopolies. It is generally agreed to-day that many social monopolies are advantageous, but there are others which are distinctly injurious to the best interests of society. Some of these injurious social monopolies have been made possible by special favors received from the natural monopolies which we are discussing; as, for example, by receiving lower freight rates than competitors could secure. If all citizens could be assured just and equal treatment at the hands of natural monopolies, the limits of competition would be extended, while the limits of monopoly would be restricted. But it is problematical whether such just and equal treatment can be hoped for while natural monopolies are in private hands.
Jevons's Criteria. The English economist Jevons, as a result of careful study of government management of monopolies, reached the conclusion that there are certain general principles or characteristics by which we may judge what monopolies the State may most safely undertake to manage. These characteristics may be briefly summarized as follows: (1) the business should be of a routine nature, as, for example, is the business of the post-office; (2) the business should minister to a permanent and widespread public need; (3) the business should be of such a nature as to be constantly subject to public criticism; (4) it should be of such a nature as to require a relatively small amount of capital in proportion to the amount of business done; (5) and finally it should be of such a nature that the technical apparatus required for its successful management may be easily and accurately understood.
As regards these criteria, it may be observed in the first place that they afford information only as to what businesses the State is most likely to conduct with successsuccess or failure being here regarded solely from the standpoint of the private business manager. In other words, there is no place in this statement of principles for the consideration that the State may promote the social welfare by managing business at what, in the language of the private entrepreneur, would be called a loss. Our public highways are almost everywhere a State-managed monopoly, created and maintained by taxation, not by fees or tolls. Judged solely by the standard of private management, they, therefore, do not constitute a successful business. Yet no one to-day would advocate a change in public policy which alone could make their management "successful."
In the second place, it may be observed that although we may be unwilling permanently to restrict the State's activity within the "ring fence" thus set up, yet we may well use Jevons's criteria as an aid in determining the order in which the State should assume the management of natural monopolies. Furthermore, it will appear on reflection that differences in the degree to which various natural monopolies now conform to these criteria are not permanent, but are ever changing. Thus the railway business is becoming more and more susceptible to routine management; the need for its service becomes every day more widespread; it falls more and more under the intelligent criticism of the public. We may, therefore, question whether, judged even from the standpoint of private business, all natural monopolies may not in time be successfully managed by the State.
Conclusion. Public sentiment in favor of public ownership of the natural monopolies of the second class is rapidly gathering volume and force. The advantages which might result from such a policy have been explained. While recognizing these, we must not overlook the enormous difficulties in the way of government ownership and control, the serious problems of governmental organization involved, the problem of improving the civil service, of securing greater honesty and efficiency in the public business. In the case of government railways would arise the problem of rates and of the con-flicting demands of different sections and industrial interests. In European countries these difficulties have proved very grave, and are still far from being successfully solved.
Even with the present strong tendency toward public ownership, it must of necessity be a long time before all natural monopolies will pass out of private hands. Mean-while, there will remain the ever perplexing question of regulating the granting, extension, and renewal of franchises, and of the public control over such undertakings. No question in economics is more worthy the careful con-sideration of the thoughtful student who desires to equip himself for honest and intelligent citizenship.
1.The essential idea in monopoly is unity of action, leading to control of price and other conditions.
2.Monopoly value differs from competitive value in that the supply of monopoly goods is not determined by cost of production.
3.Monopoly price is the price of maximum net revenue. In establishing the supply and the price, the monopolist disregards fixed expenses; hence a fixed tax on monopoly cannot be shifted.
4.Monopoly price is controlled on the side of demand by the wealth and purchasing habits of consumers.
5.It is claimed in favor of public ownership of natural monopolies that the policy diffuses prosperity, is economical, purifies politics, and overthrows injurious social monopolies.
1.Define monopoly. Name and define the different classes of monopoly. Mention some monopolies of which you have knowledge, and explain what monopoly advantages they enjoy.
2.Sum up in a brief statement the peculiar properties of natural monopolies of the second class. Mention some monopolies of this class.
3.Show by a numerical illustration and by diagram how monopoly price is determined. Explain the difference between monopoly price and competitive price.
4.Explain differences in the effect of different methods of taxation of monopolies.
5.What advantages are claimed for public ownership of natural monopolies? What dangers are involved in such a policy?
6.State the law of monopoly price.
Baker, C. W.: Monopolies and the People, Part II. Baker, M. N.: Municipal Engineering and Sanitation. Bemis, E. W.: Municipal Monopolies, pp. 660-680. Bullock, C. J.: Introduction to the Study of Economics, Ch. XL Ely, R. T.: Monopolies and Trusts, Ch. III, pp. 102-104, also Ch. VI, pp. 229-23l.
Hobson, J. A.: Evolution of Modern Capitalism, pp. 156-160. Jenks, J. W.: The Trust Problem, pp. 20, 43, 53, 98. Report of the Chicago Conference on Trusts.
Report of the United States Industrial Commission, Vols. I and II. Shaw, Albert: Municipal Government in Great Britain; also Municipal Government in Continental Europe, Ch. VI.