POLITICAL SCIENCE

QUARTERLY.

RAILWAY TARIFFS AND THE INTERSTATE COMMERCE LAW. II.

CARCELY second in importance to the short-haul clause of the national law, which has been discussed in the preceding essay,1 is the section which prohibits pooling. What is the true significance of pooling? What will be the effect of the law? To give a correct answer we must enter upon a consideration of competition in general.

And here we are immediately confronted by the two fundamental questions: Is free competition universally beneficent? Is free competition universally existent?

The doctrine of free competition is essentially a modern idea.

1 POLITICAL SCIENCE QUARTERLY, June, 1887, p. 223. It has been a source of great satisfaction to me that the Interstate Commerce commission in its recent weighty decision has taken substantially the same ground as that occupied in my first article. The chief points are as follows:

'First. That the prohibition in the fourth section against a greater charge for a shorter than for a longer distance. . . is limited to cases in which the circumstances and conditions are substantially similar.

"Third. That . . . in case of complaint for violating the fourth section the burden of proof is on the carrier.

"Fifth. That the existence of actual competition... may make out the dissimilar circumstances and conditions . . . in the following cases:

1. When the competition is with carriers by water which are not subject to the provisions of the statute.

2. When the competition is with foreign or other railroads which are not subject to the provisions of the statute.

3. In rare and peculiar cases of competition between railroads which are subject to the statute, where a strict application of the general rule of the statute would be destructive of legitimate competition.

"Sixth. The fact that long-haul traffic will only bear certain rates is no reason for carrying it for less than cost at the expense of other traffic." - In re The Louisville & Nashville R.R. Co. et al., pp. 27-29.

As the basis of nineteenth century economics it was first formulated by the Physiocrats and Adam Smith. It is entirely foreign to ancient and mediæval conceptions. The economy of the middle ages was founded on the idea of reasonable, customary price the justum pretium of the legists, theologians, and statesmen. The institutions were based on restrictions, privileges, and enforced monopolies, while the legislative prohibitions were not entirely the product of class selfishness but in part the recognized expression of an attempt to secure distributive justice. That the legislators finally overreached themselves and stifled all liberty by their multifarious restrictions is a wellknown fact. The necessary and salutary reaction found its theoretic justification in the "natural law" tenets of the eighteenth century, and a partial realization of those tenets followed in the first half of the nineteenth century. The idea now became current that a reign of free competition and its logical correlative, absolute laissez faire, would bring about a harmony of interests, a state of universal bliss. The enthusiasm of Bastiat and McCulloch was natural in seeing the world break away from the shackles of medieval restraint. But recent experience has demonstrated the falsity of their anticipations and has disclosed serious defects in the régime of free competition. It does not always work evenly; it often secures undue advantages to the unscrupulous; it has given birth to great abuses in the factory system and the fraudulent speculation of modern society. The law of competition is not always beneficent.

Furthermore, it does not exist universally. The doctrine depends on the postulates of absolute transferability of labor and capital. But this assumption is approximately true in only a few instances, absolutely untrue in many instances. In the industrial undertakings of the present day the capital invested is often fixed, not circulating, capital, and cannot easily be transferred to a more lucrative business. It is difficult to gauge even approximately the superior profitableness of some competitive enterprise; and even when it has been gauged, it is still more difficult at once to transfer the capital. In fact, in only one department of business life does the doctrine of the absolute

play of free competition hold good-in the stock exchange of modern times.1

John Stuart Mill long ago called attention to what we may term economic or industrial monopolies, where competition is neither illegal nor absolutely shut out by nature, but where it is shown to be practically undesirable and utterly inefficient, thus of itself giving place to some form of monopoly.2 Other writers, and especially Farrer,3 have attempted to analyze these phenomena and show why the law of competition is not applicable. Certain characteristics are common to them all. The industry demands a large amount of capital; it supplies a necessary of life; the article furnished is local; the industry occupies a peculiarly favored situation; the method of operation requires unity and harmony of management; the production can be largely increased without a proportionate increase of capital. This is true not only of docks, waterworks, and gasworks, but of all media of transportation- turnpikes, canals, telegraph, post, and railways. In some of these competition has never been attempted; in most cases it has been tried, but has miserably failed. The disappearance of competition has benefited the companies and in many instances also the public. But at all events, whether beneficial or not, competition has disappeared, and combination and monopoly have resulted.

The chief consideration is the possibility of increased production without proportionate increase of plant or capital. To use a happy phrase, the business is subject to the law of increasing returns. The traffic on a railroad may be doubled without the necessity of duplicating roadbed, track, terminals, and general expenses. Ten lines between New York and Albany would not benefit the public, and would certainly ruin 1 This explains, as Cohn pointed out, why Ricardo, who was a stock-exchange broker, first successfully elaborated the theory of free competition. Untersuchungen über die englische Eisenbahnpolitik, Bd. II (1875), S. 384.

2 Book v, ch. xi, § 11; Appleton's ed. 1880, vol. ii, p. 584.

8 Cf. Industrial Monopolies, Quarterly Review, October, 1870. Also Sax, Die Verkehrsmittel, Bd. I, S. 66 et seq., and Simon Sterne, Monopolies, Lalor's Cyclopædia of Political Science, vol. ii.

4 H. C. Adams, Relation of the State to Industrial Action, Publications of the American Economic Association, vol. 2 (1887), p. 523.

each other. One line judiciously managed can perform all the work at far less cost. The railway is an economic monopoly ; the inevitable tendency is toward fusion and single-headed management.

In addition to these economic monopolies proper, we find almost every department of wholesale trade at present taking the form of industrial combination. To maintain that prices are everywhere regulated by the free play of competition is no longer permissible. We cannot ignore the fact that producers find it to their interest to combine and agree on certain prices less than which it shall be unlawful to ask or take. Adam Smith already said: "People of the same trade hardly meet together even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." Even then the movement had begun; to-day it has become well-nigh universal. There is scarcely a trade throughout the land without its combinations, many of which in the last few months have taken the impalpable form of trusts, in the endeavor to attain corporate advantages without assuming corporate responsibilities. There are really four classes: combinations to limit production, to regulate prices, to regulate distribution, to divide the field. Some comprise all four characteristics. To describe or enumerate them is needless in view of the recent discussions to which they have been subjected.1 But the facts exist. Prices are no longer determined by the action of free competition, but by the artificial manipulation of these industrial combinations or partial monopolies.

Are these combinations now a necessary evil? Are they an evil at all? Here it will be necessary to revise our natural opinion that monopoly is always injurious. This is as great a mistake as to affirm that competition is always beneficent. The characteristic feature of modern economy is that articles are produced not to satisfy any particular demand, but for the world

1 Cf. J. B. Clark, Limits of Competition, and F. H. Giddings, Persistence of Competition, POLITICAL SCIENCE QUARTERLY, March, 1887, pp. 45, 62. Also the articles of H. D. Lloyd, North American Review, 1884 and 1885. For Europe, see Kleinwächter, Die Kartelle (1883). For England, Select Committee on Railways (1882), Evid. qu. 3893; (1881), Evid. qu. 16,376.

375 moderate local discriminations. The changes are violent, the conditions unstable. Reduction of rates is sometimes carried to such a point that not even operating expenses are met, for the reckless and bankrupt roads feel no need of earning any fixed charges. The railway wars, which are the logical and extreme manifestations of railway competition, thus exhaust the companies and afford but a dubious relief to the public. Lowness of charges is outweighed by the instability of charges. And the reduction itself is necessarily of an ephemeral character. Continuance of the rates means universal bankruptcy; escape from ruin is possible only through combination. The combination which results again raises rates, and the charges must now be sufficient to earn profits on the often increased capital of the two lines. If competition be beneficial to the public, it is a very temporary < benefit; if railway wars, on the other hand, throw all trade into confusion and engender the most aggravated abuses, then the cessation of the competition is a boon to the public, even though the combination results in a relative increase of charges. And if this be true, then a railway policy which obviates the danger of railway wars and "cut-throat" competition can give the public not only stability of rates but also the additional advantage of relatively lower charges.

However the railways start out, they are sure to end in combination. It is the same development as in all other economic monopolies, with the sole difference that the railway monopoly is more pronounced and the railway combinations more widespread. In no business are the effects of spasmodic competition more pernicious. It needs but slight acquaintance with the practical construction of railway rates to perceive the absolute interdependence of tariffs. A war between two important lines necessarily involves the interests of distant roads throughout the country. The only escape from ruin is the replacement of competition by some form of combination. No less than seven possible forms of arrangement have been successively tried: 1. Agreement to make equal rates or give equal facilities as to speed, accommodation, etc. 2. Agreement to forward traffic over each other's lines by working arrangements or traffic facili