The Economics of Welfare

Pigou, Arthur C.
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First Pub. Date
London: Macmillan and Co.
Pub. Date
4th edition.
35 of 73

Part II, Chapter XX


§ 1. OVER the large field of industry, where voluntary Purchasers' Associations are not an adequate means of overcoming those failures in industrial adjustment which occur under the more ordinary business forms, the question arises whether the magnitude of the national dividend might not be increased by some kind of public intervention, either by the exercise of control over concerns left in private hands or by direct public management. In the present chapter we are concerned, not with the comparative merits of these two sorts of intervention, but with the broadest aspects of intervention generally.


§ 2. It is natural at first sight to look for light on this question from the experience of the war. The urgent national need for enlarged supplies of munitions, home-grown food, ships, and certain other articles, led to extensive State intervention in production. National productive establishments were set up, and private establishments were controlled and sometimes accorded special grants to enable them to expand their operations; while the Board of Agriculture took powers to encourage, and, if need be, to compel, increased cultivation of land, and also provided a number of facilities in the way of soldiers' and prisoners' labour and specially imported machinery to assist farmers. A study of what was accomplished under these and other heads would, indeed, be of great interest. But it would not really do much to help our present inquiry. The difference between war and peace conditions is too great. In those four years of strain the underlying motive of the main part of the Government's industrial action was to force capital, enterprise and labour, forthwith and at no matter what cost, into the production of particular urgently needed things. Nobody denies that, when there is a shortage of anything relatively to the demand for it, this fact by itself always tends to stimulate people to direct their efforts towards producing that thing rather than other things. But this reaction is usually a slow one; and in the Great War the essential requirement was always speed. The principal purpose of government assistance and coercion was to secure this; to surmount at once by direct attack obstacles that, in the ordinary course, could only be turned by a slow and gradual movement. The need for such action was, of course, intensified in industries where the Government itself, by artificially keeping down prices, had removed what would normally have been the main stimulus to private efforts after increased production. With the end of the war all this has been changed. The problem of national economy is no longer to effect an instantaneous transformation from one scheme of production to another, but to maintain permanently the best scheme. To show that Government is fit (or unfit) to accomplish the former of these tasks is not to show that it is fit (or unfit) to accomplish the latter. Moreover, the scheme of production called for in the Great War involved an enormous output of things of uniform types for the direct use of Government itself. To show that Government is fit (or unfit) to control or operate industries devoted to a scheme of this kind is not to show that it is fit (or unfit) to control or operate industries devoted to the more variegated scheme called for in normal times. Yet again, in the Great War, the various controls set up by Government were necessarily improvised in a great hurry in a time of abnormal difficulty and pressure. No evidence that intervention in these conditions was wasteful or ineffective could prove that it would display the same defects in the more favourable conditions of normal life. For these reasons war experience can afford very little real guidance, and our problem must be attacked by other means.


§ 3. For some persons the obvious approach towards it is blocked by the supposition that certain industries, those, namely, that make use of the right of eminent domain, such as railway service (national and street), gas-lighting, electricity supply, water supply and so forth, are, for that reason, suitable for public intervention, while other industries, because they do not make use of the right of eminent domain, are not suitable. This supposition is erroneous. It is true that the exercise of eminent domain practically implies monopoly, since neither State nor municipal authorities are at all likely to allow double parallel interference with streets and highways. But this circumstance only puts these public utility services into the general class of monopolistic services: it does not render them different, in any essential respect, from services that have come into that class—like the oil and tobacco industries in America—in quite other ways. Thus eminent domain is in no way a condition precedent either to governmental management or to governmental control through a licence. Public slaughter-houses, licensed premises for the sale of intoxicants, and the system of licensed cabs in London are practical illustrations of this fact. The broad question of policy is different according as we are concerned with monopolistic or with non-monopolistic industries; it is different again, within monopolistic industries, according as discriminating prices are, or are not, practicable; but it is the same, ceteris paribus, whether the industry concerned does or does not require to exercise the right of eminent domain. No doubt, as will appear presently, undertakings at the start of which this right has to be exercised, since they necessarily come into contact with the public authorities in their first beginnings, and, therefore, can be brought under control at once before any vested interests have grown up, can be subjected to public intervention much more easily than others. This distinction of practice is very important, but it is not, and should not be treated as, a distinction of principle.


§ 4. In any industry, where there is reason to believe that the free play of self-interest will cause an amount of resources to be invested different from the amount that is required in the best interest of the national dividend, there is a prima facie case for public intervention. The case, however, cannot become more than a prima facie one, until we have considered the qualifications, which governmental agencies may be expected to possess for intervening advantageously. It is not sufficient to contrast the imperfect adjustments of unfettered private enterprise with the best adjustment that economists in their studies can imagine. For we cannot expect that any public authority will attain, or will even whole-heartedly seek, that ideal. Such authorities are liable alike to ignorance, to sectional pressure and to personal corruption by private interest. A loud-voiced part of their constituents, if organised for votes, may easily outweigh the whole. This objection to public intervention in industry applies both to intervention through control of private companies and to intervention through direct public operation. On the one side, companies, particularly when there is continuing regulation, may employ corruption, not only in the getting of their franchise, but also in the execution of it. "Regulation does not end with the formulation and adoption of a satisfactory contract, itself a considerable task.... As with a constitution, a statute, or a charter, so with a franchise. It has been proved that such an agreement is not self-enforcing, but must be fought for, through a term of years, as vigorously as at the time of formulation and adoption. A hostile, lax, or ignorant city council, or even a State legislature, may vary the terms of the agreement in such a manner as totally to destroy or seriously to impair its value."*56 For this the companies maintain a continuing lobby. "It is from them that the politicians get their campaign funds."*57 This evil has a cumulative effect; for it checks the entry of upright men into government, and so makes the corrupting influence more free. On the other side, when public authorities themselves work enterprises, the possibilities of corruption are changed only in form. "The new undertakings proposed by the municipalisers would lead to dealings to the extent of many million dollars with tradesmen, builders, architects, etc., to the increase, by hundred, of important offices, and to the employment of tens of thousands of additional public servants. Party leaders would have their proportion of increased patronage. Every public official is a potential opportunity for some form of self-interest arrayed against the common interest."*58


§ 5. The force of this argument for non-interference by public authorities is, clearly, not the same at all times and places; for any given kind of public authority will vary, alike in efficiency and in sense of public duty, with the general tone of the time. Thus, during the past century in England, there has been "a vast increase in the probity, the strength, the unselfishness, and the resources of government.... And the people are now able to rule their rulers, and to check class abuse of power and privilege, in a way which was impossible before the days of general education and a general surplus of energy over that required for earning a living."*59 This important fact implies that there is now a greater likelihood that any given piece of interference, by any given public authority, will prove beneficial than there was in former times. Nor is this all. Besides improvement in the working of existing forms of public authority, we have also to reckon with the invention of improved forms. This point may be put thus. The principal disadvantages of municipal and national representative assemblies, as organs for the control or the operation of business, are four in number. First, in the United Kingdom—though this statement is hardly true of Germany—these bodies are primarily chosen for purposes quite other than that of intervention in industry. Consequently, there is little reason to expect in their members any special competence for such a task. Secondly, the fluctuating make-up of a national government or of a town council is a serious handicap. Sir W. Preece wrote: "I have the experience of electric lighting in my mind. Large municipalities overcome the difficulty by forming small and strong committees and selecting the same chairman, and thus maintain a kind of continuity of policy. Small corporations start with very large committees; they are constantly changing, and the result is that you find, sometimes inability to agree upon the system to be used, sometimes inability to agree upon the means to be employed to conduct the service; and it is incessant trouble and squabble."*60 Moreover, this incident of fluctuating membership may lead to action based on short views—views bounded by the next election, not extending to the permanent interests of the community. Thirdly, the areas, to which public authorities are normally allocated, are determined by non-commercial considerations, and, consequently, are often likely to prove unsuitable for any form of intervention with the working of an industry. It is well known, for example, that attempts, on the part of some municipalities to regulate, and of others to operate, the service of, street-traction and the supply of electrical power have suffered greatly from the fact that these services, since the development of modern inventions, can be organised most economically on a scale much in excess of the requirements of any one municipality. Finally, as indicated above, regular governmental agencies, in so far as they are elective bodies, are liable to injurious forms of electoral pressure. These four disadvantages are all serious. But all of them can be, in great measure, obviated. The first, second and fourth are practically done away with under a system of municipal government such as prevails in Germany, where the burgomasters and aldermen, corresponding to the English chairmen of committees, are whole-time paid experts with practically permanent tenure of office. All four disadvantages can be overcome, perhaps even more effectively, by the recently developed device of Commissions or ad hoc Boards, that is to say, bodies of men appointed for the express purpose of industrial operation or control. An example of a Commission for operation is afforded by the Railway Department of New South Wales or the Port by London Authority in this country, and one of a Commission for control by the Interstate Railway Commission of the United States. The members of such Commissions can be specially chosen for their fitness for their task, their appointment can be for long periods, the area allotted to them can be suitably adjusted, and their terms of appointment can be such as to free them, in the main, from electoral pressure. The system of Commissions or ad hoc Boards also, in great part, escapes a further important objection to intervention in industry by such bodies as municipal councils. This objection, as stated by Major Darwin, is that such intervention "lessens the time which these bodies can devote to their primary and essential duties, and, by increasing the unwillingness of busy men to devote their time to public affairs, it lowers the average administrative capacity of the Local Authorities."*61 When industries are operated or controlled by special public Commissions, this objection is inapplicable. The broad result is that modern developments in the structure and methods of governmental agencies have fitted these agencies for beneficial intervention in industry under conditions which would not have justified intervention in earlier times.

Notes for this chapter

Municipal and Private Operation of Public Utilities (Report to the National Civic Federation, U.S.A.), vol. i. p. 39.
Bemis, Municipal Monopolies, p. 174.
Municipal and Private Operation of Public Utilities, vol. i. p. 429
Marshall, "Economic Chivalry," Economic Journal, 1907, pp. 18-19.
H. Meyer, Municipal Ownership in Great Britain, p. 258.
Darwin, Municipal Trade, 102.

Part II, Chapter XXI

End of Notes

35 of 73

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