The Principles of Political Economy

Henry Sidgwick

Book III

Chapter IV

Section 3

§3. Canals and railways. The case is otherwise with canals and railways. Many of these more artificial and elaborate ways of communication have been constructed and managed by private enterprise. Still in some of these cases the funds for their construction have been partly obtained by the aid of Government, in the form of a guarantee of interest or otherwise; while even where the capital of railways has been raised without any assistance from the national exchequer, the companies providing it---in fully peopled countries---have usually had to obtain from Government exceptional powers for the compulsory purchase of land, in return for which they have had to submit to a certain amount of governmental regulation. In many other cases railways and canals have been altogether constructed at the public expense, and managed by Government officials. The actual motive for these various kinds and degrees of governmental intervention has generally been that otherwise it did not seem likely that the improvements in question would be executed at all; the prospect of profit to private undertakers not being sufficiently brilliant and certain to overcome the difficulty of collecting capitals of the large amount required. In the case of railways in particular, the power of compulsory purchase of land has almost always been found indispensable; without it, the most enterprising companies would have shrunk from the task of bargaining with a large number of private landowners, each able by his refusal to increase the expense and diminish the utility of the line very materially. The practical issue has therefore not been between private enterprise pure and simple, and any form of governmental interference, but merely as to the kind and degree of the latter. For, on the very principles of natural liberty as ordinarily understood, it seems due to the owners of property on whom a forced exchange is imposed, that the power to compel such exchange should only be granted after careful investigation has shown a decided prospect of public advantage from it; while yet the necessity of making this investigation, by whatever machinery it is conducted, renders it difficult to exclude altogether the kind of illegitimate influences that we before noted as a danger incident to governmental management. So again, when a railway has been constructed, the more or less complete monopoly which it is sure to have of the facilities of conveyance between certain places on its line is, in part at least, due to the necessity of obtaining governmental sanction for any rival undertaking; hence Government is specially called upon to take care, if possible, that the interests of the public are not sacrificed to those of the monopolists. Further, the large amount of capital required for the construction of a railway or a canal generally excludes the independent enterprise of individual capitalists from this department: the choice, therefore, lies practically between governmental agency and the agency, under governmental control and regulation, of large joint-stock companies; and we have before observed that the latter is likely to exhibit somewhat the same defects as governmental agency, in comparison with management by private employers, The experience of different European countries, during the last fifty years has afforded considerable means of comparing the two systems: and the drawbacks that it has shown to exist in the system of management by regulated joint-stock companies may be stated as follows---taking for simplicity the case of railways, which has now the greatest practical importance.

1. In Construction, want of system, leading to unnecessary outlay; while yet gaps are left which it would be for the interest of the community to fill up; since local lines not likely to bring additional profit to shareholders might often pay their own expenses and greatly benefit their districts.

2. In respect of Management, again, so long as the separate companies are fighting each other for traffic, the public loses by the incoherent organization of its railroads---through difficulties of through---booking and imperfect correspondence-probably more than it gains in cheapness by competition. Competition, however, tends to be continually reduced by the `Fusion' or `Amalgamation' of companies, which it is decidedly the interest of the latter to effect;---though until it is effected the desire that each company naturally has to arrange the amalgamation on the best terms to itself tends to intensify rivalry, and prevent any effective cooperation in the meanwhile.

3. Amalgamation, however, increases the danger of divergence between public and private interests, that we have seen to be involved in monopoly. Nor has anything been gained, in England, by the attempt made to secure the public interest, when the construction of the line is authorized, by imposing limits on the fares charged; and attempts of this kind seem generally likely to fail, since the difficulty of forecasting the future conditions of a business like railway travelling would render it necessary to fix the limits of charges at the outset so high that it would probably not be the interest of the companies to come up to it, in case the undertaking was successful.

Again, the attempt to keep down the profits of such a monopoly, by fixing a maximum dividend, is open to the serious economic objection that when the maximum is reached, the company ceases to have any interest in preventing waste in management. This objection, however, might to a considerable extent be obviated by allowing the company to appropriate a certain share of the profits made beyond a certain limit, on condition that the remainder be applied to the reduction of charges. And in England the profits of railways have as yet not reached the point at which this particular objection would become practically important. Here the actual divergence of private from public interest lies mainly in the fact that the former excludes the possibility of such a reduction of fares as might greatly increase the utility of the railways at the risk of a slight loss in net revenue---a risk which it would obviously be expedient for the community to run under the circumstances, but not for private shareholders.

On the other hand, in a country like our own, in which large accumulations of capital are continually being made, and any opening for its profitable employment is eagerly seized, there are great counterbalancing advantages in leaving the field to joint stock companies: and there seems no reason to doubt that this agency has actually supplied us with railways both more amply and at an earlier period than governmental agency would have done, and probably with a closer adaptation of the order in time of their construction to the needs of industry.

On the whole the conclusion would seem to be, in the case of undertakings of this kind, that where the work is likely to be done by joint-stock companies if Government does not interfere, it should be left to the former during the first and more tentative stage of the undertaking, and even that private enterprise should be encouraged by concessions tolerably liberal as to charges, &c. for a limited period; but that the ultimate interests of the community should be secured by giving the Government the right of either freely revising the charges at the end of the period, or taking the business entirely into its management, on the payment of a fair price for the material capital employed, but without any extra sum in consideration of actual or expected profits.

In the case of railways it is not practically possible to separate the general management of the machinery of conveyance from the management of the roads over which it works. But, as I have before observed, the case is different with ordinary roads and canals. Here the provision and management of the moveable instruments of conveyance has been generally left to private enterprise, without any governmental control for economic purposes, except as regards the prices charged for the use of vehicles plying in the streets of towns. The ground for this latter exception lies in the great convenience to the consumer of a uniform and stable price: otherwise the use of hackney carriages would seem to be a commodity of which the value might be left to be determined by open competition, as advantageously as the value of any other article.

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