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LECTURE TWO
Some Special Cases
IN MY first lecture I suggested that we ought not to neglect the broader consequences of the changing balance between public and private enterprise. As the poet Roy Campbell once wrote:
Things have a nearer meaning to their looks,
Than to their dead analysis in parts.
But we clearly cannot ignore the lessons to be drawn from the case-by-case method. The pragmatic approach was not overlooked by the main liberal writers, all of whom were prepared to regard favourably as proper functions of the State those which passed the following tests:
1. Where a given expenditure would bring an even larger economic return to the community but would not be undertaken by any private individual.
2. Where a given expenditure, although not necessarily yielding an economic return in the narrow sense, could nevertheless be shown to be ‘really important to the general interest’.
3. Where the individual in striving, in apparently rational fashion, for some benefit or the avoidance of some harm, would normally be led to take action which would frustrate his own purposes.
4. Where it could be shown that the State, for one reason or another, would be able to produce goods or services more cheaply than private enterprise.
Applying these tests, there is much common ground as to what are the legitimate functions of the State. Defence, justice, law and order, a high and stable level of employment, town and country planning, the care of the needy, taxation and currency would be at the top of the list. (Note, however, that most Governments in recent years have neglected their responsibility for improving methods of taxation and for preserving the value of the currency.) The next group includes important services for which prices cannot normally be charged: preventive medicine, some branches of education and research, information, flood control, drainage and land recovery. In a third group the advantages of central co-ordination may call for State responsibility: postal services, telephones, and perhaps the supply of gas, water and electricity.
It is, however, in the study of those cases about which people do not agree that we get to grips seriously with the subject. In Great Britain in recent years the major and most complex topics have been nationalization of industry or of such services as health and broadcasting; the public support of science, technology and education generally; the control of the location of industry and the conservation of natural resources, especially of land. These topics raise, in varying admixtures, the same important issues: what economies are to be gained from operating on the largest possible scale; what advantages flow from monopoly operation; and what criteria should determine the degree to which public should supplement, where it is not intended to supplant, private effort.
One might discuss the topics in terms of the issues or the issues in terms of the topics but I propose to follow the latter course and I turn first to the question of the optimum size of operation.
The defence of State economic activity on the score that a government will normally operate on a larger scale than a private individual or institution and therefore will be likely to produce goods and services at a lower cost is found fairly widely, but it has been advanced with greatest confidence in relation to the nationalization of industry and it can therefore be most usefully examined in that connection.
At first sight it seems an odd idea that the whole of an industry that happens to fall within one national boundary should be regarded as the most efficient unit for production. Optimum size would seem to be a function of technical and marketing conditions, of the normal rate of innovation and so on. These would seem to have little or no relation to the historical accidents which have determined the boundaries of one country. Certainly this proved to be the case with the British nationalized industries. For no sooner had they begun to operate than it became clear that, far from their size being a virtue, it constituted their most persistent and troublesome problem. This even the most ardent advocates of nationalization have pointed out. As one of them put it:1
Some of the administrative problems of the nationalized industries arise from the very size of the industries taken over. Bigness is perhaps their greatest drawback.
It has proved, indeed, a drawback difficult to overcome. This accounts for the long string of public and private inquiries into the working of these Public Boards. The reports of the investigating committees have see-sawed between the view that more decentralization was needed in order to inject life and a local sense of responsibility into the organization and the opposite view that less de-centralization was desirable, that tighter centralization was called for in order to transmit through the organization the superior wisdom and knowledge thought to reside at the centre. Usually what was recommended by one committee was the opposite of what had last been tried, but without benefit, as the result of the recommendations of an earlier committee. The other side of the road has always seemed to be less muddy. These fluctuating views should not be a matter of surprise. They flow from the fact that the various committees were trying to deal with what may well have been an insoluble problem. The nationalized industries were so large as to make it dubious whether they could ever be efficiently operated, whether they had not outstripped the limits of administrative feasibility. This has never been admitted explicitly. But implicitly it has been accepted by the action of both political parties: even the Labour Party has devoted much thought to other possible forms of public ownership which would place upon the Government much more restricted responsibilities as to the detail in which and the scale upon which the Government would take charge of an industry.
1 Ernest Davies, Problems of Public Ownership. Labour Party Pamphlet, 1952.
I think there are two simple lessons to be drawn from the history of nationalization. The first is that industries, and particularly the newer ones, present us with diversity and intricacy too great to be conceived of except by those who have to try to deal with them. The National Coal Board, in trying to make a full list of its assets, in an industry commonly regarded as homogeneous, once rather wistfully confessed:
It was a process like the making of the Doomsday Book.
The second moral is that increasing size is not a cure-all for the troubles of any institution, it may be a positive menace. And this point is just as relevant in public policy relating to mergers in private industry as it is in the matter of nationalization.
What are claimed as the special virtues of monopoly when it is vested in public hands? (Note that the claim that a government should prohibit all private persons from doing certain things is the very opposite of the more common one that the government should step in only where the individual cannot or will not act.)
The reasons put forward for public monopoly have been numerous and varied. Sometimes they have been technical. Thus it has been said that if coalmining is placed under one national authority then coal reserves can be exploited more systematically, without obstruction from individual land or mineral rights. But coal does get mined quite efficiently in countries which do not have this form of centralized public control. In the generation and distribution of electricity, central control makes it possible to bring a balance between deficits and surpluses in different regions; although the same effect might be achieved by special agreements between otherwise independent generators. The British Broadcasting Corporation has argued for monopoly on technical grounds because of the limited number of wavelengths available. But in their joint evidence before the Broadcasting Committee in 1949,1 Sir Robert Watson-Watt and Sir Geoffrey Crowther rejected the argument and what has happened since suggests that they were right.
Sometimes the case for a publicly operated or conferred monopoly is submitted on grounds of welfare. It used to be argued that the monopoly powers vested in the nationalized industries gave them the chance of supplying privileged or needy groups at exceptionally low prices. This argument is much less frequently met with now. Sometimes monopoly is recommended because it can be used to raise cultural or moral standards. Lord Reith, in his unswerving advocacy of what he usually referred to as ‘brute monopoly in broadcasting’, based his argument mainly upon ‘the paramount importance of the preservation of a high moral tone’ in the community. And when he was in a position to determine these things, he went into detail as to how this should be interpreted. He had particularly austere views about what we should be allowed to listen to on the Sabbath.1 But, as the recent popularity of broadcasting from pirate radio ships has made clear, the efforts, however lofty, of one individual or group to improve the standards of another simply by restricting their range of choice, can have powerful boomerang effects.
1 Report of the Broadcasting Committee, 1949. Appendix H, pp. 333–41.
There is another much more important, interesting and at first glance cogent defence of monopoly. It can be presented as the condition precedent to order and rationality in the economic system. It appeals to many as the obvious way of bringing about what is variously described as integration or co-ordination or unification. Behind this is the tacit assumption that order in the economic system cannot exist unless it is consciously engineered by one or a small group of men. It constitutes a denial that there can be such a thing as spontaneous order.
This anxiety about what might go wrong unless there is constant and conscious guidance in the economic system can best be illustrated by reference to transport. There are different forms of transport and it seems sensible that each should be devoted to the purpose which it best serves. Everyday observation appears to indicate that there is much duplication. Vehicles are seen to be travelling in the same direction only partly full. Road, rail, air and water facilities exist on the same routes. Surely, it can be argued, if one organization could only get all the pieces of this jigsaw puzzle under its control, vast savings would be possible.
1 R. H. Coase, British Broadcasting: A Study in Monopoly, Chapter III.
Thus when the British Transport Commission was first set up in 1947 it began with the widest possible interpretation of this idea:
Rail, road and inland water services were to be developed as complementary to each other and were not to be regarded as rival forms of transport.1
Yet, over the years, the seductive concept of a waste-free fitting together of these different services has proved a will-o’-the-wisp. There is no such thing as ‘transport’ in the sense in which the Commission at first envisaged it. There is only the individual consumer who, for one reason or another which is good to him, will prefer to travel between two points by one method of transport rather than another. Or there is the individual manufacturer, who for one of a thousand reasons may prefer to have his goods carried in one way rather than another. Anyone trying to solve this jigsaw puzzle is confronted with an infinite number of possible permutations of preferences by consumers, in the face of which the would-be integrator does not really know where to start.
1 ‘Statement of Policy on the Integration of Freight Services By Road and Rail.’
This is exactly what has happened in the case of the early ambitions of the British Transport Commission. Gradually it has been forced back, in its search for some practicable basis for action, to virtually the opposite ideas from which it started. In its 1950 Report it is found saying:
The Commission had no intention of operating integration schemes which would impair freedom of choice where regular services of different kinds are available between the same points.
And in its 1951 Report it moved further:
All the Commission ask is that the customer shall pay the real cost of the service he selects and that he shall not receive one service at its bare cost if he insists at the same time on the maintenance of other services at less than cost.
On the whole, perhaps, these simple lessons are being accepted. The view is now widely held that prices and costs should be closely related, not merely in order to enable nationalized industries to shed their special welfare responsibilities but also to bring about a more economical use of resources with closer conformity to the pre...
