Essentials of Economic Theory / As Applied to Modern Problems of Industry and Public Policy

by John Bates Clark

GENERAL ECONOMIC LAWS AFFECTING TRANSPORTATION

Of all the various clubs used by trusts for attacking rivals and driving them from the field, the first in order is the one which depends on getting special rates for transportation. Railroads develop monopolies within their own sphere and also contribute greatly to the development of monopolies elsewhere. The second fact is the more important, but both require attention. By reason of its special connection with producers' monopolies does the function of the common carrier have much to do in deciding the question whether an economic revolution is or is not impending. It is safe to say that it is imminent as a possibility and will become probable if the favoritism shown by carriers to great shippers is not effectually repressed.

How the Consolidation of Railroads makes the Repression of Favoritism Easy.—It is also safe to say that such repression will be easy if the consolidation of railroads themselves shall actually go to the utmost possible length. With all lines under one central control and earnings entirely pooled, there would be no motive for granting special favors to any shipper except as it might come through a corrupt relation between the shipper and some officials of the railroads. To the carrying corporation the giving of a rebate would merely mean a surrendering of some possible profits. With railroads consolidated the threat of the great shipper to divert his freight from one line to another would lose all its effectiveness, and the interests of the stockholders in the general carrying company would demand high rates from all. The law forbidding rebates and all other forms of favoritism would assist the railroad company in carrying out its own policy, and would be obeyed with the readiness with which an order to pocket an increased gain is naturally complied with.

A Danger which becomes greater as Discriminations become Fewer.—This reveals the fact that the consolidation which makes the suppressing of discriminations easy will make an all-round advance of rates possible, in so far as merely economic influences are concerned. Nothing but the power of the state itself can prevent this; and while the consolidation that would be perfect enough to stop discriminations has not yet taken place, enough of consolidation has been secured to cause some advance in the general scale of freight charges and to threaten much more. It already rests with the government to avert this second evil. Monopolies extending throughout the field of production would mean a demand for socialism which could hardly be resisted; and even a few monopolies in industry assisted by a great one in transportation would mean much the same thing.

General Economic Principles governing Transportation.—With a view to determining the bearing which transportation has on the problem of economic freedom, and thus on the prospect of avoiding the alternative of state socialism, we need to state the essential principles in the theory of railway transportation.

The fact that makes a vast amount of carrying necessary is that agriculture is subject to a law of diminishing returns, while manufacture obeys an opposite law. In tilling the soil labor and capital yield less and less as more and more of them are used in a given area; and therefore both of these agents need to extend themselves widely over the land in order to use it economically. In the production of staple crops which can be freely carried across sea and continent, the natural tendency is to scatter a rural population with some approach to evenness over all the land available for such crops. Market gardening requires less land per man and the areas devoted to it are much more densely peopled; but even within this department of agriculture the law holds true that too much labor and capital must not be bestowed upon an acre of ground. In a general way agriculture diffuses population, while manufacturing concentrates it. This latter work is done most economically in great establishments.

The Law of Diminishing Returns from Land not restricted to that used in Agriculture.—It is commonly said that manufacturing is unlike agriculture in that it is subject to a law of increasing returns; but this statement is true only when its terms are carefully interpreted. The diminishing returns from agriculture and the increasing returns from manufacturing are not two opposite effects from the same cause. There is, indeed, a logical anomaly in contrasting them with each other. In agriculture we get smaller and smaller results per unit of labor and capital when we overwork a piece of ground of a given size by putting more and more labor and capital on it. The trouble here is that land, on the one hand, and labor and capital, on the other, are not combined in advantageous proportions; and exactly the same effect is produced by the same cause in manufacturing. One can overtax a mill site by confining larger and larger amounts of capital within a given area. If the site is so small that the building has to be carried far into the air and supplied with walls strong enough to resist the jar of machinery on many floors, manufacturing becomes a far less economical operation than it would be if the site were larger and the mill lower. The gain from centralizing the manufacturing process comes in part from the increased size of the particular establishments; but that requires that every part of the plants, land included, should be increased. As the whole of an establishment becomes larger its product becomes cheaper; but, in the enlargement, there should be no undue stinting in the amount of land used. In both agriculture and manufacturing, then, there is a loss of productive power when areas of land are disproportionately small, as compared with amounts of labor and artificial capital; but in the realm of manufacturing large establishments under single entrepreneurs combining the agents of production in the right proportion increase the productive power of men and instruments as they do not in agriculture. Great farms show no such economy as great mills.

Basis of the Law of Increasing Returns in Manufacturing.—There would be some increase of returns in manufacturing from making the establishments large even if the work were done by hand; but by far the greater part of the advantage is due to machinery. The invention of the steam engine was the beginning of it, and that of textile machinery afforded a quick continuation of the revolutionary change. In nearly all lines of production, outside of agriculture, machinery is far too elaborate to be used in household industry. One may say that the transformation of the world into one enormous farm dotted over with great workshops, with all the social and political changes which that involves, was brewing in the tea-kettle which the boy Watt is said to have watched, as the lid was raised by puffs of steam and the possibility of a steam engine suggested itself. The mechanical force of steam began at once to centralize manufacturing. That made increased transporting necessary, and it was not long before the same element, steam, provided the means of this extensive transportation. It is necessary, of course, to carry the products of the farm to the mill, and also to carry manufactured goods back to the farm; and neither of these things would have been required on any large scale under a system of household industry. The economy which leads to this lies altogether in the greater cheapness of the manufacturing. The difference between the cost of fashioning materials in the home and that of doing it in the mill is so large that it would have brought about the building of mills and the creation of manufacturing centers, with the carrying which it involves, if neither railroads nor steamboats had come into being. The growth of factory villages had made some headway at a time when no elaborate machinery existed; but if that condition had continued, manufacturing centers would have been smaller, more numerous, and more scattered than they have been. It is the cheapness of carrying by railroads and steamships which has made it possible to get the fullest benefit from the so-called law of increasing returns in manufacturing.

Mining as related to Transportation.—Mining is a process which has to be local, because ores and coal are furnished by nature in a local way; and one might mention this as a second cause of extensive transportation. A great part of the carrying so occasioned depends, indeed, on the growth of the manufacturing centers, since mills and furnaces need great quantities of fuel. A means of heating private dwellings, of cooking food, etc., might conceivably be supplied in a local way, by the growth of forests; but the fuel needed for the centers of manufacturing and commerce has to come from distant points. The law of increasing returns in manufacturing, then, and natural location of mines are the most generic causes of transportation. The system which has resulted gives to everybody more and better food, as well as more and better goods of every kind, than he could possibly have had if the primitive system of local manufacturing had continued. The cheapness with which form utility is created in the mill and place utility on the railroad are the two causes which are at work.

The Rivalry between Producers of Form Utility and Producers of Form and Place Utilities.—In the technical language of economics, there has been a contest in efficiency between that creating of form utility which is done when goods are made in households or in small villages, and that joint process of creating form and place utility which consists in making goods at central points and carrying them to the widely scattered homes of consumers. The latter process, involving as it does the necessity of creating two utilities instead of one, is now by far the cheaper.