Leonard Darwin.

Municipal ownership; four lectures delivered at Harvard university 1907 online

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now be made, without any such lapse of
memory, to arrive at definite conclusions by
this method.

Manchester makes so many thousand dollars
a year out of its gas-works, and why should
not we do the same ? This is the most elemen-
tary form of the usual financial argument in
favour of municipal ownership. But even if
nothing else had to be said, it must be admitted
that, in all social questions, averages are more
trustworthy as guides than single instances.
We see sometimes in fruit shops that only the


best of the fruit is exposed to view at the top
of the baskets, it being evidently intended that
the simple-minded customer should judge the
whole by these especially selected specimens.
Now the methods of such vendors are not
wholly dissimilar to those adopted by those
advocates of municipal ownership who are
constantly harping on the profits of municipal
gas-works, which are no doubt considerable,
whilst maintaining a discreet silence with
regard to the net profits of English electrical
lighting works, merely because they happen to
be a negative quantity. On the other hand,
if we could conceive the object of a salesman
being to prevent the public from buying his
goods, the least tempting fruit would be
exposed to sight ; and this would be similar
to the practices of certain opponents of muni-
cipal industry who do nothing but harp on
the subject of municipal failures. If selected
specimens cannot be trusted in the buying
of fruit, this is equally true in judging of
municipal industries ; because each industry
is subject to exceptional conditions, and the
errors thus introduced can only be eliminated
by considering the average of the results of a
considerable number of industries.

This point may, perhaps, be illustrated by a


reference to English gas-works, on which the
profits, as already remarked, have been con-
siderable. The amount of the profit made
obviously depends on the price charged for the
gas ; and, since this industry is practically a
monopoly, this price is regulated to a large
extent by custom or example. English private
gas-works have very unwisely been granted
perpetual franchises ; and on this account it
is not improbable that they are now charging
prices above what may be described as the
competition level, with a corresponding increase
of profits. It follows that if English muni-
cipalities have been at all influenced by the
example set by these private corporations as
regards the price charged for gas, their profits
also will have been swollen in like manner :
an influence not felt in English municipal
electrical works, because perpetual franchises
have not been granted to the owners of private
electrical enterprises. The profits of municipal
gas-works taken separately ought not, there-
fore, to serve us as a guide.

On similar grounds, the consideration of
the profits obtained in single cities should be
barred. We must not pick and choose our
examples ; because the exceptional conditions
obtaining in any one city may modify the


results there obtained so as to make it
impossible for other cities, where no such
exceptional advantages exist, to follow its
example. Good results in municipal industry
may, for example, be partly attributable to ex-
ceptional business capacity on the part of a
local governing body. But town councillors
who claimed to possess this exceptional advan-
tage that is, to be wiser than the average of
other town councillors would certainly gener-
ally be held by others to be in reality unwise
themselves. They should not refuse to be
guided by averages, and should avoid the
consideration of separate cities or industries;
and we should do the same.

Looking, therefore, only to the average financial
results of municipal ownership, possibly the best
way to indicate in the fewest words the general
situation in England is to liken the whole
municipal industry of that country to a large
industrial corporation. Judging by a return
made to Parliament in 1902, the capital put
into this great municipal venture at that date
was $600, ooo, ooo *; whilst the interest paid to
the shareholders, to continue the simile, was
nearly $23,ooo,ooo, 2 or a little under 4 per cent.

1 ,120,000,000. Round numbers only are given in these
lectures. 2 ,4,500,000.


on the capital. But it must not be supposed
that this sum, which I have likened to the
interest to shareholders, found its way un-
diminished into the municipal treasuries. In
establishing these industrial concerns, not only
had large debts been incurred, the interest on
which had to be provided out of the gross
profits ; but sinking funds had also to be
provided, it being obligatory in England that
all municipal industrial debts should be paid off
in a given time. Thus less than $2, 000,000 1
went to the relief of taxation : a sum, however,
which will increase continually as the debts
are liquidated, until in time English munici-
palities, so it may be urged, will enjoy the full
income of $23, ooo, ooo 2 without any deduction
for interest or sinking funds.

It should, however, be noted that if none
of the debts had been liquidated at the date
of this return, the interest and charge for
sinking funds on the whole capital provided
would have been more than the $23,000,000 2 ;
and a small net deficit would have been shown,
instead of this small net profit of about
$2, ooo, ooo. l In other words, in so far as these
average results in England may be taken as
a guide, we ought to anticipate, when a new
1 ,360,000. 2 ^4,500,000.


municipal industry is being established, that
a slight deficit would at first be made : a
deficit which would be converted into a fairly
substantial profit some forty years afterwards,
when the debts were all liquidated.

Thus painted the financial picture is not
unpleasant to look at; for, although it appears
that a city establishing a municipal industry
ought to anticipate a probable deficit, yet this
deficit would probably be so small that the
citizens ought to be willing to run this risk
for the sake of material future profits. If all
my fellow-countrymen were to be convinced
that each new municipal venture would prob-
ably add to the immediate burden of local taxa-
tion, this movement would no doubt receive
far less support than it does at present, even
though this, in truth, afforded no proof that
municipal industry was on the whole financially
disadvantageous. There are, however, many
other circumstances which ought to be taken
into account, some of which tend to brighten
this picture, but more to tarnish it. As an
example of the former, there will be found
amongst the enterprises included in this return
such services as baths, wash-houses, and
burial grounds ; which certainly were not
undertaken with any idea of making a profit.


But even if these items are entirely omitted,
the interest on the remainder is only raised
to about 4 per cent, on the total capital pro-
vided. On the other hand, English municipal
accounts, although they are on the whole well
kept, have been subject to telling criticism,
with the object of proving that the profits of
these municipal ventures are not really so
high as they are thus shown to be.

These questions connected with accounts are,
however, too technical here to be dealt with
at length ; and only the most important of
all these criticisms will be mentioned namely,
that with regard to the depreciation in the
value of municipal property. According to
the above-mentioned return, the amount set
aside to meet this depreciation is less than
^th per cent, on the total capital ; and
it can hardly be denied that this is very
inadequate. Municipal authorities may, how-
ever, rightly urge that the citizens of to-day
are paying off the whole debts incurred in
starting these enterprises ; and that they are
in effect presenting these industrial works as
a free gift to posterity. Posterity, they may
add, has no right to grumble if called upon,
when possessed of these free gifts, to put them
in good repair, and the present generation


is not, therefore, under any obligation to create
a large depreciation fund. This is sound
enough. But those who use such arguments
in effect admit that further capital expenditure
for these industrial concerns will be necessary
in future, and that, consequently, the gross
profit of $23,000,000 will never find its way
undiminished into the municipal treasuries of
posterity. If full commercial depreciation were
charged, as it ought to be, at all events, for the
purposes of this argument, it would then be
seen that the gross profits to be anticipated in
the future would be materially less than the
figure above mentioned.

But even if a careful investigation should
prove that English municipal industries will
in future be a source of considerable profit to
the cities concerned this is certainly not the
case at present yet this would tell us nothing
whatever as to whether these cities, in truth,
gain or lose by these enterprises. Whatever
certain advocates of municipal ownership may
do, we must not forget to look at the other
side of the question, and to consider what
sources of income these cities have foregone
by transferring these industries from private
to public ownership.

The circumstances which have to be taken



into consideration in fairly estimating the
gains and losses due to municipal ownership
are too numerous all to be mentioned here.
Many of them arise from the fact that a city
has, as it were, two pockets for money an
industrial pocket, and an administrative pocket ;
and it appears at first sight to matter but little
which pocket is used. Town councillors, who
have established some industrial enterprise,
like to show good results ; and, when it can
be so arranged, they naturally desire to avoid
drawing money from the industrial pocket.
The sin may be but a trifling one, for no one
may be directly injured, the result merely
being that the causes of any industrial loss,
namely, unavoidable failures or honest blunders,
are kept in a subdued light. Councillors are,
after all, human beings ; and, where all are
thus tempted, some will fall. As a single
instance of the possible effect of this human
weakness, the lenient assessment of municipal
property may be mentioned. A tax on
municipal industries is merely, it may be
thought, a useless transfer of money from the
industrial to the administrative pocket ; and a
very inconvenient transfer when the contents
of the industrial pocket are running low.
Thus a city's industrial property may be more


lightly assessed in England than if that same
property had remained in the hands of a private
corporation. But, where this is the case, the
additional tax, which would have been received
from the private corporations had they re-
mained as the owners, must be deducted from
the profits shown in the city's industrial
accounts in order to ascertain the true gain to
the city resulting from its municipal enter-
prises. In England this is probably not a
very important point ; but if I am right in
supposing that municipal property is not taxed
in the United States, here this may be a very
important deduction from municipal profits,
and the point is one which must by no means
be overlooked. Anyhow, it affords a convenient
illustration of the many difficulties which are
met with in comparing the finances of municipal
and private industries.

Several other circumstances might also be
mentioned which in like manner throw a
doubt on the validity of accepting municipal
profits as being an indication of municipal
gains : as, for example, the possibility of charg-
ing the administrative account too highly for
the lighting of public places, or of including
in that account the capital expenditure for the
widening of streets for street railways. All but


one of these possible criticisms will be passed
over in silence ; that one being so important
that it must be briefly considered. For the
purpose of illustrating the point in question,
take the case of a landowner who owns a farm
which has just fallen into his hands at the
termination of a lease, and who is doubting
whether or not he had better farm the land
himself. In these circumstances there certainly
never was a landowner so stupid as to forget
the fact that, by farming the land himself, he
would forego the rent he might obtain from a
farmer if he were instead again to lease out the
farm. Yet it seems that a blunder closely akin
to this is constantly being made with regard
to municipal ownership, the rent which might
have been obtained from private managers
being overlooked. Taking street railways as a
convenient example, they are divided into two
classes in the Parliamentary return of 1902,
already mentioned, namely, those owned and
worked by municipalities, and those owned
by municipalities and leased out to private
corporations for working. These returns un-
doubtedly indicate that those civic authorities
who lease out their street railways to private
corporations make a larger gross profit on a
given capital than those who work them


themselves ; the gross profit being equivalent
to the net profit which may be anticipated
when all the debts are liquidated. As to
the immediate results the case is not so clear ;
but the figures indicate that a city should
expect to obtain, whilst the debts remained
unredeemed, a net profit of about ^ths per
cent, on the capital, by working its own
railways ; whilst by leasing them out it might
expect to make about 2 per cent., provided
that the same conditions held good in the
two cases as to sinking funds. But if a city
only makes less than i per cent, by municipal
management, whilst it might have made 2
per cent, by leasing, may we not fairly say it
is losing over i per cent, by its municipal
venture? Such calculations are untrustworthy
for various reasons ; but we may, at all events,
fairly conclude that the fact that English muni-
cipally-managed street railways are making a
profit is consistent with the belief that English
citizens would have been less heavily taxed
had none of the street railways been worked
by the direct employment of municipal labour.
As to the other industries which are managed
by civic authorities in England, rents could in
many cases have been drawn from private cor-
porations had they been granted the necessary


franchises enabling them to undertake the
management ; though, it is true, we have no
means whatever of estimating how large these
rents would have been. No doubt, as regards
certain industries, had they not been muni-
cipalised, they would have been managed by
private corporations with perpetual franchises
rent free, the English law being what it now
is ; and the cities in question would have been
in receipt of no income from them. But under
a reformed system of legislation with regard to
private industry, we may safely assume that a
very considerable sum would have been flowing
in the form of rent from private corporations
into the municipal treasuries had no muni-
cipal industry existed ; and this sum ought
to be deducted from the municipal profits in
order to estimate the advantages or dis-
advantages of municipal industry compared
to well-regulated private industry.

Accepting the foregoing as being the results
of a study of English municipal statistics, an
endeavour must now be made to draw general
conclusions therefrom. Judging by average
results, it was seen a city, when starting any
new municipal venture, ought to expect to
make a small deficit as long as the debt
remained unredeemed, and to have to make


good this deficit by additional taxation. It
was also seen that, not only would this
anticipated deficit probably be larger than the
Government returns appear to indicate, but
that, in order to ascertain what would be the
loss at first in consequence of the abandon-
ment of the system of private industry, the
rent which might have been drawn from a
private corporation must be added to that
deficit to ascertain the loss : a rent which,
judging from the average results of English
street railways, would amount to 2 per cent,
on the total capital. English statistics, there-
fore, do not disprove, and may, it appears
to me, be quoted as giving some support
to the view which I hold, namely, that English
cities have increased the immediate burden of
taxation by their municipal ventures by over
i per cent, on the capital sunk thereon. This
conclusion will, perhaps, be readily accepted
until it is seen what further deductions can
be made from it. The sinking funds which
English cities are obliged to find for the
redemption of their industrial debts amount to
a little more than i per cent, on the capital
thus sunk ; and if it is true that the taxation
is increased by a like amount in consequence
of these ventures, it follows that this sinking


fund is in reality all drawn from the pockets
of the people by additional taxation ; or, in
other words, that every penny which English
cities have invested in industrial ventures has
been raised by taxation which would not have
been raised had the industries in question not
been municipalised. The profits which will
eventually be made out of municipal industries
consist, therefore, of nothing but the interest
on the invested savings of the people : an
interest which each individual might have
obtained for himself had the money not been
drawn from him by taxation. If this be a
correct view of the situation, it seems fair to
conclude that England, if she is not losing,
is gaining nothing whatever by her municipal


Complicated as has been this discussion, it has
been simplified by leaving out one whole side of
the question, a side which in reality cannot be
omitted, if sound conclusions are to be reached.
It may be said, and it has been said, that muni-
cipal industry does not, it is true, result in any
direct financial gain to the municipal treasuries,
but that the goods thus supplied are both better


and cheaper than those supplied by private pro-
prietors. The result is, so it is urged, a gain
to the consuming public. This is a legitimate
argument in favour of municipal ownership in
so far as facts can be brought forward to sub-
stantiate it ; and it should therefore be examined.
Time makes it impossible, however, for me to
dwell at length on the questions thus opened
up for consideration ; nor is it very desirable
to do so, if, as is probable, the result would
be to thicken rather than to lighten the fog
through which we are passing. A few words
must, however, be said.

Figures have no doubt been quoted to prove
that the price charged for gas in England by
private corporations is higher than that charged
by municipal gas-works. The difficulty in such
comparisons is to eliminate all the other elements
of difference besides the one the results of which
we wish to investigate. In all the published
results known to me, it appears that the popula-
tion supplied by each private gas-works is on
an average smaller than the population supplied
by each public gas-works ; and it is probable,
therefore, that the private gas-works supply less
densely populated areas. But gas - works in
scattered districts cannot produce gas as cheaply
as works in more crowded districts ; the chief



reason being that the capital expenditure on gas
mains is proportionately greater. It is therefore
not improbable that gas from private works is
dearer, not because of the private management,
but because the population supplied is less
dense. In fact, municipal authorities, being free
to establish works everywhere, have generally
done so in the most favourable localities, only
the districts rejected by them being available for
the operations of private corporations. In such
investigations it is essential that all circumstances
affecting prices, such as the average relative
level of wages, the cost of materials, etc., should
be taken into consideration, or the results will be
more or less fallacious. For lack of such pre-
cautions, all existing comparisons of the relative
prices of gas, electricity, water, etc., produced
by municipal and by private industry are, in
my opinion, untrustworthy.

It is, moreover, not only the relative price, but
the relative quality also which has to be taken
into consideration. Even in those industries in
which comparisons of quality can be made with
accuracy, they will be as fallacious as the com-
parisons regarding price if the effects of all the
other elements of difference are not eliminated.
As regards water, gas and electricity, it is, for
example, doubtful whether, on the whole, the


civic authorities do test their own productions
as rigidly as they test the productions of private
corporations. Again in some services, as, for
example, in the case of street railways, the quality
of the service supplied is largely a matter of
opinion ; and, in endeavouring to compare the
results of public and private management in
this respect, we can do little more than decide
on the weight to be attached to flatly contra-
dictory statements. The terms of the franchises
which have been granted to the private pro-
prietors must also be held in view when
comparing their performances with those of
civic authorities. For example, a private
corporation may be working a street railway
with the knowledge that it may be and almost
certainly will be bought out before long by
the municipality ; and the terms on which they
would be expropriated may make it impossible
for the private proprietors to adopt improve-
ments except at a risk of financial loss ; whilst
the municipal street railways, with which the
comparison is being made, are never hampered
in a similar manner.

Thus, whether we consider price or whether we
consider quality, it is now impossible to tell for
certain, by direct evidence, which supplies the
cheapest and best goods, municipal industry or


private industry. It follows, therefore, that the
conclusions arrived at as the result of our
statistical enquiry namely, that it is more
probable that cities are losing than gaining by
their municipal ventures though it is rendered
more doubtful, is not contradicted by extending
the enquiry so as to include the questions con-
nected with price and quality.


To those who are only acquainted with the
newspaper accounts of English municipal
industry, this result may, perhaps, appear sur-
prising. It may be as well, therefore, briefly to
consider on a priori grounds the probability of a
city making a gain or a loss on any industry
which it may undertake to manage. In a large
number of cases, English cities have bought
gas-works from private corporations, the price
paid being the commercial value of the industry
at the date of the purchase ; and these cases may
be regarded as being typical of municipal industry
generally without introducing any serious errors.
When considering such a transfer of property, it
is first to be noted that the income received from
the works, both before and after municipalisation,
may be divided into two parts: the first part


being that paid away in management expenses,
including wages, cost of materials, etc. ; and the
second part being that available for the reward
of capital, or the interest on shares, stocks or
loans. These two divisions, which together
make up the total income, are received by the
private proprietors before municipalisation, and
pass into the municipal treasury after the works
become public property.

In order to discuss the transfer of these two
parts of the income separately, we may, in
the first place, assume that the city in question
will manage the industry neither more nor
less efficiently and economically than the
private corporation it succeeds; or that the
amount of income absorbed by management
expenses after municipalisation will be the
same as it was before the transfer of the works.
We may also assume for the purposes of this
discussion that prices remain unchanged, or
that the consumer is not affected by the

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Online LibraryLeonard DarwinMunicipal ownership; four lectures delivered at Harvard university 1907 → online text (page 3 of 8)