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Municipal ownership; four lectures delivered at Harvard university 1907 online

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transfer ; in which case the total income
received will obviously be the same before and
after municipalisation. But both the total
income and that part of it absorbed in manage-
ment expenses being the same, the remaining
income available for all other purposes must
be the same also. In other words, after



54 A PRIORI ARGUMENTS

municipalisation, the city, when it has covered
all the management expenses, will find itself
possessed of an income available for all other
purposes which is neither greater nor less than
the sum which the private managers had
previously paid away in interest to their share
and debenture holders. Now it has been
assumed that the works were purchased at their
true capital value ; and consequently, the sum
which the municipality must raise by way of
loan to effect the purchase represents what
was the capital value of the works whilst in
private hands. But all capital is drawn,
broadly speaking, from the same money market,
and the tendency is for all lenders of capital to
obtain the same reward for their services, or the
same real rate of interest for their capital, who-
ever be the borrower. The city will, therefore,
have to pay about the same amount in interest
for this given capital as was previously paid
away by the private proprietors in interest on
shares and loans ; and it will find, therefore,
that this being the total amount of its avail-
able income, it has nothing over for any other
purpose whatever. But in England cities are
forced to find sinking funds in addition to the
interest on loans. The conclusion, therefore,
at which we arrive, when municipal industry



INTEREST ON LOANS 55

is regarded in this broad a priori way, is that,
granted that no change takes place in the
management, the income just covers the whole
of the expenditure other than the charge for
the sinking fund, and that this sinking fund
must be covered by raising additional taxation ;
or, in other words, that a city gains nothing
and loses nothing by such a venture.

A reason frequently given for believing that
municipal ownership will be a source of gain
to a community is no doubt that municipalities
can borrow money at a lower rate of interest
than can private corporations : an argument
which directly traverses the conclusions just
arrived at. The investor who buys gas
corporation shares gets, it is true, a higher
immediate return on his investment than the
investor in city loans. But this is really not
to the point ; because the money is raised on
wholly different terms in the two cases. Private
corporations can only give their own works
and profits as security for capital and interest.
Municipalities, on the other hand, not only give
this same security namely, the municipal works
and the profits thereon but they in effect give
the whole real property of all the citizens as
an additional security. Thus a decline in
dividends or in value is vastly more probable



56 A PRIORI ARGUMENTS

in the case of corporation stocks than in the
case of the loans of great cities. What we want
to know is the average over a long period of
the total payments made by corporations to
capitalists, calculated as a percentage of the
total money expended on the concerns in
question. Is this percentage higher than the
interest paid by cities for their loans? There
is no statistical proof that it is higher, and
no proof, consequently, that cities initiating
industries can make a profit because of their
method of raising funds. Moreover, it is the
gains that we are considering, not the profits.
A city might often make a profit by buying
gas-works, and by then raising the price of
gas. Profits may also be insufficient to cover
the interest on industrial loans, and additional
local taxation may be raised to make up the
deficit. And if prices be thus raised, or if
taxation be thus increased, this increase in
the burden on citizens must for the purposes
of comparison be added to the interest pay-
able on the industrial loans ; because citizens
escape these burdens under a system of
private industry. Or, in other words, part
of the profits of municipal industry should be
regarded as an insurance against the additional
risks thus thrown on the community. Thus



COST OF PRODUCTION 57

there are several reasons why a mere com-
parison between the interest paid by cities
on their loans and the immediate return to
investors on their investments gives no sure
indication of the possibility of cities gaining
from municipal industries. It may, indeed, be
a fact that the mere prestige attached to the
name of a great city may help it somewhat in
borrowing money, and thus slightly facilitate
its industrial ventures. But this is certainly
but a small gain, and it is one which cannot
now be estimated.

Thus, if it be assumed that the management
will become neither more nor less economical
when industries are transferred to public bodies,
these a priori arguments indicate that a trifling
gain to a city may be made by its municipal
industries. But is it right to make any such
assumptions as to the management? In other
words, can goods be produced as cheaply by
the direct employment of municipal labour as
by private corporations or by contract work?
Something may be said on both sides of this
question ; but general considerations tell, on
the whole, heavily in favour of the belief that
municipal production will be more costly than
private production.

The strongest argument in favour of the belief

H




58 A PRIORI ARGUMENTS

that direct employment is economical relates
to the expenses of superintendence. When
municipalities do work by the direct employ-
ment of labour, only one set of inspectors or
superintendents are required to supervise that
work ; whereas, in the case of work managed
by private proprietors, municipalities may not
be able to trust to the superintendents paid by
the private corporations ; in which case they
must also employ inspectors on their own
account, thus increasing the cost of production.
This is a valid argument in favour of the direct
employment of labour by municipalities when
the cost of superintendence forms a compara-
tively large percentage of the total cost : as, for
example, in the case of small bodies of men
employed in road -making. But as regards
most of the industries usually municipalised
in England, such as the supply of water, gas
and electricity, the cost of municipal inspection
is very small, and in such cases this argument
should carry but little weight.

On the other hand, there are many strong
reasons for believing that production by labour
paid directly by municipalities will be materially
more costly than production by private pro-
prietors. A detailed examination of the diffi-
culties of economic management by public



RATES OF WAGES 59

bodies would, however, occupy too much time,
and all that can here be attempted is to point
out the underlying reasons why these difficulties
are experienced in municipal and not in private
industry. Of these general causes the most
important is the fact that the municipal
employee often has a vote in the district in
which the industry at which he is employed
is situated ; or, in other words, he frequently
has a voice in the selection or the removal of
his own masters, which is, of course, never the
case in ordinary private industry. The muni-
cipal employer has, in fact, an inducement
for wishing to please his employee which the
private employer does not feel. The wages
of municipal workmen in England are, it is
true, seldom raised as a definite and conscious
method of political corruption, but rather as
the result of party bids for popularity with this
portion of the electorate. Whether this be the
true explanation or not, and whether justifiable
or unjustifiable, it is, however, certainly a fact
that municipal workmen are paid more highly
than their brothers in private industry.

Any undue consideration for the feelings of
municipal employees which is rendered probable
when large numbers of voters are employed in
municipal industries, must also militate against



60 A PRIORI ARGUMENTS

the efficiency of the superintendence of these
works. Discipline must have some tendency
to become slack when employers have one eye
on the vote, and cannot fix both firmly on the
work. Moreover, the power of paid officials
both of dismissal and of selection on account
of merit are for the same reason generally
very strictly controlled in municipal industry ;
and this makes it impossible for the heads of
departments to carry on business with the
same efficiency and promptitude as is possible
in private works. Lastly, civic authorities
often pay inadequate salaries to their leading
officials, because by so doing they gain the
applause of the mass of the voters. In respect
to the voting power of employees, the nearest
approach to the condition of affairs obtaining
in municipal industry is to be found in certain
co-operative manufactories. The comparison
is not, however, an encouraging one ; for,
when the employees are given votes for the
election of their own managers, these under-
takings rarely flourish. In one respect the
superintendence may be even more inefficient
in municipal industry than in co-operative
manufactories ; for, when anything like the
spoils system exists, municipal officials are
frequently changed. Thus, even if municipal



THE INCENTIVE OF GAIN 61

workmen were no more highly paid than
private workmen, for all these various reasons,
municipal production by direct employment
would probably be more costly than private
production.

As regards the other underlying considera-
tions which indicate the probability of rela-
tively inefficient management in municipal in-
dustries, they are applicable, not only where
the employees are directly paid by the civic
authorities, but often also to industries owned
by public bodies, but not thus managed. Of
these general causes, the most serious is the
absence of the incentive of personal gain in
municipal industries. The mass of municipal
voters interest themselves but little in the
effect on their pockets of any bad management of
these industries ; whereas shareholders, though
often apparently very apathetic, indicate that
they are alive to the fortunes of the private
works in which they are interested by frequently
selling their shares. Such sales of shares act
as a stimulus to the managers of private
industries which is without an equivalent in
municipal industry. Moreover, the directors,
often being large holders of shares, have also
a personal interest in the economic manage-
ment of the works under their control. Thus



62 A PRIORI ARGUMENTS

the desire for personal gain is a stimulus
which originates with the shareholders, is
reinforced by the directors, and animates the
whole organism of private industry in ways
too numerous to mention.

The last of the general causes of inefficiency
in municipal industries here to be mentioned
is the fact that the system of civic administra-
tion of our cities was created with the view to
the performance of functions very different from
those of manufacturers. Political considerations
are mainly held in view in the nomination of
candidates for local elective bodies, and voters
are but little influenced in giving their votes
by the relative business capacities of these
candidates. In England the aldermen are
added to Town Councils by co- option, and
in this co -option business qualifications are
also but little regarded ; but in private
industries, where directors are also in effect
practically co-opted, the weakness of the
Board of Directors in any special direction
is often seriously considered when rilling a
vacancy. For these reasons elected bodies
are likely to contain a smaller proportion of
men of sound business instincts than are
usually found on the managing bodies of
private corporations.



SUMMARY 63

Thus, whether we look to the fact that many
municipal employees are also voters, or to the
absence of the stimulus of personal gain in
municipal industries, or to the political character
of local elective bodies, we see ample reasons
for anticipating that a smaller profit will be
made on a given capital in municipal than
in private industry.

To sum up these a priori arguments, we
have seen that the income of which a city
would become possessed by purchasing any
industry may be divided into two parts. As
to that part which went in the payment of
interest on the capital of the private pro-
prietors, it was seen that cities when they
received it into their treasuries might thus
hope to make a very slight gain, because of
their higher credit. This is, no doubt, a
valid argument in favour of municipal owner-
ship with or without direct employment, but
an argument generally grossly exaggerated,
through misapprehensions of the facts. The
second part, or the remainder of the income
of which cities would become possessed by
the municipalisation of any industry, is that
which covered the expenses of management in
private industry ; and, as it was seen that these
expenses of management would be considerably



64 FINANCIAL CONCLUSIONS

increased by the direct employment of muni-
cipal labour, it follows that this available
income would no longer cover these expenses.
A loss much more considerable than the
possible gain due to high municipal credit
would, therefore, probably be incurred. In
other words, the general conclusion arrived
at by a priori considerations is that a city,
even if no sinking fund had to be provided,
would make a loss by purchasing any industry
and working it by the direct employment of
labour, a loss which would have to be made
good by additional taxation.



FINANCIAL CONCLUSIONS

Comparing this result with the results arrived
at in the previous discussion on municipal
statistics, it will be remembered that there
also a loss was somewhat vaguely indicated
as being not improbable. It may, however,
only be safe to conclude that the results of
a priori reasoning are not refuted by statistics ;
for certainly a very wide margin of doubt
exists as to the gains or losses indicated by
English municipal accounts, mainly because
of the difficulty of estimating the income



INCREASED TAXATION 65

which might be derived from private industry
under proper franchise laws, and of making
allowance for various questions connected with
price and quality. But if such statistical
results are unreliable, ought we not to attach
great weight to the conclusions arrived at by
a priori methods? It must, moreover, be
remembered that English statistics generally
relate to cities where municipal industry only
includes a few municipal monopolies, and
also that these works have not, as a rule,
been constructed by the direct employment
of municipal labour. If, therefore, we wish
to estimate the effect of the wide adoption
of municipal ownership, together with the
direct employment of labour, and also of its
entry into the field of competitive industry,
we have no statistics to guide us, and we
must trust almost wholly to a priori considera-
tions : considerations which point to the con-
clusion that a considerable burden of extra
taxation would be thrown on the inhabitants
of any city in which such experiments were
being made.

But if we confine our attention to the muni-
cipal ownership of the chief municipal mono-
polies, when English statistics do become
relevant, it must be admitted that we have

I



66 FINANCIAL CONCLUSIONS

been marching through a fog in tracking the
truth of municipal finance, and that we may
have lost our way. But it can hardly be
denied that if municipal industry with the
direct employment of labour did not result in
a loss, as above suggested, but was in reality
a source of considerable gain to the cities of
that country, this fact could not possibly have
been hidden by any statistical cloak. This
conclusion is not unimportant ; for if, on other
grounds, it should appear, as regards any
particular industry in any particular place,
that its operation by the direct employment
of municipal labour is distinctly undesirable,
then the financial aspects of this question may
be dismissed without consideration. A re-
examination of the facts certainly could not
disclose the existence of more than a small
gain to English cities on the average ; and this
small gain could not outweigh any serious
disadvantages in other directions which might
result from municipal ownership. On the
other hand, if my conclusions are right, then
the financial results of the direct employment
of labour by municipalities must always tell as
a material weight in the scales against this
method of management.



LECTURE III

MUNICIPAL CORRUPTION

IN my last lecture we were considering the
financial aspects of municipal ownership ; and
the conclusion arrived at from a study of
English statistics was that, as practised in that
country, it is a source of no great gain or loss
on the average to the cities practising it ; whilst
a priori arguments pointed to the conclusion
that it is considerably more likely to be a
source of loss than of gain. Passing on to
the more weighty arguments in this controversy,
the one most frequently discussed in the United
States is probably that connected with muni-
cipal corruption. And here again, in dealing
with this subject, we shall be considering
municipal ownership operated by the direct
employment of municipal labour.

One of the points which here appears to tell
most in favour of municipal ownership is the
belief that it would tend, if extensively adopted,

67



68 MUNICIPAL CORRUPTION

to purify civic life ; whilst in England many
of the opponents of this movement base their
opposition largely on their conviction that
corruption would thus inevitably be increased.
Here, therefore, is a flat contradiction of
opinions which is well worth investigating.

A sentiment sometimes carries considerable
weight because it has been only vaguely
imagined, and has never been held up in the
cold light of logical reason. Of this type is
the following argument, which, although it is
generally only perceived in a sub - conscious
way, appears to have an illegitimate influence
in the United States. There is no country, so
the argument runs, where municipal ownership
flourishes to a greater extent than in England ;
in England municipalities are free from corrup-
tion : therefore, let us adopt municipal owner-
ship as a cure for corruption. It is true that
there is little open and serious corruption in
English cities ; and it is also true that muni-
cipal ownership has there made vast strides in
recent years. This argument is nevertheless
wholly illogical : which will probably be made
apparent when it is translated into a logical
form. It might, no doubt, be logically urged
that municipal ownership has increased greatly
in England ; that corruption has decreased



CORRUPTION IN ENGLAND 69

concurrently with this increase in municipal
ownership ; and that, consequently, municipal
ownership has not improbably been the remedy
which drove away the disease. This argument
would be logical ; but, unfortunately, the facts
necessary to sustain it are wholly wanting.
With regard to all forms of corruption, but
especially as to the underground action of
respected city thieves, it is always difficult to
ascertain the truth, and only personal impres-
sions derived from reading and conversation
can here be given. In the greater number of
English cities there is nothing worse than a
mild type of corruption ; and even that is very
rare, except in the smaller elected bodies. It
consists in local builders getting jobs which
outsiders would do more cheaply, and perhaps
in officials getting commissions for placing
municipal orders. But there are no signs x
whatever of any lessening of these corrupt
practices having taken place simultaneously
with the increase of municipal ownership; and,/
indeed, recent revelations of serious corruption '*
in certain localities make it appear as if there
were a back-sliding and not an advance in^
municipal morality. Thus the coincidence
of the existence in England of fair municipal
purity and a great amount of municipal industry



70 MUNICIPAL CORRUPTION

cannot in any way whatever be made the basis
of an argument in favour of the purifying
effect of municipal ownership.

English municipal purity, such as it is, is, in
fact, due to wholly different causes. The civic
morality of any country is a tree of slow growth,
and to account for its form we must study the
storms of bygone years. But municipal owner-
ship in England is of recent growth, and has
developed with extraordinary rapidity during the
last few decades. It is true that municipal water-
works have existed for a long time, and that
the gas-works of Manchester were placed under
public control as early as 1824 ; but these are the
exceptions and not the normal developments by
which the state of a country should be judged.

/The rate of the increase in municipal industry
may be sufficiently illustrated by the one fact that
the debts for public service utilities in English
cities recently increased by 100 per cent, in

\fourteen years. 1 It is, however, the directly-
paid employees we now mainly have in view ;
and if the increase in their numbers were
known, the figures would probably be even
more startling ; because, as regards the works
for which the debts are raised, the proportion of

1 See Statistical Abstract for the U.K. Cd., 3092. 1889-90
and 1903-4.



OWNERSHIP AS A CURE 71

water-works and harbours, where there are com-
paratively few municipal employees, has been
decreasing in recent years. Thus, if history
teaches us that the current ethical code is but
slowly affected by external causes, it must be
admitted that English municipal morality has
been as yet comparatively little affected by this
movement. On the same grounds, if municipal
ownership should now be rapidly developed in
the United States, and if, in truth, contrary to
my belief, it would have a curative influence, it
must also be admitted that whatever faults now
exist would continue to show themselves for
many years to come.

No doubt many intelligent and thoughtful
persons do believe that municipal ownership
would tend to stop municipal corruption in the
United States. As a stranger I must speak
with caution on this subject, and deal mainly
in generalities. It may, however, fairly be
regretted that those who hold such beliefs do
not, as a rule, state at all clearly how this puri-
fication is to be affected. Municipal ownership^
can only produce such beneficial results in^
one of two ways : it may either directly tend
to make those taking part in local government
intrinsically purer by planting higher ideals in-
their minds, or it may lessen corruption by the



72 MUNICIPAL CORRUPTION

removal of temptation from the path of the
civic authorities. These, the only two possible
beneficial tendencies, must each be examined.

With regard to the first of these possible bene-
ficial influences, it is necessary to enquire why
municipal ownership should have an intrinsi-
cally purifying effect on civic life. Where great
responsibilities are thrown on elected bodies in
English-speaking countries, it is true, no doubt,
that they generally rise to the occasion. But as
regards the larger English cities, the number of

^ the different duties performed by their Town
Councils is now so great that any new additions
to the list would add but little to the dignity of
their position or to the interest taken by the

\ public in their work ; and it is difficult to believe
that any elevating influence could result from an
increase in the burden thrown on their backs.
Whether the duties performed by the local
authorities of Boston and New York, for example,
are insufficient to arouse their civic enthusiasm
to the utmost, or whether new responsibilities
would heighten their ideals of civic duty, it is for
the citizens of this country to judge.

But in such matters we must always look to
both sides of the question, and here we must
consider whether municipal ownership may not
have a deteriorating effect as regards the character



DETERIORATING INFLUENCES 73

of elected administrators. In England it has
frequently been suggested that the number of
sound and capable men willing to devote their
time to municipal administration is very limited,
and that the more capable they are, the more
completely will their time, as a rule, be absorbed


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Online LibraryLeonard DarwinMunicipal ownership; four lectures delivered at Harvard university 1907 → online text (page 4 of 8)