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Municipal ownership; four lectures delivered at Harvard university 1907 online

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considered. There it was seen that, where
competition is free and effective, prices are
automatically regulated, and there is no need
in this respect for governmental interference.
But the more an industry tends to become a
monopoly, the more necessary is it for the
State to prevent private proprietors from reap-
ing undue or illegitimate profits, and the
greater, consequently, are the advantages of
municipal ownership. But a monopoly can
always be avoided in the constructive stage of
\industry ; because it can always be arranged
v that there shall be competition/ between archi-
tects and contractors for the design and
/ building of the works, and between different
private proprietors when granting the franchises
giving the necessary rights to embark on the
industry in question. Water supply in towns


is the most complete monopoly which exists ;
but the building of water-works can always be
let out to tender. There is, therefore, no
reason on account of an industry being a,
monopoly for ever resorting to the direct
employment of labour by municipalities in the /
constructive stage of industry.

In the productive stage, no doubt, many
industries inevitably tend to become monopolies;
and, where this is the case, the regulation 01^
prices can most easily be effected by civic
authorities if they undertake the direct manage- /
ment of the business themselves. In the case
of water, it is often very difficult for a city to
estimate what will be the actual cost of the
supply ; because the experience of other cities,
and, indeed, the previous experience of the
same city, affords but an uncertain guide.
Hence the control of water supplies in private
hands may present considerable difficulties,
and the necessity of regulating prices may
make the municipal management of water-
works very desirable. But, as regards other
industries, if the factors effecting the supply^
of the^ product are unlikely to change quickly,
and if its quality and quantity are easily/
measured conditions which are fulfilled in the
case of gas, electricity, and street railways


'"then there is generally but little difficulty in
estimating the cost of production for some
time to come ; and in these circumstances, if
short franchises with sliding scales are granted,
it ought to be possible to enforce a fair
scale of prices on private proprietors. In
some cases private corporations would probably
obtain undue profits, and the average prices
in private industry would, therefore, probably
be somewhat higher on this account than the
scale of prices which would obtain if the
industries in question were municipalised,
and if the civic management were equally
economical. But municipal management will
not be as economical as private management ;
and any small gain which cities may on the
average thus reap by the more efficient con-
trol of selling prices will generally be more
than counterbalanced by less efficient manage-
ment. Thus this argument in favour of the
municipal management of public utilities,
other than water supply, is generally not a
strong one ; though it does point clearly to
the serious disadvantages of granting long-
period franchises to the private proprietors of
municipal monopolies.

The second argument in favour of direct
employment, namely, that dependent on the


temptation under which private proprietors lie
of neglecting questions other than those affect-
ing their profits, is of more importance ; for,
undoubtedly, where considerations connected
with health and morals point in a different
direction to mere financial considerations, the
former should generally prevail. As regards
the constructive stage of industry, it is
obvious that plans and designs must in all
cases be made before building is commenced ;
and opportunities of considering these designs,
and, if necessary, of altering them, might
always be afforded to the civic authorities
whether the work was eventually to be per-
formed by private contractors or by the direct
employment of municipal labour. As to the
execution of work on approved designs, in the
case of the building of sewers, where the work"
is quickly covered up and where subsequent
inspection is difficult, a strong case, though
perhaps not a conclusive one, can be made,
out in favour of direct employment. But as
regards building operations generally, where^
subsequent inspection is not very difficult, we
have to weigh the fact that the contractor is
likely to be an expert in the construction/
of works of a certain type, against the fact
that he is tempted to scamp his work in


order to swell his profits. Experience appears
to indicate that contract work executed under
proper supervision is sufficiently good to make
it doubtful whether work performed by direct
employment is better or worse in quality ; and
as regards this argument also there appears,
therefore, to be no case made out for direct
employment in the constructive stage of
ordinary industries.

In the productive stage of industry, the
fact that civic authorities are not too closely
tied to questions affecting profits does, no
doubt, tell in favour of municipal ownership
with direct employment in the case of many
public service utilities which, though the term
industry seems hardly applicable, are at times
undertaken by private proprietors for the sake
/of making a profit. It may be right, for
example, for a city to manage public baths,
in order to promote health and cleanliness,
^even though a loss is thus incurred ; and
other services may, perhaps, similarly be
justified on the ground that, if a community
does not appreciate a good at its true value,
civic authorities can stimulate its sale by
selling it below cost price. In the case of
/'harbours, again, their municipalisation may be
advisable because the whole of the inhabitants


of the cities concerned may be benefited by
their maintenance, whilst the levy of a tax
may be the only method of making them/
all pay for the advantages thus received. In
weighing the relative merits of public and
private slaughter-houses, humanitarian and
sanitary considerations may point to the
necessity for greater expenditure than private /
proprietors could easily be made to incur. It
is, no doubt, possible that all these services
might be left in the hands of private pro-
prietors if bounties were awarded to compensate
them for probable losses ; but bounties are
always open to serious objections. Lastly,
where a service is of vital importance to the
community, it may be undesirable to lose
complete control over it even during the
period of a short lease or franchise. Although,
unfortunately, perpetual franchises have been
granted to the proprietors of water -works in
England, the following example indicates that
the municipalisation of water supplies would
be preferable to private proprietorship even if
the franchise laws were reformed. There are
reasons, though not conclusive reasons, for
believing that in a certain English city the
water supply may at any moment become
contaminated with the germs of enteric fever



through no fault of the private proprietors
of the water -works. In these circumstances
it is extremely difficult to force the private
corporation to take costly precautions against
the threatened danger precautions which,
no doubt, the municipality would take if it
owned the works. Thus it appears that, for
somewhat similar reasons, the municipalisation
''of water-works and of a number of other public
\ utilities should receive strong support. But
/none of the foregoing arguments apply with
any great force in favour of the municipal
management of such services as the supply
\of gas, electricity, or street railways; that is
to say, to those industries where a loss ought
not to be incurred by the municipalities
managing them, where there are alternative
methods of supplying the wants of the public,
and where questions connected with health,
morals, and comfort are not very seriously

The main advantages and disadvantages of
direct employment having now been discussed,
it may be as well to recall briefly the way in
which the whole question of municipal owner-
ship is being approached. The different
functions which a city may perform have been
compared to those of an administrative body,


a landlord, and a manufacturer ; and the/
question under consideration is in what cases
should a municipality perform all these three
functions? If the city authorities only act as
an administrative body, all industries must
remain in private hands ; if they only act in
the dual capacity of an administrative body
and of a landlord, then they must lease out
such industries as they own to private pro-
prietors for management ; whilst, if they
undertake all these three functions, they may
themselves manage the industries they own
by the direct employment of labour. Thus
there are three possible methods of operating
industries which have to be compared ; and,
in order to facilitate this comparison, it
seemed best to begin by comparing the last
two methods ; that is to say, assuming a city
to be the owner of an industry, the first
question at issue is whether that industry
should be leased out to private proprietors
for management, or whether it should be oper-
ated by the direct employment of labour by the
municipality itself. It is, in truth, difficult
to separate this question from the broader
question of municipal ownership ; but it may,
nevertheless, be convenient first to sum up the
foregoing arguments which are all certainly


relevant to the direct employment of labour
by municipalities.

Taking first the case against direct employ-
ment, the strongest argument brought forward
by its opponents is that a large number of
voters may thus be brought on to the pay
lists of municipalities, and that this would
inevitably increase the danger of civic corrup-
tion. Then again, as to financial considera-
tions, a priori arguments pointed clearly to
the probability that the normal result of
direct employment would be, not necessarily
a deficit, but a Joss, to the city practising it ;
whilst English statistics, which, of course,
should not be taken as a guide to countries
proceeding further along the path of muni-
cipal industry than England has already trod,
did not refute and may even be claimed to
afford a doubtful confirmation of this con-

X Thus the probability of greater corruption
and of increased cost of production afford the
strongest arguments against direct employ-

\ment. On the other hand, it has been urged
by the advocates of this system that muni-
cipal workmen are better paid than private
workmen ; but on examination this argument
in favour of direct employment was found to


be invalid. It is, moreover, indisputable that
civic authorities obtain a complete control
over the prices of goods they produce if they
manage the works themselves ; and that some
regulation of prices is necessary in the case
of an industry tending to become a monopoly.
This, however, affords no argument in favour
of municipal ownership in the case of industries
where competition is free and effective ; and
when indirect competition does exist, as in
nearly all industries, and when the prices
charged by private proprietors can be fairly
well regulated under a system of short-period
franchises, the advantages which arise from
direct employment on account of the facility
for regulating prices are small. Lastly, it
is urged that private proprietors, since they
must always be seeking for profits, will pay
little attention to questions of morals, health, or
comfort. But here again it was seen that little
weight should be attached to this argument,
except in the productive stage of water -works
and of a number of other public utilities hardly
to be called industries, such as public baths,
wash - houses, cemeteries, slaughter - houses,
markets, and perhaps harbours.

Opinions will no doubt differ widely as to
to be attached to these opposing


arguments ; and although my present endeavour
is to state arguments rather than conclusions, my
own views may, perhaps, be stated very briefly.
Direct employment should, in my opinion, always
be shunned in industry proper, except in the
following circumstances : In the constructive

// stage of an industry it may, perhaps, be advan-
tageous in the case of the building of sewers, and
in a few other cases where the work of inspection
is exceptionally costly and difficult. In the pro-
ductive stage of industry direct employment is

^ only beneficial where three conditions are ful-
filled : namely, where there is a strong tendency
for the industry to become a monopoly, where it
is of great importance to the community or, in
other words, where a loss might reasonably be
incurred by the municipality managing it and
where, in the near future, changes in the factors
of supply are not improbable against which
adequate provisions cannot be inserted in fran-
chises or leases. As regards industries owned

3 by cities and not fulfilling these conditions,
including gas-works, electric lighting works,
and street railways, it is, on the whole, prefer-
able that they should be leased out for short

X periods to private proprietors for management.

This conclusion, which is on the whole

strongly adverse to direct employment, would


if accepted practically close this whole contro-
versy in England ; because the strength of the^
movement in favour of municipal ownership lies
in the desire for direct employment. Direct
employment being barred, it would be easy to
deal with all the outstanding questions with
regard to ownership ; and it is for this reason
that they have been relegated to a position of
secondary importance. They must, however,
be discussed briefly, and in my next lecture
industries owned by municipalities and leased
out to private proprietors will be contrasted with
industries both owned and managed privately.

It must, however, be remembered both that the
main object of thus dividing the subject was to
emphasise the fact that there are two not readily
separable questions at issue, and that the result
of the comparison next to be made will not be
without effect on the question of the direct
employment of labour by municipalities. The
arguments which remain to be considered are,
it is true, relevant to municipal ownership gener-
ally; but as direct employment is not compatible
with private ownership, to whatever extent these
arguments now to be discussed should turn in
favour of private ownership, to that extent there
will be an additional weight to be placed in the
scales as against direct employment.



IN my last lecture the direct employment of
labour by municipalities was considered, and
the conclusion arrived at was that, as regards
the points thus far discussed, civic authorities
should, as a general rule, avoid it as far as
possible. No doubt in the exceptional cases
where it is the best system to adopt, there
municipal ownership becomes a necessity ; for
municipalities would practically never undertake
the direct management of labour at works they
did not own. But, where direct employment is
rejected, it still remains to be considered what

x are the advantages and disadvantages of muni-
cipal ownership : that is, of municipal industry

\without direct employment. Little time will,
however, be devoted to this discussion, both
because it is a question of less practical im-
portance at present than that of direct employ-
ment, and also because some of the points yet
to be considered bring us into close contact with

' the great controversy between individualism and



socialism a controversy extending far beyond /
the scope of these lectures.

Municipal ownership without direct employ-
ment may be established in the following ways.
A city may initiate an industry ; that is to say,
having decided, for example, that public electric
lighting works shall be built in a certain district,
and having raised the necessary funds and
bought the land, the civic authorities may leave
the construction of the works entirely in the
hands of a contractor. In this case municipal
ownership occurs in the constructive stage of in-
dustry, but without direct employment. Again,
civic authorities who have either initiated in-
dustries in the foregoing manner, or who have
bought them as going concerns, may lease them
out for operation to private proprietors. Here
there is municipal ownership in the productive
stage of industry. It may no doubt be said that
municipal ownership of this description is not
often met with, as in reality it is generally
accompanied by direct employment. This is
true ; but it merely tends to confirm the belief
that the subject now under discussion is of less
importance than that of direct employment.

When a municipality raises money in order to N
establish or acquire an industry, it is, in fact,
speculating with the wealth of the tax-payers ; /



for either their property must be pledged as a
security for the loan, or the money must be raised
by taxation. No individualist would consider
such speculation as quite unobjectionable ; and
if the industry were bought, many socialists
would also protest on the ground that the price
paid was excessive. No doubt, in the case of
an industry which tends to become a monopoly,
the greater that tendency, the less is the
risk involved in its municipalisation. But risk
cannot be wholly avoided ; for the demand for
the goods supplied may decrease ; and where
works are bought at their market value, the price
paid always introduces a speculative element.
In fact, in all cases some risk, great or small,
is thrown on a city by municipal ownership,
the other hand, when a franchise has been
granted to a private corporation to permit it to
operate any industry, no risk whatever is thus
thrown on the citizens as such ; and private
ownership, therefore, always has in this respect
an advantage over municipal ownership.

Against the foregoing advantage, namely,
that dependent on the absence of risk, various
alleged disadvantages of private ownership have
to be weighed in the scales. As to the financial
questions involved, these have already been
discussed in connection with direct employment,


and the result was that on the whole the balance
of argument appeared to turn decidedly against
municipal ownership. Again, it has frequently
been urged that the interests of the public are
more efficiently safeguarded when municipalities
own industries, whether they operate them or
not, than with private ownership. But, where
competition is free and effective, it has been
seen that the public, as consumers or tax-payers,
require no safeguards, and this argument in
favour of municipal ownership falls to the
ground in these circumstances. It is true that
when there is a tendency for an industry to
become a monopoly from any cause whatever,
then that industry must be more or less con-
trolled by the State. But here again it must be
remembered that, as to the objects sought to be
obtained by that control, namely, the safeguard-
ing of the interests of the consumer and the tax-
payer, they are exactly the same whether a
municipality does or does not own the works in
question ; and also that any safeguards, which
in the case of municipal ownership should be
inserted in the leases granted by municipalities
to private corporations, can equally well, in the
case of private ownership, be inserted in the
short -period franchises granted to private pro-
prietors. In fact, it has not yet been sufficiently


X recognised that, if a franchise is only granted for
a limited period, the State may be said in a sense
to retain the true ownership of the industry,
although it is nominally a case of private owner-

\ship ; and that where the ownership is thus in
effect, though not nominally, retained by the
State, actual municipal ownership presents little
advantage as regards the safeguarding of the
interests of the public.

Where a corporation has, however, been
granted a franchise, giving it the right to
manage a monopoly in perpetuity, then the
conditions are, no doubt, such as to make it
improbable that the interests of the public are
being properly safeguarded, and some reform
is much to be desired. There is no inherent
objection or difficulty in the State permitting
municipalities in such cases to convert these per-
petual franchises into short-period franchises, the
private corporations being duly compensated ;
and this seems to me to be the wisest reform to
be adopted in these circumstances. But if this
suggestion is rejected as impracticable, then it
appears that the only way for the civic authori-
ties to safeguard the public without resorting to
direct employment is to buy out the owners of
perpetual franchises and to lease out the works
for short periods to private corporations.


Thus far it appears that the case for municipal^
ownership without direct employment is strong
only where, in the case of monopolies, perpetual/
franchises have already been granted. But, as
regards street railways, since municipalities
must repair the roadways, there is also much to
be said in favour of the control of the whole
surface of the street, whether paved with iron or
not, remaining in the hands of the civic authori-
ties. With this and a few similar exceptions,
the risks involved in municipal ownership make
private proprietorship with short franchises the
preferable system.

The foregoing arguments deal with the
more immediate effects of municipal owner-
ship ; but it may well be that the ultimate and
indirect consequences are of greater importance.
There remain, in fact, to be considered other
objections to municipal ownership which are
not likely to be seriously felt as long as the
bulk of the industry of a country remains in
private hands. All capital, however raised,
represents the savings of a community ; whilst
goods produced with the aid of this capital
form the stream out of which payment is made
for all work and for all saving ; and it is
urged that this stream, or this national divi-
dend, as it is called, is likely to be diminished


by the municipalisation of industries, to the
obvious detriment of all classes. In consider-
ing whether civic authorities will, on an
average, invest the national capital so as to
produce more or less goods than if the same
sum were invested by a number of private
individuals or corporations, each using an
independent judgment, we must regard the
nation as a whole, and we must not consider
results in separate localities. When the nation
is thus regarded, it becomes evident that if
municipalities confine themselves to the pur-
chase of going concerns, or to the initiation
of such services as would, in any case, cer-
tainly be established by private proprietors if,
in fact, they do not by their action directly
alter the investment of the national capital,
then there is no prima facie reason why muni-
cipalisation in these circumstances should
affect the productivity of the national capital.

It is in cases where cities step beyond these
limits that harmful results are more likely to
arise as regards the investment of capital.
Town councillors must regard themselves as
trustees for money raised by taxation from
citizens, and this may make trlem^ecline to
extend their systems of street railways, for
example, into districts where losses might


possibly be incurred, even though such ex-
tensions would be legitimate speculations for
private and willing subscribers : a caution
which may make the average receipts per mile
of municipal street railways higher than that
of private street railways. On the other hand,
it has already been pointed out in connec-
tion with financial considerations that various
circumstances, including the absence of that
admirable automatic regulator of private invest-
ments, the fear of personal losses, tend to
make municipalities invest the funds at their
disposal in a rash and unremunerative manner.
Municipal authorities are, in fact, likely to

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Online LibraryLeonard DarwinMunicipal ownership; four lectures delivered at Harvard university 1907 → online text (page 6 of 8)