Leonard Darwin.

Municipal trade; the advantages and disadvantages resulting from the substitution of representative bodies for private proprietors in the management of industrial undertakings online

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AUTHOR OF "bimetallism"



Printed in Great Britain

7D ^S >o


Fo7' full Contents see next 2'"'<{l^-







Vn. RISKS AND GAINS ..... 173

viii. municipal statistics ..... 207

ix. price and quality ..... 247

x. competition and protection .... 284

xi. municipal house-building . . . ,319

xii. legislation with reference to municipal trade . 346

xni. legislation affecting private trade . . 384

xiv. conclusion ...... 430

Appendix ....... 453





Municipal Trade was little practised sixty years ago ; it is
now increasing rapidly ; and it is more extensively under-
taken in Great Britain than in any other conn try.

(i) The phrase " ?*Iunicipal Trade" need not be rigidly defined.
(2) Municipal extravagance is not dealt with here. In this Chapter
is traced the introduction of Municipal (3) Markets, (4) Baths,
(5) Harbours, (6) Piers and (7) Water Supply. (8) As to the last-
mentioned enterprise, large towns have led the way ; and (9) very
considerable sums have been invested in the United Kingdom
(10) and in Foreign countries; (11) Hydraulic Power Works being
sometimes added as an adjunct. (12) Municipal Gas-works in
England (13) have been for the most part established since 1850;
(14) and this trade is commonly municipalised in Germany but not
elsewhere abroad. (15) In the Gas trade is included the manufacture
of residual products. (16) Electric Lighting Works are generally in
private hands in America ; (17) on the Continent they are more
often municipalised, and (18) this is the case with the majority of
works in England. (19) The effect of terminable concessions will
be to increase the number of municipal works. (20) Tramway
enterprise has been more progressive and has been less frequently
municipalised in America (21) and on the Continent, than (22) in
England ; and (23) municipal management will probably increase
largely in Great Britain. (24) Omnibuses have been run in con-
nection with Municipal Tramways. (25) Municipal House-building
has only been recently undertaken in England. (26) Under the
Act of 1S90, Parts I. and II., municipalities may become, in
exceptional cases, both house-builders and house-owners ; (27) whilst
Part III. gives to municipalities more definite powers of trading
in house property. (28) Municipal house-building has been little
practised abroad. (29) Pawnshops and Insurance. (30) Many other



enterprises are carried on by a few municipalities ; (31) and many
demands have been made for further powers. (32) English municipal
rates and {33) municipal debts are increasing rapidly, (34) and are
considerably heavier than the local debts of other important
countries. (35) Thus Municipal Trade is increasing rapidly, and
is more extensively undertaken in Great Britain than elsewhere ;
(36) and here we have to consider how far this movement is a wise



77iis volume does 7iot deal with Socialism ; although no
doubt Socialists are advocating Municipal Trade as a
stepping-stone to some thoroughly socialistic system. The
socialistic plea that workmen will receive more favour-
able treatment when employed by the State cannot be
admitted as an argument i7i favour of Municipal Trade.
The advantages and disadvantages resulting from munici-
palisation must, therefoi^e, be balanced one against the other
in each case separately.

(i) Although Municipal Trade and Socialism are products of the
same forces (2) this volume does not deal with Sociahsm. (3) The
socialistic argument based on the favourable treatment of workmen
employed by municipalities must, however, be examined. (4) Fair
wages clauses should be inserted either in all or in no contracts. (5)
Municipal Trade is advocated as being beneficial to the workmen in
both municipal and private employment. (6) As regards beneficial
reforms involving no cost, they should generally be enforced by
Parliament on all employers, public and private. (7) Costly benefits
to municipal employees must increase the cost of municipal pro-
duction. (8) Such benefits are justified neither by any problematical
saving of contractors profits, (9) nor by the fact that municipalities
can borrow money more cheaply, (10) nor by any possible increase
of production therefrom. (11) But, if as a matter of fact municipal
employees are more highly paid, how then can this be justified?
(12) It can hardly be justified on account of the example set,
because such examples are not followed. (13) The superior treat-
ment of municipal workmen is equivalent to giving them a bonus
out of the revenue ; (14) and should be condemned on this, (15) and
on other grounds. (16) Municipal employment and charity should
not generally be combined. (17) The advantages and disadvan-
tages of municipalising each trade should be separately considered.




There is an increasing tendency for certain trades to become
monopolies ; and with it an increasing necessity for 7nunicipal
control. The choice in such case lies between the municipalisa-
tion of the industries in question and subjecting them to State
regulation. The former alternative is nozu more popidar ;
but its popularity tells but little in its favour, because the
arguments on the two sides are not placed with equal force
before the people and because the ifijurious indirect effects are
usually ignored.

(i) The tendency of trades to become monopolies has increased,
and has tended to foster Municipal Trade. (2) This increase has
been due to the law of increasing return, (3) which tends to make
rival firms amalgamate ; (4) to the effect of granting rights to
interfere with the streets ; (5) to the advantages arising from a
large clientele; (6) and to the increase in the value of land in
towns. (7) In the case of monopolies, prices must be regulated
by the State, (8) which may be done either by municipalisation
or by the control of private undertakings ; the choice between
these methods being the subject here discussed. (9) This choice
must also be considered in the case of competitive industries.
(10) Merely to consider whether any industry will be well managed
by the State does not help in making this choice. (11) To what
extent should. the popularity of Municipal Trade count in its favour?
(12) Popularity based on sentiment proves nothing. (13) Municipal
Trade may appear to be more popular than it is. (14) The evidence
in favour of Municipal Trade is more voluminous than that in favour
of private trade. (15) Legitimate pride prejudices both councillors
and (16) officials. (17) Councillors represent both the consumers
and the manufacturer in Municipal Trade. (18) Official utterances
based on recently established enterprises are especially unreliable
as an indication of success, (19) and popular opinion is largely based
on such official evidence. (20) Popularity may, moreover, be
dependent on temporary beneficial results, (21) which may be felt
even though Municipal Trade is not the best system which could
have been adopted. (22) Lastly, popularity is a delusive test,
because it depends on obvious facts and arguments. (23) Summary
of chapter.




The strongest argument in favour of Municipal Trade is that
companies, looking inaitily to making profits, may, in the case
of monopolies, ignore questions connected with public health,
morals, order, or convenience. Municipal Trade is, tJiere-
fore, undoubtedly right in many cases.

(i) To admit that the importance to the community of any in-
dustry justifies its municipalisation almost admits the case for
Sociahsm ; (2) and importance is no criterion as to how far
municipalisation is advisable. (3) The onus of proof rests with
those who demand municipaHsation. (4) Rigid control or muni-
cipalisation is necessary with complete monopolies. (5) The State
will pay more attention than private proprietors to health, morals,
etc., and for this reason, (6) especially where prices are not easily
estimated, (7) municipalisation is often advisable. (8) The Liquor
traffic will not be discussed. Advantages may arise from the
municipalisation of Baths, (9) Harbours, (10) Markets, Cemeteries,
and Slaughter-houses. (11) But the arguments here considered do
not necessarily tell in favour of the direct employment of labour.
(12) Roads should be in public hands, (13) and thus arises an
argument of no great weight in favour of municipal gas, water, and
electric works and telephones. (14) The surface of the roadway
should be in public hands ; (15) though the tramway business need
not therefore be entirely municipalised ; (16) neither need tramways
be initiated by Local Authorities. (17) The difficulty of estimating
cost tells strongly for municipal water-works, (18) and but slightly
for municipal gas and electrical works. (19) The necessity for a
copious supply tells for municipal water-works, (20) but not for
municipal gas or electric works. (21) Summary of chapter.


Municipal Trade in moderation has a stimulating effect on
Local Authorities : but, if extensively undertaken, it tends to
loiver their efficiency. And a large number of voters being
in the pay of the State adds greatly to the probability of

(i) Municipal Trade stimulates public interest in local administra-
tion ; (2) but it also has harmful effects. (3) Discontent may be


aroused against existing suffrage laws ; (4) and the evils of the
compounding system may be increased. (5) Discontent will also
be produced by the taxation of traders to establish rivals to them-
selves ; (6) by the suspicion that judicial functions are performed
with partiality ; (7) and by the action of contiguous municipalities.
(8) Additional work due to municipal trading would lower the
business capacity of Local Authorities, (9) and would tend to make
them neglect their ordinary duties, (10) if it were very extensively
undertaken. (11) Local Authorities should not be involved in labour
disputes. (12) Voters being paid by the State is a source of danger
because (13) their votes are apt to be given on personal grounds.
(14) The more scrupulous the candidate the less likely is he to win
the votes of State employees; (15) and scrupulous men, therefore,
are less likely to become candidates. (16) Unscrupulous councillors
will object to the presence of the scrupulous on Councils. (17)
Appointments being given on political grounds, (18) and the in-
sufficient salaries of municipal officials lead to corruption. (19) False
steps in the direction of Municipal Trade are difficult to retrace. (20)
Corruption tends to go from bad to worse. (21) The ballot is little
protection against corruption. (22) The necessity of State manage-
ment in certain cases makes Municipal Trade less, not more, advis-
able in other cases. (23) A small margin of corrupt voters may
suffice to maintain a corrupt system. (24) We must not rely on the
existing purity of our municipal administrations ; (25) for the germs
of disease already exist. (26) The corruption existing in large
American cities, (27) and in the smaller towns, (28) should be a
warning to England. (29) Corruption is used in the United States as
an argument for "municipal trading, (30) because in that country
private enterprise leads to so much corruption. (31) Even if
private enterprise now directly produces more corruption. Municipal
Trade might, in the end, produce worse effects, (32) because,
with many rate-paid voters, corruption is less easily eradicated.
(33) The difficulty of eradicating the corruption due to private
enterprise tends to diminish ; (34) whereas the evils due to public
management tend to increase. (35) In the United States, Civil
Service reform is necessary, and (36) the regulation of private enter-
prise has been much neglected. {2,7) Complete monopolies should
be granted. (38) Public management is more demoralising than
public ownership. (39) Municipal Trade has been undertaken
to a comparatively small extent in the United States, (40) and the
case in its favour is not established. (41) In England Municipal
Trade is more likely than private enterprise to introduce corruption.
(42) Summary ofthe foregoing arguments as to corruption, (43) which
tell with different weight in different cases. (44) Summary of the
effect of Municipal Trade on administration.




We should expect to find private management is, on the
average, somewhat more efficient and decidedly more economi-
cal than public management.

(i) When Corporations and Boards are compared (2) it appears
that Boards may be selected from a wider field ; (3) and, on account
of the methods of election, (4) and of re-election, will normally
contain more business men. (5) With regard to the influences
acting on managing bodies, (6) voters being consumers, (7) and the
ease of raising money, may lead to extravagance ; (8) whilst risks
being thrown compulsorily on all ratepayers (9) and a want of initia-
tive, may lead to uneconomical caution in municipal enterprise. (10)
Progress in Municipal Trade may be checked by the inconvenience of
Local Government areas, (11) or by the difficulties connected either
with joint municipal enterprises, (12) or with work outside municipal
areas. (13) Consequently private capital will be invested in enter-
prises capable of yielding a larger return. (14) Low salaries,
(15) and promotion by seniority, (16) and, perhaps, more broken
employment, make municipal officials somewhat less efficient and
most costly ; (17) whilst other influences make them more powerful.
(18) Slack discipline, (19) and various other influences tend to,

(20) and certainly do make the municipal labour bill higher.

(21) The economy of private trade is due to the stimulus of personal
gain, (22) an influence less felt in monopolies. (23) Municipal in-
spectors will criticise private trades more keenly. (24) Shareholders
can indicate their discontent by selling. (25) The main question as
to monopolies is as to the remedy of grievances. (26) Councillors
give their services for nothing. (27) Private trade is, on the whole,
likely to be more economically managed, (28) a result which, if
admitted, condemns the municipalisation of competitive trades ;
whereas, as to monopolies, the advantages of Municipal Trade have
to be weighed against this and other disadvantages.


No gain is made by Municipal Trade unless a risk is run ;
and taking the more economical management of private trade
into account, we should on a priori grounds expect to find


that communities have gained nothing financially by their
municipal trading enterprises.

(i) Municipal finance will first be discussed without reference to
figures. (2) The question is not simply whether a profit will be
made; (3) for when the word "profit" is defined, (4) it will be
seen that we want to ascertain the gains., not the profits. (5) The
gross income of private companies is paid away in {a) working
expenses, {b) payments to Local Authorities, and {c) dividends, etc.
(6) As to {a) the net profits will diminish on municipalisation if the
management is less economical. (7) As to {b) municipal industries
must be taxed like private industries. (8) Rents are a more important
item amongst the payments to Local Authorities ; (9) and rents
formerly received, (10) or, rather, rents which might now be obtained,
(11) as well as an allowance for all services which companies might
be forced to render gratuitously, should be deducted from the net
profit to find the gain. (12) As to (c), questions connected with risk
and rate of interest have to be investigated. (13) The case of going
works being bought will be first considered. (14) When borrowed
money is invested, no gain can be made unless a risk is run ; (15) and
this law is applicable to Municipal Trade. (16) Municipal prestige,
however, does make some little gain possible without a corresponding
risk. (17) A part of municipal trading profits should be treated, not
as a gain, but as an insurance against losses (18) sustained in any
municipal enterprise undertaken by the same Local Authority. (19)
The gains made by investing borrowed money are due to either excep-
tional knowledge or luck. (20) As exceptional knowledge cannot be
claimed by Local Authorities, the financial results of municipal
trading is largely a matter of chance. (21) For this reason, single
instances of success or failure tell but little ; (22) for the element of
risk or chance is never absent. (23) The foregoing arguments are
also applicable to municipal trades initiated by Local Authorities.
(24) In considering the capture of the unearned increment, (25) the
effect on prices of the concessions granted must be held in view.

(26) Sliding scales of prices do not altogether meet the case.

(27) The unearned increment is captured equally well by terminable
concessions or by Municipal Trade, whether the works are built

(28) or bought by Local Authorities. (29) Increments can be
captured by violating existing bargains, (30) and concessions should
always contain provisions for the necessary readjustments of prices,
etc. (31) It is difficult to decide the price to be paid for fraudulently
acquired concessions ; (32) but, in all other cases, it should be decided
by the value in the market. (33) Summary of Chapter.




Turning to facts and figures in order to check these theoretical
conclusions, the Local Government Board Returns afford the
best info7'matio7t available ; but the more these Returjis ai^e
studied, the less reliable they appear to be as guides for future

(i) Reliable statistical results would be more satisfactory than
theoretical conclusions. (2) An increase of remunerative loans
appears to be correlated with an increase of rates ; though the
cause is obscure. (3) An abstract of the financial results of English
municipal trades for four years is given ; (4) and figures repre-
senting the net profits are thus obtained. (5) The future as well as
the existing net profits must be considered. (6) Percentages cannot
be usefully calculated on outstanding debts. (7) Gross profits
should be calculated as percentages of the total capital provided.

(8) Existing net profits are of little use as guides for future action ;

(9) but an estimated prospective net profit on gas-works can be
calculated from existing gross profits, (10) a calculation, however,
involving possibly erroneous assumptions. (11) Gas-works municipal-
ised in years gone by are now more profitable than gas-works recently
municipalised. (12) As regards the total reproductive undertakings,

(13) a figure representing the estimated prospective net loss is given.

(14) Thus figures indicating the required results can be obtained
from these returns. (15) But can they be relied on? (16) As regards
gas-works the results have been shown to be faulty, (17) and an
endeavour has been made to correct them. (18) As to average
results, certain items of expenditure are said not to have been
properly charged. (19) There is some justification for charging
depreciation on a lower scale in Municipal Trades ; (20) but, if this
has been done, the foregoing results require correction ; (21) because,
inter alia, Municipal Trade is in its infancy. (22) There are reasons
for believing that the capital has been overstated, (23) and that it has
been understated. (24) To estimate the gains, the net profits must
be increased by the cost of inspection, (25) and diminished by the
amount of possible rents ; (26) a very important deduction.
(27) These hypothetical rents will, in the absence of perpetual
concessions, increase pari passu with municipal profits. (28) Past
experience is unreliable as a guide for the future because it is
scanty, (29) and because of changes in the rate of interest on
loans. (30) The greater profit yielded by the older municipalisa-
tions does not indicate that profits will increase to that extent in
future enterprises, (31) because industries tend to die out, (32) because


the increase of population may not be maintained, (33) and because,
as regards individual industries, the old enterprises were more
profitable because more risk was involved. (34) In the foregoing
discussion little reference has been made to price and quality.


The doubt as to the reliability of these Statistics is greatly
increased if questions connected with price and quality are
taken into consideration. A nd a genei'al conclusion is reached
that the probability of making a gaitt should never be held
out as a legitimate inducement to cities to adopt Alufiicipal

(i) The gain to the community from municipal trades is, to a
large extent, independent of the level of prices charged by Local
Authorities. (2) The results obtained in the preceding chapter can
only be objected to (3) on the ground that the relative level of prices
in municipal and private trade affects the question of possible rents.
(4) Can we estimate the gains to the ratepayers and to the con-
sumers separately, and, by combining the results, find the gain to
the community ? (5) As to the estimation of the gain to the consumer,
(6) local circumstances greatly affect the prices of gas, (7) and
tramways fares, etc. (8) Comparisons between prices charged in
pairs of towns may tell unduly in favour of Municipal Trade. (9) If
separately considered, the reductions in prices made by municipalities
tell but little. (10) The rents actually paid by private proprietors,
(11) the length of their concessions, (12) and the risk run by them,
must all be allowed for in all comparisons of prices. (13) Local
Authorities, who have built or bought works, have, in effect, granted
to themselves perpetual concessions. (14) In short, the difficulties
connected with all methods of comparing prices are at present
almost unsurmountable. (15) Thus neither as regards prices, (16) nor
as regards quality, can we say which way the balance of argument
tells. (17) Enquiries as to the financial results of Municipal Trade
must involve the consideration in detail of questions of price and
quality, (18) and if these considerations are omitted, the results
are valueless as regards its eftects on the community as a whole.
(19) Do statistics confirm the theoretical conclusions arrived at in
chap. vii. ? (20) Average results should be mainly relied on,
(21) though they may be vitiated by the effect of causes affecting
many industries. (22) Are conclusions based on a priori reason-
ing, or are those based on statistics most to be relied on ? (23) Some
circumstances merely throw doubt on statistical results ; (24) others



make them appear too discouraging ; (25) but possible rents,
(26) and many other considerations indicate that they are too
encouraging. (27) Thus statistics do not refute a priori reasoning,
(28) The contrast between the statistical, and (29) the theoretical
conclusions is illustrated in another manner, (30) an illustration
which indicates that no material gain or loss has directly resulted
from Municipal Trade, although taxation is now being increased
thereby. (31) That this loss will become a gain in time is no
argument for Municipal Trade. (32) Indirect financial results
must now be considered. (33) Though tramways, etc., do no
doubt raise the value of rateable property, (34) Municipal Trade,
even if it were more progressive than private trade, might not
increase the revenue ; (35) and, as it is less progressive, it cannot
do so. (36) To spend public money in order to raise the value of

Online LibraryLeonard DarwinMunicipal trade; the advantages and disadvantages resulting from the substitution of representative bodies for private proprietors in the management of industrial undertakings → online text (page 1 of 35)