General Economic Laws Affecting Transportation

Of all the various clubs used by trusts for attacking rivals and

driving them from the field, the first in order is the one which

depends on getting special rates for transportation. Railroads develop

monopolies within their own sphere and also contribute greatly to the

development of monopolies elsewhere. The second fact is the more

important, but both require attention. By reason of its special

connection with produc rs' monopolies does the function of the common

carrier have much to do in deciding the question whether an economic

revolution is or is not impending. It is safe to say that it is

imminent as a possibility and will become probable if the favoritism

shown by carriers to great shippers is not effectually repressed.



How the Consolidation of Railroads makes the Repression of Favoritism

Easy



It is also safe to say that such repression will be easy if

the consolidation of railroads themselves shall actually go to the

utmost possible length. With all lines under one central control and

earnings entirely pooled, there would be no motive for granting

special favors to any shipper except as it might come through a

corrupt relation between the shipper and some officials of the

railroads. To the carrying corporation the giving of a rebate would

merely mean a surrendering of some possible profits. With railroads

consolidated the threat of the great shipper to divert his freight

from one line to another would lose all its effectiveness, and the

interests of the stockholders in the general carrying company would

demand high rates from all. The law forbidding rebates and all other

forms of favoritism would assist the railroad company in carrying out

its own policy, and would be obeyed with the readiness with which an

order to pocket an increased gain is naturally complied with.



A Danger which becomes greater as Discriminations become

Fewer



This reveals the fact that the consolidation which makes the

suppressing of discriminations easy will make an all-round advance of

rates possible, in so far as merely economic influences are concerned.

Nothing but the power of the state itself can prevent this; and while

the consolidation that would be perfect enough to stop discriminations

has not yet taken place, enough of consolidation has been secured to

cause some advance in the general scale of freight charges and to

threaten much more. It already rests with the government to avert this

second evil. Monopolies extending throughout the field of production

would mean a demand for socialism which could hardly be resisted; and

even a few monopolies in industry assisted by a great one in

transportation would mean much the same thing.



General Economic Principles governing Transportation



With a view

to determining the bearing which transportation has on the problem of

economic freedom, and thus on the prospect of avoiding the alternative

of state socialism, we need to state the essential principles in the

theory of railway transportation.



The fact that makes a vast amount of carrying necessary is that

agriculture is subject to a law of diminishing returns, while

manufacture obeys an opposite law. In tilling the soil labor and

capital yield less and less as more and more of them are used in a

given area; and therefore both of these agents need to extend

themselves widely over the land in order to use it economically. In

the production of staple crops which can be freely carried across sea

and continent, the natural tendency is to scatter a rural population

with some approach to evenness over all the land available for such

crops. Market gardening requires less land per man and the areas

devoted to it are much more densely peopled; but even within this

department of agriculture the law holds true that too much labor and

capital must not be bestowed upon an acre of ground. In a general way

agriculture diffuses population, while manufacturing concentrates it.

This latter work is done most economically in great establishments.



The Law of Diminishing Returns from Land not restricted to that used

in Agriculture



It is commonly said that manufacturing is unlike

agriculture in that it is subject to a law of increasing returns; but

this statement is true only when its terms are carefully interpreted.

The diminishing returns from agriculture and the increasing returns

from manufacturing are not two opposite effects from the same cause.

There is, indeed, a logical anomaly in contrasting them with each

other. In agriculture we get smaller and smaller results per unit of

labor and capital when we overwork a piece of ground of a given size

by putting more and more labor and capital on it. The trouble here is

that land, on the one hand, and labor and capital, on the other, are

not combined in advantageous proportions; and exactly the same effect

is produced by the same cause in manufacturing. One can overtax a mill

site by confining larger and larger amounts of capital within a given

area. If the site is so small that the building has to be carried far

into the air and supplied with walls strong enough to resist the jar

of machinery on many floors, manufacturing becomes a far less

economical operation than it would be if the site were larger and the

mill lower. The gain from centralizing the manufacturing process comes

in part from the increased size of the particular establishments; but

that requires that every part of the plants, land included, should be

increased. As the whole of an establishment becomes larger its product

becomes cheaper; but, in the enlargement, there should be no undue

stinting in the amount of land used. In both agriculture and

manufacturing, then, there is a loss of productive power when areas of

land are disproportionately small, as compared with amounts of labor

and artificial capital; but in the realm of manufacturing large

establishments under single entrepreneurs combining the agents of

production in the right proportion increase the productive power of

men and instruments as they do not in agriculture. Great farms show

no such economy as great mills.



Basis of the Law of Increasing Returns in Manufacturing



There

would be some increase of returns in manufacturing from making the

establishments large even if the work were done by hand; but by far

the greater part of the advantage is due to machinery. The invention

of the steam engine was the beginning of it, and that of textile

machinery afforded a quick continuation of the revolutionary change.

In nearly all lines of production, outside of agriculture, machinery

is far too elaborate to be used in household industry. One may say

that the transformation of the world into one enormous farm dotted

over with great workshops, with all the social and political changes

which that involves, was brewing in the tea-kettle which the boy Watt

is said to have watched, as the lid was raised by puffs of steam and

the possibility of a steam engine suggested itself. The mechanical

force of steam began at once to centralize manufacturing. That made

increased transporting necessary, and it was not long before the same

element, steam, provided the means of this extensive transportation.

It is necessary, of course, to carry the products of the farm to the

mill, and also to carry manufactured goods back to the farm; and

neither of these things would have been required on any large scale

under a system of household industry. The economy which leads to this

lies altogether in the greater cheapness of the manufacturing. The

difference between the cost of fashioning materials in the home and

that of doing it in the mill is so large that it would have brought

about the building of mills and the creation of manufacturing centers,

with the carrying which it involves, if neither railroads nor

steamboats had come into being. The growth of factory villages had

made some headway at a time when no elaborate machinery existed; but

if that condition had continued, manufacturing centers would have

been smaller, more numerous, and more scattered than they have been.

It is the cheapness of carrying by railroads and steamships which has

made it possible to get the fullest benefit from the so-called law of

increasing returns in manufacturing.



Mining as related to Transportation



Mining is a process which has

to be local, because ores and coal are furnished by nature in a local

way; and one might mention this as a second cause of extensive

transportation. A great part of the carrying so occasioned depends,

indeed, on the growth of the manufacturing centers, since mills and

furnaces need great quantities of fuel. A means of heating private

dwellings, of cooking food, etc., might conceivably be supplied in a

local way, by the growth of forests; but the fuel needed for the

centers of manufacturing and commerce has to come from distant points.

The law of increasing returns in manufacturing, then, and natural

location of mines are the most generic causes of transportation. The

system which has resulted gives to everybody more and better food, as

well as more and better goods of every kind, than he could possibly

have had if the primitive system of local manufacturing had continued.

The cheapness with which form utility is created in the mill and place

utility on the railroad are the two causes which are at work.



The Rivalry between Producers of Form Utility and Producers of Form

and Place Utilities



In the technical language of economics, there

has been a contest in efficiency between that creating of form utility

which is done when goods are made in households or in small villages,

and that joint process of creating form and place utility which

consists in making goods at central points and carrying them to the

widely scattered homes of consumers. The latter process, involving as

it does the necessity of creating two utilities instead of one, is now

by far the cheaper.



The Ultimate Limit of Charges for Transportation



Charges for

transportation have as one extreme limit the difference between the

cost of making goods at one point and the cost of making them at

another. This rule is applicable, of course, only to those numerous

cases in which it is physically possible to create the goods at both

points. If they can be made at point A for ten dollars, by using five

days' labor, and at point B for twenty dollars, by using ten days'

labor, ten dollars would furnish the extreme limit of a possible

charge for carrying them from A to B. In a certain number of cases the

actual charge approximates this extreme limit. With a mill in A,

working with much economy, and a number of household workshops in B

producing with less economy, the product of the large mill may invade

the territory supplied by the little workshops, and the carrier may

receive in return for transportation about as much as the difference

between the two costs of production. With a great mill at A and a

small one at B, the same thing may happen.




C



COMPETITIVE

CARRYING BY

HIGHWAY

v

A------------------------>B

]



Narrower Limits usually Applicable



In by far the larger number of

cases such a difference between costs is more than the carrier can

get. Usually there is some alternative mode of procuring goods at B

which does not involve actually making them on the spot at a serious

disadvantage. It may be possible to convey them to B from a third

locality, C, where they are made in an advantageous way. If this

carrying is done by some process in which competition rules,--if, for

instance, C is not far from B, so that goods can be carried thither by

drays,--the cost of making the goods in C plus the natural or

competitive cost of conveying them to B will together make up the

natural cost of procuring them in this latter locality. The difference

between that and the cost of making them in the great center which we

have called A will constitute the limit of the freight charge from

that city to B; and even though between these two points the carrier

has a monopoly of the traffic, he can get no more.[1]



[1] For a case in which a railroad can get the entire

difference between the cost of goods at the point from which

it carries them and their cost at the place of delivery, but

voluntarily refrains from doing so, see the note at the end

of this chapter.



Other Applications of the Same Rule



This rule applies even where

goods made in C have to be carried great distances, provided the

carrying is done in some competitive way, at a low rate based on cost.

Consumers in B may have the option of bringing the goods by water,

along the coast or across an ocean, at a rate that makes the cost of

procuring them at B not much above the cost of making them at A. If

so, this small difference of costs represents all that any carrier can

get for moving them from A to B, and though this carrying may be done

by a railroad which has a monopoly of its route, its service will

command no higher rate than the one which is thus naturally set for

it. The rate is governed by costs, though not by costs incurred by the

railroad. Whenever competition rules, the returns for any productive

function tend to conform to costs, and we here suppose that it does so

rule (1) in the making of goods at A, and (2) in the procuring of the

goods by some alternative method at B. The difference between these

costs sets the maximum limit of the freight charge between A and B,

and this may exceed the cost of this service and leave a profit for

the carrier who uses this route.



Freight Charges and Value



The return for a productive operation

of any kind whatsoever is directly based on the value which it imparts

to something; and in the case of carrying, the value is measured by

the amount of "place utility" which the carrying creates. This is

merely one application of a universal law. What the goods are worth

where they are consumed, less what they are worth where they are made,

equals what can be had for moving them from the one point to the

other. Freight charges are gauged by the principle of "value of

service," but so also are the charges for making the goods. When

things are produced and used at the same place, the producer's returns

equal the value of his product, and this is fixed by the principle of

final utility. It is, however, a truism of economics that this value

itself tends under competition to conform to the cost of creating it.

In our illustration the manufacturing returns are fixed by the value

of service and also by the cost of service, and so are the returns for

transporting the goods from C to B; but the returns for carrying them

from A to B, where monopoly prevails, are not governed by the cost of

service but by costs elsewhere incurred.



Freight Charges and Cost



The law of costs as well as the law of

value holds good, in general, in connection with transportation.

Competition in this department tends to bring values created to a

certain equality per unit of cost and to reward the labor and capital

which are used in carrying as well as they are rewarded elsewhere, and

not better. If our table of industrial groups were elaborated, there

would be between A and A', as well as between A' and A'', and between

adjacent subgroups throughout the chart, a symbol which should

represent the work done by the carrier; and the fact would appear

that naturally this work is neither favored nor injured in the

apportionment of rewards. Free competition, if it existed in

perfection everywhere, would be a perfectly undiscriminating

distributor of earnings, and would apportion all returns according

to costs.



A'''

A''

A'

A



Variations of Freight Charges from Static Standards



Place values

are not an exception to the general rule of value; and yet freight

charges actually remain at a greater distance from the standards

furnished by the direct costs of carrying than do the returns for

other services from corresponding standards. There is an approach to

monopoly in this department, and, when direct competition exists, it

is a more imperfect process here than it is elsewhere. Moreover, the

costs which here figure as an element in the adjustment of freight

charges are of a peculiar kind, which, although not unknown in other

departments of production, have nowhere else so great influence and

importance. The study of railroads and their charges is baffling, not

because the economic forces do not here work at all, but because here

they encounter a resistance which is exceptionally strong and

persistent. The quasi-monopoly which elsewhere continues only briefly

lasts long in this department of production; but it is subject to the

same principles which everywhere rule.



The Modes of Approaching the Study of Freight Charges



In studying

freight charges we may, if we choose, start with the intricate tariffs

of railroads, as they now stand, and try to find some principle which,

if applied, would bring order out of the mass of capricious and

inconsistent rates. Such a rule will ultimately be needed, but it can

best be obtained by examining at the outset the transportation which

is done by simple means and under active competition. It will be found

(1) that basic principles apply to all transportation whether it be by

railroad or by simpler means; (2) that in the early development of

every system of common carrying the action of these principles is

disturbed; (3) that in the case of the more primitive systems the

disturbances are soon overcome, but that they continue longer and

produce far greater effects in the case of railroads; (4) that one

important influence of this kind tends naturally to disappear, while

another continues and calls for regulation by the state; and (5) that

this regulation needs to be based on natural tendencies and to conform

to the laws which, when competition rules, govern the returns of all

classes of producers.



A Typical Instance of Partial Monopoly in Transportation



We may

now trace the development out of a purely competitive condition of a

simple instance of what is usually termed monopoly, though in a

rigorous use of terms it can hardly be so called. It is a monopoly the

power of which is limited. So long as goods made at A are carried to B

by some primitive method which insures the presence of competing

carriers, the returns for carrying will tend only to cover costs. By

a normal adjustment the price of the goods at A only repays the costs

of making them, and if these and the carrying charge amount to less

than the costs of making the goods at C and transporting them to B,

none of them will come to B in this latter way. Makers at A and

carriers on the route from there to B will possess the market, and the

place value which the goods acquire when taken to B will be fixed

directly by the costs of carrying.



It is when there is no effective competition on the route between A

and B, while there is free competition in making the goods both at A

and at C, and also in carrying them from C to B, that a typical case

of a partial monopoly is presented.




C



COMPETITIVE

CARRYING



v

A------------------------------->B

MONOPOLISTIC CARRYING

]



The price of the goods at A is a definite amount fixed by competition

between producers, and the price at B is also a definite amount fixed

by competition between different makers at C and between different

carriers between C and B. The difference between these amounts sets

the limit of the charge for carrying from A to B; but in that

operation there is, for a brief period, no effective competition. For

simplicity let us say that this carrying is at first done by a single

wagon owned by its driver, and that his charge for the service he

renders nearly equals the difference between the cost of making the

goods at A and that of obtaining them at B from some alternative

source. This lone and honest driver is thus illustrating the practice

of the modern railroad, in that he is "charging what the traffic will

bear." The goods he transports have one natural value at A and

another at B. These two values are determined separately and in ways

that are quite independent of the carrier and his policy. When he

begins to do his work, he charges an amount which about equals the

difference between the two values.



The Impossibility of Long-continued Profits in the Case of Primitive

Carriers



With the growth of traffic direct competition will soon

appear. A second wagon will be put on the route and then more, and the

strife for freight will bring down the charges to the level of cost.

For a brief season a favored drayman was able to get nearly the entire

difference between the value of the goods at the point where they are

made and their value at the point where they are used, as these two

values were determined by independent causes with which he had nothing

to do. Now, he and his rivals can, indeed, get the difference between

the value of the goods at the one point and their value at the other;

but this difference is now directly determined by the carrying charge.

That charge, again, is determined by the cost of rendering the

service. There was a brief interval when the value of the service and

the cost of it were different amounts; but now they coincide. We shall

see that the essential difference between carrying by primitive means

and carrying by railroad is in the fact that in the latter case the

period when value and cost are different is greatly prolonged.



The Appearance of a More Efficient Competitor



With the growth of

traffic a sailing vessel comes into use on a route connecting A with

B, and the cost of thus conveying goods is less than that of conveying

them over the roadway. The charge made by the sailing vessel is lower

than that made by the teamsters, and the goods are thus delivered at B

cheaply enough both to attract to the water route all carrying from A

and to put an end to all carrying from C. The former carriers between

B and C lose their business, and the makers at C lose some part of

theirs, in the same way that any producer loses the traffic when he is

underbid by rivals. The public is the gainer to the extent of the

reduction which takes place in the cost of the goods as delivered to

consumers in the market at B; nevertheless, the situation still

involves a limited monopoly. The sailing vessel now has no effective

rival, and can charge "what the traffic will bear," and that is very

nearly the cost of conveying the goods by wagons. The advent of the

vessel has benefited the public; yet it is regarded as constituting a

new monopoly, and the benefit which the public gets is less than it

will get when a really effective competitor of the sailing craft makes

its appearance.




C



. ABANDONED

ROUTE

.



.



v

A - - - - - - - - - - - - - - ->B

\ ABANDONED ROUTE /

\ /

\ /

\ /

\/

WATER ROUTE USED

]



A Principle governing Charges by Unequal Competitors



The principle

which, in this instance, governs the freight charges is one which is

active in all departments of production. We have seen that a maker of

goods who has just acquired a monopoly of a superior method may, for a

time, charge what the goods cost as made by inferior processes. If the

manufacturer has some patented machinery which effects a great

economy, he is not at once obliged to govern his prices by what the

goods cost in his own mill, but may charge about what they would cost

if they were made by the inferior machinery which he formerly used.

This is what they still cost in the mills of certain rivals, and it

thus appears that competition of a sort fixes his price for the goods

he creates, but it is the competition of less capable producers and

fails to benefit the public as the rivalry of equals would do. If

there is evil in such a monopoly as this, it is not because the public

is injured by the advent of the cheaper method. The improvement

usually begins to confer benefit on consumers at the moment of its

arrival, through the effort of the efficient producer to secure

traffic. It causes the prices to go down, though the fall is at first

only a slight one, and the consumer's case against the monopoly of

method is on the ground of his failure to receive a further benefit.

He will get that further benefit whenever a producer who can compete

on even terms with the one who now commands the field shall make his

appearance.



Unequal Competition Typical of Carriers



Our recent illustration

represents a similar condition in carrying. The public gets a slight

gain from the advent of a sailing vessel; but it fails to get the

further benefit that the advent of a second vessel will ultimately

bring. For a time the freight charge stands nearly at what teamsters

have charged. For cheaper rates the public must wait for the advent of

another vessel.



The Cause of the Partial Monopoly in Carrying



There is nothing to

prevent a second schooner from being put on this route, if the returns

to be expected should warrant it. At the outset the new vessel would

get only about a half of the amount of traffic enjoyed by the first,

and the rates would probably be reduced by the competition between the

two. Until the returns of the first vessel become large it has no

rivalry to fear, but it is clear that its monopoly is held by a very

precarious tenure. It is not likely long to enjoy the benefit of any

charges which yield much profit. The growth of traffic will in due

time bring the competing vessel, and the rule of returns that only

cover costs will again assert itself. The owner of the first sailing

craft has been able for a time to charge "the value of the service" he

has rendered, as that value was determined independently of his own

action; but now this value itself depends on his action and that of

rival carriers using the same route, and it adjusts itself at the

level of cost.



The Effect of partly Unused Vessels for Carrying



The case

illustrates another principle which is equally general. The

entrepreneur whose capacity for producing is only partially utilized

may often take some orders at less than it costs to fill them, as cost

is usually understood, and he will still be the gainer. In

manufacturing as well as in carrying there are "fixed charges"; there

are costs which stand at a definite amount which is independent of the

volume of traffic, while other costs increase as the volume grows.

These are the "variable costs," and they have to be further

classified, since some of them do not increase as rapidly as the

business grows, while others increase with the same rapidity as does

the business. The makers of sewing machines, typewriters, reapers, and

mowers, and indeed machinery generally, can usually increase their

product without correspondingly increasing their outlay. They can make

goods and sell them in a foreign market at rates which would injure

and might even ruin them if they were applied to the sales made in

their own country. This fact is most obvious when the manufacturer's

machinery is not all kept running or when it all runs only a part of

the time. Increasing the output is then a particularly cheap

operation. When a carrier's facilities are partially unused--when a

ship carries a cargo in one direction and returns in ballast, or when

it sails on both trips with its hold only half full--it is ready to

carry additional goods at a low rate provided that this policy will

not demoralize its existing business. In our illustration we have

assumed that some merchandise is made at A and consumed at B, but it

may well be that goods of some sort are produced at B and consumed at

A. There may be stone quarries at B and there may be need of stone for

paving or building at A, and the vessel may carry a return cargo of

this kind at any rate which does not greatly exceed the mere cost of

loading and unloading it and be better off for so doing. If the entire

difference between the cost of the stone at B and the cost of

producing it at A from some other source is a very slight one, the

amount of it still represents all that the ship can get for carrying

the stone. The utmost that the traffic will bear is this difference in

costs; and yet the business will be accepted, for the return exceeds

the merely variable costs which it entails. The fixed charges, the

interest on the cost of the vessel, and the outlay for maintaining it

do not need to be paid in any part from the returns of this extra

business. They are already provided for.



If instead of returning from B with a hold quite empty, the vessel

made both voyages with a hold only half full, the result would be

similar. It would then be in a position to make a low bid for further

freight in both directions. If this entails no cutting of the rates

for carrying the original goods, the vessel can take further goods

with advantage at any rate above the merely variable costs.



Production which is Advantageous though it does not repay all

Costs



There are two general conditions under which it is

advantageous, both in making goods and in carrying them, to extend

production, though the further returns which are in this way gained do

not cover all costs. First, the producer must have an unused capacity

for making or carrying goods. In such a case it is possible to make or

carry an increment of goods without entailing on himself an

increment of cost that is proportionate to the amount carried. In his

bookkeeping his original business is charged with costs amounting to a

certain sum per unit of goods produced or carried. His further

business is charged with a smaller outlay per unit.



Secondly, it must be possible to demand separate and independent

returns for the different increments of goods, so that cutting the

rate charged for one part of the traffic does not entail cutting the

rate charged for the other. In the case of a manufacturer this is

secured, either by carrying some goods to a remote and entirely

independent market, or by producing some new kind of goods the low

price of which will have no effect on the sales or the prices of the

other kinds. In the case of the carrier it is accomplished in a

variety of similar ways. He can take return cargoes at a low rate. If

he stops at different ports along his route he can charge less for

goods landed at certain ports than for those landed at others. He can

classify his freight and carry some of it at a rate at which he could

not afford to carry the whole. With the growth of traffic, however,

this condition tends to disappear. Its existence requires that the

carrier should have facilities only partially used. As the ship

acquires fuller and fuller cargoes, it ceases to be advantageous to

fill the hold with goods which pay lower rates than others; just as a

mill, which may have run for a time partly on goods that yield a large

return and partly on those which yield a small one, gradually discards

the making of the cheaper goods as the demand for the dearer kind

increases. The vessel which can get full cargoes of profitable

merchandise will cease to devote any space to what is less profitable.

In the end the ship in our illustration will be transporting in both

directions all the first-class freight it can take, and will accept

neither the stone nor the merchandise consigned to ports to which it

can be carried only at the cheap rates.



Result of Effective Competition throughout the Carrier's Route



The

condition just described--that of full cargoes of profitable

goods--inevitably attracts a rival vessel, and the ordinary effects of

competition then begin to show themselves. The vessels pursue the same

route, cater to the same traffic, and if they try to get business from

each other, bring down their charges. The warfare may even bring them

to reduce the rates to the level at which only variable costs are

covered--a policy that, if persisted in, would bankrupt them both; and

here, as well as in the case of railroads, there is a powerful motive

for combining and ending the war. It usually causes a merely tacit

agreement to "live and let live"--a concurrent refraining from the

fatal extreme of competition. The reductions, as made, have to be

general and to apply to all parts of the traffic, and unless each part

of the freight carried earns a pro rata share of the fixed charges

incurred in the business, the traffic is carried at a loss. On the

supposition which we have made--that the special and comparatively

unprofitable increment of carrying was discontinued as soon as the

first vessel could use its entire cargo space in transporting goods of

a high class--the arrival of the second vessel may cause the less

profitable carrying to be resumed, since there will not be enough of

the better sort to afford two full cargoes. Moreover, a normal kind of

competition will stop short of the warfare which drives both rivals

into bankruptcy, and will leave the rates at a level at which the

receipts of each carrier cover all his outlays.[2]



[2] A full discussion of the limits of freight charges would

take account of the fact that "what the traffic will bear" is

an elastic amount. An infant industry will bear less than a

mature one; and moreover, a rate that it will bear without

being taxed out of existence may be sufficient to stunt its

growth. A railroad may be interested in hastening its growth.

When goods have one cost at A and another at B, a railroad

company may carry them from the one point to the other for

less than the difference between the costs because it wishes

the industry at A to grow and furnish freight. Farmers who

are introducing a new crop in a section of country remote

from a market may be encouraged by a rate for carrying which

leaves them a margin of profit. It is when a branch of

production has more nearly reached its natural dimensions

that the charge for carrying its product tends to approach

its highest limit.