smaller places that could possibly be produced by the removal of undue elasticity from the railway rate system? His reference to the dangerous tendencies of centralization is open to a similar question. Perhaps enthusiastic appreciation of the achievements of railway transportation has induced an over-generous estimate of the extent of its social influ ence. Fifthly, an abnormal disregard of distance, which is always possible in the making of special rates to meet particular cases, may bring about a certain inelasticity of industrial conditions by hindering the rise of new industries or by postponing or averting the well-merited relative decline of old ones. But a greater insistence upon the rights of geographical location might with equal effectiveness bring about this economic retardation. The argument cuts both ways. The last item of the preceding catalogue of evils, abnormal disregard of distance, is the occasion for the inclusion of a separate discussion of the causes of economic waste in transportation, six of which are named as prominent by the author: (1) congestion of the direct route, (2) rate-cutting by weak circuitous line, (3) pro-rating practices in division of joint through rates, (4) desire for back loading of empty cars, (5) strategic considerations concerning interchange of traffic with connections, and (6) attempts to secure or hold shippers in contested markets. Some of these are of mere academic interest. As regards (1), it may be more economical from the point of view of society, for the time at least, that freight should be carried by a circuitous route in which capital has been already invested than that new capital should be laid down, in the expansion of the congested route, considerably in advance of its full utilization. Nor is rate-cutting by circuitous lines (2) to be regarded too seriously. The competition of circuitous lines has produced some obvious excesses, at times fostered by unhealthy pro-rating practices (3), but, on the whole, there is good reason to regard the restriction it imposes upon monopolistic price-making by the direct route or associated direct routes as beneficent, and, as has been pointed out previously, there is always the possibility that the reaction upon the railways will conduce to greater technical efficiency. The attitude sometimes assumed by railway traffic men, and apparently approved by Ripley, that traffic between any two points "belongs" to the direct route or routes, is a dangerous one. Economic waste cannot be determined solely by the money costs of working traffic over the different routes. Where the circuitous route coincides with favorable conditions of back-loading the competition with the direct route may become very keen indeed, but a circuitous route favored by such traffic conditions has some ground for insisting that it is, under these circumstances, one of the prime factors in the establishment of the rates in question. In such cases it very frequently happens that favorable backloading conditions are present on both the direct and circuitous routes, a fact that eases, for the direct route, the severity of the competition. If the foregoing criticisms are well-founded, then circuitous routing is hardly as serious as Ripley's indictment would lead us to believe. Five resulting evils are named by him: (1) inordinate swelling of the volume of ton mileage, (2) dilution of ton-mile revenue, (3) rigidity of industrial conditions, (4) fostering of centralization both of population and industry, and (5) the imposition of a tax upon American production. The last three are the only ones that call for consideration, and (3) has already been considered in another connection. If real economic waste occurs, all factors in the case, and not merely the question of direct versus circuitous routing, being taken into account, we need not hesitate to agree that such a tax upon the productivity of the country should be avoided, in so far as it is capable of being foreseen. The fourth item Mr. Ripley does not discuss, though one or two scattering references to it occur in the volume. The reviewer must follow his example somewhat, for the problem is too large a one to be dealt with adequately in this article. What follows is simply intended to emphasize the difference of opinion that prevails on the matter. It is interesting to note that, discussing the third item, Ripley gives the following illustration, which seems to show some hesitation as to the validity of the fourth count of his indictment. "If Pittsburgh is the natural center for iron and steel production, it may not be an unmixed advantage to the country at large, however great its value to New England, to have the carriers perpetuate the barbed wire manufacture at Worcester." Professor M. H. Robinson, in his able attack upon the economic disadvantages of the present system of rate-making, urged as one objection that the system checked the normal tendency towards concentration of production in those localities most highly favored by nature, and thereby increased cost of production. When doctors do not agree with one another, or even with themselves, what is the uninstructed layman to think? A certain tendency towards centralization is commonly regarded as economically and socially beneficial, in spite of the evils that may result from the aggregation of human beings in urban centers. To take the liberty of repeating a statement made by the reviewer in a previous article: A rate system, constructed and applied in such a way as to reduce all industries wherever situated to a dead level of profits, would militate against ress. localization and would tend to maintain a higher cost of production. But such rate-making is a far-fetched hypothesis, justified neither by the history of the past nor by a reasonable anticipation of the future. The existing rate system shows no tendency to alter the natural lines of industrial progUnder its influence, the farming of New England has been transferred to the more fertile fields of the Middle West, and, in its place, there has been built up those manufacturing enterprises for which it was marked out long before the railways appeared. The lumber industry of the Northwest has been developed concurrently with that of the Southeast. Centers of trade such as St. Louis, Cincinnati, Cleveland, Chicago, Omaha, and many other cities, highly favored by nature, except in the matter of proximity to the Atlantic Coast, and ear-marked for industrial advance before the railways reached them, have not failed to make the most substantial kind of growth. It is true that localization has not been developed to the last degree of physical concentration, and that the present rate system permits a certain diffusion, but it is a gratuitous assumption to argue that this means a higher level of cost. The economic theory of production does not justify the supposition that the cost of production curve continually falls as localization develops. There seems good reason to believe that, after a certain degree of localization is attained, the cost curve is not appreciably affected. Under the railway régime of this country, localization has developed in localities with particular advantages of production or distribution, very often rather the latter than the former: as the tide of population has flowed westwards, other localities, often enough with still greater advantages of production, have been relieved of their relative disadvantages of distribution, with the result that they, in turn, have become points of localization. Thus much of what appears to be diffusion is really experimental localization in a country still in the stage of regional development. In a vast territory such as the United States, it is evident that, for many industries, there are several localities offering, for their own areas, at least, special advantages for the indissolubly related processes of production and distribution. Indeed, apart from the consideration of stationary cost after the attainment of a certain intensiveness of localization, the desirability of some diffusion of industry must surely be admitted. Complete concentration of any industry would mean, in general, an increased average distance of transportation for the products of that industry and, quite possibly, for some of the raw materials and fuel. The advantage to the consuming community of the lower cost of production at the point of concentration, if such existed, might easily be neutralized, in whole or in part, by the higher freight charges arising from the greater average distance of carriage. Furthermore, the more complete the concentration, the stronger would be the tendency towards combination and monopoly, again with possible inimical effects upon the consuming interests.1 1 Rate-making and Rate-reforming, Railway World, March 11, 18, 25, April 1, 1910, p. 198. All the foregoing considerations point pretty clearly to the nature of the underlying general principles of rate adjustment. In the words of our author, both cost of service and value of service must be continually invoked as a check upon each other. "Neither will stand the test of reasonableness alone. Whether the one or the other should take precedence can only be determined by a careful study of the circumstances and conditions in each case." If for each class of service, economically distinguishable as such, the actual total cost assignable to each unit of service under conditions of free competition, including earnings of management and return to capital, could be made the measure of each rate, then rates so adjusted would probably be the most desirable from the point of view of maximum economic welfare. This much may readily be granted to the theory of cost-of-service rate-making. But, as Edgeworth has pointed out, with so complex a system as that of railway transportation, how can we ascertain in the absence of free competition what would be the charges fixed by it? Theory must bow to practice, and hence in attempting to use cost as a criterion of rate reasonableness we must be satisfied with the less significant cost of movement, interpreted, perhaps, as mere out-of-pocket expenses, and consequently applied with a very large allowance for error. Below this level rates should not go, because traffic so secured would cause an actual reduction of the surplus available for the overhead and more constant charges. Where conditions of competition are very keen, rates tend to be driven down to or near to the level of their prime costs, with consequent reduction of their contributions to supplementary costs. While such rates are easily defended from the standpoint of the particular interests of the individual road, they are not to be justified so readily from that of general economic interest, unless they are indispensable to the development of new business. In the consideration of rates upon established business, the point of emphasis should be, as Lorenz suggests, those expenses which would not now be incurred if the traffic had not been called forth, and, so far as these can be identified, they should be regarded as fixing the lower limit of rate adjustment. While the lower limit of charges can be indicated, not by any means with precision, but still with some pretence to definiteness, the same cannot be said of the upper limit. Ripley takes considerable pains to show how the relative insignificance of the transportation charges, as compared with the value of many goods, makes it impossible to look in these cases to the principle of charging what the traffic will bear for protection of the consumer from exorbitant rates; such cases must be settled with "some reference, indefinite though it be, to the extra cost incident to the particular service." If the question had been one of minimum rates, the economic propriety of such a solution might have been conceded. Within considered limits the comparison of relative extra costs might be allowed to be of service in helping to fix rate relations. But what the logic of its employment in the determination of maximum rates can be, is difficult to understand. The question is complex to a degree. Are we to suppose that the railways have deliberately neglected an obvious and easy opportunity of securing an appreciable increase of revenue? The unlikelihood of such a supposition induces one to believe that some powerful force has compelled the maintenance of rates on high-valued goods at a comparatively low level. Without doubt a partial explanation at least is to be found in the territorial extensiveness of the market for the higher-valued products, permitting competition, particularly market competition, of special intensiveness. So long as this continues (and it is likely to do so) there will be effective a powerful check upon any large and general increase of a permanent nature in the scale of transportation charges applying to these commodities. But, supposing that the rates on such goods could be considerably enhanced without effect on the present or future demand for them, does it follow that rates raised to the maximum level would be exorbitant or extortionate? Is there any logically acceptable criterion of the reliability of maximum rate schedules other than that of the effect upon demand (including future demand, so far as it can be measured in advance)? Perhaps such a criterion may permit distinctly monopolistic profits with consequent justification of a readjustment of the general level of rates; but this is another matter. Though Professor Ripley may be inclined to estimate rather highly the value of cost of service as a check, his general argument would by no means meet with the approval of strict cost-of-service theorists. From their point of view it is open to serious criticism. For instance, as one of the reasons for attributing theoretical unsoundness to cost of service as a sole rate basis, Mr. Ripley makes the assertion that its application would hinder all transportation of low-grade traffic, and would prevent any development of long-distance business. Cost-of-service advocates would reply that this would be a distinguishing merit, for one of the evils of the present system with its low rates for low-priced goods and high rates for high-priced goods, is exactly that it encourages the country" to use more of the goods which it needs less because its wants are more fully satisfied, and less of those which are in greater demand." Further, Mr. Ripley passes unnoticed the argument that 1 'See article on "Freight Rates," M. H. Robinson; Yale Review, 1909. |