remain, but monopolistic situations will remain (“regulation competition" as it is euphemistically called), and motortrucking concerns will grow to larger size than economies warrant. Indeed, big business may take over, not because of competition but because of a protective policy administered for the purpose of limiting competition and protecting competitors.

For an industry to be competitive it is necessary that its resources be both legally and economically mobile. It is obvious that motor transport is characterized by a high degree of economic mobility of its resources. Economic mobility requires that the resources be readily transferable to uses other than those in which they are presently engaged. In motor transport both investment and facilities are easily moved to other uses. This may be accomplished comparatively easily and rapidly by the physical adaptation of facilities to new market demands, or by a geographic shift of plant or equipment to tap other market areas. Ready transferability may also be achieved by new investment or disinvestment with a consequent shift of capital to or from motor transport. Because most of the capital invested in motor transport is in facilities that have a relatively short life and in equipment that can be shifted easily from one use to another or to new market areas, the utilization of resources can respond readily to the demand for them.

If resources are to be legally mobile, it must be possible for them, so far as the law is concerned, to be free to move from one use to another and from one market to another. There must be freedom to move the physical equipment according to the wishes of the producers, or to convert it or divert it to other uses. Similarly, decisions regarding investment or disinvestment must be left to the enterprisers. In other words, what is called freedom of entry, which carries with it freedom of exit, is one of the fundamental requirements of a truly competitive structure. If this is denied by law, special privilege is accorded to an entrant to an industry or to an existing producer, and this protects him to the extent that freedom of entry is limited against the pressures of competition. He is no longer faced with the threat of an alternative supplier of similar services who may be willing to risk his resources in the belief that his venture may be successful. Instead, the would-be competitor is faced with the necessity of demonstrating, over the opposition of the existing occupants or occupant, that present or prospective markets warrant admitting him. This is a difficult task because of the typically speculative nature of the evidence which can be gathered and because the experimental device of testing out markets by newcomers is precluded by the present administration of the law relating to motor carriers. Moreover, because such limitations, by their very nature, are designed to give protection to the existing carriers, the burden of proof rests on the shoulders of the applicant for admission. Such legal limitations on mobility of resources are not compatible with competitive enterprise or competitive pricing, and are anomalous to say the least, when the economic characteristics of the industry do not warrant such limitations.

The pattern of economic regulation of transportation that exists in the United States today emerged with the rise of railroad transportation as the prime agency of inland transport. The original purpose of regulatory legislation was to curb the abuses of monopoly in transportation by limiting maximum rates and curbing unreasonable discrimination. In other words, the purpose was to protect the consuming public against the excesses of monopoly. As experience in regulation grew and the economics of railroad transportation came to be understood more thoroughly, it came to be recognized that a large element of monopoly in railroad transportation was unavoidable and that thoroughgoing competition was ruinous to the participants. At the same time, it became clear that there were really three choices with regard to railroad transport: (1) Unregulated private monopoly, (2)_regulated private monopoly, or (3) monopoly under public ownership. The Transportation Act of 1920 was based upon the second of these choices and incorporated a thoroughly comprehensive scheme of regulation to deal with it. Whatever the shortcomings in detail and administration may have been, the policy expressed in that legislation was in keeping with the economic realities of transport in the United States at that time.

The extremely rapid emergence of the newer agencies of transport after 1920, coupled with the pressures of the depression after 1930, revealed the inadequacy of the policies of 1920 for the totally new situation in transport that developed with such startling suddenness. On the one hand, the railroads were being regulated with a rigidness that would have been too severe, in unstable times, even if no alternative means of transport had developed. On the other hand, the newer means were practically uncontrolled. Congress met

the situation by passing the Motor Carrier Act of 1935 and some other similar legislation whereby the pattern of public policy, established to deal with an industry that was basically a monopoly, was extended to industries that have none of those characteristics. Substantively, the Transportation Act of 1940 made no change in the regulatory program.

Today, the motor carriers operating in those areas where entry is restricted wish to retain the pattern of regulation and to extend it further to nonregulated highway carriers if possible. Their stand is based on two grounds: (1) they want intra-agency protection, that is, they wish to have competition among motor carriers limited by public authority; and (2) they want interagency protection, that is, they want public authority to impose severe limits on the right of the railroads to compete with them.

If modern inland transport had grown up around the motor carrier instead of around the railroad it is difficult to see how the present-day pattern of regulation would have emerged at all. As already pointed out, railroad regulation developed because the economic characteristics of railroads made competition an ineffective device for protecting the consuming public. If motor transport had held the field, competition would have provided those protections. The fact that motor transport emerged later does not seem to provide any logical reasons for treating it differently from what would have been done, had the reverse been the case.

Some support today is given to the idea that the common carrier is entitled to some degree of protection against competition because of the obligations it assumes and it required to maintain, and that this protection should even limit the amount of competition which other common carriers by motor may offer. Because motor transport embraces a large number of suppliers who no not fall into the category of common carriers, it is necessary to make a distinction between the latter and the former so that those who are not common carriers are prevented from offering common-carrier service. This may necessitate widening the notion of the common carrier or at least drawing a clear-cut line between common and contract carriers. This, however, is not a sufficient reason for limiting the number of common carriers who wish to compete with each other, for limiting the type of equipment they can use, the commodities that anyone of them can carry, or the routes they traverse. If a carrier wishes to offer common-carrier service, presumably it thinks the business is worthwhile and wants to compete for it. There seems to be no reason why this privilege should be denied when the structure of the industry is so competitive. It is difficult to see how consumer protection is afforded by a policy which imposes limitations on competition by restriction of entry. Nor is it necessary to restrict the competition of contract carriers by limitations of entry, either among themselves or with common carriers, if the objective of the policy is public interest and consumer protection. The argument often advanced, that contract carriers will tap off the cream of the traffic assumes that those who want common-carrier service have to be supported by those using the type of service afforded by contract carriers. This argument not only runs counter to the cost characteristics of motor transport; it also raises the question why the users of contract service should be expected to carry any of the burden created by demands for common-carrier transport.

Current regulatory problems in motor transport center primarily around two, matters: (1) rates, and (2) certification.

Fair prices in competitive business are those prices dictated by the forces of competition. They are also the prices that will have to be established by public authority if it decides to regulate them. But such regulation is just so much waste in time, expense, and inconvenience if competition prevails. The only type of control that is necessary in this situation, if it is necessary, is that which is designed to prevent predatory action or the deliberate attempt to drive a competitor out of business. Protection from this unfair competition, however, requires a different type of regulation from current rate controls and needs to look at other practices that may be used equally well to eliminate competitors. Rules of fair competition do not require comprehensive price regulation.

Present procedures involving requests to change rates too frequently result in prolonged and expensive hearings often followed by denials by the ICC that are not compatible with the legitimate economic interests of the carrier. If a motor carrier wants to lower rates on competitive traffic it is usually faced with the opposition of all the other carriers with whom it competes, rail and motor alike, to say nothing of industries and communities who dislike the effects of the competition. In other words, rate regulation in motor transport becomes a

battleground for protecting existing rate structures with the cards too heavily stacked against the one seeking to get business by price competition. This is particularly hard on the small carrier who needs to be allowed to compete if he is to thrive but who cannot match the array of money and talent lined up against him. Yet this situation is unavoidable so long as protests, especially by competitors, against competitive ratemaking are permitted.

The foregoing remarks apply even more emphatically when application is made for a certificate of public convenience and necessity or a permit. Whether the application be for new service, or extension of service either to new territory or new commodities, the situation is much the same although requests by those wishing to enter the motortrucking field for the first time generally meet with the most vigorous resistance. In any event, it is necessary for the applicant to prove that there is a public need for the service, that existing service is inadequate and/or that the carrier already serving the field will be unable to supply the expanding market adequately. This becomes well-nigh impossible especially if service has been reasonably good to date or if it cannot be demonstrated that the development of a community or an area has been handicapped by the inadequacy of the available supply of transport.

In addition, the new applicant will have to defend his operating financial plans, prospective profits, schedules, and so forth in the face of opposition of existing carriers, both of his agency and others that may be affected, or think that they may be affected, at some future date. The traffic to be developed, the possibilities of such traffic, the economic development of the area, and the future prospects of the area will all have to be portrayed for the tender scrutiny of those carriers already occupying the field. Moreover, even the descriptions of the equipment which is to be used will be examined by intervenors who wish to see the application denied.

The foregoing is not a caricature of proceedings. It is a summary statement of what is taking place every day all across the country before examiners of the Interstate Commerce Commission. Hearings are prolonged into years and the money spent on endeavoring to secure operating authority on occasion runs into hundreds of thousands of dollars. This does not cover the expense arising from the array of talent alined against the applicant.

If this procedure were necessary to protect the consuming public and to guard against ruinous competition it might be a necessary cost of private enterprise in transport. As it is, it is simply a wasteful process. Moreover, it is hardest on the small operator who cannot afford the expense involved and who cannot match the resources marshaled by his opponents to keep him out of competition. Generally, the ones who are most able to resist the intrusion of competition, or break down the resistance to it, are the large carriers who do not or should not need the protection. In other words, current procedures are stacked against the small carrier, not deliberately by the ICC, but by the false premises upon which current regulatory practices are erected.

It is sometimes argued that limitation of entry is necessary in order to protect the highways against excessive use by truckers. Apart from the fact that this ignores the use of these highways by the private carriers, the argument fails to correlate use and cost. If highway use is to be limited it should be through means designed to assess cost of use directly and proportionately to the specific use, not by arbitrary restriction which is for the purpose, or at least will have the unavoidable result, of protecting competitors.

It is also argued that economic regulation of motor carriers is necessary in order to avoid discrimination and predatory action. In reply it may be pointed out that neither of these present difficult problems in highly competitive business. To deal with them, nothing more is necessary than supervision designed to prevent predatory action. Economic regulation, regulation of rates, and limitation of entry certainly are not necessary. On the contrary, it is difficult to see how any policy could be more specifically designed to create the conditions in motor transport necessary to make discrimination and predatory action possible.

The foregoing remarks are not to be interpreted as advocating the abandonment of all kinds of public control of motor transport, such as public safety, financial responsibility, and so forth. Nor is it recommended that current restrictions be removed overnight without regard for time necessary to bring about appropriate readjustments. What has been emphasized, and what it is necessary to emphasize, is that economic regulation of motor transport is totally unnecessary in the interests of a healthy motor-transport system, competition. and public welfare. The fact that there is interagency competition does not

alter this problem so far as motor transport is concerned. Finally, this is one area where small business can flourish and will flourish if public authority will permit it to do so.

APPENDIX 22 (a)

[From Land Economics, August 1952]

THE ECONOMIC BASIS OF PUBLIC POLICY FOR MOTOR TRANSPORT

By Dudley F. Pegrum1

1. INTRODUCTION

The phenomenal development of land transportation in the 19th and 20th centuries was primarily the story of the invention of the steam locomotive and the growth of the railroads. So much was this the case that land transport, except for strictly local service, was almost synonymous with rail transport from 1850 to 1920. There appeared to be no other means to challenge its complete

supremacy.

The invention of the internal combustion engine in 1884, with the first workable automobile in 1887, was destined, however, in the next half century to revolutionize transportation. It was, in five decades, to provide a means of land transport that expanded transportation services enormously, changed the entire pattern of living, and increased intercommunication and mobility of population beyond any previous conception. Furthermore, the development of the use of the automobile introduced an alternative source of supply for a wide variety of transport services such that transportation, in many lines, has become one of the most competitive fields of endeavor in the economy.

From a mere 4 motor-vehicle registrations in the United States in 1895, and 4 factory sales, automotive equipment increased during the next half century such that in 1949 total motor-vehicle registrations in this country amounted to 44,120,243, of which 36,292,703 were automobiles, 134,971 buses, and 7,692,569 trucks. The total investment in motor transport for the same year was something over $35 billion, as compared with $23 billion for railroads. A recent estimate places the investment in highway facilities, in terms of construction costs, at $28 billion down to the end of 1949 with total highway expenditures for the latter year alone amounting to $3.3 billion.*

The total estimated ton-miles of freight carried by trucks and truck combinations on the main rural roads of this country was 89 billion in 1949, as compared with 28 billion in 1936.5 Intercity motor trucks accounted for 1.67 percent of the revenue ton-miles of freight in this country in 1928, while the railroads moved 77.56 percent. In 1948, the distribution was 8.69 percent for trucks and 64.2 percent for railroads. In California, where freight traffic moves predominantly by motor vehicles, 20.9 percent of the gross operating revenues from the transportation of property went to the railroads and 73.7 percent to the highway carriers.

Despite the magnitude of motor transport as a whole, it is still essentially an industry of small-scale operations. Of the total of 20,998 class I, II, and III motor carriers of property reporting to the Interstate Commerce Commission in 1947. 2,097, or 9.99 percent earned 67.92 percent of the revenues, while the re maining 90.01 percent earned 32.08 percent of the revenues." The California commission estimated that, in 1946, 55 percent of the carriers reporting to it earned less than $5,000 each per year in gross revenues from carrier operations.”

1 Professor of economics, University of California.

2 Study of Domestic Land and Water Transportation, hearings, Subcommittee on Domestic Land and Water Transportation, U. S. Senate, 81st Cong., 2d sess., Washington, D. C.. 1950, p. 940.

3 Ibid., p. 148.

4 Ibid., p. 148.

5 Ibid., p. 950.

S. Daggett, Principles of Inland Transportation, revised edition (New York: Harper & Bros., 1934), p. 5.

7 Annual Report, Interstate Commerce Commission, Washington, D. C., 1949, p. 15.

8 Annual Report, California Public Utilities Commission, 1950, pp. 147-148.

Interstate Commerce Commission, Bureau of Transport, Economics and Statistics Reve nue Ton-Miles and Passenger-Miles of Class I, II, III Motor Carriers, Statement No. 490 (Washington. D. C., 1949), p. 18.

10 1948 California Public Utilities Commission 62 (1948), p. 71.

It is evident that this new form of land transport has, in the course of a little more than a quarter of a century, risen from a position of comparative insignificance to that of a major industry and a major transportation agency, indispensable to the economy of the country. It would appear that monopoly based upon technological conditions has been ended over an ever-widening area in transportation for as far as one can see into the future.

The structural changes in transportation in the last quarter of a century have imposed a compelling necessity for reorientation of both regulatory policy and private management to a radically new situation in the whole field. The traditional patterns of thinking on public policy need to be reexamined by legislative bodies, regulatory agencies, the suppliers of transport services, and shippers, in the light of the completely new technological and economic situation in transportation.

Today, however, the situation is totally different. Land transport cannot be regarded as a homogeneous industry in any respect. It cannot even be regarded as an industry. Instead it is a group of industries composed of agencies such as railroads, airlines, pipelines, and automotive vehicles. The only significant thing they have in common is that they offer facilities for the movement of goods and persons.

These different agencies have diverse economic characteristics. They supply many different kinds of services, some competitive, some complementary, and some quite different. They offer these services under markedly different technical conditions and very different market conditions. The consequence is diverse economic characteristics as they relate to costs, supply of services and facilities, and organizational structure.

As was stated above, transportation is frequently regarded as a natural monopoly. Railroads have almost invariably been clssified in this category as also have public utilities such as gas, water, electric light and power, and telephone. The word "natural" as it is used in this connection refers to the fact that monopoly emerges from the economic characteristics of the industry in question and that competition is forced to play a very subordinate role in the fixation of prices to be charged for the particular type of services offered. As one economist puts it with reference to railroads: "Competition fails to establish a normal level of rates sufficiently remunerative to attract the additional investments of capital that recurrently become necessary." "

There are several reasons why monopoly is natural to certain industries. Capital has to be invested in amounts which are large relative to the market opportunities available for the goods or services that are to be produced. Capital costs therefore form a relatively large part of the total costs of production and addition to the plant will involve a large proportionate increase in capital investment, and will necessitate a large prospective increase in the market. A railroad, for example, has to make large initial outlays to build a single-track line and acquire the necessary terminal facilities to operate it. When that plant is utilized to capacity, double-tracking will require a large additional investment which cannot profitably be made unless there is prospect of a large increase in traffic. Expansion of this type entails difficult problems of market anticipation because the facilities will have to be built well in advance of market opportunities. In the meantime, the traffic which is available will have to bear the burden of keeping the railroad in operation until the new traffic has been built up. If, instead of double-tracking, a new railroad were to be built, an almost complete duplication of facilities would be necessary and the immediately available traffic would be inadequate to give either road a profit. In addition, the economies which would be available from such things as running trains in opposite directions at the same time would be unavailable.

Then there is the fact that much of the investment that has been made is specialized both as to functions and as to markets. Railroad tracks are only useful where they are laid and cannot readily be turned to other areas if the markets shift. In addition, they have little use except for supplying railroad transportation to a geographically fixed area.

Natural monopolies are also characterized by a concomitance of production and consumption. That is, the services must be consumed in direct conjunction with the production facilities. This results in the absence of what is known as shopper's technique. The consumer cannot shop around because no other supply is readily available to him. This is especially true of public utilities.

11 E. Jones, Principles of Railway Transportation (New York: The Macmillan Co., 1925), p. 91.