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Home -> Charles Francis Bastable -> Public Finance -> Chapter III

Public Finance - Chapter III

1. Preface

2. Chapter I

3. Chapter I a

4. Chapter II

5. Chapter II a

6. Chapter III

7. Chapter IV

8. Chapter V

9. Chapter VI

10. Chapter VII

11. Chapter VII a

12. Chapter VIII

13. Chapter VIII a

14. Book II Chapter I

15. Chapter II

16. Chapter II a

17. Chapter III

18. Chapter III a

19. Chapter III b

20. Chapter IV

21. Chapter V

22. Book III Chapter I

23. Book III Chapter I a

24. Chapter II

25. Chapter III

26. Chapter III a

27. Chapter III b

28. Chapter IV

29. Chapter V

30. Chapter V a

31. Chapter VI

32. Book IV Chapter I

33. Chapter II

34. Chapter III

35. Chapter IV

36. Chapter V

37. Chapter VI

38. Chapter VI a

39. Book V Chapter I

40. Chapter II

41. Chapter III

42. Chapter IV

43. Chapter IV a

44. Chapter V

45. Chapter Va

46. Chapter VI

47. Chapter VIa

48. Chapter VII

49. Chapter VIIa

50. Chapter VIII

51. Chapter VIIIa

The Industrial Domain.

1. IN the preceding chapter the gradual decay of state
revenue from landed property has been considered. Special
circumstances may preserve a comparatively large amount
of agricultural possessions in the case of some nations, but
so long as the present system of private ownership and free
competition continues and it is only to societies resting
on that economic basis that attention need be directed
no large part of the State's resources can, speaking
generally, be obtained through the rent of public lands.
The universal tendency exhibited in countries so widely
separated in all respects as England, the United States,
and India is towards a relative, or even an absolute decline
in the revenue derived from this form of receipts.

Another class of public property does not show so clearly
the same movement. The industrial domain, if it has been
contracted in some directions, has been enlarged in others,
and its position in state aud public economy is deserving
of the most careful examination. For this purpose it is
best to take the leading groups of industrial activity be-
ginning with that which belongs to extractive industry,
and is consequently nearest to agriculture and forestry.

2. Besides the retention of agricultural land and forests,
the State has in most societies regarded mines as belonging
to itself. Thus the famous silver mines of Laurium were
an important source of revenue to the Athenian people
who let them out on lease. Rome retained its salt mines
and monopolized the sale of the product. As the Roman
dominion extended by conquest the mines of the provinces
came under its control. The modes of management applied
were different in respect to the various minerals, gold and
silver mines being directly worked by the state slaves, and
other mines conceded on lease or abandoned to private
working subject to a tax proportional to the produce.

The mining laws of mediaeval Europe were affected by
feudal ideas ; they placed the right over minerals in the
4 Lord ' or ' Seigneur] and the influence of this system can
be traced at present in the English law as to gold and
silver mines. The desire to encourage mining industry,
and the need of gaining revenue for the sovereign, both
tended to restrict the rights of landowners with respect to
what lay beneath the surface. Hence the system of ' free
mining,' under which the discoverer was entitled to open a
mine against the landowner's wish subject to the payment
of royalties to the State (Bergregal) became usual x . Not-
withstanding this growth in continental States of a separate
property in mines, some countries retained much of their
mineral wealth as public property, more particularly where
the landed domain also was extensive. The various parts
of the German Empire are noticeable for their state mines,
though the distribution of these sources of wealth is far
from uniform. Prussia owns coal, iron, lead, silver, and
copper mines, which (including the value of the partially^
worked-up products) contributed in 1884-5, 102 fr million
marks gross revenue. Austria, Russia, Spain, and India
also possess some mines as state property, though they are
practically conceded to private owners. The financier is
not much concerned with this part of the public possessions
as the net revenue obtained is small. The mines and
mining works of the Prussian government in 1884-5 gave
only 17 \ million marks (about 875,000) as their net yield.
Salt, which in many countries contributes very largely to
the public resources does so through taxation.
Whatever be the net return from mines it should
economically considered be divided into two parts, (i) the
rent of the mine and (2) the profit on its working including
the gain of elaborating the raw material obtained from it,
where this is done at the mine. The former is essentially
the same as the rent of land, though possessing some
peculiarities due to the exhaustible nature of mineral pro-
ducts and is generally levied in proportion to the gross
product. Without state ownership it might be applied as
a special tax on private owners of mines 1 . The second
element is plainly the result of the employment of capital
and should therefore comprise both ordinary interest and
employer's gain. The use of capital in mining is a highly
speculative one being most uncertain in its returns. The
receipts from the Prussian mines have varied much between
1870-1880, and of course are dependent on the prices of
the minerals produced 2 . It therefore seems desirable to
give up this source of revenue by selling the mines to
private individuals or companies, and applying their price
to the reduction of credit card debt, and from the financial point of
view, the wisdom of the policy of sale is indisputable. The
continuance of mines as state property is due partly to the
survival of the older forms of public economy in which taxa-
tion was subordinate to quasi-private receipts, and partly to
views of economic policy. The danger of mineral supplies
being worked in a reckless and extravagant manner without
regard to the welfare of future generations, and the dread
of combinations by the producers of such commodities as
tin, copper, and salt, with the aim of raising prices, have
both tended to hinder the alienation of state mines.' There
are fortunately other and more effectual methods of ward-
ing off these, by no means imaginary evils. The disposal of state property does not carry with it a surrender
of the right of state regulation where public interests
require it. It is also possible to retain the ownership or
dominium in the State, giving long leases to the capitalist
workers by which system the risk of marked fluctuations is
in a great measure avoided ; or, finally, the net receipts from
mining industries may be specially taxed.

In one case, the policy of sale may not be a wise one.
When the particular product of a mine is taxed, the neces-
sity for supervision compels the public officials to watch
the processes closely, and under such conditions to place
the whole business in the hands of the administration or of
a powerful company may be the best course and prove the
least inconvenient to all concerned. The principal example
is in the case of salt which is taxed in most countries, and
monopolized by the State in some. Where the supply is
obtained from mines there is an obvious advantage in
keeping them in the hands of the State l .

3. The modern State has not confined its activity to
extractive industries. In the iyth century, France started
some of those model manufacturing establishments which
continue to the present, and possess so varied a character 2 .
The German States followed a similar course, and during
the 1 8th century many artistic industries were founded
under official management. The object was not financial ;
it was rather to supply a standard for private producers and
to discharge the functions now* supposed to belong to
exhibitions. The more costly products were intended for
court use or as gifts to foreign princes
This class of state factories has preserved its original
type and is important only as giving examples of superior
work or supplying some state need for a certain commodity.
But though financial aims are not prominent in this depart-
ment of public economy, there are opportunities for realiz-
ing a moderate revenue by careful management and securing
a superior class of products.

The latter consideration becomes of great importance
when we pass to the method of supplying the larger public
services such as the military and naval forces. The diffi-
culty of deciding on the best mode of meeting the manifold
needs of modern armies and fleets is chiefly due to the
conflict of financial and technical reasons. As we shall see,
there are strong economic and financial objections to direct
manufacture by the State. But in some cases it is essential
to secure a high standard of excellence in the products.
Guns that will not go off at the right time and bayonets
that bend under pressure are dear at any price : and state
establishments for the production of these articles are
defended on the ground that in no other way can goodness
of quality be guaranteed. The state clothing-factories and
flour-mills have been supported by like arguments, since it
is assumed that complete supervision of private contractors
is practically impossible. On purely financial grounds
state industries of the kind are open to serious criticism
owing to the very defective system of keeping accounts
which is characteristic of such establishments. The amount
of invested capital is hardly ever properly estimated ;
receipts that should go to capital are assigned to revenue,
and expenditure that ought to be met from revenue is
defrayed from other state funds or by borrowing l . To
meet this evil it seems best in a developed industrial
community to trust to private enterprise for the supply
even of warlike implements. The growth of such factories
as those of Elswick and Essen ought to enable Govern-
ment to dispense with the troublesome institutions that
require so much attention and vigilance to prevent the
grossest abuses. Where there is not a fully grown system
of industry it may be necessary to keep up state arsenals,
dockyards, and factories, to supply wants that would other-
wise remain unsatisfied, and it is, perhaps, partly to this
earlier condition that we owe the erection of the state
industries in question. Moreover the possibility of keeping
down prices, by having an alternative source of supply in
the not unknown case of there being only one private
factory in existence, may be allowed in favour of state
industry, though against it there is the risk of political
corruption in towns that are largely supported by public
outlay. Admitting then that the State's manufactories for
its own use are necessary only in the earlier stages of
development, and ought to diminish as society advances,
we may go on to assert that the same proposition is true
of public industry in general. The Government of a back-
ward country may rightly undertake works that would be
quite uncalled for in more advanced nations. British India
gives us numerous illustrations. The most promising agri-
cultural industries have been taken under state management,
and costly experiments have been tried. The best available
evidence, however, leads to the conclusion that the greater
part of these well-meant efforts have been unsuccessful, and
have in some instances been abandoned.
industries is not likely to be a financial success, and is
besides open to other weighty objections both social and
political, there are some exceptions to the general state-
ment. --There is no validity in a plea of laissez faire set up
in opposition to special cases of state industry, when it can
be shown that the interests of the community will be
furthered by interference. The rule of non-intervention
is nothing but a generalization from experience, and holds
good so far only as experience supports it. Where special
reasons justify the action of the public power there is no
ground for objecting to its employment. To avoid the
opposite and more dangerous extreme, we should add that
the advantageous conduct of certain industries by the State
is no argument in favour of extending its activity to other
and dissimilar cases.

In addition to the direct supply of the needs of the
public services, which in some cases is a good ground for
the State undertaking industrial functions, there is the
important class of cases in which the production of certain
articles is subject to heavy taxation. In such cases the
placing of the absolute control of the process of production
in the hands of a state department may be a financial
necessity, as the only effectual remedy against fraud and
evasion. The French tobacco manufacture is probably the
best example of this system, to which the Bengal opium
regulations may be added. The large receipts obtained
from these industries are not in reality industrial. Scienti-
fically speaking, they are a part of the revenue raised by
taxation of which state monopoly is a particular form 1 .
The ordinary gains of a business are all that should be
credited to it as * earnings,' unless the extra amount is due
to the superior efficiency of public management.

5. The remaining cases, where the industrial action of
the State may possibly be useful and has in practice been
largely applied, may be grouped under two heads, according
as they exhibit specially one of two characteristic features ;
viz. (i) those industries in which there is a tendency to
the creation of monopoly, or in which the establishment of
monopoly is likely to prove economically advantageous,
and (ii) the large and important industries that deal with
communication and transport. This classification is un-
fortunately not completely distinctive, since the last group
in many instances exhibits the features of the first-
mentioned one ; but it is sufficient as a guide in discussing
the principal points of interest.

(i) The first group is not easily characterised and separated,
but there are some general marks that may be taken as
common to all the industries in question ; they are :

(i) The products are much required, and in some cases ab-
solute necessaries or of high sanitary importance. (2) They
are connected with special localities, and situation is an
element in their advantages. (3) They are usually subject
to the (so-called) lav/ of ' increasing returns,' and thus con-
centration and unity in management tend to cheapen the
product. (4) Competition is not steadily operative even
when no legal restrictions are imposed J .

On coming to collect the industries that belong to this
group, we further notice that they in great measure fall
within the domain of local rather than that of general
government, and are moreover chiefly due to the conditions
of city life.

The oldest, and one of the most important, is the supply
of water. Under ordinary circumstances this indispensable
commodity is valueless in the economic sense, and has
usually been the stock example in economic text-books of
objects that possess utility but are not wealth. The growth
of population in certain confined areas at once creates
a greater demand than can be supplied from natural sources,
and at the same time pollutes that limited amount. Fresh
supplies must be obtained from a distance, and often
necessitate heavy outlay. In earlier times this of itself
made it incumbent on the State to do what no private
individuals' association could accomplish, a policy ex-
tensively carried out by the Romans. In the modern
period, the business of water-supply to cities has been
placed in the hands of private companies, who have in-
vested large amounts of capital for the purpose. The rise
of the sanitary movement of the present century and the
danger of monopoly on the part of the holders have led to
an extension of public activity, and to the purchase of
waterworks by the municipalities. This tendency has been
clearly shown in the United Kingdom during the last
quarter of a century. Of the larger towns, London, Bristol,
and Newcastle only are supplied by private companies, and
the purchase of the London water-companies is already
debated. The receipts for water-supply by English local
bodies in 1887-8 were over ^"250,000. In the United States
there has been a like movement. Out of 135 towns of
above 10,000 inhabitants, 91 had municipal waterworks, the
remaining 44 being supplied by companies. Continental
cities also in many cases have acquired full charge of this
industry : this is true of Berlin, Paris, and Vienna, not to
mention smaller towns 1 .

The business of lighting has not as yet been so largely
entrusted to public agency, but several leading British
towns have acquired their gasworks ; Manchester, Birming-
ham and Leeds, Glasgow, Edinburgh and Belfast may be
mentioned as examples. The United States have hardly
entered on this branch of state industry. Philadelphia and
Richmond are the only important towns that have public
gasworks, and some smaller towns have public stores for
electric light. Most German cities own their gasworks,
while Paris is supplied by a privileged company l .

Drainage and the removal of refuse, as well as other
sanitary arrangements, are usually regarded as a public
function involving expense, though scientifically these
operations are on exactly the same plane as the supply of
water and light, and might be carried on as a private
business ; but in practice, as the service is a general one, its
cost is defrayed from taxation.

The actually existing forms of these public industries,
and the line of development that they are following, are
easily explicable. The rapid increase of public waterworks
is due to the great importance of a pure supply of that
necessary, to the large quantity of it that is required for
public purposes, and finally to the absence of invention in the
industry. Lighting, while it possesses some of the features
just mentioned, is very different in the last respect. Until
the contest between gas and electric-lighting is closed, the
acquisition of either of these industries will be a financial
risk that no prudent body will care to incur 2 .

6. Without dwelling on further details, or considering
the politico-social aspect of the movement, we need not
hesitate to say that a new public domain, yielding large
gross returns, has within the last fifty years become estab-
lished in most civilized States. The gas and waterworks of
the United Kingdom under municipal working give an
estimated yield of about ^"7,000,000, and the similar German
industries afford a considerable net return to the local
budgets. It is quite possible that in the next century such
industries will give substantial aid towards meeting the
heavy expenditure that town administration requires 3 .

On the other hand, there are some financial aspects of
the case which reduce this apparent gain to much more
moderate dimensions. The purchase or construction of the
needed public works has involved municipal governments
in heavy debt. Thus the latest returns of English munici-
palities show that forty-six leading towns had an outstand-
ing debt for waterworks of 28,000,000, while thirty-one
owed 10,330,000 for their gasworks ; further, that forty
towns had a debt of over 1,500,000 for market buildings.
Adding these figures together we get over 40,000,000 of
debt remaining, besides what has been already paid off.
According to the United States Census of 1880, about
29,000,000 of local indebtedness was incurred for water-
works. The cost of these loans has to be deducted from
the gross receipts of the industries before a full estimate of
their financial position can be made ; and though the actual
debt charge is enhanced by the sinking funds attached 1 ,
there is on the other side the cost of renewing the works
after a period. Another deduction has also to be made.
On the assumption that the different public industries were
left open to private enterprise, it would be possible to tax
their profits, or, as most of these industries are monopolies,
to levy a special charge on their gains. The right of sup-
plying a large city may be sold to a company or let for
a term of years, and the revenue thus obtained without
risk or trouble applied to the services of the municipality.
By granting a long period, with the ultimate reversion to
the local governing body, a large revenue would be pro-
vided for the future, and the difficulties of public manage-
ment escaped.

As in the case of mines and their products, any excessive
charge for municipal services must be regarded as taxation.
The profit of capital expended on public works is a part of
the earnings or industrial receipts ; so is any further amount
gained by the low interest at which well-managed towns
can borrow, or the savings that monopoly, with the con-
sequent check to waste in competition, may cause ; but any
additional charge for the supply of water, gas, or other
services is in fact a tax on the consumers or users of that
service \ We have noticed before this mingling of earnings
and taxes in public economy. Another financial evil may
possibly result from municipal industries. Instead of tax-
ing the consumers by heavy rates, the administrators may
reduce the charges below the profitable level, and so give
what is in fact a bounty on the commodity at the expense
of the tax-payers. Where the article is required by
the poorer members of the community the temptation to
adopt this course is very strong, but it really involves the
transfer of the industries so dealt with to the head of ex-
penditure ; from being a source of revenue they become a
charge on the municipal budget, and their development
only adds to the public burdens.

7. (ii) The second group of industries leads us back to
the Finance of the central power, and includes amongst its
ranks the best known and accepted of all state employments.
The Post Office has been regarded, even by the older
economists, as an exception to the general rule against
state interference in trade and industry. ' It is perhaps/
said Adam Smith, ' the only mercantile project which has
been successfully managed by, I believe, every sort of
government Y and his opinion has been accepted by all his
English followers, none but the extremest advocates of
state abstention ever questioning the public management
of this department.

State postal service originated in the claim of the
sovereign to monopolize whatever affairs closely affected
public interests, and in the need of communication between
officials. Its development has been the same in its general
features in all European countries. At first the service was
rendered by private persons, or by sKme specially privileged
body (e. g. in France the messengers of the University of
Paris), and was finally taken by the State, though in most
instances it was farmed out to a company.

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