Competing with the Phone Company

The belief that telephone service is a natural monopoly dies hard; like many a liberal fairy-tale, it has been around so long that it is generally accepted without question. All of which makes particularly significant a pair of articles in the Spring 1969 issue of Law and Contemporary Problems. The first describes telephone service during the years 1893-1920: a period of unregulated competition. Notwithstanding high school textbook opinions to the contrary, the unregulated era was not a period of chaos, cutthroat competition, or hopeless overlapping of service. Rather, it was a period of rapid growth of the market, major technological advances, and increasing productivity. "Total factor productivity increased at an average annual rate during the period 1899-1909 which exceeded the average annual rate for any subsequent period." As for the level of service, "the independents introduced the dial system on a widespread basis, pushed telephone service into smaller communities and rural areas, and certainly contributed to lower prices."

By detailing the market structure and competitive behavior that prevailed in the unregulated period, the author lays to rest the claim that telephone service is inherently monopolistic. It was this claim, strongly promoted by the Bell System, that led to the eventual enforcement of a monopoly structure on the industry, and the resultant inefficiency, poorer quality, and higher cost of today's telephone system. The author sums up the piece thusly: "Telephone competition during the years 1893-1920 was neither inefficient nor costly, but was, on the contrary, productive of benefits sharply outweighing its costs…Dynamic technology may provide more effective control on communication rates and services than unaided regulation can supply."

The companion article considers the other end of the communications regulations dilemma—today's technology explosion in the field of digital (computer) data transmission. Today, he points out, we have an opportunity to avoid repeating the mistakes of the past, vis a vis the telephone system, by allowing competition to regulate the market, rather than governmental decree. The telephone system is hardly the optimum medium for transmitting digital data, yet so far the FCC has not (with one exception)—allowed companies with competing forms of transmission (eg, microwave) to set up common carrier systems. AT & T, Western Union, and Comsat are expending vast sums trying to convince the FCC to continue to uphold their monopolies. The author of this article—a dissenter to the pro-monopoly bias of the Rostow Task Force—eloquently summarizes the case for a free, competitive market in data transmission.

For further details see:
"The Early Competitive Era in Telephone Communication, 1893-1920," by Richard Gabel, Law and Contemporary Problems, Vol. 39, No. 2, Spring 1969, pp. 340-359, and "Common Carrier Regulation—The Silent Crisis" by Harry N. Trebing, Ibid, pp. 299-329

Creeping Capitalism

If you haven't already heard about it, check out the Sept. 1, 1970 issue of Forbes for the most libertarian cover story of the year. In a detailed report headlined "Creeping Capitalism" Forbes describes the growing trend towards private, competitive companies taking over such typical government functions as education, mass-transit, mail delivery, garbage collection, fire protection, and even police protection. Mass transit and garbage collection are areas which have only been in government hands for a short while; hence, their return to the marketplace is not especially noteworthy. But education, mail, police, and fire protection are another story, having been virtually government monopolies for as long as anyone can remember.

The first, halting steps toward marketplace education entail the "performance contract" concept. A number of firms, such as Westinghouse Learning Corp., Alpha Learning Systems, etc., are making contracts with local school boards, betting their profits that they can measurably improve students' progress at a lower cost than the school system. Over $8 million worth of such contracts were awarded this past fall. In postal service, the article focuses on American Courier Corp.'s airmail service for high-priority items (checks, vaccines, etc) too valuable to be trusted to the statist postal monopoly, and on the Independent Postal System of America (IPSA)—a delivery system for third-class mail with franchises in about 20 states.

The article's biggest surprises concern police and fire protection. While libertarian theorists have been arguing about the need for "alternative, free-market institutions," numerous capitalists have been out in the real world building such institutions. Already two out of every three police officers in the country work for private employers (which means they engage only in protection, not the enforcement of statist laws such as tax laws, draft laws, drug laws, etc). Forbes estimates that the private protection market totaled $1.6 billion in 1969, not including some $400 million for alarm systems. In the Scottsdale, Arizona area, businessman Lou Witzeman's Rural Metropolitan Fire Protection Company provides fire fighting services to some 100,000 people, over 400 square miles of territory. Witzeman's company provides fire protection for an average of $3.50 per capita, compared with the $15-$20 per capita cost of government fire departments in cities of comparable size.

As Forbes points out, "giant bureaucracies lack the discipline imposed by the profit motive. Can they deliver the services in an acceptably efficient manner in our confused and complex society? Can the police any longer really police, the educators educate? Even the liberals, traditional advocates of big government, are beginning to wonder whether private enterprise may not be able to do a better job than government. They are becoming advocates of creeping capitalism…One thing is certain: for better or for worse, the century-old trend for steadily-increasing government—provided service has about run its course."

For further details see:
Forbes, Sept. 1, 1970, pp. 22-27.