The United States stands poised on the brink of a new era in the exploitation of space. The Space Shuttle—scheduled for a first launch before the end of the year—will usher in routine, low-cost transportation into earth orbit and back. The technology now exists to develop permanent, manned space installations—factories, power plants, colonies—making for what G. Harry Stine has called the "third industrial revolution." Moreover, many of these activities are starting to look not just feasible but potentially profitable as well.
Nevertheless, most space-industrialization enthusiasts base their expectations and projections on continued—even expanded—government funding. Though many of these people are otherwise ardent free-enterprisers, they argue strongly for government involvement, to reduce the risks and speed the pace of space industrialization. And the specter of government red tape and control? Mostly they soft-pedal it or hope that, as long as their people are involved in the planning, it won't be too damaging.
The whole drama has a strangely familiar ring to a student of technological history. The industrialization of space is hardly the first instance of a set of technological developments coming of age. Nor is it the first case of a technology's enthusiasts promoting government assistance.
In the past 150 years we have witnessed a number of other commercializations of technology, including the development of the railroads, mass production of automobiles, development of the telephone system, creation of commercial radio and TV broadcasting, and the introduction of nuclear electric-power plants.
In each of these cases the industry in question called on the federal government to play what it considered a crucial role in fostering the industry's development. And in each case, this federal assistance had both benefits and costs. The ostensible benefits—the successful commercialization of the technology and establishment of a viable industry—are quite familiar. Less appreciated are the costs, mainly long-term, which accompanied the assistance.
WORKING ON THE RAILROADS Government was involved in railroad building, for example, virtually from the start. From the 1830s to the 1850s, state and local governments, anxious to improve products' access to markets and to increase land values, invested heavily in early railway companies. Two-thirds of the Pennsylvania Railroad's 1852 capitalization of $10 million had come from local governments over the years. In the 1830s Ohio adopted a law committing the state to furnish one-third of the capital for any railroad company in the state. Besides subsidies and loans, states frequently granted railroads charters, monopoly privileges, the power of eminent domain, and in some cases exemption from taxes. In the 1850s the federal government began to subsidize railroad construction, especially the projects for transcontinental lines. The government made land grants, issued loans, and guaranteed private loans.
By the 1870s, the era of extensive railroad building had ended, and a period of intense competition ensued. Railroads attempted various agreements to restrict competition, but none proved effective for more than a short time. Over a period of years, therefore, railroad officials lobbied for federal regulation to accomplish what private agreements could not. The result was passage in 1887 of the Interstate Commerce Act. This legislation in effect cartelized the railroad industry and set up the Interstate Commerce Commission as administrator of the cartel.
Between 1887 and 1920 the railroads did relatively well as a cartelized industry. But all during those years, new amendments and regulations kept being added, gradually increasing the extent of ICC control and cutting into the authority of railroad management to run their own business. The Transportation Act of 1920 was the culmination of this process, imposing much more stringent restrictions on railroad finance, pricing, and service.All key railroad management decisions became subject to ICC approval. The railroads were virtually nationalized, in all but name.
What have been the results of 150 years of government involvement? The initial subsidies, loans, and land grants produced substantial overbuilding, leading to many financial debacles. Numerous uneconomical companies and routes came into being, only to suffer bankruptcy or merger into larger, cumbersome systems. Government regulation initially helped company profits, by halting the long-term downward trend of rates—a dubious benefit to consumers but a usual consequence of cartelization. The creation of the ICC and subsequent regulations also helped freeze the then-existing pattern of routes and companies, preventing the emergence of more-efficient systems, such as transcontinental railroad companies.
In the 20th century the progressively tightened grip of the ICC has come close to strangling the railroads. Their financial ill health is known to all. Decades of "deferred maintenance" are gradually taking their toll. The government take-over of bankrupt Penn Central extended to over a dozen railroads before it was completed. And the deficits of Amtrak and Conrail keep setting new records.
What if the government had not intervened? Would we have no railroads today? Hardly. The rate of initial construction would have been slower, with investors having to be convinced of the soundness of each venture. Fewer uneconomical lines would have been built, and competition would have weeded out more of the marginal firms. Today we would very likely have several competing transcontinental railroads and a host of specialized short lines. Unit trains and piggyback freight service would be far more extensive, and innovations like Auto-Train would probably have occurred on a much wider scale.
PAVING THE WAY Another area of transportation—the auto industry—has also come in for government subsidy. It is not, of course, the production of automobiles that has been aided. Rather, local, state, and federal governments have provided an extensive and continuing subsidy in the form of paved roads. Prior to the development of the automobile, roads were relatively simple and inexpensive. Except in cities and towns, where brick was sometimes used, most roads were topped with little more than dirt and were built largely by clearing the land and filling in holes. Many roads were privately constructed, including a great number of "turnpike" toll roads in the first half of the 1800s.
The advent of the automobile changed all that. Cars, and especially trucks, required paved roads, and these were far more expensive. The auto industry and automobile owners' associations vigorously promoted the idea that state and federal governments should build paved roads and that the State's coercive power of eminent domain should be used to obtain the land. As more and more people began to purchase cars, these arguments received wider acceptance, and the concept of "free public roads" took on a new, more expensive meaning: instead of referring to freedom of access, the word "free" came to mean "without charge." To be sure, the gasoline tax and the highway trust fund did result in users paying, indirectly, for much of the direct cost of road construction. But these indirect payments are not at all related to the cost of road use by individual users. And, in any case, people think of road use as a "free" good.
With what result? The separation of road use from direct payment has led, in the view of many economists, to a massive overuse of roads, especially during rush hour. A perceived price of zero leads to a virtually infinite demand on the urban freeway system. Economists also note that government roads impose on their surroundings many externalities, such as noise and air pollution, whose costs are not counted. And land-acquisition costs are frequently understated, since the land is secured by eminent domain.
In the absence of these direct and indirect subsidies, what kind of auto use and road system might we have today? If the government had never condemned land and paved roads, it is quite possible that America would not be the automobile-dominated society that it is today. To be sure, the inherent flexibility of the private automobile is so great that its popularity would still be high, even if users had to pay, directly and in full, for paved roads. But several important aspects would very likely be different.
Highways would all be toll roads and would probably be fewer in number. Most of the freight that now moves by long-distance truck would be carried by rail, at substantial energy and cost savings. There would be roads designed only for automobiles and charging lower tolls than the much more costly roads designed to take truck traffic. In urban areas, the trolley lines of the 1920s and '30s might not have been buried under concrete. Instead, they would have undergone a technological evolution into modern, light-weight, computer-controlled transit systems. Buses, taxis, and jitneys, paying monthly or annual fees for the use of roads, would serve downtown areas. With the coming of computer technology, sophisticated urban expressway metering systems, like those proposed by William Vickrey of Columbia University, would have come into existence. Such a system, consisting of roadside sensors capable of recording the passage of specific vehicles, tied in to a central computer for billing, would permit the expressway (not freeway) owner to charge tolls that varied in accordance with demand, thereby greatly reducing congestion and motivating car pooling. In short, without road subsidies America would be much less of an auto-dependent society.
DIALING FOR DOLLARS Despite the extensive patent protection obtained by the Bell Telephone Company, the early telephone industry was characterized by wide-ranging competition. For the first 30 years following Bell's 1876 prototype, numerous firms entered the telephone business, and many succeeded. Many cities had two or more competing telephone companies, often not interconnected. Despite Bell's efforts to buy up competitors, by 1907 there were nearly as many phones provided by independents as the three million provided by Bell.
Clearly, efficient nationwide telephone service required interconnection and standardization, but the question was, how best to bring this about—by means of the marketplace or via government decree? The government route was the one taken. Financier J.P. Morgan took the lead role in pushing for consolidation. To achieve his goal of a single nationwide system, he brought Bell pioneer Theodore Vail out of retirement to head AT&T. Vail proceeded to implement the goal of "one policy, one system, universal service." The two key elements in his campaign were the creation of state public utility commissions that would grant telephone monopoly franchises and then regulate the rates charged and the creation of a similar federal regulatory apparatus for interstate operations. The Vail plan succeeded rapidly; commissions were set up in most of the states within a decade, and the federal government brought telephone and telegraph companies under ICC regulation in 1910. They were given their own regulatory agency with the passage of the Communications Act of 1934, which set up the Federal Communications Commission.
Under state PUC and FCC regulation, we have gained a technically sound telephone system. But the system—and its various franchised companies—has fallen behind technologically, offering far less capability and in many cases charging far higher rates than current technology makes possible. It is only in the last 10 years that the FCC has begun to allow limited competition—in both the end-user equipment market and in long-distance transmission. True, specific telephone companies holding exclusive franchises have prospered under the government's wing. But consumers have been denied many of the benefits of advanced technology that have been available in other areas of the market—in electronics and data processing, for example.
What might today's telephone system be like if the industry had not obtained government help and protection? It's not likely that there would be duplicate sets of phone lines in our cities—economic considerations would probably have ended that aspect of competition. Yet many other types of competition would probably have blossomed.
Right from the start there would likely have been competition in long-distance transmission—much as there has been in railroading, with different firms laying out different cross-country routes. Certainly, in the absence of FCC prohibition, long-distance microwave transmission companies would have come into their own long before the 1970s, providing vigorous competitive service for both voice and data. And satellite transmission of long-distance communications would have made rooftop antenna service—like Satellite Business Systems is only now gearing up for—a reality by the late 1960s or early '70s. In fact, commercial investment in communications satellites would very likely have been far greater, and sooner, had long-distance communications not been virtually monopolized by one company anxious to protect its massive investment in cable facilities. Instead of springing to life very belatedly in the 1960s, competition in providing end-user equipment would have grown up along with the industry, giving consumers and businesses a far wider range of PBXs, terminals, and special-purpose telephones.
What about standardization in the absence of regulatory control? Oddly enough, the railroads achieved nationwide standardization of track gauge long before they were federally regulated, simply because universal interconnection made good economic sense. And the railroads—again on their own—developed the idea of time zones and nationwide standard time. The machine-tool industry likewise developed standardized screw threads. There is every reason to think the telephone industry would have been farsighted enough to do similarly.
RIDING THE AIR WAVES Commercial radio broadcasting began in 1920, and by 1922 there were 564 broadcasting stations in the United States. Because no law provided for assigning property rights in specific radio frequencies, chaos was the order of the day during this early period. Users of all types freely chose which frequencies to use, subject only to registering their use with the secretary of Commerce, under a 1912 law. Conflicts between users abounded, leading Commerce Secretary Hoover to call a series of Radio Conferences in the early '20s. The general thrust of these meetings was that the federal government should be empowered to allocate frequency use and at the same time to prevent any user from establishing property rights in any spectrum allocation. Legislation embodying these principles finally emerged in 1927, bringing into being the Federal Radio Commission. At the price of giving up any property rights to radio frequencies, and conceding control over the essentials of their business to a federal agency, broadcasters achieved order in their industry.
The rest of the history is well known. In 1934 the Federal Communications Commission was created, superseding the FRC and adding telephone and telegraph to its regulatory functions. Protected by the FCC, the radio broadcast industry became cautious, conservative, monopolistic—and very profitable. Television accentuated the pattern, with three powerful networks coming to dominate the industry. Growing adept at utilizing the FCC to their advantage, the networks successfully manipulated the commission into retarding the development of pay TV and cable TV. Nationwide programming for a mass audience demanded lowest-common-denominator program content in order to maximize market share. The result was the cultural "wasteland" bemoaned by critics in the 1960s and still with us today—along with an FCC that continually engages in implicit and explicit censorship of a kind that would never be tolerated in the print media.
How might radio and TV have developed in the absence of the FCC? Interference between spectrum users had to be prevented somehow, but the normal mechanism for resolving such conflicts over the use of a limited resource—for example, downtown land—is a legal system that provides for the protection of property rights. If, instead of creating the FRC, Congress had defined property rights in the electromagnetic spectrum, and made them fully transferable in the market and enforceable in the courts, there would have been no need for an administrative body with vast powers to control the shape of the industry.
Consequently, there would have been no way for the present monolithic network structure to remain the dominant pattern in the industry—if it had come into existence to begin with. Cable-TV technology and more-aggressive development of UHF would have led to a vast expansion in the number of channels and the type and diversity of programming. Cable today would be in virtually every home in urban areas, offering specialized pay-TV programs catering to hundreds of special-interest markets, much as magazines do today. Two-way, interactive cable would already be a widespread reality. Many fortunes would have been made outside the narrow realm of mass-market broadcast TV. And consumers would be far and away the ultimate beneficiaries.
PUSHING THE ATOM In nuclear power we find an industry which, once again, has come to its present size and prominence primarily with government assistance. In this case, however, the industry itself is largely a government creation, rather than being an independent sector that sought out government protection.
After World War II the federal government, possibly reflecting pangs of conscience over the use of atomic weapons against Japan, decided to promote the development of the "peaceful atom." After laying out billions of dollars, the government announced in 1954 that the technology for nuclear electric-power production was ready for commercialization. Congress passed the Atomic Energy Act of 1954, permitting private utilities to take part in atomic power development by giving them access to the Atomic Energy Commission's heretofore classified technology.
Unfortunately, despite extensive R&D efforts, the insurance industry considered the potential risks of nuclear accidents too great and refused to write third-party liability insurance for nuclear power plants. Congress therefore passed the 1957 Price-Anderson Indemnity Act, making the taxpayers liable for any large-scale nuclear accident. With this cushion, the insurance industry then made available $60 million per reactor in conventional liability coverage.
Despite both the R&D subsidies and federal insurance coverage, the growth of commercial nuclear power has been halting and uncertain. A 1977 study by the Rand Corporation concluded that if it had not been for the quadrupling of oil prices by OPEC, nuclear power plants would still not be competitive with fossil-fuel plants. What seems to have happened is that governmental efforts have pushed high-cost nuclear technology onto the marketplace before the market really called for it. Decades of AEC public-relations efforts misled both the public and the power industry into expecting too much, too soon, of a very complex, costly (but nonetheless worthwhile) technology. This made for fiascos like Westinghouse overextending itself in making commitments to supply reactor buyers with uranium. Utilities believed their own PR that minimized the cost and complexity and maximized the ready availability of nuclear power plants. The AEC in the early years failed to appreciate the difficulties involved in such issues as nuclear waste disposal and glossed over them in public. As a result of all these factors, in the 1970s a massive public-opinion backlash set in, fanned and exploited by many with political or ideological axes to grind.
What if commercial nuclear power development had not been subsidized and its liability limited by the federal government? If, instead, the government had merely made available to the power industry the nonclassified results of its military reactor R&D programs? Some would say that we'd have no nuclear plants in operation today. And that might be true. More likely, I believe, is that industry would have conducted a lower-key R&D effort on its own, focusing far more attention on design and operational factors relating to reactor safety and waste disposal. Prototype reactors would have operated for many years, and commercialization might just about now be beginning—with enough operating experience and proven safety features to convince the insurance industry that reactors are insurable. Instead of a public backlash, there would probably be a wave of enthusiasm for nuclear power, which would now be viewed—along with solar power—as America's savior from the depredations of OPEC.
PERILS ABOUND In each of these cases of new technology being commercialized, the government played a major role. It sometimes provided heavy subsidies that encouraged investment well beyond what would have occurred at that stage with strictly private efforts. In the terminology of economists, such investments represent misallocations of resources—funds were transferred away from sectors where the market signaled that they could be more productively (profitably) used, to areas that were less, or not yet, productive. Such uneconomical investments are most evident in the cases of the railroads and nuclear power plants. In other instances government involvement served to determine the shape and structure of the industry, distorting it from what free-market forces would have produced and leading to its ultimate control by government. This was the fate of the telephone and broadcasting industries.
Government involvement has also led to serious social consequences, such as fuel-wasting transportation patterns, overdependence on the automobile, mind-numbing television programming, and a backlash against high-technology energy. In the case of the railroads, where government involvement has the longest history, we see an industry regulated into stagnation and decay.
Thus, possible perils in government intervention in the introduction of new technology include:
• premature, and therefore inefficient, investment of capital;
• eventual government control;
• adverse social consequences;
• stagnation of the industry;
• popular backlash due to the above and to government sponsorship and subsidy.
In no case did government involvement make possible the development of the industry. It may have speeded it up a little or altered its course somewhat. But in each case, the industry developed because it made economic sense, in and of itself. And the same applies to space industrialization.
COMMERCIALIZING SPACE Government involvement in space, except for military purposes, has heretofore been focused mainly in two directions: public-relations efforts (beating the Soviets to the moon), and scientific research. More than half of total NASA expenditures to date have been on Cold War PR efforts like the Apollo program. The bulk of its remaining funding has gone, not for commercial or industrial projects, but for scientific endeavors—astronomy, geophysics, planetary chemistry, etc. It is only within the last five years, with the development of the Space Shuttle, that NASA has begun to take commercial utilization of space seriously.
But even now there remains the question whether NASA really understands the world of profit-and-loss business. The Shuttle program is funded at several billion dollars per year and reflects NASA's Apollo-proven, gold-plated approach to system development. In sharp contrast is the modular launch vehicle being developed completely privately by OTRAG in West Germany (see REASON, July 1978). OTRAG , which made its first test launch in May 1977, has invested over $30 million to date and expects development costs to total only $400 million by the time its first low-earth-orbit booster is qualified in 1981. OTRAG is relying heavily on mass-produced, commercially available, off-the-shelf components to keep costs down. To minimize complexity, it has avoided using cryogenic fuels. Its booster design is totally modular, even having a separate microcomputer for each rocket motor.
The contrast between OTRAG and NASA speaks volumes about the difference between private industry and government. OTRAG is making design decisions on the basis of true cost-effectiveness. Without access to the taxpayers' wallets, it must demonstrate to its 600 private investors that it can design and build a launch vehicle that is simple, cheap, and reliable. It is engineers and cost analysts who have the ear of OTRAG's management, not scientists used to living at public expense. And that difference makes all the difference.
What has happened with NASA is similar to what happened with railroads and nuclear power. Enthusiasts for the new technology grew impatient with the cautious, cost-minded pace of commercialization and turned to government to speed things up. But as in those prior examples, government has devoted huge efforts to misallocating resources—playing Cold War macho games and being a patron of science—instead of taking space exploitation seriously as a business prospect. The result, already, is a large group of vested interests depending on ever-larger NASA budgets.
But the emergence of OTRAG indicates that a new era is about to begin. (OTRAG is the first, but by no means the only, private launch-vehicle effort; several others are already on the drawing boards.) For years the argument among space enthusiasts was that space industrialization is feasible; it's just that we need the government to fund the heavy start-up costs that private industry can't or won't cover. In other words, as with railroads and nuclear power, give the industry a push beyond what the private capital market views as justified. OTRAG's investors, however, reject the need for a governmental push. They expect to make a lot of money selling launch-vehicle services in the 1980s, and they want no government interference in reaping those profits.
What this should be telling us—and the General Electrics, IBMs, TRWs, and Boeings—is that we are already very close to the point where commercial space activities can pay for themselves. The markets for communications satellites and earth-resources-sensing satellites are themselves already well developed. Orbital materials processing and solar power production show immense potential. Do we really need government involvement to push these things along? And do we want to pay the long-term price this involvement will very probably entail?
No one can say for sure what these consequences would be. But based on the historical precedents, might we not anticipate:
• the emergence of government-franchised exclusive monopolies in solar power and communications satellites;
• manufacturing cartels in space-processing activities, owning the limited number of facilities made available on government-owned space stations;
• technological and economic stagnation in space transportation under the heavy hand of government regulation;
• unanticipated, adverse social consequences such as total government control of land use, farming, and population movements, based on remote-sensing data;
• a popular backlash against space industrialization, as an elitist rip-off of tax money for the benefit of wealthy industrialists and technocrats.
Is government help really worth such costs? Should the taxpayers really be asked to underwrite a commercially viable endeavor? Frankly, I don't think so. It would make far more sense to pay heed to the lessons of history.
Editor Robert Poole, Jr. holds two engineering degrees from MIT and spent seven years in the aerospace/defense industry. This article is adapted from a presentation at an American Astronautical Society conference, The Industrialization of Space.
This article originally appeared in print under the headline "Free Space!".