- Historic Sites
The Controversial World Of
The Regulatory Agencies
April 1977 | Volume 28, Issue 3
Public economic regulation of the modern commission type emerged in response both to some of these private business efforts to evade competition, and to the problems of a few industries that tended toward “natural monopoly.” Imagine a city in which ten electric companies compete for the consumer’s dollar, just as grocery stores do. All ten could tear up the streets, run their lines into houses and business establishments, and march their transmission towers across the local landscape. Or imagine a pair of small nineteenth-century cities connected by twenty different railroad tracks laid down by competing rail corporations. None of the railroads would get enough freight to make a profit, and most of them would soon go bankrupt. These industries, and a few others like them, have the peculiar character of being more efficient under monopolistic conditions because their economies of scale are so large. It takes an immense amount of money just to go into the railroad or utility business. But once the tracks are laid, or the lines strung, it costs relatively little more to carry additional freight, or to transmit additional current. Thus the cost of doing a lot of business is not much more than the cost of doing a little.
On the other hand, with just one railroad serving a city, or just one electric company, the consumer can no longer buy from a competitor if he is not satisfied with the service. He either buys from the electric company or he goes without electricity. As modern technology made certain fingers of Adam Smith’s invisible hand arthritic, some new means of regulating natural monopoly industries had to be found. In part, regulatory agencies first appeared as a surrogate for competition, a substitute for the lost discipline of the Smithian market.
Commissions were the characteristic American solution to the problem, but they were by no means the only possible alternatives. In many European nations, even those with capitalist economies, the state often went into business for itself. The publicly owned Prussian railways, for example, were an international model of efficiency. To this day, many transportation and electric utility enterprises abroad are publicly owned—and so are a few in the U.S. But in nineteenth-century America, public ownership seldom struck policy makers as the best solution to the problem of natural monopoly. For one thing, it smacked of socialism, though this argument belonged more to the twentieth century than to the nineteenth. Secondly, the Founding Fathers had deliberately designed a somewhat inefficient, cumbersome, tripartite government so as to check the accumulation of absolute power often found in European governments. Then too, the federal system of overlapping state and national spheres of influence made the American context much more complicated. And finally, widespread political corruption during the Gilded Age made public ownership seem the one method least likely to succeed in practice, even though it made the best sense as a proposition in logic. As Charles Francis Adams, Jr., remarked in 1867, “One might imagine the glee of the New York ‘rings’ and bar-room politicians on hearing that the Hudson River [Railroad] or the Erie road was to be given over to their pure hands and tender mercies. …”
Adams, grandson of one President and great-grandson of another, was an expert on railroads and a leading advocate of their regulation by commission. In 1869, owing largely to his voluminous writings and quiet lobbying at the State House, the Massachusetts legislature created a state Board of Railroad Commissioners. The governor appointed the 34-year-old Civil War veteran to one of three board positions. Adams set about his work with the dedication that had already distinguished his family’s contributions to public life for four generations. His method, again characteristic of his family, was to persuade by reasoned argument rather than coercion. He sought to show through careful analysis how the interests of the railroads could harmonize with “the public interest.” Throughout his decade of service on the Massachusetts board, he spent at least half his time simply studying the railroad problem, and writing about it. “Busy in my usual way,” notes one of his diary entries for 1870, “that is with my pen.”
Adams’ unusual emphasis on what might be termed regulation by publication accorded not only with his own talents, but with the state government’s notions of how best to deal with the natural monopoly question. The commission regulated not through lawsuits and other legal proceedings, but through suggestion and the cultivation of public opinion. “The board of commissioners,” observed Adams, “was set up as a sort of lens by means of which the otherwise scattered rays of public opinion could be concentrated to a focus and brought to bear upon a given point.” Of course, behind the carrot of the board’s gentle reasoning stood the stick of legislative power. The legislature of Massachusetts customarily followed the commission’s recommendations for new laws, and itself continued to attend carefully to the state’s railroad policy.
Adams’ avoidance of coercion and adversary proceedings worked well for that state and that time. Moreover, the investigatory function continued to have an important role in regulatory practice in the future, both for the states and in the federal government. It did not, however, provide a complete solution to all the problems that regulators encountered in other periods and for other industries.