Ed. Note: When I was in a bank training program in Houston in 1979 (age 24), I wrote a letter to Senator Phil Gramm very critical of his stance on federal railroad regulation. I picked up the ringing phone a few workdays later to the words ‘This is Phil Gramm…’ Shocking! So with adrenalin going, I answered his letter back to me with an in-depth explanation of my view, which Murray Rothbard published in The Libertarian Forum, July – August, 1980. This was one of my earliest publications and first thoughts on public utility regulation (which have changed little in the last 45 years).
Introduction: Murray N. Rothbard
When Professor Dr. W. Phillip Gramm, an eloquent and hard-hitting champion of free-market economics, was elected to Congress from the 6th district of Texas, many people thought that Congressman “Phil” Gramm (as he was promptly renamed) would be a mighty force for liberty and the rollback of the State. But this seems to be the season for libertarian sellout, and Representative Gramm has been anything but.
When Gramm managed to gut a powerful drive for railroad deregulation in order to subsidize Texas coal producers, Texas businessman, Austrian economist, and libertarian, Robert Bradley, Jr., took him to task. There followed the full reply of Congressman Gramm and the eloquent rebuttal of Rob Bradley. One of the most interesting aspects of Congressman Gramm’s self-serving reply is that he is taking the now standard line of libertarian sellout: I of course am for complete liberty, but …”
The “but” in this case, as in most others, is that some people and some businesses might have to suffer in the short-run if liberty, or in this case total railroad deregulation, is to be achieved. Those people living off the public trough, living off the taxpayers and consumers, are going to be temporarily discomfited. The question then is? Are we going to postpone getting liberty into parasitically in the style to which they have been accustomed? Or are we going to press on for the cause of liberty and prosperity regardless of inconveniences?
Liberty is not always a rose garden – especially for the existing ruling class and those living off the State. The political temptation is to forget principles, and this is what congressman Gramm has done, perhaps helping to scuttle railroad deregulation altogether. These are the eternal temptations of politics: to abandon principle for the politically expedient; that is, to continue the politicians own perks in office.
Gramm Response
Dear Mr. Bradley,
Thank you for writing to let me know of your dissatisfaction with my vote in support of Congressman Eckhardt’s amendment to the Rail Act of 1980.
As an economist who is firmly committed to competition and free trade, I can understand your view that Congressman Eckhardt’s proposed amendment would be anti-competitive and would continue the federal over-regulation of the railroad industry that has crippled that industry. However, the Rail Act raises questions that are more complex than simply whether regulation is desirable or undesirable, a question about which you and I would have few disagreements.
The present condition of this nation’s railroads results from market forces and government regulations that have their roots in the 1920’s when mass production of automobiles first began to threaten the railroads’ domination of transportation in this country. If we are to again have a vital rail industry, as I believe we must, Congress must act carefully to begin reintroducing competition in the railroad industry while preventing cold water shock treatments that could cause destructive market perturbabtions.
In particular, the coal producers in Texas and neighboring states have become dependent of rail transportation provided at artificially low rates. Many of these producers have no options other than to ship coal on a single available rail line because competition exists neither from other rail lines nor from other modes of transportation.
To give the railroads excessive freedom to raise rail rates to such “captive” shippers would create massive dislocations in the coal industry, dislocations that would reverberate throughout the economy of Texas and the economies of states that depend on Texas coal.
I supported Congressman Eckhardt’s amendment and I will support similar efforts that may be introduced when the House reconvenes July 21 because I believe these efforts provide constructive progress toward complete deregulation of the railroad industry while preventing short-term problems that would benefit neither the railroads nor the shippers who depend on the railroads.
I appreciate having the opportunity to represent you and other Texans in Congress. If I can be of service to you, please contact me.
Yours respectfully, Phil Gramm, Member of Congress
Bradley Rejoinder
Dear Dr. Gramm:
I thank you for the explanatory letter dated July 16. Your letter certainly had a better tone than mine, but I am very sensitive about economists-turned-politicians, i.e., those who know better, selling out the market in favor of personal goals. Perhaps you can avoid this criticism since the “Chicago School” brand of market economics, from the writings of its founder, Henry Simons, to its doyen, Milton Friedman, has stressed instances of “market failure” and government “correction” as you claim is the case concerning railroad deregulation. However, many economists of this persuasion – Harold Demsetz [1] for one – have in recent years abandoned this textbook view in favor of the unhampered market. Some of the cogent arguments that have changed their minds I will attempt to present below.
As I understand your position, you wish to avoid the “cold water shock treatments” of total deregulation of the railroads by retaining the Interstate Commerce Commission’s power to regulate rail rates. This stance has your support since “coal producers in Texas and neighboring states have become dependent on rail transportation provided at artificially low rates” as have the electric utilities and their consumers, and to allow a location monopolist rate freedom would “create massive dislocations” for both the producers and ultimate consumers of the coal.
Further, I have learned from a recent Houston Post article that you, along with fellow Representative Jim Wright, are proposing government loan guarantees for a new railroad to operate in the Powder River Basin to “increase” competition. [2]
Before I embark on a critique of the regulation your support, I ask how you can boast of “constructive progress toward complete deregulation” when the basic business decision of rate setting is left in the hands of bureaucrats? According to the Post article cited above, proponents of deregulation bill will have to be “gutted”. And, certainly, if you wish to launch a “private” railroad with government subsidy, the entire industry will that much more be in the hands of the State.
A number of eminent free market economists have brought forth an impressive case against government regulation of “natural monopolies” which I bring to your attention.
First of all there exists no scientific procedure of discovering what the “right” price should be. Or in Kirzner’ words: “…what is the likelihood that government officials, with the best of intentions, will know what imposed prices, say, might evoke the ‘correct’ desired actions by market participants?’” [3] After all what is “right” for the railroad company, given its costs, capital requirements and risk, may not be “right” for the producers and consumers of the coal. For, conceding the subjective nature of value, only the market process can balance – in a non-haphazard manner – the forces of supply and demand. Summarizes Mises:
Prices are a market phenomenon. They are generated by the market process and are the pith of the market economy. There is no such thing as prices outside of the market. Prices cannot be constructed synthetically, as it were. They are the resultant of a certain constellation of market data, of actions and reactions of the members of a market society. [4]
Therefore, if the “right” price cannot be found, then the decided upon price from a market standpoint is either too high – thus punishing the consumers and producers of coal – or too low – thus undermining the capital requirements of the railroad. In the latter case, this could mean higher future railroad rates from capital disrepair.
Computing an “average rate of return” for the railroad to add to its cost is not an escape in this regard. There is nothing normal about the disequilibrium phenomenon of profits and nothing homogeneous about returns industry to industry and firm to firm with industries. And the cost side of the “cost plus” equation is not objective but subjective as James Buchanan has recently taught the profession, further muddling the government allowable price calculation. [5]
But let us step back and realize that Godlike creatures and value-free econometricians are not in charge of such price determination, as if they could find the “best” price in the situation. The forces at work are bureaucrats and special interest lobbyists – persons having judgment-distorting elements such as personal biases, emotional tendencies, political favoritism, career biases and corruption avenues. And certainly the entire lobbying and testimonial effort is a cost for all parties involved, parties who believe they can costlessly cheapen the market price of railroad services.
So, in all, not only do we see that scientifically a bureaucracy cannot find the “right” price, but the worst forces will be at work to decide such a price. So much for the textbook correction of market “failure”, in spite of the history of bureaucratic and ICC pricing.
Another line of argument against your position has been receiving wide attention in recent years, specifically since Kirzner’s 1975 Competition and Entrepreneurship. His argument demonstrates the fundamental weakness of equilibrium neoclassical theory in judging market “failure” or “imperfection” – from which you textbook reasoning is derived. The argument is that the government regulation of prices retards the consumer benefits that in the absence of such regulation would accrue from uninhibited entrepreneurship. (In equilibrium, of course, the entrepreneur does not exist.)
This is true since, as Kirzner puts it, “nothing in the course of the regulatory process suggests a tendency for as yet unperceived opportunities of resource allocation improvement to be discovered.” [6] To be more specific, in any “cost plus” regulatory environment, entrepreneurial alertness to new methods to minimize costs and service innovations to maximize revenue is stifled though, of course, not entirely eliminated as under socialism. This is very much a cost for the coal parties that economists cannot ignore.
The third line of argument is one you have undoubtedly taught many times in your academic career: the problem of non-market pricing on resource allocation in general. The “artificially low price” you admit exists creates an overutilization of coal and underutilization of coal and transportation substitutes (such as nuclear power and pipeline fuels). These are further costs or your regulatory stand.
In all, the above drawbacks of regulation counter the supposed “massive relocations” of deregulation. In sum, they offer a supportable case for the free market unless (1) an economist rests his case on the first approximations of equilibrium theory to the exclusion of the real world of disequilibrium and bureaucratic realities or (2) a politician rests his case on the special interests of his district. But utilitarian arguments pro and con aside, are you, Dr. Gramm, a true lover of liberty? Do you support the market only when you are convinced it will produce “umpteen more bathtubs: as Murray Rothbard puts it?
To end this open letter, unless you can convince me that:
- Bureaucratic pricing is “costless” and a better alternative to market pricing;
- Entrepreneurship – particularly in the cost minimization sense – is not inhibited by price regulation;
- Resource allocation is satisfactory with an “artificially low” price;
- Ultimate deregulation, your alleged goal, is helped by continued regulation; and
- The market and individual freedom to exchange on non-coercive terms are not to be valued for their own sake; then,
I – and all true free market economists and libertarians, many of whom will read this letter – call on you to renounce your claim as “an economist who is firmly committed to competition and free trade”. Having repudiated this noble claim, you, I am sure, will continue to do fine in the political arena. However, future historians will remember you as not only destroying legislation that would have been a rare victory for the market in this day and age, but as one of the many who destroyed the market economy in the twentieth century.
Revise your stand immediately and use your influence to tilt the close vote toward passage! The legislature, after all, is still in session. And please, write me such a letter if I were to ever put politics and personal gain over liberty!
Sincerely yours, Rob Bradley, Jr.
Footnotes:
- For example, see his “Why Regulate Utilities?” in Yale Brozen, ed., The Competitive Economy (Morristown, J. J.; General Learning Press. 1975) for sophisticated arguments explaining competition with so-called location monopoly instances.
- “House’s OK of rail decontrol amendment may spell end of measure of this session”, The Houston Post, July 25, 1980, 1-A.
- Kirzner, “The Perils of Regulation: A Market-Process Approach”, Law and Economics Center Occasional Paper, The University of Miami (1978), p. 15.
- Mises, Human Action (New Haven: Yale University Press, 1949), p. 395.
- See Buchanan’s Cost and Choice (Chicago: Markham, 1969).
- Kirzner, op. cit., p. 16.
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