Was the farmers’ discontent due to:

• Financial scandal?• Bribery and political scandal?• Monopoly and economic price discrimination?• Falling farm prices?• The tariff?• Inadequate money supply?

All of the above; some of the above; none of the above?

Riddle of the Sphinx

What is it that is of one voice, and walks on four legs in the morning, two legs at noon, and three legs in the evening?

Image: Britannica Online, http://208.154.71.60/bcom/eb/article/single_image/0,5716,14660+asmbly%5Fid,00.html

How is it that in an age of apparent Plenty, an age of “material greatness”, farmers and laborers could face such “wide-spread impoverishment”?

They [our forefathers] believed in a supposed law of supply and demand powerful enough to secure to the farmer and the laborer the just rewards of their toil. (R of the S, p. 49)

S

D

Q

P

Is supply and demand broken?

Yes

and No

Cradling wheat near Sperryville, Virginia. A hand binder follows the mower. These men had never heard of a combine harvester. "Sure would like to see that." Their father used a reap hook.

Suggested credit Line: Library of Congress, Prints & Photographs Division, FSA-OWI Collection, [reproduction number, e.g., LC-USF35-1326]

Land-grant colleges taught “scientific farming”.

View of man driving three-horse team led reaper and another man bundling cut rye probably somewhere in Routt County, Colorado reached via Denver & Salt Lake Railroad (formerly Denver, Northwestern & Pacific), Moffat Road; man holding whip to drive horses.

Western History/Genealogy Department, Denver Public Library

View of agricultural machinery on Montgomey (Montgomery?) farm, in (probably) Colorado; shows horse-drawn wheat thresher, men, and a tractor. Western History/Genealogy Department, Denver Public Library

Complete view of threshing operation, Wilmont Farm, Colorado; shows machinery needed to run thresher, mule-drawn wagon with crop piled high awaiting threshing, partially emptied wagon with crop being placed into thresher, and horse-drawn wagon being filled with threshed crop in burlap sacks. Cut field is in foreground.

Western History/Genealogy Department, Denver Public Library http://www.loc.gov

Quantity

Price

Long term (interrupted) supply trend

Long term demand trend

Was the farmers’ discontent due to:

• Financial scandal?• Bribery and political scandal?• Monopoly and economic price discrimination?• Falling farm prices?• The tariff?• Inadequate money supply?

All of the above; some of the above; none of the above?

All of the above!

We will return to questions of MONOPOLY

andMONOPSONY

In the next section.

Now consider how REGULATIONwas designed to work

Wayland and Chapin

Railroads: (pp. 387-389)

1. A creature of the state - chartered and financed

2. An agent of the state - “affected with a public interest”

3. A practical monopoly - “The private enterprise which undertakes, as an agent of the State, to perform the service named, is entitled to a just compensation…. But it is evidently liable to abuse. The government has need therefore, to subject the business to reasonable conditions and to retain such power over it as to guard the public against oppression.”

Note the discussion of external benefits at 390ff.

Munn v. Illinois

The legality of government regulation was not assured by the Constitution.

In fact, the constitutionality of an 1871 Illinois law establishing rate (price) regulation was challenged, and affirmed by the Supreme Court in 1877 in the case Munn v. Illinois.

Munn v. Illinois

The case involved a question of whether the state of Illinois could regulate the prices charged by a grain elevator, or whether such price regulation violated the 14th amendment to the Constitution, which prohibits any state from depriving "any person of life, liberty, or property, without due process of law... ."

In Munn, the Court decided that in certain industries "affected with a public interest," such regulation was legal.

In Munn, the Court decided that in certain industries "affected with a public interest," such regulation was legal.

Munn v. Illinois

The phrase "affected with a public interest" refers to businesses, often natural monopolies, which provide some essential service, for which there are no substitutes. Transportation, communication, and utility industries fall into this category.

Grain elevator, Creston, Iowa. July 2000 © J. D. Klein

Price Regulation

Price and Entry regulation

Railroads* ICC; STBTrucks* ICCPipelines ICCBuses* ICCAirlines* CAB; Electricity* FPC; FERCNatural gas* FPC; FERCNuclear energy AEC; NRCRadio* FCCTelevision FCCSecurities* SECBanks* FDIC; FRB; Treasury

* Deregulated, at least in part

Rate of Return Regulation

r = Allowed rate of returnp = Price of output set by the regulatorsQ = Quantity of output soldw = wage rate (or in general, input price)L = labor input (or in general, variable inputs)K = value of invested capital

r = pQ - wL K

pQ = wL + rK

See Worksheet on rate-of-return regulation, on Reading List

Rate of Return Regulation

1. the level of operating (variable) costs (wL)

2. the value of invested capital (K) (Should K be evaluated at historical or replacement cost? How do you measure replacement cost? What about construction work in progress--CWIP?)

3. the fair rate of return, ( r )

4. the relationship between p and Q (In economic terms, what is the elasticity of demand; in legal terms, how much restriction in output will occur if prices are allowed to rise? What will happen to overall revenues?)

r = pQ - wL K ISSUES

Did Regulation Work?

Entry was controlled – to allow firms to achieve economies of scale (?)

Firms were forced to be profitable, for better or worse. (Important for banks, airlines especially?)

Some efficiencies were probably lost (Rail/truck; telephone; conceding to wage demands)

“Capture Theory” of Regulation

Source: Moore, Regulation Magazine, v. 18, no. 2

During the recessions of 1973-1981, people looked for something to blame – and some regulation had outgrown its usefulness.

Regulation and Deregulation

Railroads and Trucks and Busses - 4R, 1976, Staggers, 1980, ICC gone

Airlines - Kahn and the end of the CAB, 1938-1978

Natural Gas - ending distortions of the energy crisis

Electricity – PURPA, 1978; Energy Policy Act of 1992

Telecommunications - AT&T Settlement; 1996 Act

Cable Television, deregulated, re-regulated in 1980s

Banking and Securities - Glass Steagall, 1933-1999

Economics of Deregulation

Regulation was needed because industries were: -Natural monopolies-Affected with a public interest

What could change?- Technological change- Growth in Demand- Invention of new substitutes

Economics of DeregulationWhat could change?

- Technological change

Quantity

DollarsperUnit

Average Cost 1

Average Cost 2Combined Cycle Gas Turbine power planthttp://www.btwebworld.com/northlincs/nthlincs/power.htm

Economics of DeregulationWhat could change?

- Growth in Demand

Quantity

DollarsperUnit

Average Cost

Demand, 1876

Demand, 1976

Economics of Deregulation

What could change?- Invention of new substitutes

Quantity

DollarsperUnit

RailroadAverage Cost

Economics of Deregulation

Deregulation has produced some efficiencies:

Hub-and-spoke system for airlines; package deliveries

Freer entry (airlines, mail, electric power)

Inter-modal shipping (rail-truck)

Full service financial vendors (although increased risk and size)

Economics of Deregulation

But deregulation has not always worked perfectly:

Cable TV rates

California electricity shortage

Savings and Loan crisis (from repeal of Regulation “Q”)

Railroad snarls following 1976 merger of Union Pacific & Southern

Price discrimination in airlines (lower prices where more competition)

Published on 01/09/2001, THE RECORD, HACKENSACK, N.J.

ANOTHER RERUN: RATES FOR CABLE TV GO UP AGAIN --- POPULAR CABLEVISION PLAN TO COST NEARLY 13% MORE Cablevision is increasing monthly rates for its most popular service by almost 13 percent, nearly double the average rate hike the company announced for its 325,000 North Jersey cable television customers seven weeks ago. Citing "rising operating expenses and programming costs," Cablevision Systems Corp. is notifying customers that monthly bills for expanded basic service will increase to as much as $41.20, beginning in February …

On rising cable TV rates

Friday, January 19, 2001 The Bergen Record"Another rerun: Rates for cable TV go up again" (Page A-1, Jan. 9) gives the lie to the theory that deregulation of utilities will produce lower rates. Citizens have to be frustrated with the ongoing increases in cable rates that continue to go unchallenged.

When people look at their electric and gas bills they see further proof that perhaps the old, regulated, monopoly-determined rate was far better than what we are experiencing today. There is really no competition for the cable companies, and so those who can't get along without cable are paying through the nose. John Malone and other cable company magnates can run to the bank and laugh at the subscribers who don't understand voting with their feet.

Verizon-Bell Atlantic (New Jersey Bell) made a stab at increasing monthly rates after a long period of flat charges, but the Board of Public Utilities and the Office of the Public Advocate went after them with a vengeance. Where are these same regulatory-minded officials now to block these exorbitant proposals? Alfred J. Murphy Jr., Hillsdale, Jan. 10http://www.bergen.com/letters/murphy1920010119c.htm

Social Regulation

Another kind of regulation: “Social Regulation”

Safety and Health OSHA, CPSC, NHTSA, FDA, FAAEnvironment EPATruth in Ads FTC

                                                                                   

Point - Counterpoint

Regulation Magazine, The Cato Institute, AEI, conservative, “that government which governs least governs best”

The Brookings Review, liberal,Efficiency AND equity – not efficiency at all costs.

OR:

versus

Monopoly & Antitrust

Read for Monday QUIZ ON THESE 3 READINGS:Ely: “The Tariff and the Trusts…”New York TimesCarnegie: “Bugaboo of the Trusts”

For Wednesday:Review theory of Monopoly (intro text)Carnegie: “Wealth” (note hyperlinked version online)The Economist article(s) – you will have to look them upMyers

For Friday:EdmundsClark