Mr. Foley, a partner In Souther, Spaulding, Kinsey, Williamson & Schwabe, practices law in Portland, Oregon.
Jurists often weave erratic seams in the legal fabric we call jurisprudence. Once rooted in the law, error seems to possess all the tenacity of crabgrass; aided by the concept of stare decisis (stand by previous decisions) and the juridical tendency never to undo what has once been accomplished, error takes sustenance and proliferates, until a whole body of normative rules wells up and covers the territory.
This article deals with just such a concept: the doctrine that governments can regulate and control business enterprises "affected with a public interest." In varying guises, this postulate with its myriad tentacles has strangled freedom for almost a century, although its antecedents can be discerned in earlier Anglo-American reports.
The American birth of the rule took place in 1876 in a decision by the Supreme Court of the United States entitled Munn v. Illinois,’ the most important of the so-called "Granger" cases presented to the Court at the same time. The Supreme Court of the United States upheld a Minnesota law which required grain warehouses to secure a license and to comply with price restrictions in order to operate as a business. The rationale of the court: grain warehouses were "affected with a public interest."
In 1933, during the throes of depression occasioned by government interventions into the economy, the doctrine received impetus to strangle all manner of economic concerns in the case of Nebbia v. New Yorke which prohibited price reductions in enterprises "affected with a public interest."
The lack of judicial understanding of economic and moral values appears in the following statement:
The court has repeatedly sustained curtailment of enjoyment of private property, in the public interest. The owner’s rights may be subordinated to the needs of other private owners whose pursuits are vital to the paramount interests of the community.³
A wiser decision, and one justified by sound reason of political economy and morality, permits anyone to engage in any business at any time unless he initiates aggression or practices fraud upon another.
The overweening coercion emanating from, and justified by, Munn v. Illinois and Nebbia v. New York impels us, even at this late stage, to examine the foundations of the doctrine. What does "affected with a public interest" really mean?
All Businesses Which Survive Serve the Public
What businesses are cloaked with a public interest? A better inquiry: what enterprises are not affected with a public interest? Upon examination, one finds that he can make an equally good case for the public interest in all endeavors, and not just grain warehouses, wharves and taverns. The only business not affected with a public interest is one which fails to serve the public. The sole business I can conceive of which does not serve the public is one which sinks into bankruptcy.
Once again, we discern a judicial decision which fails to accord with sound principles of economics and human action. The majority in Munn v. Illinois could not perceive that the only reason for the existence of any business enterprise is to create and transfer goods or services to willing recipients.
A successful business is one which satisfies enough consumers or customers at a high enough price so that the enterprise returns a profit to those individuals who have contributed to the entrepreneurial activity. An unsuccessful business is one which does not attract and satisfy sufficient customers at a sufficient price to generate a profit and encourage maintenance of the necessary capital investment.
To the extent that customers express satisfaction in a product or a service, in continued purchases, the producer serves the "public interest." To the extent that no customers seek the creations of a business, there exists no "public interest." Thus, we can say with some certainty that Edsel Motor Division of Ford Motor Company was not a business "clothed with a public interest." On the other hand, any individual or corporate business which does attract and hold customers is, at least to that extent, "affected with a public interest."
All Interests Are Truly Private
But the problem demands deeper consideration: How should we define "public interest"? What is the public? In a very real sense, all inhabitants of a given community or territory constitute that particular public, for a public refers to a community or populace at large in their common, non-private characters and capacities.
As with other terms, however, the phrase "public interest" has undergone a certain corruption at the hands of the illiberal element. Currently the words seem to convey a belief that the public interest overrides any personal or individual interests. Yet, all interests derive from persons. In that sense, all interests are private interests, at least at their genesis.
You like ballet; you band with others to form a civic ballet association to promote the art. Seminally, the community interest in ballet existed as a wholly private interest: yours. As you gain adherents, does the interest take on an altered character, or does it remain a distinctly individual undertaking? If the private interest changes into a public interest, do we measure such dynamism by the number of supplicants or the character of the interest, or in some other manner? In other words, what is it which transmutes a purely personal individual value or desire into one of such overpowering essence and force that it can be termed a "public interest" and justify the limitation upon the freedom of individuals?
Private and Public Interests Are Not Susceptible to Differentiation
The difficulty in responding to these rhetorical questions lies not in the answers but in the inquiries themselves. It is a difficult task to state a question neutrally, and these particular questions rest on a presumption that we can define and differentiate private and public interests. In truth, we cannot do so. As commonly used, a private interest may be defined as a value held by an individual. Since each man is a unique and discrete being, each man possesses a separate set of values or interests. I may be interested in baseball, you may prefer ice hockey. I may enjoy picking a guitar and singing; you may consider my renderings anything but musical. Each person, by his ideas, his words, and his conduct, holds and expresses these values which make up his private interests. He seeks to advance these interests, to enjoy them, to introduce others to them. Nonetheless, these interests never lose their individual private character.
The True Meaning of Public Interest: Coercion Writ Large
On the other hand, no such thing as a public interest exists, despite continual use of the phrase.5 When one utters that pair of words, he means to convey a thought most aptly derived from Munn v. Illinois: he means that some private, personal, individual interest or value of one or more persons is, in the speaker’s subjective opinion, of such overwhelming importance that all members of society should embrace it as eternal verity and that if any other private, personal, individual interest or value conflicts with the advancement of the first interest, the conflicting interest must be shunted aside, depriving the holder or holders of that second interest of their liberty or right to enjoy and advance the second interest. In plain language, the "public interest" represents a power tool to coerce those who disagree with the idea or subjective value advanced by the statist.
Consider this definition in analysis of some of our earlier examples. My pleasure in baseball may exist side by side with your interest in ice hockey; each private interest receives and satisfies its own followers. Should too few persons share my interest in baseball, and refuse to patronize supporting advertisers and to buy grandstand seats, my favorite home team may move away to Spokane, for the owner has a private interest in making a return on his capital investment. If he does not make a return in Milwaukee, he will move to Atlanta; if he makes an insufficient return in the latter city, he may travel elsewhere or he may reinvest his remaining capital in an entirely different venture, one which attracts and pleases more people.
Now notice what will happen if I am able to convince the government that baseball is an enterprise "affected with a public interest." I may attend the games because they accord with my personal, private, individual interest. You, however, prefer to spend your earnings on the hockey games. If you and others who do not share my interest in baseball preponderate, the owner and operator of the team will lose money. Yet, if his business is "affected with a public interest," he cannot move the team to the most favorable location, or raise his prices, or take any other ameliorative steps. Instead, he must either remain captive and lose money (destruction of his capital), sell to someone else who will remain and lose money, or secure a subsidy or other favors from the government. Most "public enterprises" follow the latter course.
Subsidy and monopoly inevitably lead to regulation and disallocation of economic goods. One common result: increased taxes for all members of the community to support the team in the "public interest." I might well be willing to pay extra taxes to advance my private interest turned public, but chances are, I would rather mulct my neighbors, thinking that this endeavor represents the greatest good. In any event, you will be deprived of your capital (which you would ordinarily use to support the hockey team) against your will, and you will be compelled to watch your privately and justly earned funds spent on an endeavor you dislike, an endeavor which cannot carry its own weight in the free market.
Let Each Support His Own, Without Forcing Others
The only fair method of allocating scarce resources between numerous activities commands each man to support that which he values with that which he has created, and to compel no other man to act contrary to his desires. Justifiable societal action consists of the coercive prevention of force and fraud and the preservation of a system of settling disputes, and no more. Myriad activities can take place concurrently, with no forced adherence to any particular one. If any endeavor lacks supporters, it must pass from the scene until new support appears. When this concept replaces the doctrine of "public interest," when the "public interest" shibboleth reveals its true nature, freedom regains its exalted place.
As demonstrated earlier, any business not in bankruptcy is "affected with a public interest" in the sense that some customers (the "public" of that enterprise) find satisfaction in the products supplied. Mr. Justice Field recognized this a century ago when he declared:
The public is interested in the manufacture of cotton, woolen, and silken fabrics, in the construction of machinery, in the printing and publication of books and periodicals, and in the making of utensils of every variety, useful and ornamental; indeed, there is hardly an enterprise or business engaging the attention and labor of any considerable portion of the community, in which the public has not an interest in the sense in which that term is used by the court in its opinion. . . .6
Thus, the phrase not only connotes a coercively imposed choice by some adherent of a cause, but also descends into meaninglessness. It becomes a catch-phrase employed by courts to justify the unseemly result of depriving someone of his liberties, a juridical make-weight. Of course, the community possesses the naked power to pilfer and destroy. That is not to say that looting and coercion is justified, nor can one honestly credit a grain warehouse or a milk seller with cloaking their enterprise with a public interest. Such a statement reminds one of a robbery victim pilloried by the community for owning property of interest to the miscreants.
No entrepreneur cloaks his business with a public interest. Each person evaluates his talents, creates capital, and plunges into an enterprise which he believes will satisfy the public and produce a subjectively acceptable rate of return. Employing the jabberwocky of the Supreme Court, one cloaks his business with a public interest when he serves the public well.
The Concept Extended; Public Utilities
Venturing forth from the holding of Munn v. Illinois, the courts in the past one hundred years have justified all manner of regulation of, and intrusion into, the private affairs of those businesses denominated "public utilities." A public utility has been defined as a business regularly supplying the public with a particular commodity or service of "public consequence or need."7 In simple terms, a public utility supplies a product which some of the public believes that all must have.
The mere statement of the definition expresses the ambiguous and tautological nature of the phrase, similar to that encountered in defining "public interest." Anything and everything can fit the definition, depending on the values of the speaker.
Early inroads occurred in medieval England in the realm of food, drink and lodging.8 Inadvertent poisonings occurred with some frequency and the traveler often found himself at the mercy of the innkeeper. Because sustenance and lodging formed the "necessities" of life, those who supplied these goods and services soon came to be labeled as "affected with a public interest" or some such nebulous phrasing signaling a limitation upon the suppliers’ freedom. Of course, laws preventing coercion and misrepresentation amply protect the consumer.
In subsequent centuries, all manner of businesses fell in and out of the category of a "public utility," depending on the current whims and fads of those in power. Companies supplying water, fuel, power, energy, and transportation quickly come to mind. In almost every instance, the so-called public utility supplied goods or services which were greatly in demand; this factor seems to make one of the two distinctions between "public utilities" and other endeavors. The other apparent criterion for speaking of a particular business as a public utility appears to rest on the fact that, while many individuals seek the goods or services provided, only a relatively few producers choose to offer such wares.
These two reasons require analysis in order to determine if any veracity resides in the rule singling out some businesses as "public" and limiting their freedom of action. We have already discerned that the mere attribution of the term "public" to a business presents an exercise in banality, since all businesses which sell goods or offer services demanded by someone else serve that portion of the "public." Nevertheless, is there any reason why we should treat some activities differently because (1) many persons desire the product or (2) few persons supply the product?
Universality of Demand
First, consider the universality of desire. Economics considers the distribution of scarce goods, not free (abundant) goods. This science posits, as a first principle, the proposition that human wants are insatiable and competing, and economic goods (the subjects of those wants) are scarce. Values, being subjective, vary from person to person. Some desires crop up more frequently than others: the need for food, clothing, shelter, transportation. Yet the mere universality of these wants affords no rational basis for treating the supplier with disdain or coercion.
Let us accept the postulate that man requires food to survive. It does not logically follow that the producer of grain, a farmer, must be restricted in his liberty merely because others gain sustenance from the grain. Suppose the farmer desires not to sell; he created the value (grain)—he should be able to eat it, hoard it, destroy it, do with it as he pleases. Such a right accords with justice and with the axiom that each man owns the absolute right to live his own life and to choose his own destiny without interference from any other human being, so long as the actor does not coerce or defraud another individual.
The farmer does not coerce or defraud the would-be consumer by holding onto his grain. The consumer retains the choice to eat beef, or olives, or jello, or to purchase grain from another farmer. Or, if he really wants the first farmer’s grain, he will pay the price which represents the concatenation of values between farmer and producer. After all, grain is a perishable commodity and the first farmer will not want to store his crop forever lest he lose his entire capital investment. And, the first farmer cannot exist on grain alone; he requires a balanced diet, shoes for his children, blankets for his bed, tobacco for his pipe, books for his pleasure, and countless other items which grade from necessity to luxury, depending upon the particular set of values held by the actor.
One may urge that individuals cannot survive without food and drink and, therefore, these products demand special dispensations. True, persons cannot survive for long periods without food and water; that fact does not justify restriction upon the liberties of others, so long as the others do not employ force or fraud.
We might conjure up a hypothetical example where a cruel creature hoarded food while others starved. Yet those who desire the food possess no moral right to take from the producer that which he has created. One need not evidence much perception to discern that few persons, if any, will fit the hypothetical mold of evil, and that other citizens abound who possess sufficient food and beverage to alleviate any impending starvation and who display a willingness to do so. Sympathy etches the character of the free man. The supposition that one miscreant would and could corner the supply of food and drink (or any other product) and sit idly by while others go without sustenance remains the wildest sort of whimsy, wholly out of union with reality.
The Apparition of Monopoly
Second, consider the possible monopoly of production. Those who employ the concept of "public utility" fear the concentration of power over the supply of a given product in one or a few men.’° If a concentration appears, history proves it likely to be ephemeral.¹¹ If one man produces goods or services so much in demand that he makes a profit, other entrepreneurs will follow him into the field and reduce the cost to the consumer. If only a few supply the many, it is simply because those few are the only ones who freely desire to invest their capital in the enterprise, probably because the potential return lacks sufficient attraction to other enterprising ventures.
Proponents of the public utility concept often tender a collateral argument: public utility monopolies justify on the basis not only of the need of the public (demonstrated heretofore to be sham), but also on the preservation of capital. This contention assumes that competing public utilities would duplicate service and thereby act uneconomically because of the extensive capital investment commanded. Such a suggestion raises the immediate inquiry of whether, assuming the truth of the argument, such facts really justify the destruction of freedom.
More saliently, however, every producer competes with myriad others, both for the entire consumer dollar and for that part of the consumer dollar normally expended on such products. To this extent, each producer duplicates investment with others, yet no one decries the competition between Montgomery Ward and Sears, Roebuck, or between Albertson’s, Fred Meyer, Safeway, and A & P. Indeed, those most vociferous in favor of "competition" as a goal often inconsistently acclaim virtue for monopoly in the "public utility" arena.
If two power companies serve the same area, and duplicate transmission lines, so what? Each will remain ensconced in business only so long as it provides a satisfactory service to its customers. Indeed, increased competition inevitably leads to better service at a lower cost, with ultimate benefit to the purchaser. If one of the power companies cannot compete effectively, it will leave the industry and convert its capital to other, more favorable uses.
Competition Assures Efficiency
It is apparent that a change in transportation costs, production technology, management, or any other cost factor can upset a monopolistic position. Also, a concentration beyond the optimum point is an invitation to failure, for the unit costs of production tend to increase again. The monopolist who disregards this fact invites potential competitors to invade his field and reduce him to his optimum size. There is no need for government to break up a giant enterprise; if it were too large, the competitors would reduce it. . . …. Of course, it is most unnatural and unlikely for a businessman to rise to eminence through product improvements and lower prices, and then suddenly to turn toward output curtailment and price increases. But if he should act in such a manner, which is conceivable, he practices self-destruction.
HANS F. SENNHOLZ, "The Phantom Called Monopoly"
Competition no more destroys capital here than in any other business milieu; if capital is wasted or destroyed, that amounts to one of the costs we must be willing to pay for freedom. If one of the competing power companies leaves the field, the public utility proponents apprehend the increased cost to the "public" of this "necessary" service. Of course, the "public" possesses the ultimate weapon: it can refuse to purchase the service and thus drive the producer out of business (even if the service constitutes a "necessity," substitutes generally exist). Or,more likely, a competitive producer, attracted by profit, will enter the field and offer the same service for a lower price.
Thus, we perceive that reason entitles no enterprise to the appellation "public utility" or the special advantages and regulations which attend such a designation. No business can be truly said to be "affected with a public interest" in the sense that such an endeavor should be subjected to special rules. Equal treatment should be the bench mark of state/business relations.
Persistent repetition of the "public" concept of business enterprises permeates the past century of American history, rendering the hypothesis of almost universal acceptance. One can only pray that succeeding generations will visit the issue with precision and clarity of analysis and not be betrayed by the hoariness of age. Old myths die hard, but pass away they must if freedom is to become enthroned. One can pierce the fiction of a "public" business by recognizing that no business possesses "public" functions; the only business of business is business, the supplying of the best possible goods and services at the highest possible return to the greatest number of customers. If any business performs this function, it will amply serve the public interest.
194 U.S. 113, 24 L. Ed. 77 (1876).
²Nebbia v. People of State of New York, 291 US 502, 54 S. Ct. 505, 78 L.Ed. 940 (1934). ³lbid., 291 U.S. at 525.
‘The concept of value provides a separate topic of discussion beyond this essay.
*One may wonder if man can conceive of that which does not exist. Unicorns on the moon and the vagaries of science fiction should dispel this question. Man seems destined to conceive, and act upon, political and economic fantasies.
*Note 1, op. cit., 94 U.S. at 141.
‘See Gulf States Utilities Co. v. State, 46 SW 2d 1018, 1021 (Tex Civ App 1932); Black’s Law Dictionary (4th Ed., West Publishing Company, St. Paul, Minn., 1957) 1395.
One should not lose sight of the fact that English law, while possessing similar roots, differs markedly from the American experience, the latter stressing human liberty and the free market to a greater degree.
See Note 1, op. cit., 94 U.S. at 130-132, where Mr. Chief Justice Waite stresses the "monopoly" aspects of grain warehouses.
¹ºHow singular that most of these theorists express no concern over the concentration of monopoly power of coercion (government) in the hands of the few and the incompetent, yet quake with the thought of free market concentrations.
¹¹Better minds than mine have exposed the illusions which pockmark the chimera of monopoly. See, e.g., Sennholz, Hans F., "The Phantom Called Monopoly," VII Essays on Liberty 295-317 (Foundation for Economic Education, Inc., Irvington-on-Hudson, New York 1960); Armentano, Dominick T., The Myths of Antitrust (Economic Theory and Legal Cases) (Arlington House, New Rochelle, New York, 1972); Rogge, Benjamin A., "Will Capitalism Survive?" III Imprimis No. 5 (May 1974), discussing Joseph Schumpeter’s Capitalism, Socialism and Democracy (1942).