Léon Walras on Industrial Regulation: Railroads as Economic and Moral State Monopolies

Abstract

Modern microeconomics foundations of industrial regulation policies were developed during the second half of the 19th century. One of the main theoretical and applied debates which is still an issue today concerns natural monopolies. Railroads were at the center of these debates, because of their technological and industrial significance. The main question raised at this time was the participation of the State on the provision and regulation of this industry.

In France, between the 1840s and 1880s the evolution of regulatory legislation was deeply related with the academic contributions, in particular coming from liberal economists belonging to the Société d’Économie Politique. The dominant views among these French economists advocated for a Private provision and incentives to create competition within this industry and some defenses of a private-public partnership through concessions. Contrary to this point of view L. Walras was in favor of a purely public provision of railroads and transportation.

Walras’s point of view was developed with twofold argument of theoretical and a moral nature. This paper analyses the logic and coherence of these arguments and concludes that they are constructed upon an original vision on human nature and economic dynamics that contrast with the traditional views on Walras’s pure political economy. The case made in favor of the State intervention on Railroads industry considers altruistic motivations of human action, public servants surrounded by democratic institutions as free press and the role of education. On the economic side we found an interesting dynamic argument based on the importance of the network nature of railroads, the possibility for the State to improve the general economic development through the impetus given to railroads and the possibility to take advantage of the monopoly rents of some railways in order to finance new parts of the network. These ideas are mainly establish trough a dynamic conception of the development of the railroads network and its consequences on economic growth.

Keywords: L. Walras, Monopoly, Railroads, Economic Regulation

JEL Classification: B13, B21, L92, L12