INTRODUCTION

During the twentieth century, the dividing line between the private and public sectors became hotly disputed territory. It was the source of more economic debate than any other topic apart from the state of the macroeconomy. The origins of that debate and of the rise of the public sector are to be found in the mid-nineteenth century. From modest beginnings in the 1870s, the public sector grew fairly consistently in peacetime periods with noticeable spurts immediately after each of the two World Wars. Expressions of ideological commitments often took the headlines – Margaret Thatcher and Michael Foot in the 1980s, or the 1920s debates about proposals for new government housing estates – though never approaching the revolutionary tendencies in Germany and Russia.

Practical action in fact often revealed a common commitment to the mixed economy. It was under a Conservative Party government that the BBC and the Central Electricity Board were established in 1926 and that Rolls Royce and the Rover Car group were rescued in the early 1970s, whilst the privatisation of the water industry and the private finance initiatives for hospitals took place under the Blair/Brown Labour partnership of the 1990s–2000s. Indeed there were several important driving forces over which the politicians had little control. National defence, reconstruction after the wars, internal unification were of vital concern whilst technological change and externally imposed political changes (the microchip for outsourcing, loss of colonies for airlines) fundamentally changed the parameters of the debates and government policies.

The size of the public sector can be measured in different ways. Production of goods and services (like health, armaments) can be measured by the value added or by incomes generated (wages, profits, rent) but public spending on goods and services is the most common; this is because of its ease of measurement, because it complements the government cash transfers on pensions, child benefit etc. and because it corresponds to the monitoring and control mechanisms used by national Treasuries (www.ons.gov.uk/ons; www.imf.org; www.epp.eurostat.ec.europa.eu).

Introduction

The 1914–45 period was littered with civil wars, famines, economic depression, population displacements, ethnic cleansings, and World Wars, and yet a clear long-term demographic trend can be discerned. The total population of Europe rose from nearly 500 million in 1913 to nearly 600 million by 1950, a result of mortality falling more than fertility. In 1913 there were still very large differences in birth and death rates across Europe's regions, with the highest in eastern and southern Europe. Despite massive short-term shocks, the next thirty years were marked by huge overall declines in mortality and fertility and by a considerable narrowing of the differences across countries. One task of this chapter is to explain these developments.

A second distinctive feature of the period was the great movements and displacements of population within Europe. The underlying economic force was a large shift from agriculture to industry, matched by the move from villages to towns which is analyzed in a later section. Equally important were political forces linked to the collapse of the three multicultural empires (Ottoman, Russian, Austrian–Hungarian) which, together with the military expansions and contractions of the German Reichs in the two world wars (see Chapter 6 in this volume), led to huge population displacements, ethnic cleansings, and deaths from war, famine, and deportation.

What effect did these massive changes have on living standards? Over the whole period, real incomes rose, as did life expectancy, literacy, and education levels.

I hope that historians and economists will treat this as a first stab at a subject where cross-European comparisons have been neglected in the past. There does not appear to have been any systematic attempt to analyse and quantify the economic history of regulation and public ownership in Europe. Much remains to be done, especially since my command of languages is limited so that this book is more a research monograph than a text. There are large gaps, set out at the end of chapter 1, in both topics and countries, which I hope others will address. In the meantime let me thank the large number of scholars who have, in one way and another, been most helpful and in particular: Francesca Antolin, Judith Clifton, Francisco Comin, Alexandre Fernandez, Massimo Florio, James Foreman-Peck, Daniel Fuentes, Renato Giannetti, Andre Giuntini, Ingrid Henriksen, Ole Hyldtoft, Gregorio Nunez, Dieter Schott and Richard Tilly.

Thanks are also due to the Leverhulme Trust for the invaluable financial support which gave me time for researching and writing.

Some of the ideas and data in Part II and in chapter 14 (the data on productivity) have appeared in the following publications by Cambridge University Press: ‘European Governments and the Infrastructure Industries c.1840–1914’, European Review of Economic History 8(1) (2004); ‘The Rise of the Service Sector’, in R. Floud and P. Johnson (eds.), The Economic History of Britain since 1700. III. Structural Change and Growth 1939–2000 (2004); ‘The Political Economy of Urban Utilities in Britain l840–l950’, in M. Daunton (ed.), Cambridge Urban History of Britain, III (2001).

By the 1930s, railway systems everywhere in Europe were in desperate financial straits. German rail revenues in 1933, for example, could not even cover operating costs. In Britain, the margin was inadequate to meet interest charges, and this was true for the trunk lines in Sweden run by the state railways (Statens Järnvägar, SJ), whose gross annual profits on average over the period 1931–5 were 33 million kroner, not enough to cover interest and related capital charges of 40 million kroner; the local and provincial lines run by private companies were in even worse financial condition. In France in 1933, the balance over all networks after meeting all capital charges was a deficit of 3860 million francs. Of course, general economic conditions in these depression years were bad, and some recovery took place in the second half of the 1930s. The financial problems did not, however, disappear. The deficits in French railways rose to 5934 million francs in 1937 and, as Dormois says, as an ‘outcome of decades of subsidisation and regulations’, was an ingredient in the nationalisation of the networks in the same year, to be followed by Sweden in 1939, Spain in 1944 and Britain in 1947. Although the slogans under which this occurred were sometimes ‘socialism’ or ‘autarky’, the takeovers commanded wide support and reflected the inherent problems of economic organisation that were to bedevil inland surface transport for the rest of the century.

The technology of gas, electricity and trams in the nineteenth century allowed economies of scale in production and delivery over a spatially limited area. It is argued here that the initial developments were dominated by the private sector but that the pace of expansion thereafter was not affected decisively one way or the other by whether the utilities remained in private ownership or were taken over by municipalities. It is also argued that an ideological commitment to municipal socialism was not the prime determinant of the ownership pattern. Rather, it was the set of fiscal problems facing local authorities. These issues will be illustrated initially by the case of gas and water, which have a longer history than electricity and trams, which we will consider later.

Gas was produced from coking coal and was used initially for lighting, later for heat and power. It could be stored only for short periods and was expensive to transport. Here was a technology that yielded small local networks, most effective when each undertaking supplied one densely populated urban area. Not until the second half of the twentieth century, and especially with the discovery of deposits of natural gas, was there a real push for regional and national grids. This simple setting nonetheless demonstrates some of the central puzzles of public ownership at the local level in the nineteenth century.

The economic organisation of telephones in the thirty years or so up to the First World War reflected a set of tensions between local, regional and national interests that was to characterise most infrastructures in the 1920s and 1930s. The first concessions in each country were London in 1879, Rotterdam, Berlin and Vienna in 1881, Prague, Helsinki and Rome in 1882, and Stockholm, Ghent and Madrid in 1883. The radius of many networks was less than 5 miles, and capital cities accounted for a large share of telephone installations. Longer distance lines were slowly coming in, bringing the prospect of national networks subject to the kind of government pressures that had affected the telegraph and railways. In terms of institutions, there were local companies and municipal enterprises developing local, sometimes regional networks, while trunk lines were being developed by large nationwide companies like the Société Générale de Téléphone in France and the National Telephone Company in the UK or by agencies of the central government like the state boards in Scandinavia and the Reichspost in Germany.

National joined-up networks were feasible and desirable, as for the railways, but reinforced in the case of the telephone by the fact that, once a national network was established, the cost of increasing the number of connections was very low and there were spillover benefits to all existing subscribers. The main question was whether the initial set of institutions would facilitate the merger of local, regional and national networks.

The first issue considered here is the extent to which a detailed statistical analysis supports the proposition in chapter 6 that the pattern of regulation and ownership had little effect on the level of infrastructure development. The second issue is what factors determined the pattern of regulation and ownership. I analyse the cases of three sectors, railways, telephones and gas, as they had developed by the early 1900s. The data are good for these services and a cross-section comparison is made of eight European countries: Britain, Denmark, France, Germany, Sweden, Italy, Norway and Spain. The main sources are given in Tables 2.1, 2.2, 3.1, 4.1 and 7.1.

The level of infrastructure development, such as rail track per head of population, may be affected by the level of GDP per head (GDPPH in Table A.1 below) and by energy sources (COALPH, coal output per head), as well as the proportion of mileage in public ownership (OWN). Countries with high population density (POPDEN) may need well-developed infrastructures. Finally, when military matters loom large in a nation's thinking, a well-developed infrastructure may be seen as an important strategic weapon. Here I measure the defensive element by military expenditures as a percentage of all central government expenditures (MILB). The measures of the dependent variable, infrastructure development, are gas supplies, rail track and telephone numbers all expressed per head of population. These are shown as PENLEV in column 2 of Table A.1.

The break-up of the monolithic state-owned post and telecommunications enterprises from the 1980s was a central feature of the first phase of the privatisation process. Although much has been made of the ideological lead offered by the USA and by the privatisation of British Telecom, much of the institutional change can be better understood as a product of technological and economic developments, which undermined the case for publicly owned monopolies. With this in mind, it is useful to highlight four features of telecommunications that affect the institutional setting. The central activity is the transmission, at low running costs, of voice or visual images across a network of lines with the information routed by switching exchanges. Such public switching telephone networks have all the characteristics of natural monopolies – qualified to some extent when satellite and cable facilities are also available. This information is then received and processed at terminals (telephones, computers, fax machines etc.). Thirdly, given the complex nature of the equipment, some economic gains could accrue from having national or international specification standards. Fourthly, telecommunication networks have the property that, if a new connection is set up (a new telephone subscriber for example), there are benefits accruing not only to the new subscriber but to the rest of the existing subscribers, each of whom now has a potentially new contact. In economic terms, the social cost of a new connection is less than its private cost. These characteristics suggest that we might expect an industry with the following features.

By 1950, the trunk networks in railways, telegraph and telephone were owned and operated throughout western Europe by state monopoly enterprises, which, in some countries, also operated the secondary lines. Much of their economic environment was determined not by arm's- length regulation of fares, rates and supply conditions, but by policies established with their supervising ministries (of transport, communications etc.) and ultimately determined by parliaments. How these policies affected profitability and productivity is evaluated in chapter 14. Here I am more concerned with examining how technological change affected the institutional setting. In the case of telecommunications, it was the advent of microprocessors and the development of information technology that transformed a simple industry (telephone at the end of a network) into one with complex facilities for transmitting information via computers, mobiles, fax, videotex and email. This was to come in the last quarter of the century.

Before that came the revolutions in road and air transport. Airline business was small beer in the late 1940s, but by the 1970s had become a major industry, especially on the passenger side. The wide-bodied, large-capacity aircraft that emerged in the late 1950s had, eventually, a big effect on shipping in Europe and some effect on railways, though nothing like the impact on rail in the USA. The competition from road transport had started in the inter-war period and, especially on the passenger side, developed fiercely after 1950 as cheaper and more reliable vehicles entered the market.

As 1945 drew to a close, Europeans looked to the future rather than the past. There was to be no return to pre-war conditions. They were not glorified as the nineteenth-century world had been in the immediate aftermath of the First World War. By 1945, France was determined to avoid any repeat of the three German invasions since 1870. The defeated nations, Germany and Italy, rejected the past. Elsewhere in parts of Scandinavia, the UK and the Low Countries, there was more pride in the outcome of the war, but what they shared with France, Germany and Italy was the memory of the economic conditions of the inter-war period and a need to repair the physical damage from the war.

The credibility of capitalism was in question. The high unemployment levels of the 1930s, the collapse of banking systems, crises on stock exchanges and exchange rate instability meant that management of the macro-economy became a prime responsibility of government. The plight of the poor in the 1930s and the social intermingling during the war put pressures on government to adopt explicit policies for raising the living standards of lower-income groups. The war was a collective effort, and a ‘one nation’ philosophy pervaded many postwar governments. It was unlikely, moreover, that reconstruction would be left to the market. Shifting resources from military to civilian use would mean wild movements in prices and the prospect for some of juicy profits and rents for resources in inelastic supply.