The Free Market
The Specter of Airline Re-Regulation
The Free Market 5, no. 11 (November 1987)
Empiricism without theory is a shaky reed on which to build a case for freedom. If a regulated airline system did not "work," and a deregulated system seemed for a time to work well, what happens when the winds of data happen to blow the other way? In recent months, crowding, delays, a few dramatic accidents, and a spate of bankruptcies and mergers among the airlines have given heart to the statists and vested interests who were never reconciled to deregulation. And so the hue and cry for re-regulation of airlines has spread like wildfire.
Airline deregulation began during the Carter regime and was completed under Reagan, so much so that the governing Civil Aeronautics Board (CAB) was not simply cut back, or restricted, but actually and flatly abolished. The CAB, from its inception, had cartelized the airline industry by fixing rates far above the free market level, and rationed supply by gravely restricting entry into the field and by allocating choice routes to one or two favored companies. A few airlines were privileged by government, fares were raised artificially, and competitors either prevented from entering the industry or literally put out of business by the CAB's refusal to allow them to continue in operation.
One fascinating aspect of deregulation was the failure of experts to predict the actual operations of the free market. No transportation economist predicted the swift rise of the hub-and-spoke system. But the general workings of the market conformed to the insights of free-market economics: competition intensified, fares declined, the number of customers increased, and a variety of almost bewildering discounts and deals pervaded the airline market. Almost weekly, new airlines entered the field, old and inefficient lines went bankrupt, and mergers occurred as the airline market moved swiftly toward efficient service of consumer needs after decades of stultifying government cartelization.
So why, then, the current wave of agitation for re-regulation? (Setting aside the desire of former or would-be cartelists to rejoin the world of special privilege.) In the first place, many people forget that while competition is marvelous for consumers and for efficiency, it provides no rose garden for the bureaucratic and the inefficient. After decades of cartelization, it was inevitable that inefficient airlines, or those who could not adapt successfully to the winds of competition, would have to go under, and a good thing, too.
The shakeout and the mergers have also revived an ancient fallacy carefully cultivated by would-be cartelists. There is already a mounting hysteria that the number of airlines is now declining, and that we are therefore "returning" to the "monopoly" or quasi-monopoly days of the CAB. Is not a new CAB needed to "enforce competition"? But this ignores the crucial difference between monopoly or large-scale firms created and bolstered by government privilege, as against such firms that have earned their position and are able to maintain it under free competition. The government-maintained firms are necessarily inefficient and a burden on progress; freely-competitive "monopoly" firms exist by virtue of being more efficient, providing better service at lower rates, than their existing or potential competitors. Even if the absurd fantasy transpired that only one [U.S., presumably not world-wide] airline emerged from free competition, it would still be vital to avoid any governmental interference with such a free market firm.
Note, in short, what the pro-cartelists are saying: they are saying that it is vital for the government to impose a coercive, inefficient monopoly now to avoid the shadowy possibility of an efficient, freely-competitive monopoly at some future date. Looked at this way, we can see that the call for re-regulation and cartelization makes no sense whatever except from the viewpoint of the cartelists.
Quite the contrary; it is now important to extend deregulation to the European sphere and end the international cartel of IATA, which has crippled intra-European travel and kept airline fares outrageously high.
What of the other unwelcome consequences of deregulation: crowded planes, delays, accidents? In the first place, as is typical, competition has led to lower fares and therefore brought airline travel into the mass market far more than before. So this means that those of us who used to fly on planes half or quarter-filled with business travelers now have to face flights on totally filled planes stocked with students, ethnics carrying all their possessions in paper bags, and squalling babies. But if deregulation has ended the gracious days of yore by making air travel more affordable, those of us who wish to restore that epoch will simply have to pay for the gracious amenities by traveling first class or chartering our own planes.
Delays, accidents, and near-accidents are another story completely. They are only "caused" by deregulation in the sense that air travel has been stimulated by free competition. The increased activity has run up against bottlenecks caused not by freedom but by government, and these unfortunate remnants of government have been causing and intensifying the problems.
There are two major difficulties. One is the fact that there are no privately-owned and operated commercial airports in this country; all such airports are owned by municipal governments [except the worst run, Dulles and National, owned and run by the federal government]. Government runs airports in the same way it runs everything else—badly. Specifically, there is no incentive for government to price its services rationally. In consequence, government airports price their major service, runways for landing and takeoff, way below the market price. The result is overcrowding, shortages of runway space at prime time, and a rationing policy by the airports to provide a first-come first-served policy which virtually insures circling and aggravating delays. A privately owned airport would price runways rationally, to maximize its income, raising prices, especially at peak hours, and allowing airlines to purchase guaranteed time slots and push the far less revenue-productive private planes out of the runways in prime time. But government airports have failed to do so, and continue subsidizing runway prices, in deference to the politically powerful lobby of private plane owners.
The second big obstacle to the smooth use of the airways is the fact that the important service of air controlling has been nationalized by the federal government in its FAA [Federal Aviation Administration]. As usual, government provision of a labor service is far less efficient and sensitive to consumer needs than private firms would be. President Reagan's feat in de-unionizing the air controllers early in his administration has made people overlook the far more important fact that this vital service has remained in government hands, and poses, therefore, a growing threat to the safety of every air traveler.
As in every other case of government control and regulation, therefore, the cure for freedom is still more freedom. Halfway measures of deregulation are never enough. We must have the insight and the courage to go the whole way: in the airline case, to privatize commercial airports and the occupation of air traffic controlling.
Cite This Article
Rothbard, Murray N. "The Specter of Airline Re-Regulation." The Free Market 5, no. 11 (November 1987): 1 and 3.