all of the figures, I would tell you they are going in the distance shipments, 300 to 800 miles, and in the distance shipments, 800 miles and greater. Hence, for example, in the shipments of lettuce, in 1953, 5 percent of the shipments were 800 miles or more.

By 1961, 26 percent of the shipments were 800 miles or more. You are left with a picture, therefore, in the empirical analysis of the railroads, who are, we are told, who have their greatest advantage in the shipment of low value commodities over long distances. And we find them losing both tonnage, revenue, and over the long distances.

I presented one interpretation of my findings; namely, the localization of agricultural production. I reject that explanation on the basis of the data I have just now presented.

I offer instead a quite simple theoretical model that I will not go into in any depth; namely, it is a variant of the familiar price ceiling model. It is a variant of the simple model where the Government installs a ceiling price and then you ask yourself is it an effective ceiling price or ineffective. It is simply that the case of competition between a regulated sector-regulated as to rates and entry-and an unregulated sector, that in many cases, that seems to save the characterization of what the economist calls a competitive industry, put these two things together and tell them to compete for the same set of commodities; namely, the agricultural exempt commodities and what such a simple variant of the price ceiling model, in which railroads, the regulated carrier, ends up by being the protectors of a ceiling price; namely, the regulated rate and, therefore, also end up as being the residual claim on tonnage. They take what is left over. They take what the competitive sector does not wish to take, either because the costs are too high or it has alternative opportunities to make a greater profit. I think that is all I would have to say about the theory of the model.

It is really a straightforward piece of very elementary_reasoning. So I have the railroads acting as a residual claimant. But it is a static model. It tells you what is going on at one point of time, whereas the data I have been giving you are overtime. So it is legitimate to say what bearing does your theory have upon the actual changes? I think if you incorporate into the theory certain known changes in the transportation picture, you come out with the explanation, namely, that highways have become better, they have been improved, highway vehicles have been improved, and therefore the supply of this competitive sector has been shifting out faster than the demand for transportation, and therefore taking over a larger and larger part of the total tonnage. The competitive sector has been shifting out in its supply function. It is all it amounts to. I think at this point I should stop and briefly summarize what can and what cannot legitimately be concluded from what I have been saying.

First, I have really presented a theory which is in keeping with the empirical findings, they do not prove each other. All you can say is they do not contradict one another.

Second, the theory offers an explanation of the kinds of changes that have been taking place but they do not explain the precise quantitative changes, namely, it would be unfair to use what I have been saying to conclude that in the absence of regulation, rails share

would have gone up. I think all you can legitimately say is that in the absence of regulation, or if they were able to compete on the same basis as the exempt carriers, their rate of decline would have been lower than it is. That is it, that clearly can be stated but you cannot say it actually would have increased, not from the reasoning I have presented.

Finally, I come to a section that I call needed changes in policy, and here we are in the speculative area of my testimony.

I consider the first things I told you to be the firm and factual, the empirical. I consider this theoretical model I presented as being the interpretive portion. I am now in the speculative portion, which goes beyond my actual research.

Even if accepted as valid, the empirical results and the theoretical explanations presented in the earlier portions of the testimony, do not clearly indicate the kinds of regulatory changes that should be made.

One could not conclude from them that a policy of extending the agricultural exemptions to railroads is preferable from an efficiency standpoint to their elimination.

There are very powerful theoretical arguments that economists have been unable to solve and they have to do with the notions of what is second best.

You cannot say you will improve the overall system in terms of its efficiency, by moving any one sector closer to a competitive solution. So, there are stronger theoretical difficulties here.

Now, in order to offer some views on this question of needed changes in policy, I would like to raise questions concerning the role of regulation. I think most economists accept the idea that already such things as national monopolies, and accept the national monopoly argument and the need for regulation here. Most economists would also accept there are at times great social costs involved in freedom of entry, competition, there are social costs that may, in fact, exceed the gains from competition. I would submit that none of the arguments usually put forth, for regulation, hold in the case of rails competition with trucking for agricultural exempt commodities. I say nothing about the bulk exemption and water.

In order to justify this position, I would like to turn to some of the characteristics of this industry called the agricultural exempt transportation industry. Most of the firms that specialize in this are quite small. According to a recent study by the Department of Agriculture, firms in the North Atlantic region averaged 1.9 straight trucks. And this was the largest of all regions.

On the whole, it may legitimately be stated that their fixed costs are low, relative to their valuable costs, as a result of which there is relatively easy entry into this industry, quite aside from regulation. While I cannot support the conjecture, I suspect that many of the exempt for hire carriers have alternative uses for their vehicles, such as local pickup and delivery.

In the hearings held last year, witnesses who argued in favor of eliminating minimum rate controls on exempt commodities made much of the protection offered by the antitrust laws, against monopolization. I submit that the structure of the exempt for hire transportation industry offers even more effective protection.

This industry appears to have low-fixed costs and therefore relatively easy entry. The capital involved in the industry has for the most part good alternative uses. In this situation, any effort by railroads to engage in destructive price-cutting as a way of eliminating competition in the carriage of the presently exempt agricultural commodities would prove costly and unsuccessful. No sooner would they attempt to raise rates than trucks would be diverted from other uses to the haulage of these commodities.

May I put forth a variant of another argument? I said I have no opinions to offer on the competition between rail and water in the bulk area. Yet I would like to paraphrase that argument. It runs as follows:

The water carriers have limited flexibility in routes. Rail has a broader market area and more flexibility. Therefore, it can cut rates where it is in competition with water, even below out-of-pocket expenses, raise rates elsewhere, and thereby drive out the water carriers and once having done so, increase rates. I am presenting an argument to which I neither affirm the argument nor deny the argument. I simply use it.

If you were to cast the competition between truck and rail in this framework, you engage in an error, namely here we have precisely the opposite relationship. The truck is more flexible, the rail is much less flexible. If the rail were to attempt in any given area to cut rates, as a way of driving out the trucks, and increase them anywhere else, they would find themselves losing immense volumes of tonnage in the other area to competition from trucks.

I submit a destructive price argument is not a valid and sound one. In conclusion, technological change often increases tremendously the optimum size of the firm. Such changes may even bring about a condition of national monopoly and require the independent deduction of governmental regulation.

We sometimes lose sight of the fact that technological change can also result in new competing methods of production in which the optimum size of firms are much smaller. I submit that at least so far as most agricultural exempt commodities, this is precisely what has happened. Relatively small scale trucking firms, operating on modern highways, are efficient competitors and over sufficient protection against most efforts by railroads to monopolize the carriage of these agriculture exempt commodities.

In cases of this kind, it seems to me as an individual, talking beyond the scope of the actual research I did, in cases of this kind, the goal of a free economy should be to deregulate and return to market forces the task of allocating resources.

Senator THURMOND. Thank you, Doctor. On page four, you note that the tables and charts tend to show that over the years as agriculture output increases, railroad tonnage decreases or remains stable and railroad tonnage as a percentage of production falls considerably. To what do you attribute this primarily?

Mr. MOSES. In the actual testimony I indicated that part of the explanation is the difference in the way-this reflects the way in which a system operates where you have one of the supply sectors essentially operating as a competitive sector and one of the sectors in effect acting as the protector of a ceiling price.

I say the results you have seen partly reflect that. It also reflects other things. It reflects its improvements in highways, the improvements in trucks, it reflects the fact there were some general rate increases, which I believe extended to the agricultural commodities as well. And therefore, in my testimony I said if you look at these charts and look at the declining rail tonnages, all you can really say from my analysis is that the theory leads you to expect this, and all you can conclude is if there had not been this difference in regulation, the rate of decline in the rail tonnage, and in the rail percentage of total agricultural output would have been less than shown here.

That is all you can safely conclude.

Senator THURMOND. Are you saying then that regulation brought this about and deregulation would help to straighten this out? Is that what you are saying?

Mr. MOSES. I am saying if in the period covered by this analysis, rails had the ability to compete on the same basis as the exempt, the rate of decline shown in every one of these charts would have at least been less. It might have gone up.

But at least the rate of decline would have been less.

Senator THURMOND. Dr. Moses, would you state the principal objections which you see to S. 1061, the minimum rate deregulation proposal?

Mr. MOSES. I have read the bill.

Senator THURMOND. Do you see any objections to it, and if so, what portions do you think are objectionable and why?

Mr. MOSES. I accept those portions of the proposed legislation which are relevant to the research here done, namely the agricultural exemption and, therefore, I would state that in the present case I have no major objections to the proposed legislation, that those changes that are contemplated concerning the agricultural exemption I accept. Senator THURMOND. All right. Do you feel the trend of the times lends toward less regulation or more regulation?

Mr. MOSES. I think I have in a number of, well the entire testimony in fact, goes to say that where such changes take place as permit market forces to carry out the allocation of resources, that those market forces ought to be permitted to do so.

I feel that in the exempt area, agriculture exempt area, precisely those kinds of changes have taken place, and, therefore, it is entirely in keeping with the philosophy of the research, and the philosophy of a free economy, to deregulate, that less regulation is called for. Senator THURMOND. You feel less regulation is called for?

Mr. MOSES. Yes, concerning the commodities and the material over which I have worked.

Senator THURMOND. Dr. Moses, since your study did not include bulk transportation, perhaps you are not prepared to comment on a future extension of the bulk commodities exemption. Do you have any personal views on this portion of the bill?

Mr. MOSES. Only one, and that is that one should not by analogy, extend to the bulk exemption the reasoning that I have here given for the agricultural exemption. And I say that for two reasons: one, in the truck area, the exempt carriers are characterized by low-fixed

costs.

Therefore, you can't very well drive them out and keep them out. In the water area, you have high, very high terminal costs. So that if you drove them out, people might be very unwilling to come back in again, once rates were raised. I am not arguing against such extension, I am saying one reason why you should not use my reasoning for such extension is that you have high-fixed costs in the water area, whereas you have low-fixed costs in the truck exempt area.

The second reason is the one I stated earlier, namely, when you are talking about truck and rail, truck is the more flexible. When you are talking about water and rail, rail is the more flexible. So one should not extend the analysis here to bulk area, because there are real differences in the economics of competition between the sectors involved.

I might say the Transportation Center is now engaged in a study of water transportation and at some future time we may have some results on this question.

Senator THURMOND. All right. The Senator from Nevada.

Senator CANNON. No questions.

Senator THURMOND. Thank you, Doctor, for your testimony. Our next witness is Mr. Roy R. Scott on behalf of the GrowerShipper Vegetable Association of Central California.

STATEMENT OF ROY SCOTT, ON BEHALF OF THE GROWER-SHIPPER VEGETABLE ASSOCIATION OF CENTRAL CALIFORNIA

Senator THURMOND. We are glad to have you to testify here, Mr. Scott. You may proceed.

Mr. Scorr. Thank you, sir.

My name is Roy R. Scott. I am vice president of Harden Farms of California, a corporation engaged in the growing and shipping of fresh vegetables. I am also the traffic manager or the chairman of the traffic committee of the Grower-Shipper Vegetable Association of Central California, and I am appearing on their behalf.

I would like to read my statement. I would first like to say that any reference to Senate bill 1062 should be eliminated from the statement.

Senator THURMOND. What was that now?

Mr. Scorr. Any reference to Senate bill 1062 should be eliminated. from my statement, because it was inadvertently included.

Senator THURMOND. Your statement applies to S. 1061 only? Mr. Scort. That is right. The Grower-Shipper Vegetable Association of Central California represents the fresh vegetable industry of the central coast counties of California which annually produces and ships over 60,000 carlot equivalents of fresh vegetables to markets throughout the United States and Canada.

We are primarily interested in Senate bill 1061 which would exempt certain carriers from minimum rate regulation in the transportation of the agricultural commodities we produce. Such exemption, in our opinion, would place all modes of surface transportation on a more equitable competitive basis which would have the ultimate effect of more orderly distribution of all perishable commodities. It should also have the effect of eliminating unfair marketing situations which now exist in some receiving markets.