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Weekly UpdatesThis leaves one primary culprit--the railroads themselves. They have locked in [32] a belief which closes them out of much of a $300[+ or -] billion truckload market. This bears repetition. Railroads could be economically competitive with trucks for a market that is perhaps ten times their current total revenues of $35 billion, but they have largely chosen not to compete. Why? The answer may have to do with the inherent complexity of railroading and the organizational structure which locked in as a result.
Complexity and Diversity
A complex adaptive system is a network of agents that constantly rearrange themselves into systems that are more and more complex, where each agent faces the perpetual novelty of an essentially infinite space of possibilities. Examples are ecologies, economies, and individual industries. The higher the complexity, the more important diversity is for survival. As Doyne Farmer, physicist and pioneer in the "connectionism" of complexity theory, expressed it, "[E]volution thrives in systems with a bottom-up organization, which gives rise to flexibility." [33] Brian Arthur (see note 32) elaborated, "So the question is how you maneuver in a world like that. And the answer is that you want to keep as many options open as possible." [34]
The complexity of running railroads instigated our current economic era. In the 1880s, U.S. railroads were instrumental in giving rise to the line-and-staff corporate structure, modern trade unions, divisional budgets, standardized accounting, investment banking, incorporation law, anti-trust law, labor law, government regulation, group retirement plans, time zones, etc. These conventions are ways to deal with business complexity, but the solutions worked out are not final, and sometimes they give a false sense of security or get in the way of necessary change.
Before there was truck competition, railroad organizations evolved by trying to divide and conquer complexity. Railroads were split into operating and commercial responsibilities, which subdivided again into the traditional "stovepipes" of functional railroad departments. This compartmentalization at first helped, but now allows the intermediation of suboptimizing.[35] decision makers. That is, specialized individuals who are not responsible for profit set artificial day-to-day incentives that can reduce profit.
For example, railway commercial officers often mis-specify their goal as increasing revenue per car trip. This is simpler to measure than the financial goal as increasing profit per unit of asset-time. Trying to increase revenue per trip creates a bias against short hauls, although it is better to have four round trips of $500 revenue with $250 contribution each than it is to have one round trip of $1,500 revenue with $750 contribution over the same time frame.
The reality is that railroads could compete. The natural outcome of this reality would be a different urban landscape from the one we have previously envisioned--a landscape with fewer large truck trailers, with industrial growth clustering along existing rail rights-of-way, and with private enterprise paying for the maintenance of congestion-free freight access.
Similarly, railway operating officers often mis-specify their goal as increasing efficiency. This is simpler to manage than increasing profits. Short-haul traffic is less efficient because it uses more assets per unit of production (a handicap more than offset by short-haul's greater revenue-producing capability). John Meyer said himself in Improving Railroad Productivity that railroads use "cost-effectiveness" instead of "cost-benefit" to measure themselves, and thus end up focusing on things like average length or weight of train, instead of profit per asset-unit-of-time. [36]
Most large railroads have created profiles of what traffic they want, based on productivity measurements instead of profitability. [37] John W. Barriger, who was a senior officer of six different shorter Class I railroads in the 1940s-to-1970s, defined the productivity of inputs as "technical efficiency" and the profitability of outputs as "commercial efficiency." [38] The confusion of these two concepts would lead to an irrational bias against short hauls when they are lucratively competitive with truck but more costly than long hauls per unit of measurement.
The inertia of existing belief underlies the ideas of two pioneers in the art of advertising, Al Ries and Jack Trout. They coined the word "positioning" to stand for the pre-eminence of our first association with some product or service. "The easy way to get into a person's mind is to be first." [39] "Not only does the human mind reject information which does not match its prior knowledge or experience, it doesn't have much prior knowledge or experience to work with. In our overcommunicated society, the human mind is a totally inadequate container." [40]
Therefore, it is not surprising that railroads have been their own worst enemy in promoting the old paradigm. In the nineteenth century they were rewarded for making their daily task efficiency; short-haul statistics are not as efficient as long-haul statistics; ergo, railroads in due course fell into the belief that they are not competitive in the short-haul a priori.
CONCLUSION
The belief that trucks are more efficient than rail for low-density and short-haul freight is half-truth covering up half-falsehood. Truck is superior for low-density moves, but rail is superior for short hauls where density (lot size and complementary volume) is sufficient. That sufficiency can usually be met in urban areas, so that lot size may not have to be a full railcar or even a full truckload in order to warrant rail movement there. In fact, there should be a niche for lower-purchase-price, lower-capacity rail equipment such as the bygone 40-foot boxcar of 3,700-cubic-foot capacity.
The great impediment for railroads in the truckload short-haul market is their failure to see the opportunity and offer service. Abandoned urban right-of-way, infrequent and unreliable switching service, and nonexistent solictation are the legacies of a self-fulfilling prophecy about their own short-haul competitiveness.
Mr. Erickson is principal, Rail Cents Enterprises, Inc., P.O. Box 235, Wallingford, Pennsylvania 19086.
ENDNOTES
(1.) 1998 truckload revenues (i.e., not including less-than-truckload) are estimated at $290 billion as follows:
U.S. Census Bureau, 1997 Census of Transportation, Table 1 Eno Transportation Foundation, 1998 est. General freight trucking for-hire local truckload $8.46 billion local truck: $144 billion
-- = 69.1% [right arrow] x 69.l%
General freight trucking, for-hire total local $12.25 billion $100 billion
(local truckload)
General freight trucking, for-hire, intercity T.A. $51.14 billion intercity truck $283 billion
-- = 67.2% [right arrow] x 67.2%
General freight trucking, for-hire, total intercity $76.15 billion $190 billion
(intercity truckload)
Total 1998 Truckload: $290 billion
(2.) Charles Sanders Peirce, "First Paper--The Fixation of Belief' from "Illustrations of the Logic of Science," Popular Science Monthly (November, 1877): pp. 1-15.
(3.) "...[A] paradigm is 'the basic way of perceiving, thinking, valuing, and doing associated with a particular vision of reality. A dominant paradigm is seldom if ever stated explicitly; it exists as unquestioned, tacit understanding that is transmitted through culture....'" Willis Harmon's definition in An Incomplete Guide to the Future, as quoted by Joel Barker in Paradigms, the Business of Discovering the Future (New York, N.Y: HarperCollins Publishers, 1992), pp. 31-32.
(4.) John R. Meyer, Chairman, Task Force on Railroad Productivity, "Improving Railroad Productivity, Final Report" to The National Commission on Productivity and The Council of Economic Advisers (November, 1973), p. 159.
(5.) John Meyer, Morton Peck, John Stenason, and Charles Zwick, The Economics of Competition in the Transportation Industries (Cambridge, MA: Harvard University Press, 1959).
(6.) Conversely, Meyer's studies of urban passenger economics were not generally accepted. In 1965 he co-authored with John Kain and Martin Wohl The Urban Transportation Problem, which promoted exclusive-use busways, of which only ten miles in Pittsburgh and eight miles in Miami have been built.
(7.) John Meyer, Gerald Kraft, and Jean-Paul Valette, The Role of Transportation in Regional Economic Development, a Charles River Associates Research Study (Lexington Books, D.C. Health & Co.) p. 41.
(8.) Interstate Commerce Commission, Cost Finding Section, "Cost Study of Class I Motor Carriers of General Freight in the Middlewest Territory-Year 1953" (Washington, D.C., 1954), p. 7, Table 2, 1/2 col. 2.
(9.) The Economics of Competition in the Transportation Industries, Table 1, page 46, from data reported by Class I railroads to the ICC for 1954-55. In 1989, the ICC adopted the costing methodology used in this book, explaining it in a footnote at 5 ICC2nd 894, 896: "Regression analysis is a method for establishing a statistical relationship between the mean of a 'dependent' variable and the values of set 'independent' variables. In URCS [Uniform Rail Costing System] regression analysis is used to attribute railroad expenses to capacity and output variables. The portions of expenses thus dichotomized are referred to as 'fixed' and 'variable' expenses, respectively."
(10.) The Economics of Competition in the Transportation Industries, p. 151.
(11.) Regression analysis has the biases of measuring current practice, not potential, and of assuming linearity, although rail operations appear to be irregular stepwise functions. Whether linearity or discontinuity is more appropriate is perhaps the oldest argument in mathematics, starting with the four paradoxes of Zeno of Elea in the Fifth Century B.C. See Men of Mathematics, by E. T. Bell, Simon & Schuster, New York, 1937, pp. 23-25.
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