March 20, 2015

Many in the public see large corporations as having tremendous power, and the government as the only entity large enough to check that power. Internet users cheered when the FCC acted to regulate the telecommunications companies on the federal level. But will this move really help individual consumers? We dive into the history of government regulation, starting with the Railroads.

Railroads were the first industry to see regulation from the federal government.

Railroads were the first industry to see regulation from the federal government.

How much power do large businesses have? They do have a lot. They can greatly boost prosperity by building a plant and hiring many people from a community, or have the opposite effect when they close down operations with mass layoffs. They can transform American culture itself, as Ford Motors did when it began mass-production of the automobile, and McDonald’s did when it popularized inexpensive and quickly-prepared fast food. Large businesses often obtain sweetheart deals for themselves, securing government subsidies to offset their costs, and negotiating favorable tax payments compared to what others pay. It’s easy for an individual to feel powerless against a large corporation which didn’t give them a pay raise as an employee or is raising prices on them as a customer.

So it’s tempting for people to turn to another organization to give them a louder voice: the government. After all, since individuals can vote, the government represents “we the people”. It’s what we all learned in high school civics. As our representatives, government officials can be called upon to do things that ordinary people cannot … such as taking on the Titans of Industry.

How well has the government performed that function? Even diehard Libertarians may be quite surprised.

Where it all began: the Railroads

In the early 1800s, long-distance travel was grueling. Travel took weeks or months by horse-drawn carriage. Rough, winding trails crossed mountainous areas and through streams and rivers, at least the ones shallow enough to allow crossing. Freight traveled by the same routes. Riverboat was an alternative, but only a limited number of destinations could be reached by water. Thus, the debut of steam locomotives and rail travel became one of the most significant innovations of the century. Hazardous travel which had previously taken months became smooth and efficient over mere days. As quickly as new rail lines could be built, travelers and freight haulers began to greatly favor rail over trail.

However, once the public came to rely on the speed and dependability of the railroads, those who owned the railroads recognized their increasing dominance and began to take advantage. Prices were increased by the railroads which held a virtual monopoly on travel to some cities, squeezing shippers and farmers. In other areas where there was more than one railroad, the railroad companies colluded to form “pools” to maintain high prices. Cartoons appeared in newspapers of the day about the greedy “robber barons”. The public called on politicians to “do something”, and do something they did. The federal government finally took action to regulate the railroads, stopping the exorbitant price increases and ensuring access to transportation for all.

It’s a familiar narrative, the one that most people know. But as so often happens, what we know just ain’t so.

What the history books left out

Historians such as Gabriel Kolko have re-examined that narrative. His research, cited in the essay Big Business and the Rise of American Statism by Roy Childs, discusses the details of the push for government regulation of the railroads. The dates and quotations here are from that essay:

Kolko found that, due to the many dozens of railroads entering the transportation market, railroad rates had in fact declined continuously over the period from 1877 to 1916, and as a result, railroads were facing a squeeze on profits. The main methods used by competitors to cut into each other’s markets were rate wars (price cutting) and rebates.

Business leaders did indeed attempt to form “pools” to maintain high prices, but unknown to most people today, all of those attempts failed due to competitive pressures. The first serious pooling effort was by the New York Central Railroad in 1874, but that pool lasted for only six months. In 1876, a Southwestern Railroad Association was formed by seven major companies in an attempt to voluntarily enforce a pool; it didn’t work and collapsed in early 1878.

(Note: By “pooling”, the railroads were attempting to form cartels — a notoriously unsuccessful tactic in a free market. The ineffective OPEC oil cartel offers a modern example. Members of OPEC start by colluding to limit oil production in order to increase prices. But as prices rise, individual members have an increasing incentive to “cheat” by producing more oil than agreed, to take advantage of the higher prices. Other members soon do the same, leading to a supply glut, a return to lower prices, and a breakdown of the cartel.)

Rate wars during 1881 pushed freight rates down over 50%, and rates declined for the nation as a whole by 20% between 1882 and 1886. Facing falling prices and reduced profits, the railroads needed an authority to step in who had the capability to enforce their pooling agreements. And they found one.

In 1876, the first significant federal regulatory bill was introduced in Congress by the Philadelphia & Reading Railroad; it died in committee. By 1879, there was “a general unanimity among pool executives that without government sanctions, the railroads would never maintain or stabilize rates”. Chauncey Depew, an attorney for the New York Central Railroad, championed a regulatory commission’s necessity “for the protection of both the public and the railroads”. Railroad baron William Vanderbilt agreed, calling on the federal government to step in to end “cutthroat competition”.

The result was the Interstate Commerce Act of 1887, creating the federal government’s first-ever regulatory agency of an industry: the Interstate Commerce Commission (ICC).

But the new ICC didn’t stop the rate wars. In 1889 during a prolonged rate war, financier J.P. Morgan, who was significantly invested in the rail industry, summoned the presidents of major railroads to New York to find ways to maintain rates and enforce the act, but that failed as well. The larger companies then began seeking more power for the ICC. In 1891, one railroad baron advocated that the entire matter of setting rates be turned over to the ICC. The president of Santa Fe Railroad, E.P. Ripley, called for a system that “would do away with the enormous wastes of the competitive system, and permit business to follow the line of least resistance”. Alexander Cassatt, president of the Pennsylvania Railroad, spoke out in favor of increased power for the ICC to directly regulate rates. Even steel giant Andrew Carnegie got behind the push for greater regulation. Historian Gabriel Kolko further noted that railroads found federal regulation a more efficient and less costly alternative compared to being subject to several state jurisdictions, noting that “the federal regulation of railroads offered them protection, actual or potential, from harassment by the states” and that “it was this threat of state legislative attacks that kept the railroads solidly behind the ICC and federal regulation”.

In other words, the main push for regulation didn’t come from the public but from the railroads themselves. Why? Handing control to the government was seen as a way to achieve price stability and guaranteed profits, as opposed to the ever-changing challenges of free-market competition.

Once the door was cracked open …

AT&T was another company controlled by J.P. Morgan, who knew a useful tool when he saw it. So AT&T also sought regulation. The company got what it wanted in 1910 when it was placed under the jurisdiction of the ICC, and competitive price cutting in the telephone industry became a thing of the past. AT&T’s president T.N. Vail said, “we believe in and were the first to advocate … governmental control and regulation of public utilities.” Elbert Gary of U.S. Steel wanted the same advantages for his industry too, and in 1911 he appeared before a Congressional committee and told astonished members, “I believe we must come to enforced publicity and governmental control, even as to prices.”

Like hungry wolves fighting over freshly-killed prey, various interests battled for control of the ICC and its authority to use coercive force. At first, the railroads used it to achieve the “stability” of prices and profits they had sought. Later, freight shippers gained an upper hand, calling on the ICC to enact railroad network neutrality. Farmers and merchants were unhappy that railroads charged lower rates for long-distance shipments than for short-run hauls (railroads were able to charge less dollars per mile for long-distance transport, since the costs of short-term freight were higher). The ICC’s “railroad neutrality” decision mandated the same rate for all distances. The railroad industry then began a period of decline, and many small local railroads, facing higher costs, went out-of-business or merged with larger companies which had a better price-to-cost ratio, beginning the formation of today’s railroad oligopoly. By the 1930s, short-distance transport began to see a new class of competition: the trucking industry. But the railroads asserted their influence upon the ICC once again, lobbying the regulators to expand their authority over the nascent trucking industry in the interest of “fairness”, stifling it for many years, until the general de-regulation of the 1980s.

Even consumer advocate Ralph Nader, often a supporter of expanded government control, got fed up with the ICC. As Nader stated in 1970, the commission had become “primarily a forum at which transportation interests divide up the national transportation market”.

What about monopolies?

So the public wasn’t being plundered by railroad monopolies, as popular myth portrays. But what about actual monopolies, wouldn’t those require the government to step in?

The authors of The Market for Liberty (page 28) cite the interesting case of Alcoa, a large aluminum manufacturer. Alcoa, and its Canadian subsidiary Alcan, held a total monopoly on the aluminum production in North America from 1888 to 1940. That could’ve been a big opportunity to rake in big profits. But counter-intuitively, Alcoa reduced its prices by an incredible 97% over that time period. Why? Because of what’s known as “monopolistic competition”. That is, even though it had a monopoly, it acted as though it were facing would-be competitors. Aluminum was a genuinely free market; there were no governmental agencies to impose barriers, rules, or restrictions to inhibit competitors from entering the market. So a new competitor could’ve appeared at any time, and Alcoa’s executives knew it. Thus, despite the lack of competition, they continued to find ways to become more efficient and to use innovative technologies to cut their prices and keep potential competitors at bay. They reduced their prices from $8 to 20¢ per pound over that 52-year period, greatly benefiting their customers.

Big Business’s best friend

There’s only one way for a large company to establish and maintain true dominance, and that’s for it to “get in” with government regulators. In 2009, giant tobacco maker Phillip Morris called for the Food & Drug Administration (FDA) to regulate tobacco for the first time. Not because it was concerned about safety, but because, like the railroads, it was facing stiff competition from small and foreign competitors. As an established business, its executives knew that the FDA’s regulatory barriers would tend to keep out new competitors and protect its profit margins.

Big Business and Big Government working together: Revolutionary for its time, the 1948 Tucker Torpedo was a car the public never had a chance to buy.

Big Business and Big Government working together: Revolutionary for its time, the 1948 Tucker Torpedo was a car the public never had a chance to buy.

There are many other examples of Big Business calling Big Government to their aid. A few have been so spectacular that they’ve even drawn the attention of Hollywood. One instance was featured in the movie The Aviator. While the film focused on Howard Hughes’ personal quirks, it also featured Hughes’ creation of Trans World Airlines (TWA) as a competitor to to Pan Am, which had been a government-sanctioned monopoly at the time. TWA’s biggest hurdle was not competing with Pan Am, but overcoming the government regulators who were protecting it. A memorable scene was when a corrupt Senator subpoenaed Hughes to appear for a public hearing about supposed fraud, but Hughes turned the tables by calling attention to the Senator’s dirty backroom dealings, resulting in Hughes receiving cheers from the crowd as the Senator scurried away from the cameras.

Another example was portrayed in the movie Tucker: The Man and His Dream. There’s a reason the public never heard of this car or its advanced safety innovations: Preston Tucker was crushed by the Big Three automakers and their powerful defenders in government. In one scene, Tucker got a boost when Howard Hughes, who was also fighting the good fight against the Establishment, stepped in to lend a hand to fellow entrepreneur. Although forced out of business, he “won” in this climactic courtroom scene (video). (This movie is a must-see by Libertarians!)

The wheel that gets the grease

Many people hold the belief government is looking out for the little guy and that it represents “we the people”. But it’s time to consider: who has more influence over government policy? An individual who gets 1 vote every few years for each political office? Or a corporation which can afford a high-powered legal team, has lobbyists on staff, and often has government officials on speed-dial?

The average individual doesn’t even know who their representatives are, but executives at corporations often know their representatives personally. Furthermore, individuals have no vote at all over government regulatory agencies; the commissioners of the FCC and other agencies are appointed, often by politicians who’ve been incumbents for decades. When the government makes a new law or a regulation, there should be no doubt who their action will favor.

Back to Net Neutrality

Like electric and gas utilities, telecommunications companies were already regulated by the states through Public Utilities Commissions. These PUCs allow only one company to operate in each area. Thus, the companies get a guaranteed customer base, and merely need to submit proposed rate increases to the PUC. These rate hikes are nearly always approved in exchange for the companies being willing to “play ball”. But it’s no wonder customers aren’t too happy about having only one “choice”. The proper solution is to dissolve the PUCs and restore competition and consumer choice … not to add another layer of government involvement.

The telecommunications companies had opposed the FCC’s intervention over the internet. But, like the railroads, they’ll soon discover the advantages of becoming linked at the hip with a federal agency. The FCC’s regulations — the ones just enacted, and the ones yet to come — will give the established corporations a further advantage over any new competitors. The result is that emerging technologies (such as the potential to transmit data over existing electrical power lines) will be smothered. Upstart competitors will find the rules a barrier to entry, and the established companies will have little reason to risk the costs of innovation when existing methods already meet the government’s minimal requirements.

Marketplace vs government influence

In today’s restricted marketplace, companies can establish dominance by using government to enact rules which benefit themselves and which restrain their competitors. Corporations have a strong incentive to ally themselves with the power brokers in federal, state, and local government, obtaining favorable rules and outright favors. And why not? Pleasing thousands of customers, dealing with upstart competitors, and taking risks on innovation are much more difficult than simply pleasing a small group of government officials.

But in a free marketplace, any business — no matter how large or small — can only make gains by providing a product or service that its customers find valuable, at prices they can afford. And any person can leap in as an entrepreneur to challenge the incumbent businesses, introducing new ideas which are vastly superior to existing technologies. Such as when the internet supplanted the telephone industry, and when telephones themselves supplanted postal delivery.

Individuals have much more influence in the marketplace than they do with government. No need to wait for a November election; a consumer “votes” every time they use a product or service. Every dollar spent shows that they favor a product and the company providing it, indicating that they feel that the price, terms, and service are acceptable.

Large vs small on equal footing

Libertarians support a genuinely free market without government interference precisely because we do not want to see Big Business gain a chokehold. But we’re not necessarily opposed to large businesses either, so long as they achieve their size by voluntary means.

Small firms can deliver personal service and customize their products for individual consumers. Large companies can use economies-of-scale to reduce overhead and give their customers lower-cost solutions, and can raise the capital needed to build large-scale infrastructure. Both large and small companies have their place. It’s up to the marketplace — in other words, up to all individuals — to vote with their dollars to decide whether large or small businesses do the best job.

In a libertarian society, if a business becomes large, it’s only because they provide superior value compared to their competitors and in a way that pleases many people. In an authoritarian society, businesses lean on government’s ability to use coercive force to keep their competitors at bay and support rules which favor themselves, and that is how they become large. It is this latter method that Libertarians would do away with.

The Preston Tuckers, and other entrepreneurs smothered by Big Business and Big Government whose stories never made it to movie screens, deserve a fair-shake at offering their solutions to the public. A genuinely free and open marketplace gives every entrepreneur maximum opportunity and every consumer maximum choice, and that is why Libertarians champion it.

For Liberty,

S.L. Malleck
LPMN Vice Chair

Concerned about the expansion of government control and the erosion of individual liberty? Please consider joining and becoming active with the Libertarian Party of Minnesota. Libertarians support liberty on all issues, all the time! Libertarianism is a philosophical and political movement to promote personal freedom, strong civil liberties, a genuinely free marketplace, and peace.

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