Market Entrepreneurs

Between the generation of our Founding and World War II, there have been other “greatest” generations too.  Perhaps the least appreciated in our time has been that post-Civil War generation of market entrepreneurs, who led America from being a second tier economic power to being the industrial powerhouse of the world.  In today’s economic downturn, it is perhaps helpful to remember the method that led to the most success before, as well as those ways that did not work in the past.  One distinction that needs to be raised immediately is one between market entrepreneur and political entrepreneur.  Businessmen aren’t angels and neither are congressmen or plain folk, but competition tends to bring out better performance in people, whereas subsidization from public (tax) money risks funding and perpetuating substandard performance and inefficiencies.

Businessmen will often try to get favors or handouts from the government, because it may be easier than gathering together the necessary venture capital.  Very often after that first taste, they return again and again to the same trough rather than wean off the public dole.  The market entrepreneur pursues his business privately through private means.  The political entrepreneur is in league with government, to the extent that he pursues his business semi-privately but through means that are exclusively or partially public.  Then as today, political entrepreneurs are hard to avoid and even harder to get rid of, even though they are a drag on economic vitality and injurious to the wellbeing of the country.  Market entrepreneurs go about their business freely and mostly wanting to be left alone, creating wealth and growing the economy.  Government gets big off taxing productive market entrepreneurial activities, ironically enabling far too many government payouts to leeches in the business community of a political entrepreneurial bent.

Regulated bailouts could be the worst of all worlds if it institutionalizes business dependency on the government over the long haul and/or results in the permanent bureaucratic management by government of a private sector activity.  Some historical examples are instructive.  In the 1840s a political entrepreneur approached Congress to help him develop the U.S. steamship route between New York and Liverpool, and to cut into the business of rival English ships.  Since the British government subsidized shipping, our man Edward Collins said he would need $3 million of taxpayers’ money to construct five vessels and then an annual subsidy of $385,000 to drive passenger fares down low enough to compete.

Playing on congressional fears of British domination in trade, Collins got his money.  He only built four ships, but who’s counting.  While he promised to phase out the annual subsidy, he was soon lobbying for more, and more, and more (up to $850,000 per year).  Cornelius Vanderbilt tried to get in on the action too but by offering a cheaper deal, however the Congress had formed a cozy relationship with Collins so it turned him down.  Forced to compete entirely, he used privately financed and self-insured vessels, slowed the ships’ speed down to save on fuel, and invented a new, cheaper passenger class called steerage.  A year later, Vanderbilt’s operation was flourishing while Collins was even worse off and returned again to Congress asking for higher subsidy.  When two of his ships sank because of poor maintenance and running the engines too fast, Collins had to resort to Congress for their replacement value.  The Senate finally got wise after looking into the management practices, and no doubt comparing results and bottom line with that of Vanderbilt’s operation.  Collins lost his subsidy and within a year went bankrupt, enabling Vanderbilt to pick up more of the business privately, at less cost and far better value to customers—not to mention dominance of the seas from an American side.

A decade or so later Congress began subsidizing political entrepreneurs representing transcontinental railroad ventures: the Union Pacific, the Central Pacific, and later the Northern Pacific.  The government gave these companies tens of millions of acres of free land and tens of millions of dollars, and because the companies had no incentive to be efficient, the railroads evidenced shoddy construction, as well as circuitous routes and uneven grades.  The privately funded railroad called Great Northern, however, was a success that put the others to shame.  James J. Hill built his line for durability and efficiency and without government money, taking the shortest distance, lowest grades and least curvature that he could.  He also supervised construction and imported the very highest quality Bessemer rails.  Although these cost more up front, they also lasted a long time and were more dependable.  He took the same approach to his railroad bridges, constructing the solid granite Stone Arch Bridge 2,100 feet long and 82 feet high across the Mississippi River—a Minneapolis landmark for many decades.

Similar stories mark the success of Andrew Carnegie in steel, and John D. Rockefeller in oil.  These men were market entrepreneurs not “robber barons.”  They created wealth and propelled the United States to first rank economically in the world.  Moreover, so far as generations go, they stood head and shoulders above the risk-averse, sycophantic and slinking political entrepreneurs, who pass for so many CEOs and leaders in American business today.