I am taking a break from reading Ayn Rand’s “Captialism: The Unknown Ideal” and have started in on “The Myth of the Robber Barons” by Burt Folsom.  I have not read a great deal as yet, just the first couple of chapters, but it is fascinating reading.  The author gives a pretty complete picture of the big businessmen of the 19th century, both those he calls “political entrepreneurs,” those who rely on government assistance and priviledge to survive, and “market entrepreneurs” who were the innovators who endlessly worked to cut costs and improve their products.

The first quote is actually from the foreward by Forrest McDonald and it gives a pretty good summary of what follows in the text of the book.

Political promotion of economic development is inherently futile for it invariably rewards incompetence: if incompetence is rewarded, incompetence will be the product, and when incompetence is the product, politicians will insist that increased planning and increased regulation is the appropriate remedy.

We see this observation in action all the time in the news.

The second quote is referring to the steamboat business in New York in the early 19th century, just after Robert Fulton built and operated his first steamboat.  The book points out that what is little known is the Fulton enjoyed an actual monopoly granted to him by the New York State legislature to be the sole steamboat operator in the state for 30 years.  In 1824 the monopoly was struck down by the US Supreme Court on the grounds that only the federal government could regulate interstate commerce.  (Sadly, implicit in that decision was the idea that the federal government could, if it wanted, grant a monopoly, which in later years it would do in the case of railroads.)

The effects of the end of the monopoly were dramatic and rapid.

The triumph of market entrepreneurs in steamboating led to improvements in technology.  As one man observed, “The boat builders, freed from the domination of the Fulton-Livingston interests, were quick to develop new ideas that before had no encouragement from capital.”  These new ideas included tubular boilers to replace the heavy and expensive copper boilers Fulton used.  Cordwood for fuel was also a major cost for Fulton, but innovators soon found that anthracite coal worked well under the new tubular boilers, so “the expense for fuel was cut down one-half.”

The real value of removing the Fulton monopoly was that the costs of steamboating dropped.  Passenger traffic, for example, from New York City to Albany immediately dropped from seven dollars to three after Gibbons v. Ogden [the case that ended the Fulton monopoly].  Fulton’s group couldn’t meet the new rates and soon went bankrupt.  Gibbons and Vanderbilt, meanwhile, adopted the new technology, cut their costs, and earned $40,000 profit each year during the late 1820s.