Sunday, July 17, 2011

Michael Kazin Dreams of a Past that Never Happened

Reviewing Richard White's new book about the history of the railroads, Michael Kazin longs for an Edenic yesterday before Hayek and Schumpeter and the equivocal blessings of creative destruction:
At the end of his powerful book, ... White floats a counterfactual balloon: what if the steel lines that spanned the continent had been “built as demand required” instead of as part of a competitive dash that caused as much waste and hardship as progress? Slower, more rational development would have lessened the damage to the environment, given Native Americans a chance to adapt to conquest and perhaps saved thousands of lives. White advises, “We need to think about what did not happen in order to think historically.”

Such an alternative past would probably require a different country. The history of American capitalism is stuffed with tales of industries that overbuilt and overpromised and left bankruptcies and distressed ecosystems in their wake: gold and silver mining, oil drilling and nuclear power, to name a few. The railroad barons wielded more power than other businessmen in the Gilded Age.
Kazin longs for "lower, more rational development  ... instead of as part of a competitive dash that caused as much waste and hardship as progress."  He calls this vision "a counterfactual."  But in fact, we achieved just exactly the kind of rationalization that Kazin so admires from the greatest of all American central planners, J. P. Morgan, starting no later than July 20, 1885 (126 years ago Wednesday) when Morgan hauled the president of the New York Central and the vice-president of the Pennsylvania aboard his yacht and bullied them into an end to their competitive warfare. Ron Chernow explains:
The basic weakness  with America's railroad system was overbuilding, which forced the roads into endless rounds of rate cuts and wage cuts to service debt.  At the same time, the massive power of their largest consumers--notably Rockefeller in oil and Carnegie in steel--forced them to grant preferential rebates to big shippers, enraging small western farmers and businessmen and stimulating calls for government regulation. For Pierpont, the leading symbol of railway monopoly, pure competition was never an option.
So Chernow in The House of Morgan at 55-6.  The "Corsair Compact," as the papers called it, can be understood as the episode that made Morgan Morgan.  By the next decade,  he had become a substantive--"Morganization."  Chernow again:
Oppressed by debt and overbuilding, more than a third of the country's railway trackage fell into receivership, and English investors exhorted Pierpont to bring order to the industry.  Thwarted by gentleman's agreements, Pierpont now tried another approach to forming railway cartels: he could reorganize bankrupt roads and traansfer control to himself. Then he wouldn't be at the whim of government or feuding railway chiefs.  ... Virtually every bankrupt road east of the Mississippi eventually passed through such reorganization ... . Some thirty-three thousand miles of railroad-one-sixth of the country's trackage--was morganized.  The companies' combined revenues approached an amount equal to half the U.S. government's annual receipts.
So Chernow, 67. The railroad barons," then, may indeed have "wielded more power than other businessmen in the Gilded Age."  But not so much as the financier Morgan.  Kazin may--I suspect he does--have reservations about this concentration of power.  And there are empirical questions here that are not easily answered in the library.  Was "destructive competition" more damaging in the long run to a free economy than Morgan-style consolidation?  Possibly; without a reliable counter-example it is hard to know.  Meanwhile as Kazin quotes White, "we need to think about what did not happen."  And what did not happen was certainly not free competition.

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