Thursday, November 22, 2012

Robber Barons, Then And Now

This Naked Capitalism post on Lincoln's work for the railroads seems to make this an opportune time to post a few inconvenient truths about how our economy developed in the nineteenth century. Here's an essay from Brad DeLong, pared down to some essential points for a blog post by Mark Thoma (Thoma's comments in italics). Click through the link to get to the whole thing if you're interested, skim if you're not:
Robber Barons, by J. Bradford DeLong, 1998: 
Matthew Josephson called them "Robber Barons". He wanted readers to think back to their European history classes, back to thugs with spears on horses who did nothing save fight each other and loot merchant caravans that passed under the walls of their castles. He judged that their wealth was in no sense of their own creation, but was like a tax levied upon the productive workers and craftsmen of the American economy. Many others agreed: President Theodore Roosevelt--the Republican Roosevelt, president in the first decade of this century--spoke of the "malefactors of great wealth" and embraced a public, political role for the government in "anti-trust": controlling, curbing, and breaking up large private concentrations of economic power. 
Their defenders--many bought and paid for, a few not--painted a different picture: the billionaires were examples of how America was a society of untrammeled opportunity, where people could rise to great heights of wealth and achievement on their industry and skill alone; they were public benefactors who built up their profitable enterprises out of a sense of obligation to the consumer; they were well-loved philanthropists; they were "industrial statesmen." 
Over the past century and a half the American economy has been at times relatively open to, and at times closed to the ascension of "billionaires." Becoming a "billionaire" has never been "easy." But it was next to impossible before 1870, or between 1929 and 1980. And at other times--between 1870 and 1929, or since 1980--there has been something about the American economy that opened roads to the accumulation of great wealth that were at other times closed. 
Does it matter whether an economy is open to the accumulation of extraordinary amounts of private wealth? When the economy is more friendly to the creation of billionaires, is economic growth faster? Or slower? And what role does politics play? Are political forces generally hostile to great fortunes, or are they generally in partnership? And when the political system turns out to be corrupt--to serve as a committee for extracting wealth from the people and putting it into the pockets of the politically well-connected super-rich--what is to be done about it? What can be done to curb explicit and implicit corruption without also reducing the pressure in the engine of capital accumulation and economic growth? 
These are big questions. This essay makes only a start at answering them.

Here's an interesting note: 
And this is the third thing ... about the turn of the century robber barons: even though the base of their fortunes was the railroad industry, they were for the most part more manipulators of finance than builders of new track. Fortune came from the ability to acquire ownership of a profitable railroad and then to capitalize those profits by selling securities to the public. Fortune came from profiting from a shift--either upward or downward--in investors' perceptions of the railroad's future profits. It was the tight integration of industry with finance that made the turn of the twentieth century fortunes possible. ... 
The jump in wealth of the founders of these lines of business was intimately tied up with the creation of a thick, well-functioning market for industrial securities. And that would turn out to be a source of weakness when Wall Street came under fire during the Great Depression. ...

And: 
Progressives did not believe that the billionaires were just the helpless puppets of market forces. In 1896 Democratic presidential candidate William Jennings Bryan called for the end to the crucifixion of the farmer by a gold standard working in the interests of Morgan and his fellow plutocrats. Fifteen years later Louis Brandeis warned Morgan partner Thomas Lamont--after whom Harvard University's main undergraduate library is named-that it was in fact in Morgan's interest to support the Progressive reform program. If Morgan's partners did not do so, Brandeis warned, the Progressives would recede. Their successors on the left wing of American politics would be real anarchists and real socialists (DeLong, 1991). 
Louis Brandeis and company did not much care whether the billionaires of what they called the "money trust" were in any sense economically efficient. In Brandeis's mind, they're evil because their interests were large..., size alone made a billionaire's fortune "dangerous, highly dangerous." ... 
Populists from the American midwest found this set of issues a reliable one, and their senators took turns calling for political and economic changes to reduce the power exercised by the super-rich. ... 
The political debate was resolved only by the Great Depression. The presumed link between the stock market crash and the Depression left the securities industry without political defenders. The old guard of Progressives won during the 1930s what they had not been able to win in the three earlier decades. 
Ironically, it was Republican president Herbert Hoover who triggered the process. Hoover thought that Wall Street speculators were prolonging the Depression and refusing to take steps to restore prosperity. He threatened investigations to persuade New York financiers to turn the corner around which he was sure prosperity waited. Thus, as Franklin D. Roosevelt put it, "the money changers were cast down from their high place in the temple of our civilization." The Depression's financial market reforms act broke the links between board membership, investment banking, and commercial banking-based management of asset portfolios that had marked American finance before 1930. Investment bankers could no longer be commercial bankers. Depositors' money could not be directly used to support the prices of newly-issued securities. Directorates could not be interlocked: that bankers could not be on the boards of directors of firms that were their clients.

 D. The Drying-Up of the Flow of Billionaires 
Whatever else Depression-era financial reforms did (and there are those who think it crippled the ability of Wall Street to channel finance to new corporations) and whatever else the New Deal did (and it did a lot to bring social democracy to the United States and to level the income distribution), one important--and intended--consequence was that thereafter it was next to impossible to become a billionaire. 
Not that it was ever easy to become a billionaire, mind you, but the channels through which lucky, skilled, dedicated, and ruthless entrepreneurs had ascended were largely closed off. ... 
The hostility of Roosevelt's New Deal to massive private concentrations of economic power was effective: the flow of new billionaires dried up, as the links between finance and industry that they had used to climb to the heights of fortune were cut.

This is the important question: 
Did the hostility of America's political and economic environment to billionaires between 1930 and 1980 harm the American economy? Did it slow the rate of economic growth by discouraging entrepreneurship? As an economist--someone who believes that there are always tradeoffs--I would think "yes." I would think that there must have been a price paid by the closing off of the channels of financing for entrepreneurship through which E.H. Harriman, James J. Hill, George F. Baker, Louis Swift, George Eastman, and others had made their fortunes. 
But if so, there are no signs of it in aggregate growth data. ... 
V. Tentative Conclusions

 So what can Americans expect from their current crop of billionaires? Or rather what can they expect from the processes that have allowed their creation? 
They should be extremely dubious about billionaires' social utility. Their relative absence from the 1930s to the 1970s did not seem to harm economic growth in the United States. Their predecessors' claim to much of their wealth is, to see the least, dubious. And their large-scale presence was associated with the serious corruption of American politics.

    Perhaps those who are going to be industrial statesmen have as reasonable a chance of truly being industrial statesmen in an environment hostile to billionaires, as in an environment friendly to their creation: at that level of operations, after all, money is just how people keep the score in their competitions against nature and against each other. ...

On the other hand, their personal consumption is only an infinitesimal proportion of their total wealth. Much less of Andrew Carnegie's fortune from his steel mills went to his own personal consumption than has gone to his attempts to promote international peace, or to build libraries to increase literacy.

The child who in mid-nineteenth century Scotland painfully learned to read from the handful of books he had access to in his family's two-room cottage as they fell closer and closer to the edge of starvation--that child is visible in the Carnegie libraries that still stand in several hundred cities and towns in the United States, and is visible around us now. ...

So if there is a lesson, it is roughly as follows: Politics can put curbs on the accumulation of extraordinary amounts of wealth. And there is a very strong sense in which an unequal society is an ugly society. I like the distribution of wealth in the United States as it stood in 1975 much more than I like the relative contribution of wealth today. But would breaking up Microsoft five years ago have increased the pace of technological development in software? Probably not. And diminishing subsidies for railroad construction would not have given the United States a nation-spanning railroad network more quickly.

So there are still a lot of questions and few answers. At what level does corruption become intolerable and undermine the legitimacy of democracy? How large are the entrepreneurial benefits from the finance-industrial development nexus through which the truly astonishing fortunes are developed? To what extent are the Jay Goulds and Leland Stanfords embarrassing but tolerable side-effects of successful and broad economic development?

I know what the issues are. But I do not yet--not even for the late nineteenth- and early twentieth-century United States--feel like I have even a firm belief on what the answers will turn out to be.
Robber Barons (Economist's View)

And I've cited this article before, but it's always useful as reminder:
One legendary moment of greatness was the completion of the first transcontinental. There is a legend-making photo taken at Promontory Summit, Utah, May 1869, when the Union Pacific and Central Pacific joined tracks and reunited a war-divided people. After that came the Northern Pacific; the Great Northern; the Atchison, Topeka, and Santa Fe; * and other lines that brought a transportation revolution to the West. White debunks the legend, arguing that the achievement was shoddy and chaotic and benefited the nation very little. The money that built those lines did not come from the railroad men themselves—Leland Stanford, Collis Huntington, Henry Villard, James J. Hill, and Thomas Scott. Instead, they persuaded Congress to lay out enormous subsidies.
The Union Pacific alone raked in $43 million in interest subsidies on federal loans, and railroads east and west of the Mississippi River received more than 131 million acres in free land. White explains that largesse as a result of political corruption. But then why did so many investors, including shrewd Germans and Brits, throw money into these enterprises as well? Not until the 20th century would there be enough white settlement and shipping traffic in the West to justify such investments. No rational need existed for decades, yet a railroad-building frenzy went on and on. The builders made a lot of money for themselves, but why did so many people give them so much capital?

Other government subsidies came in the form of stifling, with armed force, any resistance from Indians or any move on the part of immigrant laborers to try to make the railroads serve their needs. White describes in brilliant detail the infamous Pullman strike of 1893, when the government blatantly took the side of the corporations. "By and large, the western railroads remained what they had been before the strike—bloated, ill managed, heavily indebted, and corrupt.  … Many were now wards of the federal courts, and all of them depended on the might of the federal government to control their own workers."

The dean of business historians Alfred Chandler Jr., in The Visible Hand(1977), described the 19th-century railroad corporation as the harbinger of order, rationality, and efficient organization. White scoffs at such an image. These corporations were made up of "divided, quarrelsome, petulant, arrogant, and often astonishingly inept men." And instead of the conventional leftist picture of a ruthless, soulless, but all-powerful business that crushed its opponents, the infamous Octopus of novelist Frank Norris, he finds "a group of fat men in an Octopus suit." They were morally challenged men, dripping with hypocrisy, mean-spirited, and grasping.
But White, who is a master of invective, describes them also as stupid and incompetent. Their only claim to genius was their ability "to find occasions for profit in their own ineptitude." Leland Stanford, for example, was well-known to his companions as dim-witted, careless, selfish, lazy, and yet filled with "immense self-regard." That tone of criticism appears all through the era. The Massachusetts railroad executive Charles Francis Adams, dismissed his fellow businessmen as creatures of "low instincts, … essentially unattractive and uninteresting." This is essentially White's view also, and he finds their success more than reprehensible; that such reptilian types ever gained so much power and wealth is bewildering. That their descendants still command so much authority is beyond understanding.

Richard White is a Thorstein Veblen for our times. Veblen (1857-1929) was an academic economist too radical for his own day. He and White share contempt for the business community; it was Veblen who invented such phrases as "conspicuous consumption" and "businesslike mismanagement." There are differences: White is a more engaging writer than Veblen, less given to windy circumlocutions, and he grounds his charges in deep and thorough research. Dripping with venom, this book is nonetheless a model of the historian's use of primary sources, narrative skill, and insightful reinterpretation of the Gilded Age. It is easily the best business history I have read, and it carries a weight of argument and evidence that cannot be denied.  Another difference is that Veblen was dismissed by Stanford University for his "immorality" and unpopular views, while White is one of that university's most honored professors.
The Transcontinental Travesty (Slate)

And lest you think anything's changed:
PITTSBURGH (AP) — It sounds like a free-market success story: a natural gas boom created by drilling company innovation, delivering a vast new source of cheap energy without the government subsidies that solar and wind power demand.

"The free market has worked its magic," the Barnett Shale Energy Education Council, an industry group, claimed over the summer.

The boom happened "away from the greedy grasp of Washington," the American Enterprise Institute, a think tank, wrote in an essay this year.

If bureaucrats "had known this was going on," the essay went on, "surely Washington would have done something to slow it down, tax it more, or stop it altogether."

But those who helped pioneer the technique known as hydraulic fracturing, or fracking, recall a different path. Over three decades, from the shale fields of Texas and Wyoming to the Marcellus in the Northeast, the federal government contributed more than $100 million in research to develop fracking, and billions more in tax breaks.
[...] The first federal energy subsidies began in 1916, and until the 1970s they "focused almost exclusively on increasing the production of domestic oil and natural gas," according to the Congressional Budget Office.

More recently, the natural gas and petroleum industries altogether accounted for about $2.8 billion in federal energy subsidies in the 2010 fiscal year and about $14.7 billion went to renewable energies, the Department of Energy found. The figures include both direct expenditures and tax credits.

Congress passed a huge tax break in 1980 specifically to encourage unconventional natural gas drilling, noted Alex Trembath, a researcher at the Breakthrough Institute, a California nonprofit that supports new ways of thinking about energy and the environment. Trembath said that the Department of Energy invested about $137 million in gas research over three decades, and that the federal tax credit for drillers amounted to $10 billion between 1980 and 2002.

The work wasn't all industry or all government, but both.
Decades of federal dollars helped fuel gas boom (Associated Press)
The day after Barack Obama won his re-election bid, the chief executive of Murray Energy, Robert E. Murray, gathered his staff and began to read a prayer. He asked God to forgive America for its choice of president, and he prayed for “guidance in this drastic time with the drastic decisions that will be made to have any hope of our survival as an American business enterprise.” He closed with a heartfelt “amen.”

Then he fired 156 people.

Murray explained that the layoffs were inevitable in light of Obama’s re-election. He’s not the only coal baron to cite the president as the cause of the industry’s supposed death knell. CONSOL Energy Inc. President Nicholas Deluliis blamed Obama for 145 planned layoffs, while Alpha Natural Resources CEO Kevin Crutchfield cited the Obama-created “regulatory environment” as the basis for 1,200 job cuts this fall. Other coal executives poured millions into (ultimately ineffective) anti-Obama super PACs. The Romney campaign itself tried to stoke anger against the administration to win over voters in coal-rich Ohio, echoing the coal CEOs’ invectives against Obama and his environmental regulation.

There’s a slight flaw, however, in this blame game: It’s almost entirely made-up. Obama has indeed increased regulation over the coal industry to limit output of carbon and mercury, mandating that older plants update their scrubbers. But his efforts have been fairly mild and nonaggressive, and the regulations—which have the benefit of protecting Americans from mercury poisoning—aren’t cripplingly costly to coal companies. 
Coal CEO Prays for Deliverance From Obama, Fires Workers (Slate)

The only thing that's changed is that they've realized the usefulness of effective propaganda. Remember, when politicians say they want to shrink government and let the "free" market decide, they mean for labor, not for themselves. There is no such thing as a free market.

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