Until recently, I was under the impression that America was founded on the principles of free market capitalism, whereby private individuals and companies made their own economic decisions without a central government or state actor tipping the scales in favor of certain companies or individuals over others.
After reading Americana, it’s clear to me that I was wrong. The author Bhu Srinivasan makes the case from the earliest days of America’s existence, state and federal governments have played key roles in funding, protecting, and advancing US technology, as well as over-riding property rights, and regulating industries that become too powerful.
I was under the impression that this kind of state involvement in markets was mostly a modern phenomenon, but the track record of great American innovations that relied on state support tells me otherwise.
Below are a few interesting examples Bhu highlights in his book of government intervention in the early days of America…
Examples of Government Intervention in American Markets
- In the 1790s, New York offered monopoly rights to entrepreneurs to create a steamboat that could successfully travel from Manhattan to Albany, enabling people to settle the interior of the state at scale. The first successful voyage in 1807 granted Robert Livingston and Robert Fulton a monopoly on all steamboat traffic in New York for 20 years.
- In 1817, the state of New York funded America’s first long-distance canal with $7.8 million of debt, at a time when the entire US federal government budget was only $8 million. This project did work, and set off a chain-reaction of other states (Maryland, Pennsylvania, Ohio, and others) to fund similar canal projects, which ended up being responsible for 10x-ing the populations of the region now known as America’s Midwest.
- In the early 1830s when entrepreneurs began trying to build railroads in America, states granted eminent domain rights to companies that forced property owners to sell their land in order to enable more direct rail lines.
- In 1843 the US House of Representatives funded Samuel Morse with $30,000 to build a telegraph that would work across long distances in outdoor settings. Morse’s success eventually enabled instant communication across America.
- The tariff act of 1870 imposed a $28/ton tariff on imported British steel (which cost $30-$40/ton without the tariff) to allow American steel producers to be profitable while they became more efficient and competitive. This worked, but meant that Americans were forced to pay almost twice as much for their steel in the late 1800s.
- Governments created the limited-liability corporation, patents, copyrights, trademark rights that established the rules of American business, allowing inventors and entrepreneurs to earn for their work despite none of these concepts having any physical or natural precedent. These patents played crucial roles in the development of the electric light among other innovations.
- The Sherman Act of 1890 forced monopoly businesses in many industries (which were originally legal) to unwind their consolidated powers. Standard Oil is the most famous example, but nearly every industrial vertical was trending towards monopoly “trusts” in the late 1800s prior to this government action.
- Poor sanitation conditions in US meat-packing factories and unknown substances in patent medicines in the late 1800s led to the creation of the “Federal Meat Inspection Act” and “Pure Food and Drug Act”, which gave the federal government authority over quality assurance for “private products meant for private consumption”, eventually paving the way for the creation of the FDA.
Counterpoints
- The automobile seems to have been mostly a free-market driven innovation. Henry Ford raised $28,000 from private investors to start Ford, and never raised another dollar for the rest of his life.
- Prohibition in America was another example of government intervention, but ultimately created a temporary push back on government power, whereby many went underground to consume alcohol, often sourcing it from lower quality vendors, which countered the government food and drug regulations that were introduced a couple decades earlier.
There is a particular quote from Bhu I like which I think provides helpful nuance in understanding the role of capitalism in America over the last 400 years:
“American Capitalism was not intellectually rigid. It was never the laissez-faire laboratory of purist, principled imaginations. The strength of the system came through its pragmatism and flexibility, juggling competing and contradictory ideas… and eventually finding political solutions to seemingly intractable issues, especially after the scars of the civil war. Just as successful species adapted to changes in their environment, democracy would shape capitalism to adapt to social conditions, with compromise emerging as the best form of insurance against any risk of revolution. This middle ground, forrged by the clashing interactions of capitalism and democracy, a free people acting to check free markets, would give rise to the regulatory framework that would govern its economic system.”
A few questions for stackers:
- What role do you think governments should play in free markets?
- Are there any examples of free markets successfully preventing monopolies and ensuring transparency in food/drug products without any government intervention?
- If America’s federal government never took steps to fund/protect/nurture early innovations, would America be more, less, or equally as successful as it is today?
- What catalysts have led to the shifting role of America’s federal government from a position of nurturing and funding innovation to limiting innovation today?