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New book asks: Did 'crony capitalism' prolong the Civil War?


When subsidization kills innovation...

In a new book titled "Uncle Sam Can't Count," Burton W. Folsom Jr. and wife Anita Folsom examine the history of largely disastrous government intervention in the American economy, through its impact on the early fur trade to 19th century railroad construction to the green energy boondoggles of today.

Following in the footsteps of Burt Folsom's excellent "The Myth of the Robber Barons," much of the book centers on the constant battle between political entrepreneurs, who seek to use their political influence to capture monopoly profits and stifle competition, and market entrepreneurs, who seek to make a better product or deliver a superior service at a lower price than the crony capitalists with whom they compete.

Uncle Sam Can't CountIn the shipbuilding business of the mid-1800s, it turns out that government intervention, specifically its mass subsidization of a handful of steamboat operators, may have literally prolonged the Civil War, in direct contradiction of one of government's stated purposes for funding the industry in the first place.

In the steamboat business, Cornelius Vanderbilt was the walking embodiment of market entrepreneurship, breaking up one shipping monopoly after the next by unrelentingly undercutting his competitors and continually improving his fleet. Vanderbilt's success was so overwhelming that in California, his opponents used 75% or $672,000 of their annual $900,000 subsidy to pay him not to run any of his ships there.

Such efforts would ultimately lead to the widespread deregulation and ending of subsidies to the industry.

But before that point was reached, the government lavished crony capitalists such as Edward K. Collins with hundreds of thousands of dollars in subsidies each year, deterring competitors and disincentivizing innovation, the consequences of which may have included lengthier and more deadly Civil War.

Here's the story as told by the Folsoms in "Uncle Sam Can't Count" [emphasis ours]:

[instory-book ISBN="9780062292698"]

"Americans were slower to turn to iron ships because their costs of iron construction were higher than those in England. Still, American engineers had been experimenting with iron hulls and screw propellers during the 1840s, partly because iron was more durable in handling the big engines built after 1840. [Edward K.] Collins apparently considered using iron, but he was no innovator. So he ended up using wood hulls for his powerful engines, and his ships were not as safe or as seaworthy because of that. With Collins using wood, American steamship operators feared switching to iron. They had little margin for error because their chief competitor was subsidized. Yet in 1851, Vanderbilt became one of the first Americans to build and run iron ships (he used them on his California route). But it wasn't until Collins's subsidy expired in 1858 that Americans began experimenting with iron hulls in a serious way.

Later, this delay in experimenting with iron meant that iron ships could not be much of a force during the Civil War. John Ericsson, who in 1862 built the iron-hulled Monitor, had been promoting the advantages of iron ships since 1843. But in 1847, when Collins decided to use wood for his subsidized fleet, only Vanderbilt dared to risk more experiments with iron hulls. The irony here is that one of the central arguments for subsidizing Collins was that his fleet would be usable in case of war. Yet his outmoded wooden ships--even the ones that didn't sink--would have been helpless against ironclad opponents. Vanderbilt gave his 5,000-ton ship, the Vanderbilt, as a permanent gift to the United States during the Civil War. He even offered to sink the Confederates' Merrimac, asking only that everyone stay "out of the way when I am hunting the critter." He never got the chance, and, partly because of the Collins subsidy, the United States never got the chance to blockade Confederate ports with an iron fleet. Who knows whether or not that would have shortened the war? It certainly would have relieved those who feared that the Confederates would buy iron ships from England. And it would have relieved Secretary of War Edwin Stanton, who worried that the Merrimac would go on a rampage, sail up the Potomac unmolested, and blow the dome off the Capitol."

What was the overall lesson of America's experiment with federally subsidized shipbuilding during the 1800s? The Folsoms write [links ours]:

"The political entrepreneurs--Robert Fulton, Edward Collins, and Samuel Cunard--cannot be lumped with Thomas Gibbons, Cornelius Vanderbilt, and William Inman, the market entrepreneurs, because of their differing attitudes toward innovation, technology, price-cutting, monopolies, and federal aid. In the steamship industry, political entrepreneurship often led to price-fixing, technological stagnation, and the bribing of competitors and politicians. The market entrepreneurs were the innovators and rate-cutters, which was necessary in order to survive against subsidized opponents. Some of them were personally repugnant--Vanderbilt disinherited his son and placed his own wife in asylum, while Gibbons tried to horsewhip one of his rivals. But they advanced their industry and cut passenger fares permanently. Since Vanderbilt ended up as the richest man in America during his lifetime, perhaps he was blessed to have received no federal aid. Collins, like Thomas McKenney in the earlier fur trade, seemed to have more problems than blessings from all the subsidies he took from the federal government."

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