#twa douglas skyliner

[stone-cold-groove]

As the Sky Chiefs pass in the night.

[johnjankovic1]

A Faustian Bargain: Schumpeter's Magic of Monopolies

Railroad iron is a magician's rod, in its power to evoke the sleeping energies of land and water. Ralph Emerson, The Young America, 1844

Industrial policy universally remains the precursor to the take-off of industry whether it was in Britain, America or elsewhere. But a more clinical study reveals how one common denominator emerges in each vignette of such meteoric growth: monopoly rights. On every single occasion across recorded history where a laggard industrializes a prototypical paradigm is espoused. A curated few are anointed to be national champions: (i) the British East India Company and the Hudson’s Bay Company were darlings of economic growth for London; (ii) the Dutch East India Company was the Netherlands’ janissary to brave the high seas; (iii) America chartered the juggernauts of the Pacific and United States Mail Steamship Companies to reconcile the Western frontier with the Atlantic Seaboard; (iv) the triumvirate of Ford, General Motors and Chrysler achieved market dominance at the beck and call of Washington; (v) North American Aviation and Rocketdyne outflanked the Soviets in America’s space odyssey; (vi) Boeing and McDonnell Douglas bestrode the sector of commercial aircraft; (vii) Pan-Am, United and TWA were incubated in mail-route subsidies. In each new venture fraught with prohibitive fixed costs any scalability requires stable revenue. Oligopolies therefore are established to marginalize smaller competitors whose presence are anathema to innovation and swift industrialization.

Industrial policy takes a myriad of shapes and the hegemony via monopoly rights whether by public procurement or other privileges perennially remains the sine quo non of innovation. Quite simply when a company finds themselves awash with capital they are far likelier to adopt state-of-the-art technology in an abbreviated time frame. Yes, legislated favouritism at first blush does appear unjust but it eclipses any other accelerant. If abandoned to the mercies of free markets fast development would be next to impossible. When government dotes on a select few their capital accumulation as de facto monopolists enables them to grow apace. Indeed the long history of industrialization shows it has never been the child of laissez-faire capitalism. In every single instance has there been the presence of government intervention. In America’s industrial firmament the majority of companies have become household names as the direct progeny of tariffs, subsidies or charters. This Hamiltonian philosophy of protecting infant industries against entrenched incumbents from abroad has been a repudiation of Economist Adam Smith’s invisible hand at least in the embryonic stages of growth. So whilst it may be a Faustian bargain of pricing out smaller companies this sacrifice of market liberties heralded a Golden Age.

The magic of monopolies was a force disrupter in the 19th century. What free market purists habitually fail to acknowledge is how the ‘creative destruction’ of a few firms perpetually remains the lynchpin of frenetic growth. The foregoing neologism first coined by Economist Joseph Schumpeter throws into relief how businesses with stable profits when unencumbered by competitors demonstrate a boldness in their expansion. Why? Companies which have amassed a war chest of capital plough their money more liberally into technology, capital assets and vertical integration to preserve their market dominance. For instance the incipient stages of America’s industrial revolution largely hinged on the railroad monopolies sponsored by government as they sought sturdier and cheaper steel at scale. The spillover from this hunger precipitated the adoption of Britain’s Bessemer process whose innovation later transcended rails as the advent of skyscrapers began to inform the skyline silhouettes of cities everywhere. Akin to economic jazz a synergy spontaneously manifested between railroads and steel mills as the rest of American businesses rode the coattails from the attendant rise in productivity. Mass production therefrom implied more tracks, heavier tonnage on those said tracks and the substitution of masonry with steel for buildings.

The externalities from railroad monopolies were many. It is not hyperbole to state America’s formative years were built on the back of railway demand after first being the beneficiary of maritime commerce and state-sponsored infrastructure like inter alia canals, ports and lighthouses. In the absence of these monopolies the fast cadence of industrialization would have been stillborn devoid of the springboard purveyed by government. Lawmakers took great pains to foster this infrastructure by being guarantors of stable profits whose knock-on effect conduced to stable markets for steelmakers. The Gilded Age then is the legacy of this synergy wrought by the paternalism of industrial policy amidst the heyday of wealth and urbanization. Contrary to conventional wisdom the robber barons of this era did not manifest ex nihilo by bootstrapping their own riches. Andrew Carnegie’s steel empire, John D. Rockefeller’s oil kingdom, Cornelius Vanderbilt or Jay Gould’s railroad fortunes all derived from real estate allotments on public land, eminent domain authority, route monopolies, mail contracts, direct subsidies and more. Unbeknownst to the layman these industry captains were not entirely self-made. In a social bargain of a utilitarian nature a few rent-seeking companies would become handmaidens to America’s exceptionalism.

Henceforth no longer would the nation be an agrarian confederation but rather an industrial heavyweight. Commerce could be swiftly conducted over savage terrains and forbidden plains in a matter of days not weeks. The achievement of industrial policy for railroads was to truncate time whereby America industrialized in less than half a century. The real muscle behind the Union’s Manifest Destiny was this lattice of iron crisscrossing the nation. Railroads thus revolutionized production insofar as this infrastructure was a fillip to the transportation of freight and people where things organized themselves organically between the merchant class in bustling cities and the farmers and miners in far-off counties. All that was required to jumpstart this growth was the seed of industrial policy bestowing privileges upon a few business interests. By 1900 America’s production exceeded that of Great Britain which hitherto was lauded as the world’s workshop (Wright 1990:652). Where maritime commerce might have been nation-building the humble railroad was itself empire-building. Such continental integration through rail links across a landmass larger than Western Europe spawned new epicentres of business overnight. This economic miracle was unfathomably quick.