The Free Market: A Case Study

The new American railroads - anonymous photogr...

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We hear the free market damned everyday, lately. Problem is those damning the free market don’t have a clue what the free market is. America’s problem since 1890 or so has been that we haven’t had a free market.

What we have had is a semi free market distorted by whatever advantage could be bought from the Congress. (By the way, one of my favorite jokes is: If pro is the opposite of con, what is the opposite of progress?) Let’s look at a one industry example.

We had the most magnificent transportation system the world had ever seen for both passenger and freight (and mail). What did we do? We came very, very near to regulating it death. The remnants of this system are still the backbone that allows all our other systems of commerce, particularly steel and electricity to function. What am I talking about here? The American Railroad network.

During the First World War the government actually took over the railroads and ran them into the ground (and only paid for a fraction of the damage they did.) World War Two was a little better but not by much. Especially after the looting of the ’30s.

In the late ’40s and ’50s there was enough vitality remaining to help rebuild Europe’s railroads, but the depredations continued. Forbidden by law from being allowed to innovate, forbidden to make a reasonable profit they just kind of held on.

Because of the way the bidding was done the railroad never made a profit on the carrying the mail. By the way, when I was young you could mail a letter at 3:00 pm in New York and it would be delivered in Chicago by 10:30 am the next day, Try that now. FedEx didn’t exist, because the market was covered.

And for that matter, if you ordered your new piano from New York it would arrive shortly in say Moorefield, Nebraska, no problem, take your wagon down to station and pick it up. Now you know how Sears and Montgomery Ward (and for that matter, Chicago, itself) got so big in the 19th century. It was the railroad, and the continent sized common market they created. By the way, you, yourself could take that trip too. Almost any trip over about 15 miles was done by train.

Since we have mentioned Moorefield, let’s talk about it a little more. The last time I was down there it had about 50 or so inhabitants, and one business. That business is a grain elevator owned by a farm coop.

Its serves as a collection/sale point for the local farmers and ships their grain to the far corners of the world. It does this in trainload lots. Some of those mile to mile and a half long trains of covered hoppers you are waiting for today may well have come from tiny little Moorefield, that doesn’t even have a gas station, let alone a grocery store.

Now multiply that by one of these elevators placed every ten miles from roughly the center of Nebraska to Eastern Ohio and from North Dakota to Texas. That is the miracle of American agriculture. There is nothing in the world, and never has been, to compare with it.

How did we get here? When Kentucky and Tennessee were settled in the early years of the 19th Century, and somewhat before, the first settlers were hunters, followed closely by farmers. As soon as somebody could get a mill working (for profit, oh the horror) they would grow wheat. They seemed to like bread. There is a letter written home to Russia from the American midwest in the late 19th century that states, “and we eat wheaten bread, every day.” You see, in Russia, indeed most of Europe, wheat bread was so expensive that it was only for holidays.

Soon though they were growing that all American crop; corn. They did well with it too, with astounding (for the day) yields. They had far more than they could use and they were broke.

What to do? Of course what they did was call their Congressman and lobby for a subsidy to not grow corn, that’s the right answer.

What, you don’t believe those tough old Scots-Irish who would become the backbone of America got subsidies? Well, you’re right. They did have a problem though, if you know anything about handling grain (or flour), you know that packing it in a burlap bag and shipping it in a leaky wooden boat isn’t going to work.

What to do? What to do?

Two things actually. One is raise hogs. Ohio, southern Indiana, and Kentucky corn made Cincinnati the pork capital of the world, for a while. Porkopolis, they called it. The second is to make whiskey, which can easily be described as concentrated corn. Now you know why the American Whiskeys such as Bourbon come from Kentucky and Tennessee. Keeps you warm on cold nights, too.

This is one of the stories about the westward migration you don’t hear much about. Farmers going broke because it cost more to ship the crop to market than it was worth. This happened all the way to the Mississippi River before the Civil War. This is also why states like North Dakota and Nebraska and a bunch of the others, even Texas to a large extent were the highway, very few stopped to settle.

They could tell that the prairie was fertile, and it was obviously going to be easier to till ( assuming the steel plow) than working around the trees of the old Northwest. But it was, and still is to some extent, lonely. (Read your Willa Cather.) That has a lot to do with how middle America has remained so individualistic, compared to city folk. And you couldn’t possibly float a crop down the Platte River, then or now.

It took the railroad, with its unequaled capacity to carry high bulk, low value commodities to make this land productive. And it is a miracle of the ages, the way America produces food stock and move it to market.

Railroad are funny creatures though, they cost a lot to build, particularly since they had to purchase their own right of way, unlike highways and pay property taxes. To break even on a railroad, you need a certain amount of traffic, which depends on a bunch of factors. The weird thing is though; you can expand your traffic, within reason, above this point and make a bunch of money, without raising your costs much, but if you go below the break even point, your costs don’t decrease significantly. This is called a high fixed cost business. The way we regulated railroads had nothing to do with this, of course, we mostly insisted that the railroad maintain every mile of road they had ever built, and pay the men whatever they wanted, whether it had any traffic at all or not.

The automobile became the curse of the railroad. In the beginning the railroads  helped. The Pennsylvania Railroad was one of the sponsors of the good road movement, which had a lot to do with the Lincoln Highway. The Pennsy also owned a pretty good chunk of Greyhound. Their thinking was that for short-haul, farm to market, or local delivery the motor vehicle would fit very nicely into the existing transportation system.

They were right, it would have, and did for a while. Where it bit them in the backside was, the government still wouldn’t let them abandon track, and motor vehicles (and) roads improved to the point where long distance travel was fun, and trucking was feasible .

They made the same mistake with airlines incidentally.

But the real problem was that roads were subsidized by the taxpayer, as were airlines. You really didn’t think that your gas price, or for that matter your airline ticket, actually paid for all the expenses they generated, did you? No, they don’t. The railroad is the most efficient transportation system ever invented.

I hope you realize that I am not referring to government sponsored and subsidized so-called high-speed rail. If it was such a good idea, it wouldn’t need government money. Another name for it is pork. Oink.

So there is a short story of one industry that started in the free market and was almost killed, in some ways, it actually was, by overbearing regulation.

Maybe we should try the free market, before we condemn it so thoroughly.

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About NEO
Lineman, Electrician, Industrial Control technician, Staking Engineer, Inspector, Quality Assurance Manager, Chief Operations Officer

4 Responses to The Free Market: A Case Study

  1. Pingback: Of Railroads and Governments « nebraskaenergyobserver

  2. Pingback: The Interurban Era, Revisited Not « nebraskaenergyobserver

  3. Pingback: ICC Redux; Let’s Kill the Railroads « nebraskaenergyobserver

  4. Pingback: Capitalism: The Only Choice for a Moral Person « nebraskaenergyobserver

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