Saturday, July 16, 2011

Important Difference: Market Entrepreneurs vs. Political Entrepreneurs

Economists LOVE entrepreneurs!  We don't always get to talk about our love because we usually get stuck worrying about other things, but they really are our preferred plan for economic prosperity.  Historian Richard White (Stanford University) wrote a new book called Railroaded about the western railroads.  He states that they are the first examples of modern corporations.  He also talks about how they were largely funded by public dollars.

The railroads have been feared and maligned.  They've been called monopolies and robber barons.  They also present a perfect example of a key distinction: Market Entrepreneurship or Political Entrepreneurship.  For the Union Pacific, they are a pitch perfect example of political entrepreneurship.  They were founded by an act of congress, signed by President Lincoln.  They were initially paid by the mile of track.  So they created train lines to nowhere.  It was taken down by the Crédit Mobilier scandal.  An elaborate fraud was created, and it was eventually found when members of congress were being bribed with shares of It was found that congressmen were bribed with shares of Crédit Mobilier financial firm.  Tens of millions of government moneys were little more than stolen.  Eventually the Union Pacific Railway was taken over by financier Jay Gould.  Other famous examples of political entrepreneurs that participated in this and other projects are Thomas Durant, Oakes Ames, Grenville Dodge, and Henry Villard.  Richard White does a good job of explaining political entrepreneurship, "It's the trading of public favors for private goods."

Unfortunately, White does not do a great job of explaining that there were also great Market Entrepreneurs in the railroad industry as well.  He largely concentrates on railroad tycoons bilking the American taxpayer, which is a worthy, if tired, story.  He should feature James J. Hill, who built the Great Northern railway.  He did it without public funds, and was one of few railway lines to survive the Panic of 1893, which was a major recession that was largely caused by misallocation of resources to railway lines.  When Great Northern was expanding to become of the transcontinentals he was quoted as saying, "What we want is the best possible line, shortest distance, lowest grades, and least curvature we can build. We do not care enough for Rocky Mountains scenery to spend a large sum of money developing it."  This was in direct contrast to Henry Villard who wasted fortunes of public dollars on just that.  Hill was rewarded by becoming one of the wealthiest Americans in history, but his name is too far gone from these discussions.  It is to our own detriment that we uniformly blame entrepreneurs for business cycle waves.  The Panic of 1893 was not caused by Hill, but he is all to often dragged down with the Villard's, the Gould's, and the Durant's.  People like Hill are the ones who create the jobs and product for their own interest, but their actions also benefit everybody's social welfare!  A perfect example of someone who is in no way Pareto efficient or optimal, but actually does increase social welfare.

Here is another article that promotes the book.

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