Introduction to American economic history:

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Capitalist markets not only automatically provide competitors with billions of signals every day about supply and demand, but create economic incentives for economically appropriate responses to those signals so that the economy is to a large extent self regulating. "This all-pervasive economic feedback mechanism - - - [makes] the market run smoothly, while it helps allocate resources with an efficiency no bureaucracy could hope to match."

  Gordon gives us captains of industry and small financiers, innovative tinkerers and shrewd managers, saints and rogues. He gives us "the grandeur and pettiness, the triumphs and tragedies." It is a fascinating milieu - as fascinating as the disorderly and vigorously creative nation itself.
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  Taken in total, it is a paean of praise for the creative possibilities of people working in systems of economic and political freedom - in market capitalism and representative democracy - that facilitate competition and productive and commercial activities. At points, the vast benefits of an economically and politically empowered civil society are also glimpsed. Sprinkled throughout the book are basic facts about economics stated in simple, easily accessible terms. This is the sort of knowledge all students should take away from Econ. 101 - but all too many seem not to have gotten.
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  The superiority - indeed, the indispensability - of free competitive capitalist markets is emphasized by Gordon. Capitalist markets not only automatically provide competitors with billions of signals every day about supply and demand, but create economic incentives for economically appropriate responses to those signals so that the economy is to a large extent self regulating. "This all-pervasive economic feedback mechanism - - - [makes] the market run smoothly, while it helps allocate resources with an efficiency no bureaucracy could hope to match."

  "If the twentieth century has taught us anything about economics, it is that free markets work better than any other kind. Virtually every possible substitute has been tried since World War I ended, and they have without exception, failed to work. Indeed, the more they have departed from the free-market model, the more they have failed to create wealth and improve living standards. North Korea, one of the last thoroughly Marxist regimes left, can produce ballistic missiles but not enough food to feed its own people."

When costs are "socialized" - spread among everyone in the community - the market system of signals and incentives is bypassed - with predictable results.

   A different approach is now being tried with health care. Unfortunately, as Gordon points out, when costs are "socialized" - spread among everyone in the community - the market system of signals and incentives is bypassed - with predictable results.

  "[Instead] of each family paying their share of the communal bill, they sent it to their employers instead. Since buyers cared not at all about medical costs, sellers such as doctors and hospitals were only too happy to increase them, year after year, until the costs threatened to become insupportable."

  The purpose of economic activities in competitive markets is to enrich and enlarge the lives of the people, and to provide the economic foundations for progress in all aspects of life by facilitating the monetary success of the providers of goods and services. Because of the incentives inherent in market capitalism, as Gordon points out, "even the most rapacious of the so-called robber barons did much more good than harm, especially in the long term."
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  Gordon provides tales not only of how vast fortunes were made or lost, but also of the follies and great philanthropic uses much of the wealth was ultimately dedicated to, and of the profound ways in which capitalist market initiatives changed the world. John D. Rockefeller, Andrew Carnegie and Henry Clay Frick played the game rough, but provided the inexpensive oil and steel that made the 20th century the "American Century." Henry Ford achieved far more than just providing inexpensive automobiles.

  "[Ford] also ended the terrible isolation of nineteenth-century rural America, changed the landscape of the country, and made the suburbs the linchpin of American politics."

  Gordon also speculates that by causing the population of draft animals to plummet, Ford was instrumental in creating vast agricultural surpluses that depressed farm prices in the 1920s and helped set off the Great Depression.

  This is a gross oversimplification. Farm prices did not start declining until August of 1929, and total farm income remained about 50% higher than during the prosperous pre-WW-I years until the Great Depression had begun.

Even the recognized giants of economic development and technological progress were beneficiaries of a vast economic system that provided them with the technological, financial, commercial and legal wherewithal for their success.

  The story includes some of the innumerable unsung heroes of economic development - men who moved the ball forward in critical ways but were not the ones who crossed the goal line. It includes the even more innumerable people whose economic empires were too small to be noticed, but who in total provided the foundations of the nation's prosperity.
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  This just serves to emphasize that even the recognized giants of economic development and technological progress were beneficiaries of a vast economic system that provided them with the technological, financial, commercial and legal wherewithal for their success. (There are not just costs that are "externalities," there are also benefits - and these benefits build to vast proportions for both producers and consumers in competitive market capitalist systems.)
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The joint stock company:

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  The predecessor of the modern corporation was the joint stock company. England and Holland developed this method of raising large financial sums and prospered mightily, Gordon points out. Spain did not and soon stagnated.

  "Unlike a partnership, where every partner's entire net worth is at risk, in a joint-stock company only the amount invested can be lost. Using this form of organization, many capitalists - - - could join together to seek the potentially huge profits in exploration and distant trade without having to fear being wiped out by the equally huge risks."

Both the Massachusetts Bay Colony and the Plymouth Colony were joint stock companies.

Rogues:

  Among the rogues are those who have tried to corner a market. Some have been successful - like the very first one - Frederick Philipse - who cornered the wampum (Indian money) market in the 1660s, and Cornelius Vanderbilt who successfully played this game with railroad securities in the early 1800s. Wampum was tubular beads made from clam shells with a hole drilled in them so they could be strung together. The Indian economy was still of vast importance in the New England colonies at that time, and Indian money was correspondingly valuable.
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  Some have not been successful - like two of the Hunt brothers whose attempt to corner the silver market crashed spectacularly in the 1980s. As prices rose, vast volumes of silver came pouring from hoards, silver coins and jewelry and silverware cupboards all over the world, swamping even the Hunt brothers.
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The person credited by history as the "inventor" is usually only the one who puts the last piece of the puzzle together to make it practical.

  George B. Selden never built a single automobile. However, he was a patent attorney and had the insight to patent the concept, drawing from the numerous efforts leading up to a practical "invention." In 1879, he applied for an "improved road engine" powered by "a liquid-hydrocarbon engine of the compression type." He kept this patent pending by filing periodic amended applications until 1895 - just before the Patent Office began tightening its much-abused procedures.
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  Soon, Selden's Electric Vehicle Co. was collecting license fees from innumerable manufacturers who were only too glad to pay for the licenses in order to keep out any new competition. However, one competitor that they tried to keep out was Henry Ford. Ford ignored the license requirement - and won the resulting lawsuit in 1911.
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  Gordon points out that many of the most important industrial "inventions" were really evolutionary in nature. The appellate court called them "social inventions." The person credited by history as the "inventor" is usually only the one who puts the last piece of the puzzle together to make it practical. The railroad, the automobile, the airplane and the computer are prominent examples.
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  Heroes:

• Barings Bank of London financed the trade of the new United States when few others would. It financed the $800,000 used as tribute to pay off the Barbary pirate states in the 1790s. It also financed the Louisiana Purchase.

• Jay Cooke, a young Philadelphia banker, invented the war bond drive. He financed about two thirds of the Civil War for the North by throwing "much of the cost of the war onto the future" that would benefit so immensely from the war's successful conclusion. With about 20% raised by taxes, paper money - "greenbacks - were needed for just about 13% - limiting the rate of wartime inflation and permitting the Northern economy to continue functioning smoothly. The figures for the South were much worse. Prices in the South rose a catastrophic 700% in the first two years of the war, and got much worse thereafter, considerably undermining support for the South's war efforts.

• Amadeo Peter Giannini founded the Bank of Italy in San Francisco. With some quick and daring action, he saved the bank's funds from the fires caused by the earthquake and then reopened on the sidewalk to finance recovery efforts. He foresaw and thus survived the financial panic of 1907 - and ultimately turned his bank into the Bank of America.

• Pres. Dwight Eisenhower was responsible for the Interstate Highway system. His interest arose from his experience after WW-I as a young officer taking part in the first motorized military convoy to cross the continent.

• Donald Nelson left a $700,000 job as the Sears Roebuck Vice President in charge of coordinating the purchase and distribution of the more than 100,000 items sold in its catalogs and stores for the $15,000 position as head of the WW-II Office of Production Management. He brought order out of chaos in the vast industrial effort to supply the nation's massive war needs. Gordon points out not only the impressive production totals of this effort, but the fact that the civilian economy - while suffering from some particular shortages in rubber, gasoline, red meat and automobiles - nevertheless was about the same size at the end of the war as it was prior to the war in 1939.

  Gordon asserts that, while government is concededly incompetent at responding to civilian consumer needs and demands, this experience proves government capabilities for managing large projects like war production. However, he also provides information indicating the degree to which efficiency was not a high priority during this all-out effort to win the war. He describes the massive bureaucratic effort that had evolved in just the first year of the war.

  "The WPB was divided into several 'industrial branches,' each responsible for a particular industry and charged with knowing exactly what every plant in that industry could produce, what it was producing at the moment, what it was already committed to produce in the future, and what inventory it possessed. This data was sent up the line to WPB divisions in charge of overall materials, allocations, production, and procurement decisions. It was at this level that the individual orders for equipment and matériel were weighed against one another, approved, given a priority, and sent to the plant that was to produce them, together with an authorization -- given an equal priority -- to draw on supplies of scarce raw materials.
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  "In view of the task at hand, it is not surprising that the WPB was soon the largest of the wartime bureaucracies in Washington, with more than 25,000 employees by the end of 1942. It used as much paper every day as a good-sized newspaper. What is surprising, perhaps, is that the system worked at all, but work it did as the American economy expanded by 125 percent between 1940 and 1944, from $88.6 billion to $198.7 billion."

  The effort could hardly have been sustained indefinitely. The removal of price controls immediately after the war revealed that the nation had suffered a 50% surge in inflation in just four years. How this bureaucratic effort would have evolved over time if continued in peacetime is easy to imagine. There would have been few Donald Nelson's appointed to lead it.

• Charles E. Wilson gave up a $600,000 salary as president of General Motors in 1953 for a $22,000 position as Secretary of Defense, to massively cut the burden of the defense budget for the Eisenhower administration.

  To this day, men of great accomplishment willingly put aside high salaried positions in the private economy to serve the public - to take a turn on watch - at much lower rates of pay in presidential and gubernatorial administrations. Part of their reward all too often is to be smeared in partisan propaganda by the opposition party and extremist ideologues.

• Nathan Straus was the developer of the department store - Macy's. Even more significant, he fought against a reluctant political establishment to gain pasteurization requirements for milk. He thus saved tens of thousands of babies each year from death by the typhoid, diphtheria, intestinal infection, cholera, and tuberculosis spread by contaminated cows milk. He had to fight city and county officials for decades to achieve this.

  "In the course of his crusade, Straus established at his own expense 297 milk stations in thirty-six cities. Over the course of twenty-five years, 24 million glasses and bottles of safe milk were dispensed. The national death rate for children fell from 125.1 per 1,000 in 1891 to 15.8 per 1,000 in 1925, mostly thanks to pasteurization. Altogether it is estimated that the efforts of Nathan Straus directly saved the lives of 445,800 children."

   For decades, when city and county governments didn't give a damn for the health of children, a successful businessman did.
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King cotton, slavery, and the textile industry:

  The process of industrialization that ultimately brought masses of people out of poverty in the Western world began with cloth in England in the middle of the 18th century. Britain had developed and held closely the secrets of the spinning, carding and combing machines for the manufacture of cotton textiles..
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  However, the U.S. had the enticing offer of capital support and a profitable free market for anyone who could bring the technology into the country. Slater memorized the details of the textile machinery and smuggled them with himself out of Britain where his prospects were far more limited than in the U.S. (For the next two centuries, people of enterprise and rare technological skills would continue to be drawn into the U.S. by these factors, immensely enriching the nation.)
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  But cotton was still not yet king in the southern slave labor economy. Removal of the seeds from the cotton bolls was still a labor intensive job that kept cotton cloth an expensive product.
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Like Spain's gold, such wealth is squandered on commodities for the favored elites rather than directed into investments that develop the rest of the economy on which the bulk of the people depend.

  Just as oil wealth today is often a curse for many nations where it is abundant, Gordon points out that the easy wealth from the slave-grown crops - tobacco, cotton, and especially sugar - was a similar curse two centuries ago. With such wealth at hand, the ruling elites need not trouble themselves with the multifaceted tasks involved in facilitating the people's commerce. It is in their interest to suppress the political and economic powers of civil society. Such governments are not dependent for their revenues on the people's commerce.
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  Like Spain's gold, such wealth is squandered on commodities for the favored elites rather than directed into investments that develop the rest of the economy on which the bulk of the people depend. "The consequences of easy profits to be had from growing cotton in the American South in the first half of the nineteenth century echo even unto today's headlines," Gordon notes.
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  Other slave-grown crops - rice and tobacco - faced stiff competition from abroad towards the end of the 18th century, and indigo had been wiped out by competition from India. Sugar remained immensely profitable - but only in the West Indies.
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"Southern capital became tied up in slaves rather than in other productive assets. And with vast wealth flowing into the South from the cotton trade, other sectors of the economy were neglected as well."

  When Eli Whitney invented his simple cotton gin for removing the seeds from short-staple cotton bolls, the slave economy of the South blossomed. A single bale of cotton was exported to Liverpool in 1784. In 1860, 4 million bales of American cotton arrived.
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  Cotton remained very labor intensive to cultivate and "made slavery hugely profitable." With the importation of slaves barred after 1808, the price of prime field hands soared twenty fold in half a century. Established plantations that couldn't grow the short staple cotton profited by selling their slaves to new plantations in the deep South where the short-staple cotton grew well.

  "Southern capital became tied up in slaves rather than in other productive assets. And with vast wealth flowing into the South from the cotton trade, other sectors of the economy were neglected as well. Industry settled in the North. Immigrants likewise gravitated to the North, where opportunities were far greater. Even the cotton trade itself was largely brokered through New York.
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  "Like Spain before it, the South failed to evolve with the swiftly evolving economy of the nineteenth century and fell farther and farther behind, clinging to the profitable but increasingly archaic system that produced so much wealth and so little happiness.
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  "It was a tragedy waiting to happen, and in 1861 the tragedy began."

"But as usual with labor saving devices, the effect of the sewing machine was to enlarge their business not destroy it." Prices dropped dramatically, permitting demand to increase even more dramatically.

  Today, it is the sewing of clothes with sewing machines that frequently gives third world countries their first industrial leg up.
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  Isaac Merrit Singer was a despicable character who used women shamelessly. However, Gordon points out, he is a prime example of Adam Smith's invisible hand at work. A machinist and a gifted tinkerer, his sewing machine has lifted vast multitudes out of abject poverty - many of them women. He was driven to work on a practical sewing machine by his financial distress when some other products failed to catch on.
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  The sewing machine was an immediate hit. It cut the time for sewing a shirt by about 90%. The Luddites were in their usual idiotic full cry, fearing for the jobs of thousands of shirt makers. "But as usual with labor saving devices, the effect of the sewing machine was to enlarge their business not destroy it." Prices dropped dramatically, permitting demand to increase even more dramatically.
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Cod - and the tragedy of the commons:

  Gordon explains the importance of cod. It is "relatively boneless and easily prepared by drying and salting" - and thus had a very long "shelf life" - an important characteristic before the age of refrigeration.
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  The profitable cod fishing grounds off the New England coast attracted the Pilgrims to that area, Gordon explains, and "indeed it was the cod that saved the first European New Englanders."

  "In 1640, only ten years after Massachusetts Bay Colony was founded by the Puritans, it exported 300,000 cod to Europe. Cod was soon also being traded to the West Indies, in exchange for salt, sugar, and molasses. Plowing the cod waste greatly increased the agricultural productivity of the stony New England soil."

  However, even the prolific cod in the fertile waters of the fishing banks could not escape the tragedy of the commons. (What everybody owns, nobody owns!) By the end of the 20th century, the cod fishery had collapsed as modern fishing fleets rushed to exploit its wealth. The U.S. and Canada are now exercising jurisdiction over the area. Canada banned bottom fishing off the fishing banks in the hope of saving this priceless asset.
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  Gordon offers this sad tale as one of the lessons in the importance of private property ownership and competitive market capitalism - and the impossibility of success with any economic systems that don't employ them.
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The American dream:

  Gordon provides some examples.

• Polish and German immigrants saw opportunity in the 26,000 acres of "black dirt country" near Pine Island in Orange County. It was considered worthless swampland by the Dutch and English who were there first. But the Polish and Germans were from similar areas in Central Europe and recognized the potential

  They acquired small plots of the inexpensive land and undertook the backbreaking work of drainage and clearance. The results were bountiful. Truck farms and vast quantities of onions poured into New York City from the slowly expanding farms. Worth $10 an acre in the 1880s, the farms were worth $200 an acre just two decades later, and $3,000 in the 1960s. While Vidalia onions from southeast Georgia now command the New York market, grass sod and a wide variety of truck farm crops still pour profitably from this area.

• Adolph Todd worked for years trying to duplicate a popular pungent German cheese. He failed - but stumbled on a cheese that became known as Liederkranz cheese. The Monroe Cheese Co. was soon selling all it could produce to New York delicatessens. A century later, however, after numerous mergers and acquisitions, the Kraft General Foods division of Philip Morris mindlessly stopped producing this minor item in its vast array of products, and the secrets of Liederkranz cheese were lost - probably forever.

• Sylvester Graham was a prominent eccentric food faddist during the first half of the 19th century. A spell-binding speaker, he was much in demand as a lecturer and made excellent money. Grahamite hotels and boarding houses that followed his dietary advice sprang up widely. 

  He preached temperance, vegetarianism, and whole grain breads. Although his reasoning looks ludicrous today, much of his advice still looks good. Ultimately, his popularity waned, and he died at just 56 years of age. However, the Kellogg brothers were among his followers and went on to fame and fortune with their cereal products - and his graham crackers remain popular with health conscious consumers to this day.
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Industrial revolution:

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  Gordon tells of some of the forgotten people whose creativity and insights made possible the advances of the historic figures of the industrial revolution.

• Oliver Evans was one of those ingenious individuals who - like Leonardo da Vinci - see clearly the possibilities of the future - but unfortunately before the technology is ripe. Around the beginning of the 19th century, he described in detail the steam-engine driven railroad, how modern refrigerators would work, gas light systems, a solar boiler, and a machine gun.

  On a more immediately practical level, he invented the high-pressure steam engine that powered the 19th century industrial revolution, and an automatic flour mill whose automatic assembly line production principles were applied by Henry Ford and increasingly by many others a century later - and thus powered the 20th century industrial revolution.

  "Together they give him a claim to the title of 'founding father of the American industrial revolution' that few can match."

  Evans high pressure steam engine was much faster, smaller, lighter and more powerful than the Watt engines. His seventeen ton steam dredge for Philadelphia harbor literally drove itself to the waterfront. It was thus "the first land vehicle in America to move by reasons other than muscle power." Soon, steam engines were powering steam boats along the nations rivers - and much else besides.
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  Machines of great complexity had been around for a long time. It was Evans, however, with his automatic flour mill, who originated the concept that the factory itself should be a machine. "You poured grain in one end, and flour came out the other," all powered by the water wheel. Labor was needed just for maintenance, adjustments and monitoring. His flour mill received the third U.S. patent issued after adoption of the Constitution. Both Washington at Mount Vernon and Jefferson at Monticello became licensees.

• James Gordon Bennett combined "elements invented by others" with his own ideas to invent the modern newspaper in the 1830s.

  "By doing so, he greatly enriched and enlarged the lives of his fellow citizens, profoundly changed both politics and everyday life, made for himself one of the great American fortunes, and came to possess a power that no journalist had known, or even dreamed of, before."

• Samuel F. B. Morse, stood on the shoulders of all previous dabblers in electric equipment, such as Sir William Watson, Benjamin Franklin and - most important - Joseph Henry who provided the last pieces of the puzzle for the Morse telegraph. The only thing that was wholly developed by Morse was "his marvelously efficient code."

Banking panics and the business cycle:

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  Gordon tells of the very first financial crisis - in 1792 - when a spectacular speculative effort in bank securities collapsed with losses that were vast for the times. However, the collapse was contained by quick and effective action by Treas. Sec. Alexander Hamilton - and the 1790s proved to be a very prosperous decade.

  "Alas, the lesson went unlearned amid the developing tide of Jeffersonian politics, which held Wall Street and all its works to be, at best, a necessary evil. It would be 195 years -- until the great crash of 1987 -- before the federal government once again moved decisively to prevent a financial panic on Wall Street from turning into a financial disaster.
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  "That is why the panic of 1987 is nearly as forgotten as the first one in 1792. If the federal government has truly learned its lesson, perhaps 1987, not 1929, should be the new image for the nation's collective imagination."

  Pres. Andrew Jackson refused to extend the federal charter of the national bank - then the Second Bank of the United States - for reasons that were good and sufficient involving abuses of the bank's position. However, the bank had served the role of a central bank, and Jackson failed to put anything in its place. Beginning immediately after Jackson's second term with the financial crisis of 1837, widespread bank failures became a feature of subsequent economic downturns until the banking reforms of the New Deal - which themselves left much to be desired. Recent reforms have removed much of the New Deal regulatory restraints on competition between banks.
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  Even now, the appropriate regulation of banks and other financial entities remains far from perfect and labors under a multitude of inherent difficulties.

    Both in 1894 and 1907, it was J.P. Morgan who stepped forth to act as the nation's central banker and prevent widespread financial collapse. Gordon provides some of the details of the 1893 depression and how Morgan saved the day. He also relates the role played (as usual) by private over-expansion and (also unfortunately as usual) the role played by incredibly stupid government economic policies. This time, the government policies involved the mix of gold and silver money.

  "Well, as anyone who has studied economics anywhere other than on Capital Hill could predict, Gresham's law kicked in. This law, an economic truth recognized more than 200 years before Adam Smith was even born, holds that 'bad money drives out good.' Silver worth one-twentieth the price of gold in the market, was declared to be worth one-sixteenth the price of gold when coined in money. So, naturally, people spent the silver and kept the gold. Gold began to trickle out of the Treasury." - - -
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  "With a free-coinage-of-silver Congress and a gold-standard president, the government was paralyzed. Soon it was literally possible to watch gold flee the country as every week millions in bullion were loaded on ships in New York harbor headed for Europe. Bets were being made on exactly when the U.S. government would be forced off the gold standard.

Monopoly:

The major combinations in restraint of trade in the 20th century have all been government sponsored and just as pernicious.

 The worst monopolies are those enforced by government. Government enforced cartels and monopolies are greatly inimical to the public interest.

  "While we still tend to think of monopolies and cartels as the product of top-hatted, nineteenth-century plutocrats conspiring in private against the public good, the major combinations in restraint of trade in this century have all been government sponsored and just as pernicious."

With the end of these monopolies, steamboat traffic and freight tonnage grew rapidly, and commerce thrived along the nation's great rivers.

  Experience with the steamship monopolies granted two centuries ago on the Hudson River and on the Mississippi River at New Orleans was similar. The legal battle wound up in the Supreme Court - argued by Daniel Webster for the plaintiffs challenging the monopolies. In one of the most important Supreme Court decisions of the Marshall Court - Gibbons v. Ogden - the federal government's exclusive rights to regulate interstate commerce were acknowledged, and the state-granted monopolies were declare null and void.
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  With the end of these monopolies, steamboat traffic and freight tonnage grew rapidly, and commerce thrived along the nation's great rivers.
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  However, with monopolies gone, the steamboat operators conspired to form cartels that fixed prices. With price competition thus constrained, other forms of competition naturally arose. The steamboats vied with each other with speed and luxury. (Similar results would occur for airlines and stock brokerage before the deregulation of prices in those industries.) It was an age of great river steamboats and steamboat races.
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"The United States had dodged a socialist bullet and, as a consequence, continued to enjoy the finest, cheapest phone service in the world."

  The "postalization" of the telephone and telegraph monopolies by government for one year during WW-I is set forth by Gordon. Socialists and liberals touted the benefits of government ownership that were supposed to lead to lower rates and better service. However, the government knew nothing of managing these services, so it simply hired AT&T to run its phone system. This simply changed a  regulated private monopoly into an unregulated government monopoly. Rates and fees rose swiftly, public support for government ownership vanished, and AT&T and other telecommunications companies regained ownership.

  "The United States had dodged a socialist bullet and, as a consequence, continued to enjoy the finest, cheapest phone service in the world." 

Mistakes:

  The most successful efforts of government economic development have generally come in the form of infrastructure improvements. Among the most successful have been the Erie Canal in the early 19th century, and the interstate highway system in the middle of the 20th century.
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  Until the railroads pushed through the Appalachians, the Erie Canal provided the most efficient route from the Midwest to the East Coast and then to Europe. It gave New York City a head start that it didn't relinquish until burgeoning trade across the Pacific allowed the Port of Los Angeles--Long Beach to move ahead of New York in 1989.
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  However, even with transportation infrastructure, government has experienced some very costly blunders. The experience of the Erie Railroad demonstrates all the weaknesses of economic decision making twisted for political purposes. From the start, government regulations fatally constrained the railroad's ability to compete. The Erie Railroad "passed through bankruptcy and was reorganized no fewer than six times before losing its corporate identity altogether in the early 1970s," Gordon points out. Chartered in 1832, it became a prime example of how not to run a railroad.
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  The history of the Interstate Commerce Commission ("ICC") demonstrates some of the difficulties inherent in government administered solutions to economic problems. The ICC was created in the 1880s to regulate the rates charged by railroads on their local lines where they had monopoly power. The ICC was quickly co-opted by the railroads, thus providing the means for a cushy cartel enforced by the government agency.
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  When competition and hardship arrived together in the form of trucking and the Great Depression, the railroads were in no shape to effectively respond. So, the ICC took trucking under its misguided regulatory wing as well. Gordon explains:

  "The monopoly on long-distance freight hauling was broken in the 1930s by the nascent trucking industry, which, from its birth, was regulated by the ICC. In the 1970s -- the nation's transportation industry by then a monument to inefficiency -- the administration of Jimmy Carter removed most of the commission's power to set rates. In 1995 it finally expired, having had nothing to do for twenty years. - - - [According to the N.Y. Times, the ICC] 'took as its interest the economic well-being of the industries under its purview. Its regulations jacked up prices and blocked entry by low-priced truckers and joint rail and truck services.' In other words, the ICC had become precisely what the mighty Pennsylvania Railroad had wanted it to be in the 1880s, the leader of a cartel. This is no small reason that both the ICC and the Pennsylvania Railroad are now on the ash heap of history." 

"Being endlessly pushed and pulled by conflicting self-interested forces, governments are naturally inclined to split the differences. Having to cater to the powerful, governments are wont to favor what is over what might be. Fearing accusations of wasting public money on crackpot schemes, governments must rely on senior experts, who all too often are already set in their ways of thinking."

  The management of notable private entities can also become divorced from current economic reality. Dominant companies - like government or any other dominant entities - quickly become "fat, dumb, happy, and almost incredibly bureaucratic." The rise and fall of IBM exemplifies this process. However, with IBM, there was a subsequent recovery from what for many businesses is the terminal disease of hubris.
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  Gordon emphasizes the frequency with which those who have achieved positions of authority - whether in the government or private sector - miss the significance of new inventions. The inventors, themselves, frequently grossly underestimate the societal impact of their inventions. Only the market recognizes all the possibilities.

  "That's why, despite much recent talk, governments will never be any good at fostering new technologies; governments are nothing more than very large committees. Being endlessly pushed and pulled by conflicting self-interested forces, governments are naturally inclined to split the differences. Having to cater to the powerful, governments are wont to favor what is over what might be. Fearing accusations of wasting public money on crackpot schemes, governments must rely on senior experts, who all too often are already set in their ways of thinking.
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  "The result is a rich literature of clouded-crystal-ball pronouncements, dead-end government research projects, and spectacular missed opportunities."

  Gordon mentions British astronomer royal Sir Richard Woolley who called space travel "utter bilge" thirteen years before the first moon landing. He also mentions the wasted billions of the Carter administration effort to develop hopelessly uneconomic synthetic fuels, and the initial refusal of the U.S. government to back the Wright brothers' airplane.

  "But if it is any comfort to the advocates of big government, even the geniuses who make the technological breakthroughs usually fail to foresee how their creations will actually play out in the future. Like the rest of us, they are too deeply imbedded in the world they know. James Watt could hardly have realized that his rotary steam engine would bring forth a whole new civilization. Henry Ford sought only to free people from the tyranny of the horse. He had no idea he was creating a profound instrument of social change."

    Samuel Morse thought his telegraph would be of use only to governments - the only entities up to that time that could afford arrangements for rapid distance communications.
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  The government refused to buy rights to the telegraph - offered to it for a mere $100,000 - leading to the formation of Western Union. However, Western Union, in turn, refused to buy the rights to the telephone offered to it by Alexander Graham Bell. Coincidentally, this offer, too, was for a mere $100,000.

  In the last decades of the 20th century, the bureaucrats who rose to positions of authority in such mighty corporate technology powerhouses as AT&T, Xerox, IBM, and Fairchild Camera would repeatedly fail to see the possibilities of new technology flowing out of their own laboratories and let fortunes slip through their fingers.

  The mighty Ford Motor Co. failed in the 1920s with its Fordson tractor because of the more astute approach of comparatively small International Harvester. International Harvester simply knew the agricultural business better than Ford and offered a wide array of agricultural implements that could be hooked up to its tractor.
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  Sometimes, it is not the successor bureaucrats but the successful entrepreneurs who built a business who fail to keep up with the times.

• Henry Ford disastrously believed that Model T technology was adequate into the 1920s.

• Sewel Avery's conservative management style saved U.S. Gypsum when the Great Depression hit, but led to the competitive demise of Montgomery Ward when he failed to expand to meet the consumer demands of the post WW-II era.

• In 1898, Asa Candler, the founder of Coca Cola, sold the bottling rights for $1. He thought the future of the drink lay with soda fountains.

Success:

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  It is astute business executives, however, who are the key to American economic success.

  As FUTURECASTS has repeatedly emphasized, as between capital, management and labor, it is management that is the key economic variable and determinant of success. Capital and most labor is fungible - and will always seek to serve the best management to maximize their own productivity and prospects.

  Gordon provides some examples:

• It was Gardiner Greene Hubbard and Theodore N. Vail who took Alexander Graham Bell's telephone, created AT&T, made Bell rich, and gave the U.S. by far the best phone system in the world. However, a century later, deregulation introduced some competition into the phone system and demonstrated how immensely superior a competitive market could be even over the most successful of monopolies.

• It was Henry Ford II who inherited the mess left by his grandfather and created the modern Ford Motor Co. that prospered through the 1990s.

• It was Julius Rosenwald who took the concepts of Richard W. Sears and Alvah C. Roebuck and created "the retail titan of much of the twentieth century." As Gordon points out, there is nothing wrong with Sears Roebuck today that a Julius Rosenwald couldn't fix - "if only the company could find one." Gordon explains some of the ways in which Rosenwald brought order out of the chaotic if inspired business practices of Sears.

• It was Desi Arnaz who negotiated a salary cut for himself and Lucille Ball for the "I Love Lucy" show in return for sole ownership of the show - but insisted that the show be filmed rather than produced live with only a low quality kinescope record. On kinescope, yesterday's shows "were worth about the same as yesterday's newspapers" - but when filmed, the syndication rights could be worth hundreds of millions of dollars - something the CBS management hadn't figured out. Even today, the showing of each "I Love Lucy" episode brings in about $100,000.

  Savvy business executives are sometimes able to conjure success out of thin air. The members of New York's prestigious Racquet Club found a way to sell the air rights above their club building for $5 million to those erecting a building just behind it by threatening to erect a tower over their building that would have blocked a very valuable view. F. W. Woolworth, who carefully counted every nickel and dime and made a modest profit out of every investment, even managed to make the architectural monument - the Woolworth Building - that commemorates his name into a profitable asset.
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Words of economic wisdom:

• Despite waves of mergers and acquisitions, the American economy keeps getting less concentrated. The reason is that it keeps growing faster than it concentrates - and it is the newest companies that are always the fastest growers. Left wing expectations about capitalist concentration - from Marx to Galbraith - are left in the dust by capitalist dynamism.

  "In 1967 the top 200 nonfinancial companies held 41 percent of the country's business assets, such as buildings, machinery, and land. By 1988 they held only 32 percent, and that number has continued to drop in the years since."

"But after numerous experiments with noncapitalist and mixed economies in the twentieth century, creative destruction has turned out to be indispensable at the macroeconomic level."

"All socialist economies have relied on monopolies to avoid 'wasteful' competition and provide economies of scale. But without competition to keep noses firmly to the grindstone, all monopolies, whether owned by 'the people' or owned by shareholders, tend to become fat, lazy, and uninnovative."

• Creative destruction is the lifeblood of economic progress. There comes a time - sometimes sooner rather than later - when even the finest of successful technologies becomes outmoded. Gordon mentions the vast success of Edison's analog phonograph technology recently displaced by digital methods. The gorgeous clipper ships that brought full-rigged sailing ship technology to its zenith lasted just two decades before being displaced by steamships just before the Civil War.

  Gordon explains how the AT&T monopoly was broken by MCI as technological innovations - especially microwave transmission technology - made competition possible. The "creative destruction" that afflicted AT&T and its stockholders was immense - but has been dwarfed by the benefits bestowed by competition.

  "[Creative destruction] is often a very painful process on the microeconomic level, as people lose their jobs and investors lose their capital. Indeed, the phenomenon of creative destruction played a major role in the rise of the left in the late nineteenth century as means were sought to avoid the pain without losing the benefits of a technologically progressive economy.
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  "But after numerous experiments with noncapitalist and mixed economies in the twentieth century, creative destruction has turned out to be indispensable at the macroeconomic level. First, because the government owns the means of production in a socialist economy, political considerations, not economic ones, have always dominated decision making in such economies. And politicians will always try to preserve what is over what might be. After all, what is votes and makes campaign contributions; what might be does not.
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  "Second, all socialist economies have relied on monopolies to avoid 'wasteful' competition and provide economies of scale. But without competition to keep noses firmly to the grindstone, all monopolies, whether owned by 'the people' or owned by shareholders, tend to become fat, lazy, and uninnovative. - - - [If] customers have to come back for lack of choice, why work hard?"

• Utopian departures from market constraints are doomed. Gordon mentions the Freedman's Bank - an utopian effort to safeguard the meager savings of the newly freed slaves after the Civil War. However, utopian ideals have no currency in the markets. The bank failed ignominiously, devastating the poor ex-slave depositors it was supposed to safeguard.

  Markets perversely refuse to conform to ideological expectations. Every socialist experiment has failed except for some of those that accepted the imperatives of the markets around them and are exposed to the rigors of competition. See, Muravchik, "Heaven on Earth.