The Regulated Economy: A Historical Approach to Political Economy.

Thornton, Mark

Big government is the most important issue of our time. America has gone from the time when people had little or no contact with federal employees to a time when federal employees are killing citizens on a fairly regular basis. Roosevelt's New Deal was the realization of big government, but the origins of the Leviathan state began with Lincoln and continued through the Progressive Era. This earlier period is the focus of The Regulated Economy, a collection of eight cases studies that examine the origins of government intervention.

The most important issue of this grandiose institutional change is the relationship between government intervention and economic growth and development. The editors can only make the weak theoretical stab (this is, after all, an N.B.E.R. conference book) that persistent interventions will tend to be socially detrimental and hinder economic growth. They lament that a complete assessment of the "impact of government on economic performance will require many case studies of the kinds offered here to determine whether, on net, government intervention promoted or retarded economic growth [p. 10]."

The second most important question is why do we have government regulation in the first place? Is it market failure or rent seeking? What is the historical process in which these interventions originated and developed? This second question is the focus of the book and the one in which the tools of the new economic history are better suited. The collection focuses on the major areas of government intervention: railroads, banking, public utilities, agriculture, and "prolabor" policies such as immigration restrictions and worker compensation. After reading the book, one cannot help bemoan the lasting economic and ideological effects of the seemingly innocent attempts to, for example, subsidize railroads in the 19th century.

Mark Kanazawa and Roger Noll use referendum and constitutional convention voting in Illinois circa 1870 to study the public choice of state railroad regulation. Their results support the classic study by Gabriel Kolko [1] by showing that railroad interests feared that they were losing regulatory control at the state level and sought protection with federal regulation. Keith Poole and Howard Rosenthal use the federal roll call votes between 1874-1887 that decided the type of federal railroad regulation enacted to conclude that the Congressional battle was based largely on long-run party interests.

One of the more interesting and original essays is by John Joseph Wallis, Richard Sylla, and John Legler. They studied the interaction of state taxation and regulation of banking during a period when the tax revenue derived from banking represented a high proportion of total revenue in many states. The possibility arises of a state with a limited tax base keeping tax rates low and limiting regulation in order to maintain revenue. The authors recognize that these conditions no longer generally apply in the era of the Leviathan state, but they do seem to ignore the possibility that their model applies to the case of tobacco and alcohol excises. These state regulatory and tax structures for banking no doubt played some role in the subsequent history of bank panics and bank failures and ultimately the adoption of federal deposit insurance, the subject of Charles Calomiris's and Eugene White's paper. They found that federal deposit insurance, an economically irrational policy, was adopted to benefit states with weak banking systems to the detriment of states with more sound systems.

Also of both interest and importance is Warner Troesken's paper, "The Institutional Antecedents of State Utility Regulation: The Chicago Gas Industry, 1860-1913." This paper helps to expose the fallacy of "natural monopoly" and the irrelevance of economists' notions about the so-called public utilities. Here the state intervened to create monopoly power which led to local regulation that encouraged progressive regulation at the state level. The historical view of Kolko, the public choice theory of politics, and the Austrian view of economics are all corroborated. Regulation was not the result of market failure. It was intended to create monopoly power. While sounding well-intentioned, this so-called progressive government intervention exploits the consumer in favor of the politically privileged.

Elizabeth Hoffman and Gary Libecap investigate the orange industry during the New Deal and find that attempts to cartelize the producers and shippers in this "best case" scenario failed even with government help. Editor Claudia Goldin investigates the origin of immigration restrictions and finds that it was motivated by self interest. Shawn Everett Kantor and Price Fishback examine the origin of workers' compensation schemes, the beginning of social insurance in America.

The strategy of the Communist Manifesto was to undermine the rights of property via progressive intervention into the economy. The growth of government intervention in America that followed its publication in 1848, are ably examined in The Regulated Economy. The essays combine to provide a much clearer understanding of how intervention developed, how it progressed to the national level, and how democracy played a key role in achieving these results. Beyond the question of motives, these case studies are of not much help in studying the relationship between government intervention and economic growth. Government intervention undermines the rights of property and changes the institutions of the market thus altering the course of economic development. Overall economic growth can continue long after interventions are enacted, but as experience indicates will eventually exact a heavy price on economic performance and will be either jettisoned or allowed to further endanger the economy. Linking these interventions to current conditions via long-run historical analysis could be a profitable extension of this work.

Mark Thornton Auburn University

References

1. Kolko, G. Railroads and Regulation, 1877-1916. Princeton, N.J.: Princeton University Press, 1965.