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Business Is No Business of the State


Uncle Sam Can’t Count: A History of Failed Government Investments from Beaver Pelts to Green Energy by Burton W. Folsom Jr. and Anita Folsom (Broadside Books, 2014), 239 pages.

The day after the 2010 mid-term elections, the federal government quietly announced the bankruptcy of Solyndra, a “green energy” company that had been touted by Barack Obama as a leader in the kind of innovation that would help the planet to “heal.”

Solyndra had been founded by a big supporter of the president and the company had received a $535 million loan from the government early in 2009. Less than two years later, the company was bankrupt and the taxpayers were stuck with the loss.

Solyndra is a recent instance of the foolish combination of government and business, but few Americans have any idea about the long history of such “partnerships.” As authors Burton and Anita Folsom show in their wonderful book, Uncle Sam Can’t Count: A History of Failed Government Investments from Beaver Pelts to Green Energy, Americans have been making the mistake of trying to mix government with business since their country’s earliest days as a nation.

The book’s subtitle lets the reader know what it covers: the history of failed government “investments,” from frontier trading posts in the 1790s through the present day with the obsession with subsidizing businesses that are supposedly friendly to the environment. Throughout, the stories the Folsoms tell are fascinating but at the same time maddening, since they leave you thinking, “How could anyone have been so stupid?”

Let’s start with the beaver pelts. George Washington had led the war for independence from Britain, but he nevertheless adhered to British mercantilistic concepts, under which the government established and supported business enterprises for the imagined national good. In 1795, with his backing, Congress passed an appropriation of $50,000 to create a number of trading posts in the Northwest Territories. The stated purpose for this was to counter British influence among the Indians by purchasing furs from them and selling goods to them.

There already were private traders doing exactly that, but Washington and the Federalists who controlled Congress thought them inadequate for advancing the national purpose. They were certain that the government had to get involved. Thus we see the earliest manifestation of a notion that still bedevils us — that state action is the most reliable means of promoting the public interest.

Although these trading posts (called “factories”) were expected to at least break even, they lost money and the subsidies had to be increased steadily. Having begun this folly, Congress could not easily stop it.

In 1808, John Jacob Astor, a German immigrant, went into the trading business. With his own money at stake and possessing a much sharper mind for business than the government functionaries running the competing posts, Astor earned good profits. Among other important differences with the government posts, Astor paid his people on the basis of their profitability, whereas the government managers and workers were paid a flat salary. Naturally, Astor’s success was an affront to the people who were receiving those salaries.

Instead of figuring out how to compete against Astor, the man in charge of the government’s operations, Thomas McKenney, turned to politics. He wheedled more money from Congress, and also sought high licensing fees for all his competitors. He even lobbied to get Congress to ban all of his free-market rivals. McKenney was the prototype of what the Folsoms call a “political entrepreneur” — eager to “win” through political influence rather than by doing a better job of satisfying consumers.

Finally, in 1822, Sen. Thomas Hart Benton managed to get a bill passed that ended the subsidies and closed the government posts, after 27 years of waste. Sad to say, however, that wasn’t the end of the foolishness. In 1824, at the instigation of Secretary of War John C. Calhoun, Congress created the Bureau of Indian Affairs, employing almost one hundred people, with the same Thomas McKenney as superintendent. Federal meddling with the Indians continues to this day.

Land and water …

Another fascinating story the authors tell is that of the early steamship industry. Here, the central character is another famous business magnate, Cornelius Vanderbilt.

In his youth, Vanderbilt worked for Thomas Gibbons, who broke the Hudson River steamboat monopoly given to Robert Fulton by New York. Soon Vanderbilt was in business on his own, rapidly improving the steamboat, lowering fares, and improving customer service.

Vanderbilt was so successful that the cartel he competed against, the Hudson River Steamboat Association, offered to buy him out for $100,000, provided that he would not run boats for ten years. He took the deal, but it did the cartel little good. It raised prices after Vanderbilt left, but other entrepreneurs quickly entered the market and undercut its prices.

With the capital from the River Association, Vanderbilt went into the business of trans-Atlantic shipping. The British were already there, Parliament having given Samuel Cunard a large subsidy for passenger and mail service. Shortly thereafter, the U.S. government followed suit, subsidizing Edward Collins to compete with Cunard.

How could Vanderbilt survive against such subsidized and earlier-established rivals? By innovation and superior efficiency, that’s how.

When Vanderbilt’s lower fares put Collins into financial trouble, naturally he looked to politics for salvation. He pleaded for bigger subsidies and got them. But while Vanderbilt kept working to lower his costs, Collins squandered money building huge, luxurious ships that lost money in competition. Economic sense finally prevailed when President Franklin Pierce vetoed the Collins subsidy in 1855.

The Folsoms next write about Michigan’s “boy governor,” Stevens T. Mason, and the hard lesson he (and, of course, the state’s taxpayers) learned about government investments in business.

Mason was a child prodigy whose ability came to the attention of Andrew Jackson. In 1831, Jackson appointed Mason — just 19 years old — to be the governor of Michigan Territory. Unfortunately, the brilliant young man was captivated by the great symbol of early American “can do,” namely the Erie Canal. He assumed that because that canal was a success, other canals would be similarly successful. Mason wanted one to speed up Michigan’s development.

Shortly after Michigan became a state in 1837, the Board of Internal Improvements began planning a 216-mile canal to run from Detroit to Kalamazoo. Digging began the next year, but this government project proved to be an utter boondoggle. After seven years, just 16 miles had been completed at a cost of $350,000. Total revenues collected amounted to $90. The project was abandoned in 1843.

And still, Mason thought that government “investments” would boost the state, and he pushed for state-planned and state-financed railroads. The Board of Internal Improvements wanted to redeem itself after the canal blunder and laid out two lines running west from Detroit. Both proved to be gigantic mistakes. The lines were badly constructed and costs far exceeded revenues. Quite a few of the politically connected contractors, however, made money selling goods and services for the lines to clueless government officials who were spending the taxpayers’ money and had no profit motive.

During that same period, quite a few other states made the same mistake Michigan did. Instead of waiting for free-market entrepreneurs to invest where they saw profitable opportunities, politicians rushed in with various schemes for fast development. Michiganians, at least, learned a valuable lesson and when they revised the state constitution in 1850, included language stating, “The state shall not be a party to or interested in any work of internal improvement, nor engaged in carrying on such work.”

… and air

Another illuminating story in the book is that of the development of the airplane. Most Americans know something about the Wright brothers, but few know that the federal government subsidized their main rival, Samuel Langley — money that was, naturally, wasted.

In 1896, Langley, an accomplished scientist and head of the Smithsonian Institution, had managed to successfully fly a model airplane for about 90 seconds. Believing that he could move from that accomplishment to building an airplane capable of transporting people, he set about hunting for financial backers. At first, he turned to wealthy individuals, pitching his venture as one of pure science, untainted by any thought of making a profit. Langley found no one who had any interest under those conditions. Of course, he then turned to the government.

Circumstances just happened to favor him. After the U.S. battleship USS Maine blew up in Havana harbor in February of 1898, war fever swept Washington and Langley cleverly argued for federal backing on the grounds that the airplane would be of great military value to the nation. That message was enthusiastically embraced by the assistant secretary of war in the McKinley administration, Theodore Roosevelt. Playing on the rampant militarism in the country and with the administration’s support, Langley was able to land a $50,000 subsidy from Congress for his efforts.

Meanwhile, two bicycle mechanics living in Dayton, Ohio, had also taken a great interest in the challenge of heavier-than-air flight. Wilbur and Orville Wright had no college education and no friends with money or political connections. They were, however, smart and determined. From 1900 to 1903, they would work in their bicycle shop in the spring and summer months, then head off to remote, windy Kitty Hawk on the North Carolina coast during the fall and winter to work on their great passion — to build an airplane.

They studied and solved each of the problems that confronted them. Especially important was building a light but powerful engine. How they did that is revealing. The Wrights asked a mechanic in their shop, Charlie Taylor, to see if he could build them what they needed. Within six weeks, he had fashioned a twelve-horsepower engine weighing only 179 pounds. The authors observe, “What took Langley four years and an international search took the Wright brothers six weeks, using only labor and materials found in Dayton, Ohio.”

In the fall of 1903, Langley twice suffered disastrous crashes that nearly killed his pilot. Nevertheless, he kept pleading for more federal money — even while rejecting offers of voluntary funding. Fortunately, Congress declined to throw any more money his way. And in December 1903, the Wrights successfully flew the airplane they had built without a dime from any government.

Today we often hear that government funding for science and technology is essential. The story of Samuel Langley and the Wright brothers is a good antidote to that.

Among the other illuminating stories about failed governmental forays into business include the subsidized waste and corruption of the transcontinental railroads built after the Civil War (with the notable exception of J.J. Hill’s sound and unsubsidized Great Northern), the proliferation of government subsidies for business during the New Deal (such as the Export-Import Bank), and the wasteful efforts ever since the Carter administration to “solve” the energy crisis (itself a result of government meddling) by subsidizing renewable-energy sources, especially ethanol.

Government should stick to its few proper tasks, which do not include any kinds of business operations. Political incentives invariably work against the efficient use of scarce resources to produce the goods and services people want. If you doubt that, you really must read this book.

This article was originally published in the August 2015 edition of Future of Freedom.

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    George C. Leef is the research director of the Martin Center for Academic Renewal in Raleigh, North Carolina. He was previously the president of Patrick Henry Associates, East Lansing, Michigan, an adjunct professor of law and economics, Northwood University, and a scholar with the Mackinac Center for Public Policy.