There’s a popular historical legend that goes like this: Once upon a time (for this is how stories of this kind should begin), back in the 19th century, the United States economy was almost completely unregulated and laissez-faire. But then there arose a movement to subject business to regulatory restraint in the interests of workers and consumers, a movement that culminated in the presidencies of Wilson and the two Roosevelts.

This story comes in both left-wing and right-wing versions, depending on whether the government is seen as heroically rescuing the poor and weak from the rapacious clutches of unrestrained corporate power, or as unfairly imposing burdensome socialistic fetters on peaceful and productive enterprise. But both versions agree on the central narrative: a century of laissez-faire, followed by a flurry of anti-business legislation.

Every part of this story is false. To begin with, there never was anything remotely like a period of laissez-faire in American history (at least not if “laissez-faire” means “let the market operate freely” as opposed to “let the rich and powerful help themselves to other people’s property”). The regulatory state was deeply involved from the start, particularly in the banking and currency industries and in the assignment of property titles to land. (Even such land as was not stolen from the natives was seldom appropriated in accordance with any sort of Lockean homesteading principle; instead, vast tracts of unimproved land were simply declared property by barbed wire or legislative fiat.)

The early republic’s two major political factions – to oversimplify a bit, call them the Jeffersonians (as represented by the Democrats) and the Hamiltonians (as represented successively by the Federalists, Whigs, and Republicans) – disagreed primarily about which forms of governmental interference to emphasise. To be sure, both side paid lip service (and sometimes more than lip service) to the “Principles of ’76,” i.e., the libertarian ideals enshrined in the Declaration of Independence; but each side quickly deviated from those principles when doing so served its economic interest. The Hamiltonians, whose chief base of support was in the urban financial centers of the northeast, called for mercantilist interventions such as subsidies, protectionist tariffs, and central banks; the Jeffersonians, whose chief base of support was rural, including the plantations and the frontier, called for state assistance in extracting labour from slaves and land from Native Americans. In each case the state ran roughshod over laissez-faire in the interests of a privileged elite.

To be sure, the Hamiltonians sometimes offered up good libertarian-sounding defenses of the rights of blacks and Indians, while the Jeffersonians offered up equally libertarian-sounding condemnations of mercantile privilege; but it’s relatively costless to take a stand against those violations of liberty of which your political opponents, rather than yourselves, are the primary beneficiaries.

But while 19th-century America was no free market, it was still too free-market for the corporate elite, who accordingly campaigned for government relief against “cut-throat competition.” As Adam Smith famously pointed out, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices”; hence the perpetual mercantile quest for monopoly privilege.

One especially useful service that the state can render the corporate elite is cartel enforcement. Price-fixing agreements are unstable on a free market, since while all parties to the agreement have a collective interest in seeing the agreement generally hold, each has an individual interest in breaking the agreement by underselling the other parties in order to win away their customers; and even if the cartel manages to maintain discipline over its own membership, the oligopolistic prices tend to attract new competitors into the market. Hence the advantage to business of state-enforced cartelisation. Often this is done directly, but there are indirect ways too, such as imposing uniform quality standards that relieve firms from having to compete in quality. (And when the quality standards are high, lower-quality but cheaper competitors are priced out of the market.)

The ability of colossal firms to exploit economies of scale is also limited in a free market, since beyond a certain point the benefits of size (e.g., reduced transaction costs) get outweighed by diseconomies of scale (e.g., calculational chaos stemming from absence of price feedback) – unless the state enables them to socialise these costs by immunising them from competition – e.g., by imposing fees, licensure requirements, capitalisation requirements, and other regulatory burdens that disproportionately impact newer, poorer entrants as opposed to richer, more established firms.

The vast regulatory apparatus that emerged in the late 19th and early 20th centuries was thus specifically campaigned for by the business community. (This is documented for the “Progressive” era by James Weinstein’s Corporate Ideal in the Liberal State, Gabriel Kolko’s Railroads and Regulation and Triumph of Conservatism, and Murray Rothbard and Ronald Radosh’s [PDF] New History of Leviathan; their findings are usefully summarised in Roy Childs’ article “Big Business and the Rise of American Statism.” Butler Shaffer’s In Restraint of Trade extends the analysis through the New Deal.) The supposedly pro-labour legislation that emerged from this area was also mostly bogus, a matter of co-opting labour leaders into a junior partnership with government and business in exchange for not rocking the boat.

That this should be so is not terribly surprising; wealthy, concentrated interests are inevitably going to have a greater impact on the political process than poorer and more dispersed ones. (Contrary to popular wisdom, which has the contrast going the other way, it is only on the market, where the price system aggregates the preferences of the poorer and more dispersed, that the latter can systematically trounce the influence of business power.) What is more surprising is that such blatantly and thoroughgoingly pro-business legislation should have been perceived as anti-business.

But in the end this is not really all that surprising either. Of course these pro-business “reforms” had to be packaged as anti-business in order for the politicians and their corporate cronies to get away with them. Moreover, many of the instigators appear to have sincerely believed, on ideological grounds, that control of the economy by a government-business partnership was in the best interests of the general populace; and thanks to such partnerships’ disproportionate control of the means of information (media and public education), the rest of society could be brought to take a similar view. In addition, because business and government each always want to be the dominant partner, there was inevitably some grumbling in the business community about the precise way in which, for example, FDR advanced their shared corporatist agenda, and this likewise contributed to the misperception of fundamental antagonism. But the historical research cited above indicates that big business has been the chief architect and cheerleader for the regulations that are supposedly designed to restrain its power. Liberals who advocate further such regulations in order to combat plutocracy, and libertarians who leap to the defense of the poor embattled corporation, are equally misguided.

This entry was posted September 18th, 2008.

Translations for this article:

• Portuguese, O mito do laissez-faire no século XIX.