A Book Review of Robert W. Folsom, Jr.’s Empire Builders
During the early nineteenth century, buying land in Michigan, a cold, remote, swampy area, was widely regarded as a bad investment. James Monroe once told Thomas Jefferson that Michigan “will never contain a sufficient number of inhabitants to entitle them to membership in the confederacy.” Since it has become one of America’s most prosperous states, with Flint at one time being the fastest growing city in America, how did Michigan attained certain attributes unexpected of it? Empire Builders, a new book by Burton W. Folsom, Jr., a senior fellow in economic education with the Mackinac Center for Public Policy, answers that question by recounting why Michiganites choose capitalism over government’s intrusion into their economy, and what were the accomplishments of their entrepreneurs.
Between 1850 to 1930, Michigan contributed considerably to America’s development from a second-rate economic power to the leader in most crucial industries. Thanks to entrepreneurs such as Henry Crapo, Herbert Dow, and Henry Ford, the state became a major producer of lumber, chemicals, and automobiles. Like the other entrepreneurs whose lives Folsom recounts, they overcame many obstacles, particularly by risking their time and money, and they offered people the highest quality products at the lowest prices. What in part distinguished them from their Rockefeller and Carnegie-like peers was their inventiveness in their industries, and that they were among America’s most independent entrepreneurs.
As college U.S. history textbooks reveal, many people evade what Michigan’s entrepreneurs proved about free markets, and blame them — not government — for causing America’s economic problems. Empire Builders provides an objective account of their lives which dispels the myths that smear them as “robber barons” who, as one historian wrote, “held the nation for ransom to amass their great fortunes.” The primary confusion in this “robber baron” view of history, Folsom writes, “is that it fails to separate market entrepreneurs, who tried to succeed by creating and marketing a superior product at a low cost, and political entrepreneurs, who tried to succeed by using government to give them an advantage.”
Fulsome begins his separation of these opposite entrepreneurs with John Jacob Astor’s privately-run American Fur Company. In 1795, Congress, knowing the economic importance of the fur industry then, expropriated thousands of dollars for government-run fur factories. However, they were so poorly run that the Indians, the expert fur trappers, refused to trade with them. In 1816, President Monroe appointed Thomas McKenney to head the Office of Indian Affairs and to expand the factories’ business. Because private traders had to respect Indians as consumers or lose money, Astor offered them the best of the goods they desired (axes, kettles, muskets) at competitive rates of exchange. McKenney, by contrast, was funded regularly by government despite his volume of trade; thus, he squandered government resources on materials the Indians refused to buy. Devoid of an incentive to alter his unprofitable practices, McKenney, unlike Astor, failed to study prices, trends and foreign markets. Furthermore, McKenney and his staff received a standard salary from Congress, with no bonuses given in profitable years, nor cuts given when trade fell. Astor outmaneuvered McKenney with his merit system that rewarded his top producers good salaries.
By 1818, McKenney conclude that the best way to beat Astor was to influence Congress to ban private fur traders. Two years later the Senate enacted a bill that forced them to post a $10,000 bond-from the previous $5-for the right to trade. Faced with this government coercion, Astor needed to become involved politically to survive. Folsom thus demonstrates how men envious of their competitors’ free-market success had lobbied government to forcibly hamper or halt them, which provoked the successful entrepreneurs’ need to court government protection to counter such coercive monopolists. Astor nevertheless prevailed and made millions of dollars; the government fur factories lost thousands. A Congress-appointed committee investigated this outcome. It concluded that the factory system just failed, but that it needed to be studied “for the lesson it teaches to succeeding legislators.”
|The primary confusion in this “robber baron” view of history, Folsom writes, “is that it fails to separate market entrepreneurs, who tried to succeed by creating and marketing a superior product at a low cost, and political entrepreneurs, who tried to succeed by using government to give them an advantage.”|
By recounting Stevens T. Mason’s governership, Folsom shows how this lesson was not immediately learned. The success of New York’s Erie Canal was interpreted by Mason to mean that state governments must tax their residents to build vital transportation networks. “Maybe states could be creators, at least in the area of transportation,” Folsom writes, as if recording Mason’s thoughts. “And after all it was states, not the federal government, which were building these canals.” Many Michiganites would learn that this theory was erroneous; that irregardless of which government, whether federal, state, or local, or which commodity were involved, government-run businesses are considerably less efficient and prosperous than their free-market counterparts.
What taught them this lesson? In 1837, Mason passed a law that allowed Michigan’s government to undertake internal improvements. Thereafter the state then subsidized two railroads, the Michigan Central and the Michigan Southern. But since no one had a financial interest in building them efficiently, they both had tracks that were too fragile to support heavy loads, and each had other major flaws the proved to be dangerous and costly. Levi Humphrey, a Mason appointee to the Board of Internal Improvements, had manipulated the results of the bids to construct the Southern so that his friends would win the contracts. They then charged three to four times the market price for supplies. The Board’s records were falsified to cover that their budget was overspent; these poorly built railroads quickly went bankrupt. Folsom thereby demonstrates how inefficient, unprofitable, corrupt monopolies are engendered by government intruding on free markets and barring competition.
|“Dow showed how a small company could beat the large monopolist.”|
Eventually, in 1850, Mason replaced his laws with a new provision in Michigan’s constitution: “The [s]tate shall not subscribe to or be interested in the stock of any company, association, or corporation,” nor shall it “be a party to or interested in any work of internal improvement, nor engage in carrying on any such work.” It created a state favorable for entrepreneurship, with its low taxes, limited regulations, prohibitions on government competition and on special subsidies to some at the expense of others.
Lumberman Henry Crapo was the first entrepreneur to capitalize on the state’s separation from economics. During the 1850s, the federal government made available millions of acres of Michigan land that was abundant with forestry. First, Crapo harvested the best product at the lowest price possible; then he reached markets nationwide with his lumber. Since his reputation for quality had spread throughout eastern Michigan, he was able to expanded his business in Flint and open a large lumberyard in Detroit. The lumber industry was Michigan’s first test in its commitment to separation of state and economics, and Crapo’s work elevated Michigan to the nation’s leading producer of wood from the Civil war to the 1900′s. “If it be so unwise a thing on the part of the [s]tate at large, thus to engage in or aid uncertain enterprises…, it must be vastly more unwise and perilous, for the feebler townships and cities, thus to…expose to serious hazards, their more limited credits.” Folsom offers this quote from Crapo to demonstrate how unlike Mason, he had learned the universal principle that free market economics must be upheld at different levels of government.
|At one point [Ford] slashed the price of his cheap, safe Model T so significantly that he risked taking losses, but found that every time he reduced the price by one dollar, thousands of new cars were sold.|
Stronger than Crapo in advocating smaller government was private chemical maker Herbert Dow. He entered his industry facing large, government-backed European chemical makers. After he failed in his first business ventures during the early 1890s, Dow entered the bleach business and immediately faced a dominant British company that cut its price for bleach in half. Eventually, through his optimistic tenacity and inventiveness, Dow became the first American to significantly challenge the Europeans in the markets they dominated, such as bleach, bromides, and indigo, primarily by discovering what people wanted and by controlling prices to produce chemicals more cheaply than others.
“‘If a corporation is big enough, it can cut prices below cost, drive out its small competitors, and then raise prices to whatever it wants to charge,” writes Folsom, describing how many people before Dow could argue against any dominant company, whether self-made or government-created. “‘Therefore, we need government regulation, antitrust laws perhaps, to control greedy corporations.’ Dow showed how a small company could beat the large monopolist.”
For example, when the Germans sold the chemical bromine in the U.S. far below costs of production and sought to offset their American loses with a high world price, Dow undercut this government-backed price-fixing when he discretely bought thousands of pounds of their bromine at their 15-cents prices; then repackaged and sold it in Europe at 27 cents. As Dow constantly sought to improve products and find new markets for his chemicals, the Germans continued to use government regulations to fix prices and control markets.
|In 1914, Ford doubled his minimum wage to five dollars per day and he cut daily working hours from nine to eight. Such an experiment caught the industrial world by surprise. His competitors were startled; his workers were energized; and Ford himself was ecstatic.|
Empire Builders culminates with automobile maker Henry Ford. According to Folsom, Ford’s greatest ability was to cut the prices of his automobiles while he continuously improved their quality. At one point Ford slashed the price of his cheap, safe Model T so significantly that he risked taking losses, but found that every time he reduced the price by one dollar, thousands of new cars were sold. Ford sold millions of high quality automobiles because he made them increasingly affordable to successive layers of Americans.
He achieved this in part by expertly adapting the assembly line to automobile making, which cut the amount of time required to complete each car by approximately eleven hours. Assembly line work, however, was tedious and partly resulted in high rates of turnover and absenteeism. Fulsome describes how these problems were resolved:
In 1914, [Ford] doubled his minimum wage to five dollars per day and he cut daily working hours from nine to eight. Such an experiment caught the industrial world by surprise. His competitors were startled; his workers were energized; and Ford himself was ecstatic. Some of the most talented workers in Detroit lined up by the thousands to apply for jobs with Ford. He couldn’t hire as many as he would have liked because turnover and absenteeism almost disappeared overnight. No one wanted to lose his job. As a result, production surged and profits skyrocketed. Ford happily paid the higher wages and also cut the price of the Model T over 10 percent in 1914, 1915, and again in 1916. With each cut, more and more of his workers could afford to buy the cars they were making.
|Folsom provides other coercive measures used by government, such as the Wealth Tax of 1935, which established an inheritance tax of 70 percent on large estates. This made it impossible for Ford to give his company to his only child or grandchildren. … “In a real sense,” Folsom writes, citing a historian, “Henry Ford’s factory, his fortune, his life-work, had been socialized.”|
To continue this production, wherein he made high quality cars, sold them to millions at affordable prices, and created tens of thousands of jobs with goods wages and shorter work days, Ford simply wanted the freedom to rise or fall by his own best decisions on who to hire, what salaries to pay employees, what automobiles to make and what prices to charge for them. Enter the government-created Great Depression and the socialist-based policies of Franklin Roosevelt’s administration, as with the enactment in 1933 of his National Industrial Recovery Act, which established the National Recovery Administration (NRA). Whereas General Motors, Chrysler, and the smaller independents willingly signed the NRA’s Blue Eagle codes that, under the threat of fine or imprisonment, regulated their production, wages, prices, and hours of work, Ford refused to comply. He’d already set the standard for all these long before the 1930′s, so, Ford wondered, why should a government agency do it. Ford also argued that government-backed unions corrupted the whole process of his operation. For example, wage hikes beyond what the market demanded translated into consumers losing their cheap automobiles.
Folsom provides other coercive measures used by government, such as the Wealth Tax of 1935, which established an inheritance tax of 70 percent on large estates. This made it impossible for Ford to give his company to his only child or grandchildren. Since gifts to foundations were tax deductible, he set up the Ford Foundation, where he placed his fortune. This move also preserved family control of his company, but it froze his capital there, away from investment. “In a real sense,” Folsom writes, citing a historian, “Henry Ford’s factory, his fortune, his life-work, had been socialized.”
|Unfortunately, although Fulsome offers such statements as “Money, or capital, was valued by these entrepreneurs not as an end but as a means to create an economic empire,” he never states explicitly the rational self- interest that was at least part of their moral basis. Instead, he reverts to the equivocal claim of their “service to others” as being more primary.|
Unfortunately, although Fulsome offers such statements as “Money, or capital, was valued by these entrepreneurs not as an end but as a means to create an economic empire,” he never states explicitly the rational self- interest that was at least part of their moral basis. Instead, he reverts to the equivocal claim of their “service to others” as being more primary. This flaw, however, fails to detract considerably from his overall work.
In Empire Builders, Folsom offers an economical, logically structured book that clearly untangles the confusions over free market entrepreneurs and their government-backed counterparts by successfully raising and objectively demonstrating the relevant facts that certain historians either evade or manipulate. He ultimately demonstrates the universal, timeless lesson of how business operates best when government is separate from economics; relegated to its only proper function of leaving men free to create and trade according to their own abilities and choices.