When Law and Economics Was a Dangerous Subject: How the Early 20th Century Controversy over Railroad Regulation Embarrassed the University of Chicago and Ruined an Economist's Career

By Giocoli, Nicola | Regulation, Winter 2015 | Go to article overview

When Law and Economics Was a Dangerous Subject: How the Early 20th Century Controversy over Railroad Regulation Embarrassed the University of Chicago and Ruined an Economist's Career


Giocoli, Nicola, Regulation


At the turn of the 20th century, railroad regulation was hotly debated in the United States. Railways were accused of abusing their monopolistic positions, particularly because of their use of rate discrimination--the charging of different rates for seemingly similar services. Public pressure for tighter regulation led to the 1906 Hepburn Act, which strengthened the regulatory powers of the Interstate Commerce Commission (ICC).

American economists were actively involved in this debate. While most of them belonged to the pro-regulation camp, the best economic analysis came from those who used the logic of modern law and economics to argue that most railroads' practices, including rate discrimination, were rational, pro-efficiency behavior. However, as one of those economists, the University of Chicago's Hugo Richard Meyer, would discover, arguing those ideas before they had gained broad scholarly acceptance could prove professionally costly.

This article uses Meyer's sad tale to review the pre-1906 American debate on railroad rate regulation. My goal is to show how a few economists had already embraced the gist of what would become law and economics, but also how the majority of the discipline, as well as legislators and public opinion, rejected this approach and, with it, what today's observers would consider sound economic analysis.

The incident illustrates two broad points: First, new industries always challenge economists and public authorities in their attempt to determine whether market forces are working satisfactorily and what the effects of government intervention would be. Late 19th-century railroads raised puzzles for scholars and regulators. That those who in hindsight got the puzzles right had little effect on their profession and policy at the time should somehow reassure those who despair today about the ill-devised regulation of, say, Internet industries. In matters of regulation, it can take a long time for public policy to get things right. Second, my story shows that economic ideas never fail or succeed in a vacuum. Regardless of their intrinsic validity, they are only accepted when their end-users--be they economists or policymakers and lawmakers--find them persuasive in terms of a broader socio-political framework. The economists' power to persuade is, in short, always contextual.

THE (ALLEGED) INEVITABILITY OF RATE REGULATION

The free play of market forces would benefit society as a whole: that was the main message--and promise--of classical economics. The message was supported by a theoretical apparatus in which full capital mobility and the profit equalization theorem (that is, the tendency of risk-adjusted rates of return to equalize across industries) occupied center stage.

Railways presented post-Civil War America with a wholly different scenario, one where, because of the enormous amount of fixed capital required, a business could not easily enter and exit the market, while competition led active firms toward either financial ruin or absolute monopoly. The underlying assumptions and fundamental theorems of classical economics simply made no sense in the industry, or so it seemed. "The railway system is not one which is amenable to the laws of supply and demand," observed Charles Francis Adams, a pioneer of modern regulation. The reason was scale economies: "It is an undisputed law of railway economics that the cost of movement is in direct inverse ratio to the amount moved" (emphasis in original). Competition simply did not apply in this case. The inverse relation between cost and traffic pointed to "a conclusion which is at the basis of the whole transportation problem: competition and the cheapest possible transportation are wholly incompatible."

A decade later, every American economist had become aware of the peculiarities of the railway industry. Another Adams, University of Michigan economist and ICC statistician Henry Carter Adams, was archetypal of the almost universal recognition that "where the law of increasing returns works with any degree of intensity, the principle of free competition is powerless to exercise a healthy regulating influence. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

When Law and Economics Was a Dangerous Subject: How the Early 20th Century Controversy over Railroad Regulation Embarrassed the University of Chicago and Ruined an Economist's Career
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.