Railroading Economics: The Creation of the Free Market Mythology

Michael Perelman, Railroading Economics: The Creation of the Free Market Mythology (New York: Monthly Review Press, 2006).

As a discipline, mainstream economics has been perhaps the most successful ideological tool to justify the maintenance of the capitalist system in the past century. Many of the arguments that we hear in support of “free market methods,” “deregulated competition,” and “property rights” are grounded in ideas derived from the so-called “science of economics.” Michael Perelman’s latest book, Railroading Economics, draws out some of the compelling history of the creation of “free market mythology” by looking back at the important economic debates that took place in conjunction with 19th-century US capitalist development. In particular, it focuses on the rise of the seldom-discussed conservative critique of the market that gained notoriety during this period as well as its eventual dissolution in favor of the pro-market theories that we have become all too familiar with in the present.

As for the legitimacy of neoclassical economics, Perelman’s position on the matter is not unlike that of most radical economists. He explains from the outset that “economics purports to be scientific because it grounds its ideology on a rigorous theoretical foundation, but this foundation rests on wildly unrealistic assumptions” (17). The actual title of Perelman’s book has multiple meanings and refers to the “ideological straitjacket of modern economics” (9) as well as the experiences of the “railroad economists” who were involved in analyzing the economic effects of the railroad industry on US society. These economists were far from radical but stood against the standard doctrine of economics which used idealistic and unrealistic theories to justify market forces. Officially, they were for capitalism but against the idea of unbridled competition, for it was this competition that was wreaking havoc in the railroad industry. This led to an argument against the “laissez-faire” model of capitalism in favor of the “corporatist” model, which posited that the sure-fire way for corporations to protect themselves against the market was to form monopolies, trusts, and cartels.

The major point of contention for this group was the marginal price structure proposed by conventional economics. Assuming this type of structure, in a competitive capitalist economy, businesses must set their prices equal to the cost of producing more units of whatever is being sold. But the railroads were not your average industry; they required large investments in fixed capital to get up and running. The real costs for the railroad companies were in building the actual railroads and making them functional, not in carrying one extra passenger or one extra load of freight. Therefore, in the context of the railroad industry, with its large portion of “sunk costs,” the theories of marginalism made no sense. If each company set its prices according to marginal price theory, they would never be able to recoup their initial costs and bankruptcy would soon follow.

Perelman begins his book with a nice discussion of the fundamental problems of conventional economic theory. In creating complex and abstract models of our world (specifically, those reflecting the various realms of exchange), mainstream economists have been institutionally trained to master the methods of their inherently uncritical discipline, which assumes a great deal in theory and demonstrates very little in reality. The strategic focus on professionalizing economics in the attempt to gain scientific legitimacy (on par with that of other academic disciplines) has required that economists learn the delicate art of reifying their theories and using them to explain the world without revealing or accounting for the many (often unrealistic) assumptions embedded in their theoretical models. For example, according to Perelman, “modern economic theory generally evades wrestling with the thorny subject of the accumulation of long-lived fixed capital” (50). This type of capital sets limits on a company’s ability to change its methods and processes of production in response to new opportunities. Conventional economic ignores this problem and simply assumes that companies can somehow transform their capital goods whenever necessary.

Throughout his text, Perelman places a large emphasis on the role of the increase of fixed capital, which became “a substantially more important factor in the structure of production” (65). The development of the railroad industry as the largest industrial sector in the US and “the preeminent form of big business” (66) relied heavily on an increase in fixed capital, as its companies required enormous investments in order to get up and running. Despite considerable government subsidies, over-hyped speculation in the industry led to several company bankruptcies after an initial boom period, typically reflective of a capitalist business cycle. These events and other economic crises in the late 19th century called into question the common understanding that “the market” was and should always be the universal answer to all economic activities. Though they are virtually forgotten today, individuals such as David Wells, Charles Francis Adams Jr., and Arthur Twining Hadley began to understand that there was a serious gap between standard economic theory and the reality of the railroad industry. This led the eminent John Bates Clark to eventually support inter-industry attempts to reduce competition through corporate consolidation. This new “corporatist” position argued that the formation of monopolies, trusts, and cartels would in fact make the economy “more efficient” as a whole; therefore, the previously cherished concept of “competition” was viewed to be the cause of -– and not the solution to –- American economic ills.

Perelman is sharp to point out that at a very basic level, “the corporatists and the socialists had much in common” (93). Both groups had a serious distrust of the market and some socialists (most notably, Lenin) looked favorably upon corporatism as an initial move towards the socialization of the capitalist economy. That being said, there were obviously major differences between these two groups, the primary point of separation being the nature of the capitalist class structure with its unequal ownership of wealth and the increasing dominance of wage-labor. Corporatist economists, unlike the major 20th-century socialist theorists, failed to account for the role of finance in the modern economy. In the struggles between industrial and financial interests, there was large-scale competition between the likes of Andrew Carnegie and J.P. Morgan. Each of these individuals symbolized a different type of capitalism, the first being a competitive, productionist one and the second being a “Morganized” corporate version. Both models contained distinct but faulty assumptions about the nature of firms and their capitalist players, which led to different beliefs about the nature of competition and the role of the large-scale corporation. These inter-capitalist conflicts over the best way to maintain a system of private ownership continued into the early 20th century.

Perelman goes on to describe how corporate leaders in the early decades of the new century felt a need to justify their power and wealth to the public. Their goal was to convince citizens that their seemingly “robber baron” interests actually benefited the general public. The need for this sort of justification spawned an early form of “welfare capitalism,” based on the rather dubious notion that “socially conscious” industry leaders could create a society based on workers’ prosperity and social justice, all the while remaining private and socially-stratified in its structure and organization. While Perelman does not make the explicit connection to the present, welfare capitalism has continued to remain the “great hope” for contemporary reformist thinkers opposed to the newest shifts toward neoliberal capitalism.

As expected, much of the rhetoric of welfare capitalism conveniently disappeared when the Great Depression hit, as it was “merely a tactic to hold workers’ militancy in check rather than a true pact between labor and capital” (157). Economists were forced to resort to a “blame game” and had to scramble to explain why such a collapse of the US market had taken place. Regardless of what was blamed for the downturn -– be it interference with market forces, the Federal Reserve Board’s move to increase interest rates, enormous technological changes, or the allegedly “high price of labor” -– the economy had most certainly moved away from the supposedly always-stable equilibrium. A lot of damage control was needed from mainstream economists. The book concludes with an interesting discussion of the “Golden Age” of 20th-century American capitalism, prompted by World War II (“a godsend for industry”) and eventually ending with the inevitable rebuilding of competitor national economies. Of course, crucial to the new characteristics of the US economy in recent decades has been the development of financialized corporate capitalism, which began exercising itself heavily in the 1980s.

Perelman’s most important conclusion should be emphasized: “modern economists suffer under the delusion that competition is an unmitigated good for society” (199). Modern economics exists primarily to justify a particular way of organizing society and the economy. The corporatists of yesteryear were right in pointing out the contradictions inherent in the “free market” ideology, but they were never able to actually renounce the system itself. Perelman encourages us to do exactly that. In the final pages, we are reminded that a complete rejection of the system in place is not about “being a utopian.” After all, “Utopia” is a Greek word meaning “nowhere”; a new society needs to be “somewhere.” With this in mind, Railroading Economics convincingly makes the case that the present organization of the capitalist economy is unacceptable and that we must continue to struggle for a better world, one that is not based solely on the interests of the small minority of individuals that own the majority of our society’s wealth. This starts with, in Perelman’s words, a call for “the end of economics and the beginning of something better” (203).

Reviewed by Andrew Michael Lee
York University, Toronto

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