Tea Party and the Right

Why Ayn Rand and Her Legion of Followers Are Hopelessly Wrong

The entire story of America's 19th-century railroad boom was the exact opposite of what Rand's ideology imagines.

 “There are two novels that can change a bookish fourteen-year-old’s life: The Lord of the Rings and Atlas Shrugged. One is a childish fantasy that often engenders a lifelong obsession with its unbelievable heroes, leading to an emotionally stunted, socially crippled adulthood, unable to deal with the real world. The other, of course, involves orcs.” – John Rogers, Kung Fu Monkey 

The reviews of Atlas Shrugged (Part 1) are in, and “brutal” doesn't begin to describe them. Phrases like "barely professional," "sterile and lifeless" and "watered-down, uninspired bilge" abound in reviews that often say, "I don't much care for Ayn Rand's ideas, but even she doesn't deserve this!" Even a positive review in Rupert Murdoch's New York Post called the film, “a bit stiff in the joints and acted by an undistinguished cast amid TV-movie trappings." 

But sheer incompetence is what we've come to expect from ideologues, and a close look at how the book's (and movie's) premise stacks up against reality can help remind us why. Atlas Shrugged's rugged Randian individualist heroine, Dagny Taggert, is a determined builder of super-trains who faces an endless parade of corrupt bureaucrats, politicians and unions standing in her way. In reality, supertrains were part of Obama's undersized stimulus package, which the Randian right savaged with a vengeance. Republican governors across the land turned down billions of federal construction dollars, with high-speed trains one of their favorite targets for destruction. Even before taking office, Wisconsin's Scott Walker killed an $800 million high-speed rail grant, a move estimated to cost the state around $100 million in preexisting commitments. They really don't like supertrains. 

Who does like supertrains? Socialist Europe and China, that's who! Europe began building them in the 1970s, and China started following suit two decades later. But China's more recent efforts have made its initial forays seem quaint. It now has almost 5,200 miles in service as of January 2011, with speeds ranging from 120 to 220 miles per hour. Another 11,000 miles are under construction thanks to substantial funding from the Chinese government's economic stimulus program. They're building supertrains about 100 times faster than Republican governors kill them here at home. 

But it's not just the railroading present or future that Atlas Shrugged gets wrong. After all, one well might argue, so what if a futurist fiction is, well, fictional? The real problem is that really good futurism—fictional or not—has a strong grasp of at least one significant aspect of the past, which it then projects forward in order to explore in greater depth. Not so Atlas Shrugged, which gets the past utterly wrong as well, as explained in detail in Railroading Economics: The Creation of the Free Market Mythology (2006), by Michael Perelman, a professor of economics at California State University, Chico.   

To be sure, there were strong, vivid individuals involved in the history of 19th-century railroad-building, Perelman admits. But market competition was the ruin of railroads, for the simple reason that competitive pricing of freight rates made it impossible for railroads to pay off the enormous initial costs of building them in the first place. Massive waves of bankruptcies devastated the industry, until anti-competitive measures were devised, first through collusion and monopolistic consolidation, then through regulation— the latter largely the product of industry figures and industry-friendly conservative economists.   

It's a fascinating story, and proof once again that truth is stranger than fiction. Perelman was happy to talk about it in detail with AlterNet. 

“The railroad industry is very, very interesting because it's an extremely labor-intensive industry and often there was a single promoter that was involved,” he said. But these promoters were nothing like Rand's protagonists. As Perelman explain, they were far more like Dagny Taggart's brother, constantly conniving with politicians in order to get ahead. 

“In our country the promoters were, more often than not, very corrupt people, and their major goal was to try to find a way to manipulate the financial system, stock holders and all,” he said. “There's a very famous work by Henry Adams--Chapters of Erie--it was Henry Adams, along with his brother Charles Francis Adams, the grandchildren and children of the two presidents Adams. It's very interesting about how the financiers, Vanderbilt and Fisk, tried to first buy the legislature and then buy judges in order to compete with each other to see who could get the contract to build the railroad, which was based on stock valuations far in excess of the railroad.” 

This was hardly an isolated case, he explained. “There were powerful individuals who developed the railroads, but they did so only by getting huge amounts of support from the government, mostly in the form of land grants. Sometimes governments would actually float the bonds that would pay for the railroads. So it was hardly an individualistic operation.” 

What's more, Perelman added, “Much of the purpose of the railroads was to increase the value of the land, so that what you do is get the land grant from the government and then the value of the land would go up with the railroad....So I believe Southern Pacific is still the largest private landholder in California.” 

Tales of corruption are only the warmup story, however, as Perelman turned to the heart of the matter. “The next problem with railroads—this was what was discussed in Railroading Economics—is that railroads are infeasible in a market economy, because under perfect competition railroads would be charging a price comparable to the cost of carrying one more ton or one more pound of freight.”   

How low is that price? So low that railroads just love to brag about it.  

“There's an ad, I think it's for CSX railroad on NPR from time to time, where they talk about carrying a ton of freight, I think 400 miles, I don't remember the number, on a gallon of fuel,” Perelman said, “So you can see that the cost of carrying a little bit extra freight is almost nothing. So if you have two railroads competing at the low price of operating a railroad--which has a very, very heavy fixed cost-- [they] will go bankrupt.”  

Nowadays that's not going to happen. But in the good old days, Perelman recalled, “this is what happened to the railroads -- they went bankrupt with frequency, so much so that in A Christmas Carol, Scrooge had his first nightmare, if you recall, that he had bought American bonds that were based on railroads, which meant that they were worthless because of this competitive problem.” 

Of course Ayn Rand must have hated A Christmas Carol, so she might not have known that. But Scrooge was hardly alone. An enormous amount of British capital was lost in American railroad bankruptcies, which is why Scrooge's nightmare was so believable. Ironically enough, Perelman notes, it was JP Morgan who played a key role in ending the railroad's ruinous competition, while his father played a key role in creating it. 

“Morgan's father, Junius Morgan, represented British investors, and many of them were ruined. They moved their capital to the United States, after having suffered loses in Latin America, and the United States seemed to be a safe harbor.” But that "safe harbor" proved illusory. “The loses were almost inevitable, until they managed to avoid competition by going through railroad consolidations,” which is where J.P. Morgan stepped in. 

“J.P. Morgan came along and coerced the railroads into accepting a consolidation -- he managed to control much of the railroad system in the United States. And once he did that, the same logic pertained for most heavy industry, and you had a major depression in the late 19th century, called 'The Great Depression' at the time. And the only response to that was to avoid competition, and have the government regulate the railroads, through the Interstate Commerce Commission, run by the railroads.” 

In short, the whole story of America's 19th-century railroad boom was the exact opposite of what Rand's ideology imagines. “Other than having the stock promoters, who were out there creating the whole idea of the railroad, the individual—the real individual, not the corporate individual—was pretty much absent from the scene,” Perelman concluded. 

But there's another sense in which railroad individualism was a myth.  

“The purpose of the railroad also wasn't individualistic, in the sense that the railroad wasn't designed to serve individual consumers,” Perelman pointed out. “It was to open up new markets and create new networks—it was the railroad network that had the ability to move freight from one place to another over long distances, and that made it possible to have large-scale industry in the United States. Again, this wasn't an individual consideration. It was something that made the United States economy much stronger by virtue of creating those networks.” 

By way of analogy, he added, “It would be comparable to building the Internet, and saying that what you're doing is serving an independent consumer. But the Internet itself would be worthless except to have other people at the end of the line in communication.” 

Being real life, there were further twists and turns to this story, which only take it further and further from the black-and-white simplicity of Rand's worldview. “Ironically, this began because of a protest movement by farmers, who were outraged that there were very, very high rates for short runs, and relatively low rates for long runs,” Perelman explained. “They thought that was evil. They wanted to eliminate that kind of behavior, which they called price discrimination, so in response to this you got the Interstate Commerce Commission [ICC].” 

But their protests only succeeded in helping the surviving railroad industry as well. “The railroads realized that it would have to be run by people with expertise in the railroads, it would give them greater control over markets. And in this way the dangerous completion of the market would be eliminated and they would be free to make a profit.” And thus was born ICC, part of the first wave of Progressive regulation, in response to a Populist revolt, but providing enormous benefits to J.P. Morgan and his associates, the last men standing after countless railroads had gone bankrupt due to free market competition.  

If Perelman's book were only about the actual history of railroads in America, it would easily be a more fascinating and surprising read than Atlas Shrugged. But there's another whole level of contradictions layered on top of that history. One of the main points of Railroading Economics is that conservative economists at the time developed a very clear-eyed understanding of the ruinous nature of free market competition. And yet, in the end, they ended up helping to solidify the free market myth. So I asked Perelman to discuss the broad outlines of how this came about.  Once again, it's a story with its share of unexpected twists and turns.   

“At the time, the academic world mostly consisted of church-run universities. All the Ivy League schools with the exception of Penn had a church connection,” Perelman began. But this hardly made them otherworldly. “The churches relied on donations and because American industry occurred relatively late, the donations tended to be from merchants who were interested in trade, and therefore wanted unrestricted markets.”   

But that's not exactly what they got, as Perelman explained the next twist. “The best university education in the world, was in Germany. So the people who became the most important economists in the late 19th and early 20th century were virtually all educated in Germany,” Perelman said. Which, of course, was not just academically, but also industrially more developed than the US at the time.   

“In addition,” Perelman noted, “they were respectful of Marx's work. Even though they did not agree with his politics, they agreed with some of his analysis, because Germany was looking at the world not from an individualistic perspective, but from the perspective of community, because the German objective was to create a state out of all these mini-states which represented what came to be Germany.” 

Thus, much as foreign students today come to America and return home profoundly influenced by American pre-occupations, the same thing happened with American students in Germany. This occurred around the same time that Otto von Bismark was consolidating the German state, controlling competition and creating the first full-scale welfare state as part of a conservative nation-building project, which sought to preempt the most popular socialist ideas in order to implement them in a way that stabilized and reinforced Germany's established social and economic order. 

Along similar lines, one of Germany's leading economists at the time, Adolph Wagner, a conservative nationalist, coined what's now known as "Wagner's law"—which states that the development of an industrial economy will be accompanied by an increased share of public expenditure in GNP.  In short, the intellectual world that would-be American economists encountered in Germany was a far cry from what they had previously known in America. 

As a result, Perelman continued, “They came back to this country dissatisfied with the kind of market-oriented economics that was being taught, and they founded something called the American Economics Association, which is the dominant economic association today. But it was designed not to support market economics, but to build something more like the German system, which was very, very successful, which was based on restrictions of competition, that competition was destructive, it was wasteful, competition was destructive and competition was wasteful, because it represented a duplication that was unnecessary.”  

Yet, once again, the seemingly straightforward story soon became more complicated again, Perelman explained. “At the same time, these same people wrote the definitive texts arguing that perfect competition was the way the economy worked, and accept it. And the question arises: 'Why would these people write two different versions?'” 

Why indeed? Anyone who's ever marveled at the pre-Murdoch disconnect between the Wall Street Journal's news coverage and its editorial pages will not be entirely surprised at Perelman's explanation. “The answer is there were two different dialogues. One was with the workers, who were very upset with the world they were seeing, and the other dialogue was with powerful people, especially people like congressmen and senators, who would have the power to regulate or deregulate big industries. 

“So on the one hand, they wrote to the powerful people, markets don't work, markets are destructive, markets are duplicative, give us free reign to organize this stuff as we see fit, more or less modeled on the German system of cartels.” This was their equivalent of the Journal's reality-based business news coverage. 

“The other dialogue was with workers--'You're getting exactly what you deserve, markets are fair, markets work perfectly,' and of course, the second version is the one that became dominant,” Perelman explained, much as the Journal's editorial page promotion of “supply side economics” became dominant in the Reagan era, despite sharply reversing 35 years of declining debt-to-GDP ratios.

As a result, Perelman said, “The American Economic Association now is just a mouthpiece of conventional type of economic thinking, even though the people that we're talking about—one was the leading railroad economists of the country, Arthur Hadley, who was also President of Yale University, [others included] names like John Bates Clark, Charles Francis Adams, the presidents' grandson and son—these were all people with deep understanding of railroads and how they worked, and all were universally skeptical about markets.” 

All this would be far more than enough to put the kibosh on Rand's fantastical imagination of the 19th century as some sort of golden age of free market competition—a fantasy shared by wide swathes of the right, from Ron Paul's obsession with the gold standard to Michael Orlovsky's infatuation with Victorian-era charity, the seed that gave birth to George W. Bush's oxymoronic “compassionate conservatism.” But Perelman's analysis has two additional basic points that make this history even more compelling in terms of contemporary impact.  

First is that the problem of fixed costs encountered by the railroads applies to virtually all major industries. Second is that an additional level of anti-competitive logic that kicks in with “post-industrial” information age technology, including, but not limited to, vertical integration—something we see exemplified in the issue of net neutrality.   

Taking them in order, Perelman explained, “The railroad problem was common with all major industries, it was the same pressure to avoid competition, through creation of trusts, cartels, and monopolies. This is the same problem, because the competition would cause prices to go to the cost of producing one more. And what you get with modern technology is the cost of producing one more unit is very, very small, relative to the fixed costs.” 

This was even quite clear in the late 19th century. “The fixed costs in railroads for capital was very, very important, I think about two-thirds of all capital investment at the time was in railroads. Morgan was also instrumental in taking over the steel industry, with Carnegie. He took over AT&T, which was another capital-intensive industry, which had virtually no cost of carrying one more conversation over the wires.” 

But the logic also applies to 20th century industries as well. “You see it in terms of the airlines, because the cost of putting me in a seat and carrying me to New York, when you have an empty seat in an airline is 15 or 20 bucks, but if they airlines only get 15 or 20 bucks, then they go bankrupt. So now you pay more than that, just for luggage, which costs almost nothing to carry to New York. Competition doesn't work.” 

Indeed, airlines have repeatedly suffered major crises ever since the deregulatory era began under Carter, and then kicked into high gear under Reagan. But even airlines are a somewhat antiquated technology, compared to what's come after them, as Perelman considered next. “Now, when you go to even more modern technology—let's say telecommunications—if you had real competition in the telecommunications industry, not just a few big companies, then, of course, prices would go down to the cost of carrying one more unit, and we'd see that telecommunications would be virtually free. So, we don't have competition.”  

What has happened with telecommunications impacts a wider range of older information technologies as well. Just as railroads worked to integrate the entire industrial order of their day, telecommunications has a similar impact today, accelerating the impact of an underlying logic that would eventually have caught up with all of them anyway—though perhaps not with such devastating speed. 

Thus, “It becomes even more extreme in industries where the cost of one more unit is free or virtually free. Then you need to have intellectual property to prevent markets from working their magic. So you see, every time the US economy slows down, you see an intensification of intellectual property, as a way of pumping up profits.” 

This brings us to Perelman's second point. “Net neutrality takes this a step further, in that not only are you eliminating market-type competition, but it would be almost  as if you would  give the railroads or the airlines the ability to discriminate on their preferences, so for example the airlines would have the right to tell obese people they can't fly, because they cost more.” 

But that's only the beginning. “It's even worse because, in terms of net neutrality, you have have what's called 'vertical integration', that is you have the same people supplying the pipelines in addition to what they put over the pipe. And so there you have an even more extreme degree of control. Because not only can they regulate the price, but they can regulate the quality of the service they deliver to force people to move toward what they want to sell.”   

He went on to give Comcast as an example, saying, “The absence of net neutrality means that can give preference to their own product, and to the exclusion of other people's products. And then when you have only a few content providers, big content providers, that would mean it would squeeze out everybody except the very very biggest [content providers] who can afford to pay the freight.” 

As a result, Perelman concludes, “There we've moved two steps from competition, from competitive conditions, something that was not even imagined by people writing about this problem in the 1890s.”   

The negative impacts may be familiar to today's young users—many of them “cyber-libertarians” as described in Paulina Boorsook's classic survey, Cyberselfish: A Critical Romp Through the Terribly Libertarian Culture of High Tech —but the historical and ideological connections are only dimly perceived, at best. 

 Finally, I asked Perelman about the question of how to construct something different—both a different understanding of economics and a system that reflects that understanding.  

“The first step would be for people to understand what the present is, and we're not making very much progress,” he said.  “People don't understand the nature of the economic system, they don't understand the nature of the financial system, and we seem to have lost the core types of organizations that could give us a framework in which we could share ideas and develop ideas. We have to build those from the ground up. It's a very, very difficult challenge.”  

I asked about Wisconsin, the upsurge of pro-labor activism there, in contrast to the much more atomized way in which labor usually functions in America. Did he regard this as a sign of hope, a potential opening? 

Perelman was hesitant. “I don't know how much of an opening there was with the election in Wisconsin for the Supreme Court, just maybe the push-back isn't as strong as we might hope.” What's more, he went on to argue, in the past progressive forces were institutionally much broader and more diverse. “You not only had unions, you had strong socialist parties, a strong Communist party before, you had—and  probably the groups that would have strongest potential would have been the churches. So if you went back to the late 19th century, there the churches we mostly very progressive, churches who would stress things like justice.  That kind of church movement was weakened, the labor movement was weakened, every kind of social movement has been, as you said, atomized.” 

“Even when the attack is so crude and clumsy as it was in Wisconsin, you might have a majority that opposes it, but you don't have a strong movement,” Perelman said, “and even when you have a strong movement, after you win, the next step is more difficult.  What do you do? Obviously, that's the question: Afterwards, what do you do?  There I would point to Egypt. They won a surprising victory, a shocking victory, I don't think anyone could have predicted, and yet, again, what happened afterward is that it looks like it's questionable there will be real change.” 

Just because he has a deep sense of how difficult our situation is doesn't mean he's devoid of hope, however.  “So, it requires a long-term vision, and we have to develop a combination of courage and patience,” he said.   

“It will be very difficult. And yet—and yet—when people start doing this, and can feel a sense of success, as long as they don't expect an immediate victory that's going to change the world, then there will be a sense of fulfillment that will make it seem very worthwhile.  But that's a hard sell at this point for a lot of people.”