Right after the Civil War, our nation embarked on a frenzy of railroad building, spurred by very high levels of government subsidy, albeit often in the form of land grants. Total track miles and tonnage carried burgeoned. But did we overbuild? And was this was a case of government sticking its nose into private markets?
This question arises because I am doing some earth-moving on our south Minnesota farm, closing out an old gravel pit and flattening the last of nearly a mile of railroad grade abandoned 38 years ago. What took hundreds of men and dozens of horses a week to build in 1880 today can be flattened by an enormous tractor and a hydraulic scraper in an hour.
And, over the past 50 years, this happened all over Minnesota. Many thousands of miles of railroad, painstakingly built across the prairies and through the forests of the state between 1870 and 1910 were abandoned and removed after 1960.
So was the initial investment in all this infrastructure a mistake, a waste of economic resources? And because government subsidies played such a big part, were the railroads a textbook case of misguided government intervention that made us poorer rather than richer?
What would our economy be like today if we had left rail infrastructure up to our free enterprise system?
It is impossible to answer that question with much certainty, because the railroad boom took place in a unique historical period, during which people of European origin were forcibly taking land from Native Americans. The nation’s population was surging, with a very high level of European immigration. And the technological revolution, the “age of steel and steam,” was proceeding apace. Too many things were going on at once to be able to tease out the effects of one government policy, even a major one.
We can, however, apply modern economic criteria to determine whether government action in subsidizing large and small railroads 100-plus years ago was beneficial.
The basic rule is that government actions generally make an economy worse off in situations where all the conditions for “perfect competition” exist. These conditions include having many buyers and many sellers of a product, good information on both sides, no “external effects” that harm or help third parties and so on. Such conditions seldom are met completely, but often are true to a sufficient degree that the market functions well. We don’t need government action to make sure pliers, men’s pajamas, onions, haircuts or myriad other products and services are available.
If there is “market failure,” government action may be justified, but there also needs to be some expectation that the proposed action will improve the situation. Just because a market is not meeting some social need is no guarantee that a government measure will correct the problem.
External costs and benefits are an area in which markets commonly fail. Private businesses and households, each pursuing their own self-interest, will, for example, create pollution that harms third parties. The economy as a whole will use resources less efficiently and society as a whole will be worse off.
Similarly, transportation infrastructure has external or “spillover” benefits. Society as a whole gains when people and material can be moved cheaply. It is not just the people in the cars on the highways or the owners of the trucks. The whole economy is more efficient.
Unfortunately, in a pure free-market situation, private individuals and businesses do not face incentives to build transportation infrastructure, at least not to the levels that allow the economy to be most efficient. Infrastructure is a “public good” in a narrow, specific sense used by economists. Without government action, an economy will use resources less efficiently, and households will have fewer goods and services to meet their needs for the same overall use of resources.
Sometimes there are incentives for private enterprise to produce some level of the service. Telegraph lines are an example. They benefited society as a whole, and even though companies like Western Union could not charge all members of society, they could make enough off of people actually sending wire messages that it was not necessary for government to act. At least that is what we decided in our country. Most European countries saw things differently and make telegraphy a government enterprise along with post offices.
Similarly, many miles of railroad were built, especially in the densely-populated east, without subsidy. There was enough private traffic to make it profitable. There were some state subsidies and perhaps the economy would have been more efficient if they had been more general. But private markets worked reasonably well.
Officials feared, however, that the same incentives would not work for railroads to be constructed across the vast, thinly populated areas between the Mississippi and the West Coast.
There were “barriers to entry,” another way in which markets can fail. When an enterprise requires so much capital that few or no private firms can accumulate it, effective competition will not exist.
There also was very imperfect information about the scope of the actual economic benefits that new railroads in the West would generate. Bad information means risk, which in this case deters investment.
This same combination of large capital requirements and unknown benefits also applied to locks on the Mississippi, dams on the Colorado, Columbia and Missouri rivers and rural electrification. All eventually would be addressed by government action.
With railroads, a subjective political decision was made that government should act, not to build and operate the lines themselves, as would eventually be done with locks and hydropower and as was done in much of Europe, but to subsidize private companies to carry this out.
Land was plentiful, and the federal government owned most of it west of the Mississippi. It had little value, in great part because there was no transport available for people or products. So grants of land were a way to subsidize railroads at low explicit cost to the Treasury or current taxpayers.
Having made the decision to subsidize the first transcontinental lines in this manner, federal land grants soon were applied to all manner of railroad development, including most of the little branch lines that crisscrossed Minnesota. These lines were vital to the communities they served for decades. Their abandonment a generation ago was a huge political issue, but now they are scarcely missed, at least economically.
Was subsidizing the building of the big main lines an economic mistake? Almost certainly not. What about myriad feeder lines that were abandoned after only 60 or 70 years of use? Perhaps, although the officials who decided to subsidize them had no way of knowing how soon new technology of the internal combustion engine, automobile and truck, would upset the whole transportation equation.
We probably overbuilt railroads somewhat, just as we probably over-dammed Western rivers and over-channelized Eastern ones. But the now-abandoned roads, like the one through our farm, did speed the settling and economic development of great areas, and our nation certainly would be much different if we had left the whole process to free markets.