Cornelius Vanderbilt, We Need You Today
Entrepreneurship offers a way out of America’s economic problems. With GDP growth shrinking at a one percent annual rate in the first quarter, what role can entrepreneurs play in ramping up GDP growth to four percent?
This week marks the 220th birthday of Cornelius Vanderbilt, whose life showed the transformative power of entrepreneurs—and the problems that come when government regulatory burdens become too heavy. While many decry Vanderbilt and other early titans of industry as “robber barons,” without these entrepreneurs the modern world would not be what it is today.
These innovators destroyed pre-existing, inefficient business models that were able to persist only because they were politically-connected. People who employ these tactics can be called political entrepreneurs since they use government favoritism, monopoly privileges, and price fixing to gain an advantage. People similar to Vanderbilt are market entrepreneurs—they market superior products that are offered at lower costs to succeed. Think Apple founder Steve Jobs and Steve Wozniak or WhatsApp founders Brian Acton and Jan Koum.
These same battles between political and market entrepreneurs are being waged today. Groundbreaking business models and products, such as ridesharing, fracking, and e-cigarettes, that create economic growth and benefit consumers, are in danger of being suppressed because of over-zealous government regulation that protects existing businesses.
Cornelius Vanderbilt offers lessons for today’s policymakers. While he is best-known for revolutionizing the railroad industry, he got his start in water transportation.
As a young man, Vanderbilt worked for Thomas Gibbons as a ferry captain on the waters of New York. He was competing against services offered by the Robert Fulton, the man made famous for being the first to build and operate a steamboat, and who had been granted a 30-year government monopoly over transportation in those waters. Even in the face of this special treatment, Vanderbilt was able to complete the trip faster for less than half the cost. The famous Supreme Court case Gibbons v. Ogden finally invalidated the monopoly in favor of free interstate commerce, to the further benefit of consumers. Steamboat trips from New York City to Albany fell from $7 to 6 cents, and Vanderbilt eventually offered some of his routes free of charge (he made money selling food and drink).
Similarly, much of the latest technology is offered free to users. Services from Facebook to Skype to Google’s search engine are offered free of charge, and companies earn profits from selling personalized advertising. The information age has extended its benefits to those with low incomes, just as Vanderbilt made travel affordable for the masses.
The development and popularization of steamships was helped by the competition fostered by Vanderbilt’s innovation. In 1845, the U.S. government offered a subsidy to American steamship lines to carry U.S. mail to and from Europe. This led Edward Collins to start the Collins Line with three ships operating between New York and Liverpool.
A few years later, Vanderbilt publicly announced that he was willing to operate a trans-Atlantic steamship line at half Collins’s subsidy. Collins urged Vanderbilt to accept at least as big a subsidy as his line. Worried about losing favored treatment, Collins told Vanderbilt that it would be impossible to turn a profit without the large subsidy. Vanderbilt replied, “Then you have got into a business that you don’t understand.”
Although Vanderbilt offered to carry the mail for a lower subsidy, because of rampant cronyism and corruption, Congress voted to ignore Vanderbilt’s deal and continue the larger payout to Collins. Congress even overruled a veto of Vanderbilt’s rejection by President Franklin Pierce. Undeterred, Vanderbilt went into business without government support of any kind.
Even without government subsidy, Vanderbilt undercut Collins’s prices and his ships crossed the Atlantic faster. This eventually convinced Congress to terminate Collins’s subsidy. Overcoming regulations that protect entrenched, politically-powerful interests remains as difficult as ever, but doing so continues to offer immense social and economic benefits.
Vanderbilt busted another government-backed company when he initiated a New York to California steamship line. Again, his service was faster and cheaper than the company that had been granted a monopoly.
In the early 1860s, Vanderbilt turned his attention to the growing United States railroad industry. At the time, the nation’s transportation network was fragmented into numerous short railroads, with their own procedures, timetables, and rolling stock. Vanderbilt created an interregional railroad system through consolidation, leasing, and coordinated management. This led to an organized system that increased efficiency, and sped up travel and shipment times. He did all this on his own in the interest of personal profit, and did so with efficiency that makes any well-intentioned central planner jealous.
The pursuit of efficiency continues as strong as ever today. As Manhattan Institute senior fellow Robert Bryce argues in his new book, this drive to build things that are smaller, faster, lighter, denser, and cheaper is what allows people to do more with less and efficiently combine resources to create value. This natural tendency is what has lifted millions out of dire poverty and created the material benefits of the modern world.
Vanderbilt was aware that if he took advantage of his position to exploit customers, new competitors would arise and threaten his business. The New York Evening Post even called him “the greatest practical anti-monopolist in the country.”
Vanderbilt’s life shows the promise that can come from free, open competition and the dangers to modernization government favors present. Technology continues to open up more industries to disruptive innovation. Government policies should foster creativity and human progress, not protect established interests. The next Cornelius Vanderbilt, John D. Rockefeller, Henry Ford, Nikola Tesla, or Steve Jobs is out there. Will they be able to revolutionize the economy? Or will government stand in the way of advancement?
Jared Meyer is a policy analyst at Economics21 at the Manhattan Institute for Policy Research. You can follow him on Twitter here.
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