How was the government originally organized?
The founders of the United States government intended to limit the government’s power. As Professor Burt Folsom of Hillsdale College explained in his lecture, the number one goal was to leave power to the states and value the liberty of the individual. One reason for this was that a limited government left room for maximum entrepreneurial value creation. To further explain, when people have the freedom to innovate and raise capital there is a higher chance that the needs of people will be met. There is a strong incentive for entrepreneurs to “get things right” because their success depends on it. This entire system is disrupted when governments begin to expand their control and offer subsidies.
What are the effects of these subsidies?
An example of the negative effects of government subsidies, given by Professor Folsom, is the case of the Collins Mail Steamship Company. Edward Collins proposed to the government that they give him a subsidy to jumpstart his new business. Collins proposed that he could provide a constitutional service (delivering mail) that would allow the United States to compete with England’s steamship market. While this sounded like a good idea at the time, the government ended up giving more money to Collins than it should have cost. As Professor Burt explained, a competing steamship company - created by Cornelius Vanderbilt - emerged and was more successful than Collins with half of the money. The crazy fact is that the government did not want to fund Vanderbilt, even though he was outperforming Collins.
Over time, Collins Mail Steamship Company failed and wasted the investments from the United States. This is because Collins was more focused on keeping the government happy than he was his customers. Vanderbilt, on the other hand, had his customers at the forefront of his mind from the beginning. He introduced lower fares, snacks (including his invention of the potato chip), and other incentives that brought in business. This is just one example of how subsidies do not give the incentive to create the most value.
Why isn’t this phenomena more widely known?
An excellent point mentioned by Professor Folsom is that people are not taught about these historical lessons warning against government subsidies. There are many examples in the past, so why do we never hear of them? It is clear that private entrepreneurs funded with private money allows for maximum value creation. I think we need to begin to implement a widespread approach to teaching THIS history in classes. Only then can the younger generation begin to understand and participate in the political process accordingly.
The lecture referenced is Myth of the Robber Barons by Burt Folsom.