------------ EH.NET BOOK REVIEW --------------
Published by EH.NET (January 2007)

Michael Perelman, _Railroading Economics: The Creation of the Free 
Market Mythology_. New York: Monthly Review Press, 2006. 238 pp. $20 
(paperback), ISBN: 1-58367-135-8.

Reviewed for EH.NET by Richard Vedder, Department of Economics, Ohio 
University.


The good news about Michael Perelman's new book is that it is a 
highly readable, lucidly written, and provocative account of the 
evolving American economy. Moreover, readers of this site would be 
pleased that this is a rare economist who draws very heavily on 
insights from economic history and even the history of economic 
thought in reaching conclusions about the contemporary American 
economy. Also, the book has lots of solid footnotes showing a serious 
appreciation of much of the relevant scholarly literature of the past 
century or more.

Alas, the bad news is that Perelman is almost certainly wrong, and I 
suspect most American scholars reading his book would agree. He 
believes the fundamental core of microeconomic theory as taught by 
more than 95 percent of American academic economists is misguided and 
that the American economy is in real decline. A radical economist 
(who has published more in the _Review of Radical Economics_ -- at 
least seven papers -- than in any other scholarly journal), Perelman 
avoids most of the maddening invective and polemics that sometimes 
pervades heterodox works, but in the final analysis he thinks 
Americans live in a society run by a bunch of greedy financiers who 
seriously exploit workers and cause enormous waste.

According to Perelman, classical economics emerged out of an agrarian 
society where the presumption of pure competition was fairly 
reasonable. Over time, however, massive capital-intensive businesses 
evolved, notably the railroads, with very high fixed costs. The 
neoclassical notion that profit-maximizing firms would produce where 
marginal costs equaled marginal revenue and price (in pure 
competition) simply did not fit the reality of these new natural 
monopolies. Competition was destabilizing, led to overinvestment, and 
paved the way for unscrupulous financiers like Jay Gould. In 
Perelman's view, "the increasing relative importance of fixed costs 
means that ... competition ... would lead to utter chaos" (p. 46). A 
group of "railroad economists" or corporatists understood all this, 
but they were largely ignored by conventional economists who 
developed a "quasi-religious" and "ideological" (p. 99) fervor 
towards their theoretical models, a fervor that persists today.

Perelman thinks that in pursuing competition, prices were forced so 
low that many railroads were forced into bankruptcy, much as is 
happening in airlines today. This opens the door for the "financial 
capitalists" who make money reducing competition (via mergers) and 
reorganizing bankrupt companies, getting rich in the process and 
hurting workers of the involved companies. The Enron/WorldCom 
problems of the early twenty-first century are not that different 
from those created by J.P. Morgan organized mergers of a century 
earlier, best symbolized by the formation of U.S. Steel.

In Perelman's eyes, the instability arising from the lack of 
realization of the importance of fixed costs, the machinations of 
financial interests, and so forth, have caused internal 
contradictions in capitalism. He opines that "an economy built 
increasingly on finance is a disaster waiting to happen" (p. 198), 
concluding "I look forward to the day when we no longer rely on 
competition for monetary rewards ... when cooperation and social 
planning replace the haphazard world of the market place" (p. 200). 
In Perelman's world, "success will ... depend upon the education and 
empowerment of workers rather than their exploitation" (p. 200).

As neo-Marxist accounts go, this one is far less polemical and 
hysterical than some, but it still simply does not accord with 
critical facts. Business is not beset with continually rising 
relative fixed costs, for example, a basic assumption of the book. 
The largest and most successful businesses of modern times -- the 
Microsofts, Wal-Marts, Googles, major pharmaceutical companies, etc., 
are mostly firms with little debt and often even large cash hoards. 
Fixed costs are a trivial part of expenses. Many so-called natural 
monopolies (e.g., cable and phone companies, electric utilities) are 
actually becoming more competitive over time with technological 
change, and the share of American workers employed by large (Fortune 
500) firms has declined sharply. Moreover, Perelman's 
characterization of contemporary economist's acceptance of 
Marshallian economic theory is badly distorted, as he writes as if 
economists have largely ignored imperfect competition, information 
costs, etc., while that is very far from the truth.

Despite Perelman's assertions, by any standard measures, economic 
instability has _declined_ sharply in the last sixty years. For 
example, the standard deviation on the annual unemployment rate or 
growth rate of real GDP was far lower in the last half of the 
twentieth century than the first half. Two-thirds of a century has 
passed since we had a year with a ten percent unemployment rate, 
while there were seventeen such years in the fifty years from 1891 to 
1940. "Crises" and "depressions" predicted by Perelman are happening 
less often and with smaller levels of severity, not greater as the 
analysis in this volume seems to predict. Real average consumption 
per American has risen two percent a year in the over one hundred 
years since the "railroad economists" inveighed about excessive 
competition, hardly a sign of economic decline or massive worker 
exploitation. America's immigrant problem is one of finding human 
ways of excluding newcomers, not obtaining them, a sign the nation 
retains a role as a magnet to people who come from economies that, on 
average, are far less capitalist than America. Where market's have 
been suppressed, in places like North Korea or Cuba, people are poor 
relative to neighbors living in market economies with all of the 
speculation, financial excesses, and occasional mal-investments that 
so disturb Perelman.


Richard Vedder, Distinguished Professor of Economics at Ohio 
University, is coauthor of the just released _The Wal-Mart 
Revolution_ (AEI Press, 2006). His next book will be on income 
growth, equality and public policy in the United States.

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