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[NOTE: The following is a bibliographic essay commissioned for the
H-SHGAPE discussion group. SHGAPE is the Society for the History of the
Gilded Age and Progressive Era (United States). Comments, additional
references, etc. are welcome. I will send copies of responses to the
essay's author. -- RBE]
An H-SHGAPE GAPEBIB Essay May 11, 1997
ECONOMISTS AND REGULATION DURING THE GAPE
Werner Troesken, [log in to unmask]
Many significant regulatory changes occurred during the gilded
age and the progressive era (the GAPE). The federal government passed
the Sherman Antitrust Act, the Interstate Commerce Act, and the Food
and Drug Act. State governments created state commissions to regulate
utilities, and laws regulating work conditions. Over the past ten
years, economists have written much about these and other GAPE
regulations. In part because of the increasing emphasis on
mathematical technique in economics, and in part because of the
increasing fragmentation and specialization of all disciplines, these
economic writings are outside the purview of many historians. In this
short essay, I review what economists have written about regulation
and regulatory change during the GAPE. I focus on three areas:
railroad regulation; antitrust regulation; and public utility
regulation.
STATE AND FEDERAL RAILROAD REGULATION
In a widely-cited paper, Thomas Gilligan, William Marshall, and
Barry Weingast (1989) argue that the Interstate Commerce Act "was not
solely a cartel mechanism for the railroads (as the pure capture view
asserts) nor solely a mechanism to correct market abuses by the
railroads (as the public interest theory maintains)." Instead,
Gilligan, et. al., offer a multiple interest group interpretation.
Analyzing key roll call votes, the authors identify three distinct
interest groups: long-haul shippers; short-haul shippers; and the
railroads. Voting patterns suggest that the Interstate Commerce Act
benefitted short haul shippers and the railroads at the expense of
long haul shippers. There are also studies that examine how railroad
stocks responded to the passage of the act, and key court decisions
regarding federal railroad regulation. Broadly construed, these
studies corroborate the multiple interest group story, and indicate
that most railroad stocks rose with passage of the Interstate Commerce
Act (Prager 1989 and Gilligan, Marshall, and Weingast 1990).
Keith Poole and Howard Rosenthal argue that Gilligan, et. al., do
not adequately consider the role that long-term political coalitions
played in shaping the Interstate Commerce Act. Poole and Rosenthal
(1994, pp. 116-17) write: "The need to form legislative majorities
gives strong incentives for vote trading. Roll call votes reflect
these trades; thus any simple relationship between economic interests
on an issue and voting behavior is likely to be obscured, particularly
when the vote is likely to be close. Political parties, even more so
in the last half of the nineteenth century than today, are a key
vehicle for the trades." Poole and Rosenthal (1993) find that their
variables for long-term coalition formation do a better job predicting
voting patterns on the Interstate Commerce Act than do the district-
level economic variables employed by Gilligan, et. al.
Exploring the origins of state regulation, Mark Kanazawa and
Roger Noll (1994) analyze voting patterns on an Illinois measure to
regulate railroads. A clear pattern emerges from their analysis.
Railroads opposed state regulation, while farmers favored it.
However, farmers in regions with only limited railroad service
worried that regulation would discourage future development of the
rail system in their region. In short, Kanazawa and Noll find that
at the state level, railroad regulation was not a device to facilitate
collusion among the railroads, but a device to bring shippers lower
rates.
THE SHERMAN ACT AND EARLY ANTITRUST ENFORCEMENT
Economists and economic historians find that small business
interests played a central role in shaping early antitrust policy.
Examining the Congressional debates surrounding the Sherman Antitrust
Act, Christopher Grandy (1993) finds that legislators were more
concerned with the welfare of producers hurt by the trusts than with
the welfare of consumers. Grandy's paper challenges much earlier work
by Robert Bork, who argued that legislators sought to maximize
consumer welfare. In a widely-cited paper, Gary Libecap (1992) argues
that the impetus for antitrust, as well as federal meat inspection,
came from small meat-packers who were harmed by the more efficient
meat-packing trust. Exploring voting patterns on the Sherman Act and
the timing of state antitrust legislation, Donald J. Boudreaux, Thomas
J. DiLorenzo and Steven Parker (1995) find support for Libecap's view.
Finally, George Stigler (1985) shows that states with an above average
share of potential monopolists were less likely to pass a state
antitrust law before 1890, than were states with a below average
share. This pattern, according to Stigler, suggests that big business
opposed antitrust regulation, while small business favored it.
One area that has received little attention from economists and
economic historians is the role that the trusts played in shaping the
nation's first antitrust statute. Surely the trusts had close ties to
the 51st Congress, the Congress that passed the Sherman Act. One
expects that the trusts would have exercised their political power to
defeat, or at least, emasculate whatever antitrust legislation
emerged. Subsequent enforcement of the Sherman Act suggests that
trusts were at least partially successful. Also, in an unpublished
paper, I present evidence that the trusts, and their political allies
in the senate, tried to have Senator Sherman's original antitrust bill
sent to the senate judiciary committee, where they hoped the bill
would be buried (Troesken 1997).
There are several studies of the effects of antitrust enforcement
and the Sherman Act. Burns (1977) explores the dissolution of
Standard Oil, American Tobacco, and American Snuff in 1911. He
identifies the following pattern in stock prices. When the market
first learned that these trusts were dissolved by the courts, the
stock prices of the underlying firms plummeted. However, when
the market learned how the trusts involved responded to these
decisions--typically by reorganizing into combinations that were not
legally assailable--stock prices recovered to their pre-dissolution
levels. This pattern of depression and recovery suggests that
investors believed that court enforcement of the Sherman Act would not
reduce the long run profitability of the trusts. Binder (1988)
explores the break-up of the railroad cartels in 1897 (Trans-Missouri)
and 1898 (Joint-Traffic). He finds that the decisions to dissolve the
railroad cartels did not even induce large reactions from the stock
market on the days they were announced. Railroad rates also appear to
have been unaffected by the dissolution of the cartels.
Significantly, there is evidence that antitrust regulation before
the Sherman Act led to similar patterns in stock prices. I call this
significant because it suggests that, as passed, the Sherman Antitrust
Act did very little to change public policy toward the trusts. Prior
to the passage of the Sherman Act in 1890, several states had already
filed suits against the trusts. Using quo warranto proceedings, state
officials tried to revoke the charters of trusts, or of firms in their
states who had joined trusts. In a study of one of these quo warranto
suits, I find that the decision to dissolve the Chicago Gas Trust
reduced the market value of the firm by a third. However, subsequent
efforts to rehabilitate the gas trust into a legally-secure
organizational form allowed investors to recoup nearly of these
losses. I also study gas prices in Chicago to see if the dissolution
of the trust brought consumers lower prices. Consistent with the
stock market data, dissolving the trust did not affect gas prices
(Troesken 1995).
Implicit in all of the studies cited above is the idea that the
trusts circumvented the antitrust prosecutions by changing their
organizational form and adopting arrangements that were immune to
legal attack. Comparing Great Britain and the United States, George
Bittlingmayer (1985) formalizes this idea. He finds evidence that the
Sherman Act provided some of the impetus for the Great Merger Wave.
Unlike the studies cited above, though, Bittlingmayer does not argue
that antitrust enforcement was benign. He argues that it was
pernicious. Exploring the years between 1900 and 1914, Bittlingmayer
(1993) presents evidence that periods of unusually stringent antitrust
enforcement are correlated with slumps in the stock market and reduced
economic output. The mechanisms through which antitrust regulation
could have lowered stock prices and slowed real economic activity are
manifold. But the basic idea is this: antitrust enforcement caused
firms to abandon their chosen, and presumably most efficient,
organizational arrangements, leaving them less profitable and less
productive.
PUBLIC UTILITY REGULATION
Economists typically draw from one of three perspectives to
explain the origins of public utility regulation. The traditional
public interest view is predicated on the idea that public utilities
like gas and water were natural monopolies. According to this view,
state utility commissions were designed to solve the problems that
stemmed from allowing unfettered competition in markets characterized
by natural monopoly: extended periods of high rates punctuated with
brief but intense price wars; and unnecessary duplication of capital
(Hovenkamp 1991, pp. 105-24). A competing private interest or capture
theory maintains that utility commissions were created at the behest
of utilities hoping to undermine the relatively hostile policies of
municipal authorities (Demsetz 1968 and Jarrell 1978).
The third explanation draws on the long-term or relational
contracting literature in economics. The following example highlights
the underlying logic. To sell gas, a gas company had to invest
substantial resources in a system of mains. The investment was
irrevocable. Once the mains were in the ground, the gas company could
not move or sell them. Strictly speaking, the mains represented an
asset specific or non-redeployable investment. If after the company
installed its mains, the city imposed onerous price regulations or
taxes, the company was stuck. It could not move or resell its capital.
As a result, before installing its mains, the gas company
required assurances that the city would not impose onerous regulations
or taxes ex post. Alternatively, municipal authorities had to grant
the gas company the right to use public roads to lay mains. For the
city, this right represented an irrevocable investment. Once the gas
company exercised its right to use public property and install its
mains, the city could not meaningfully revoke that right. If the
company's rates or service failed to satisfy the city, the city was
stuck. As a result, before granting this property right, the city
demanded a commitment that the utility would not charge excessive
rates or provide poor service ex post (Goldberg 1976 and Williamson
1985, pp. 327-64).
According to the relational contracting interpretation, utility
industries were never organized as markets. Non-redeployable
investments forced utilities and municipalities to create long-term,
binding contracts. Before state utility regulation, state charters
and municipal franchises embodied these contracts and supplanted the
market. The charter and franchise governed the behavior of both the
municipality and the utility. The state charter set strict limits on
the city's regulatory authority; the municipal franchise dictated the
price and quality of the company's gas. State utility commissions
functioned similarly. Like state charters, they prevented the city
from imposing onerous regulations. Like municipal franchises, they
prevented the gas company from charging high rates. Hence, the
arrival of state regulation represented more a change in the way
cities and utilities contracted than a move from pure and unfettered
competition to widespread state intervention. In a case-study of the
Chicago gas industry, I find patterns consistent with the long-term or
relational contracting view (Troesken 1996). Priest (1993) uncovers
similar evidence.
CONCLUDING REMARK
Although I have not drawn any direct parallels between the work
of economists and the work of historians, there are several. I highly
recommend the work of Herbert Hovenkamp to anyone interested in
exploring such parallels. (See Hovenkamp 1991 and 1995).
REFERENCES
Binder, John J. 1988. "The Sherman Antitrust Act and the Railroad
Cartels," JOURNAL OF LAW AND ECONOMICS, 31:443-68.
Bittlingmayer, George. 1985. "Did Antitrust Policy Cause the Great
Merger Wave?" JOURNAL OF LAW AND ECONOMICS, 28:77-111.
Bittlingmayer, George. 1993. "The Stock Market and Early Antitrust
Enforcement," JOURNAL OF LAW AND ECONOMICS, 36:1-32.
Burns, Malcolm. 1977. "The Competitive Effects of Trust-Busting: A
Portfolio Analysis," JOURNAL OF POLITICAL ECONOMY, 1977, 85:717-39;
Boudreaux Donald J., Thomas J. DiLorenzo, and Steven Parker. 1995.
"The Origins of Antitrust: An Empirical Study," in ANTITRUST IN
PUBLIC CHOICE PERSPECTIVE. Edited by Fred S. McChesney and William F.
Shughart III. Chicago: University of Chicago Press.
Demsetz, Harold. 1968. "Why Regulate Utilities?" JOURNAL OF LAW AND
ECONOMICS, 11:55-65.
Gilligan, Thomas W., William J. Marshall, and Barry R. Weingast.
1989. "Regulation and the Theory of Legislative Choice: The
Interstate Commerce Act of 1887," JOURNAL OF LAW AND ECONOMICS, 32:35-
61.
Gilligan, Thomas W., William J. Marshall, and Barry R. Weingast.
1990. "The Economic Incidence of the Interstate Commerce Act of 1887:
A Theoretical and Empirical Analysis of the Short-Haul Pricing
Constraint," RAND JOURNAL OF ECONOMICS, 21:189-210.
Goldberg, Victor. 1976. "Regulation and Administered Contracts,"
BELL JOURNAL OF ECONOMICS AND MANAGEMENT SCIENCE, 7:426-62
Grandy, Christopher. 1993. "Original Intent and the Sherman
Antitrust Act: A Re-examination of the Consumer Welfare Hypothesis,"
JOURNAL OF ECONOMIC HISTORY, 53:359-76.
Hovenkamp, Herbert. 1991. ENTERPRISE AND AMERICAN LAW,
1836-1937. Cambridge: Harvard University Press.
Hovenkamp, Herbert. 1995. "Regulation History as Politics or
Markets," YALE JOURNAL OF REGULATION, 12:548-50.
Jarrell, Gregg A. 1978. "The Demand for State Regulation of the
Electric Utility Industry," JOURNAL OF LAW AND ECONOMICS, 21:269-96.
Kanazawa, Mark T., and Roger G. Noll. 1994. "The Origins of State
Railroad Regulation: The Illinois Constitution of 1870," in THE
REGULATED ECONOMY: A HISTORICAL APPROACH TO POLITICAL ECONOMY.
Edited by Claudia Goldin and Gary Libecap. Chicago: University of
Chicago Press.
Libecap, Gary D. 1992. "The Rise of the Chicago Packers and the
Origins of Meat Inspection and Antitrust," ECONOMIC INQUIRY, 30:242-
62.
Poole, Keith T., and Howard Rosenthal. 1993. "The Enduring
Nineteenth-Century Battle for Economic Regulation: The Interstate
Commerce Act Revisited," JOURNAL OF LAW AND ECONOMICS, 36:837-60.
Poole, Keith T., and Howard Rosenthal. 1994. "Congress and Railroad
Regulation, 1874-1887," in THE REGULATED ECONOMY: A HISTORICAL
APPROACH TO POLITICAL ECONOMY. Edited by Claudia Goldin and Gary
Libecap. Chicago: University of Chicago Press.
Prager, Robin A. 1989. "Using Stock Price Data to Measure the
Effects of Regulation: the Interstate Commerce Act and the Railroad
Industry," RAND JOURNAL OF ECONOMICS, 20:280-90.
Priest, George. 1993. "The Origins of Utility Regulation and the
'Theories of Regulation Debate,'" JOURNAL OF LAW ECONOMICS, 36(2):289-
324.
Stigler, George J. 1985. "The Origin of the Sherman Act," JOURNAL OF
LEGAL STUDIES, 1985, 14:1-11.
Troesken, Werner. 1995. "Antitrust Enforcement before the Sherman
Act: The Break-up of the Chicago Gas Trust Company," EXPLORATIONS IN
ECONOMIC HISTORY, 32:109-36.
Troesken, Werner. 1996. WHY REGULATE UTILITIES? THE NEW
INSTITUTIONAL ECONOMICS AND THE CHICAGO GAS INDUSTRY,
1849-1924. Ann Arbor: University of Michigan Press.
Troesken, Werner. 1997. "Senator Sherman, Standard Oil, and the
Battle for Antitrust." Department of History. University of
Pittsburgh.
Williamson, Oliver. 1985. THE ECONOMIC INSTITUTIONS OF
CAPITALISM. New York: Free Press.
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