Political Entrepreneurs vs. Market Entrepreneurs

by Anita on March 13, 2013

Posted by Anita Folsom

What is an entrepreneur? The dictionary says an entrepreneur is ”a person who organizes and operates a business or businesses, taking on financial risk to do so.”  What is a political entrepreneur?  A political entrepreneur uses government funds in business, which greatly reduces any financial risks to the “entrepreneur.”

Not only do political entrepreneurs lobby to receive federal funds, they often work to pass laws that hinder their competitors. Thus, political entrepreneurs, one could argue, are really not entrepreneurs at all.  In most respects, they resemble government bureaucrats.

History is strewn with the wreckage of projects built by political entrepreneurs, and Americans would do well to learn history’s lessons.

In the early 1800s, the great technological innovation of the day was the steamship. Textbooks tell us that Robert Fulton operated the first American steamship, the Clermont, on New York’s Hudson River in 1807.  Man was no longer bound by the capricious winds of nature for transportation.  Steam-powered ships could move against the wind, meaning that human beings could finally cross the oceans quickly or sail upstream, travelling easily against the force of rivers’ rushing waters.

The economic impact of steamships was dramatic.  Further west, along the Mississippi River, for instance, goods from New Orleans such as furniture had to be brought north to towns upriver by horse-drawn wagons, which took weeks and meant that such items were luxuries that only the well-to-do could afford.  But once steamships began operating, prices of such goods dropped dramatically.  Soon a new settee or dining room table only cost one-sixth of the former price, because steamships quickly and reliably carried large loads upstream, which slashed transportation costs.

Robert Fulton began as an entrepreneur when he used steam power to give the public quick and easy transportation. But he became a political entrepreneur when he obtained a monopoly from the New York state legislature to carry all steamboat traffic in the state of New York for thirty years.

Fulton insisted that his monopoly meant that no one else could ferry passengers to New York City from neighboring states, but an enterprising businessman named Thomas Gibbons wanted to break Fulton’s monopoly. In 1817 Gibbons hired young Cornelius Vanderbilt to run steamboats between Elizabeth, New Jersey and New York City. On the mast of Gibbons’ ship, Vanderbilt hoisted a flag that read: “New Jersey must be free.” (Myth of the Robber Barons, page 2) For sixty days, Vanderbilt defied capture as he speedily transported passengers, lowered fares, and eluded police authorities.

The actions of Gibbons and Vanderbilt led to the landmark Supreme Court case Gibbons v. Ogden, in which the Supreme Court struck down the Fulton monopoly:  Only the federal government, not the states, could regulate interstate commerce.

Cornelius Vanderbilt went on to develop his own steamship company, and once again, he had to compete against a government subsidized political entrepreneur, Edward Collins. Collins’ company eventually went bankrupt, after wasting millions of tax-payer dollars. Vanderbilt’s line proved to be faster, safer, and much cheaper for consumers. Once again, the government had tried to pick a winner in a new business enterprise and had failed. Vanderbilt is the classic example of an entrepreneur, a market entrepreneur, which we will discuss in tomorrow’s blog.

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