The Benefits of Market Entrepreneurs

by Anita on March 14, 2013

Posted by Anita Folsom

Market entrepreneurs are those who build their businesses with private funds, using either their own money or funds from investors. Market entrepreneurs succeed by giving the public useful goods or services at a good price. Political entrepreneurs, on the other hand, lobby government officials to award federal funds to their business enterprises. Which group benefits society the most?

The career of Cornelius Vanderbilt shows us what to expect from market entrepreneurs.  He was born on Staten Island, New York, in 1794.  His great-great-grandfather had immigrated in 1650 as an indentured servant, and by the time Cornelius was born the family operated a ferry in New York Harbor. Cornelius quit school at age 11 to work on his father’s boats and began his own ferry service five years later.  In 1817 Thomas Gibbons hired him to run a ferry between New Jersey and New York City.

During the 1830s, Vanderbilt went into business for himself and established steamboat routes all over the northeast.  (Myth of the Robber Barons, Chapter One) As Vanderbilt’s boats sailed along the East Coast and up and down the Hudson River, he charged cheap fares but made money by selling food to customers onboard. He also hired excellent captains and used well-built boats with good engines. Vanderbilt’s success forced his competitors to run their companies well and either cut prices or go out of business.

By the 1840s, improving technology meant that steamships could cross the Atlantic in less than two weeks, not the three months common with sailing vessels.

The English government soon began subsidizing a British steamship line when Samuel Cunard, a political entrepreneur, received funds from Parliament to establish routes between England and New York. British politicians said that the money was well-spent because Cunard carried the mail, and his ships gave England an advantage in world trade.

Sure enough, it didn’t take long before an American, Edward Collins, lobbied Congress for funds to set up a transatlantic steamship company. In 1847 Congress agreed to give Collins $3,000,000 down and $385,000 per year. Collins pledged to build five steamships and “drive the Cunarders off the seas.”

From the first, Collins’ company followed a pattern of wasteful spending on lavishly decorated ships that were poorly built and therefore used extra fuel. But since he received his yearly aid from the government, Collins had little incentive to reduce his costs.  His steamships were crossing the Atlantic but quickly developed structural problems. Collins kept going back to Congress, asking for more and more money to build new vessels.

By 1855 Cornelius Vanderbilt had seen enough.  He told Congress that he would operate a transatlantic “ferry” for $15,000 per trip, which was far cheaper than either Cunard or Collins could do. Congress turned Vanderbilt down flat and instead continued to subsidize Collins, who by that time was receiving $858,000 per year.

To make a long story short, Vanderbilt ran a safe and successful steamship line between Europe and New York.  He developed the concept of “steerage,” charging extremely cheap fares for crowded, rather uncomfortable accommodations in the hold of the ship. He paid recruiters to travel across Europe, telling the public that they could cheaply and safely travel to America. But Collins’ ships developed so many problems (one sank in the middle of the Atlantic, killing almost 500 passengers) that the public was afraid to use his company.

By 1858, Collins was bankrupt, and Vanderbilt was on his way to become the leading American steamship operator. Vanderbilt was innovative, energetic, and loved competition in a free market. Vanderbilt’s innovations gave travelers across the world faster, safer, and cheaper transportation with no government subsidy. As a market entrepreneur, Cornelius Vanderbilt provided a useful, safe service to the public at a good price.  The Collins vs. Vanderbilt story should be a good lesson to Americans of every generation.

 

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