At Slate Star Codex, Scott Alexander recently reviewed David Friedman’s latest revision to his 1973 book, The Machinery of Freedom (sometimes called The Machinery of Friedman by libertarian wags). Scott wasn’t totally sold on Friedman’s proposals, but he posted several highlights from the book, including this discussion of how the US government was persuaded to regulate the railroad industry and then the airlines:
One of the most effective arguments against unregulated laissez faire has been that it invariably leads to monopoly. As George Orwell put it, “The trouble with competitions is that somebody wins them.” It is thus argued that government must intervene to prevent the formation of monopolies or, once formed, to control them. This is the usual justification for antitrust laws and such regulatory agencies as the Interstate Commerce Commission and the Civil Aeronautics Board.
The best historical refutation of this thesis is in two books by socialist historian Gabriel Kolko: The Triumph of Conservatism and Railroads and Regulation. He argues that at the end of the last century businessmen believed the future was with bigness, with conglomerates and cartels, but were wrong. The organizations they formed to control markets and reduce costs were almost invariably failures, returning lower profits than their smaller competitors, unable to fix prices, and controlling a steadily shrinking share of the market.
The regulatory commissions supposedly were formed to restrain monopolistic businessmen. Actually, Kolko argues, they were formed at the request of unsuccessful monopolists to prevent the competition which had frustrated their efforts.
[…]
It was in 1884 that railroad men in large numbers realized the advantages to them of federal control; it took 34 years to get the government to set their rates for them. The airline industry was born in a period more friendly to regulation. In 1938 the Civil Aeronautics Board (CAB), initially called the Civil Aeronautics Administration, was formed. It was given the power to regulate airline fares, to allocate routes among airlines, and to control the entry of new firms into the airline business. From that day until the deregulation of the industry in the late 1970s, no new trunk line — no major, scheduled, interstate passenger carrier — was started.
The CAB had one limitation: it could only regulate interstate airlines. There was one major intrastate route in the country — between San Francisco and Los Angeles. Pacific Southwest Airlines, which operated on that route, had no interstate operations and was therefore not subject to CAB rate fixing. Prior to deregulation, the fare between San Francisco and Los Angeles on PSA was about half that of any comparable interstate trip anywhere in the country. That gives us a good measure of the effect of the CAB on prices; it maintained them at about twice their competitive level.
In this complicated world it is rare that a political argument can be proved with evidence readily accessible to everyone, but until deregulation the airline industry provided one such case. If you did not believe that the effect of government regulation of transportation was to drive prices up, you could call any reliable travel agent and ask whether all interstate airline fares were the same, how PSA’s fare between San Francisco and Los Angeles compared with the fare charged by the major airlines, and how that fare compared with the fare on other major intercity routes of comparable length. If you do not believe that the ICC and the CAB are on the side of the industries they regulate, figure out why they set minimum as well as maximum fares.
