Fee Enterprise

…in the mid-Atlantic and New England states between 1800 and 1830, turnpike companies accounted for 27 percent of all business incorporations.

That’s from Turnpikes and Toll Roads in Nineteenth-Century America, by Daniel B. Klein, Santa Clara University and John Majewski, University of California Santa Barbara. A long entry in EH.net, an encyclopedia of economic history, it unpacks a remarkable but mostly-forgotten stage of business growth in North America. In reading it I wonder what relevance it might have to the current problems regarding the financing, deployment and running of Internet infrastructure, especially for rural areas that are outside the geographic scope of telephone and cable company ambitions. Take this paragraph, for example:

For Americans looking for better connections to markets, the poor state of the road system was a major problem. In 1790, a viable steamboat had not yet been built, canal construction was hard to finance and limited in scope, and the first American railroad would not be completed for another forty years. Better transportation meant, above all, better highways. State and local governments, however, had small bureaucracies and limited budgets which prevented a substantial public sector response. Turnpikes, in essence, were organizational innovations borne out of necessity – “the states admitted that they were unequal to the task and enlisted the aid of private enterprise” (Durrenberger 1931, 37).

The operative phrase is in the first sentence: better connections to markets. These were markets of the literal sort: places where people gathered to carry out business and other social activities. Most of the civilized world was country then. The most common business was farming. As farming spread farther from cities, the largest of which were ports with harbors or astride navigable inland waters, means had to be found to finance the building and operating of roads. Another two paragraphs:

Throughout the nineteenth-century, the United States was notoriously “land-rich” and “capital poor.” The viability of turnpikes shows how Americans devised institutions – in this case, toll-collecting corporations – that allowed them to invest precious capital in important public projects. What’s more, turnpikes paid little in direct dividends and stock appreciation, yet still attracted investment. Investors, of course, cared for long-term economic development, but that does not account for how turnpike organizers overcame the important public goods problem of buying turnpike stock. Esteem, social pressure, and other non-economic motivations influenced local residents to make investments that they knew would be unprofitable (at least in a direct sense) but would nevertheless help the entire community. On the other hand, the turnpike companies enjoyed the organizational clarity of stock ownership and residual returns. All companies faced the possibility of pressure from investors, who might have wanted to salvage something of their investment. Residual claimancy may have enhanced the viability of many projects, including communitarian projects undertaken primarily for use and esteem.

The combining of these two ingredients – the appeal of use and esteem, and the incentives and proprietary clarity of residual returns – is today severely undermined by the modern legal bifurcation of private initiative into “not-for-profit” and “for-profit” concerns. Not-for-profit corporations can appeal to use and esteem but cannot organize themselves to earn residual returns. For-profit corporations organize themselves for residual returns but cannot very well appeal to use and esteem.

The Internet is to commerce today what the oceans were two centuries ago: essential means for connecting between distant places and moving goods. While physical goods must still move by physical means, digital goods and the digital communications surrounding them move via the Internet, which connects over a variety of wired (copper, fiber) and wireless paths. Every town and district with absent or small data transport capacities today faces the same kinds of choices that were met by the toll roads two hundred years ago.

In the long run toll roads proved a temporary solution to a permanent problem that could be solved other ways. But I wonder what we still might learn from them, at least for regions where the problems are similar, and the solutions likely to be just as temporary.

12 comments

  1. Don Marti’s avatar

    Good point: “Esteem, social pressure, and other non-economic motivations influenced local residents to make investments that they knew would be unprofitable (at least in a direct sense) but would nevertheless help the entire community.” But investments that help a community do help the investor more than investments elsewhere.

    Today, though, most Americans put their capital into the hands of mutual fund managers. As an individual, you might invest in a local company pays a lower rate, but that pays your neighbors and ultimately makes you better off because those neighbors are likely to do business with you, and more wealth in your town creates positive externalities. If you hand your savings over to a mutual fund manager, he’ll probably do about the same as a random stock pick overall, but bring you none of the other benefits.

  2. Jason Scott’s avatar

    Let us visit, Doc, down into the Library of Marvels.

    We’ll smile and point at the rarities, the unicorns and bezoars and petrified twinkies.

    But I bet, no matter when we visit or how many times we come back, the shelf that says “temporary toll” and its companion, “temporary toll hike”, will ever be filled.

  3. francine hardaway’s avatar

    I think communities are already thinking about forming cooperatives to get broadband to rural areas, especially in places like rural Arizona. But if we really all got together and invested in our own local infrastructure, instead of in Wall Street, we might get a real return on our investment.

  4. francine hardaway’s avatar

    I think communities are already thinking about forming cooperatives to get broadband to rural areas, especially in places like rural Arizona. But if we really all got together and invested in our own local infrastructure, instead of in Wall Street, we might get a real return on our investment.

  5. Max’s avatar

    It is an interesting thesis, but others have drawn different lessons from the same history. For example:

    http://www.governing.com/columns/eco-engines/The-Weaknesses-of-Sweeping.html

    “Historian Charles Perrow, in his book Organizing America, noted how the United States was virtually alone among industrializing countries in the 19th century in allowing private railroad companies, armed with government powers and subsidies, to control the expansion of railroad infrastructure, which everyone saw as crucial to the transportation system of the future. The results were not good.”

    “‘The lack of regulation and enforcement by government authorities meant substantial inefficiencies,’ Perrow wrote. ‘Communities poured money into schemes [through subsidies of private companies] that never produced (trains never ran, ties were untreated and rotted, wooden rather than iron tracks were laid and were useless within a year and bridges collapsed). There was overbuilding to destroy rivals and gain market control, or for sheer fraud. Innovations to promote safety were resisted. Without regulation, competing lines chose different track sizes, resulting in gross inefficiencies. There was wasteful duplication of lines for speculative and monopoly purposes, routes zigzagged as towns put up capital, and then the lines were abandoned.’”

  6. Skip Malette’s avatar

    Both Don Marti and Francine Hardaway bring up some really excellent points. Cooperatives in any community are a good investment and create service that does not extract much, if anything, from the community.

  7. Tom Stites’s avatar

    A significant yet all-but-ignored aspect of our economy consists of co-ops, employee-owned businesses, community land trusts, and other entities whose aim is growth of community wealth rather than the wealth of individual or institutional investors. Take a look at http://www.community-wealth.org/, and at Gar Alperovitz’s eye-opening book “America Beyond Capitalism.”

  8. Russell Nelson’s avatar

    Max: people who don’t like markets almost always see waste in competition. They don’t understand that competition is necessary in order to get the information necessary to do the right thing. They would like to jump from having the idea (railroads everywhere) to having the final efficient implementation (railroads as trunks). They look at markets and imagine that they can skip the discovery step.

    How’d that work out for the Russians and Chinese? Mmmmm, not so good.

    The problem is that the future is not known to us, not even the people who can imagine it.

  9. Max’s avatar

    Hi Russel,

    Thanks for the response. I happen to like markets a lot, where they make sense. Market *competition* is an incredibly, perhaps uniquely effective tool for advancing certain goals, including some of the ones that you identified (fostering innovation, “revealing” previously unknown preferences, etc.). However, not all “markets” are competitive, and not all forms of competition are equally conducive to those larger goals, the fulfillment of which is what makes markets so widely and understandably appreciated. I suppose I could match your comical comparison to communist systems with a reference to the lingering consequences of aberrant forms of competition in the financial sector — hmmmm — but that probably wouldn’t be any more illuminating, or any less absurd, that the original remark.

    It goes without saying that competition is inherently wasteful, at least from a static/proximate perspective. However, it does not follow that any/all conceivable levels of waste can always and everywhere be explained away, much less justified on that basis.

  10. Brett Glass’s avatar

    Competition is not “waste.” It is necessary overhead.

    If you do not incur the cost of competition, you will incur other costs which are higher — many of them opportunity costs such as slower innovation.

  11. Max’s avatar

    Hi Brett,

    I absolutely agree that “necessary overhead” — in the form of surplus production over absolute demand, which is a natural and largely unavoidable by-product of head-to-head competition — is more than justified by the benefits that competition provides. But then that’s what I already said. However, just as some notional “markets” are remarkable for their lack of actual competition (and/or their lack of any signs of the expected benefits of competition, e.g., faster innovation), not all forms of “overhead” are equally justifiable as the price of competition.

  12. Brett Glass’s avatar

    In mature markets and technologies, one must sometimes wait for disruptive developments before there’s massive or sudden change. But no one will look for those disruptive innovations if there’s no competition.

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