Men Who Made The Rules

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One of the more amusing moments in recent American history came in 1978, when Alfred E. Kahn, the flamboyant head of President Carter’s Council on Wage and Price Stability, made the mistake of suggesting that the nation might face a deep depression if inflation were not brought under control. When a spokesman for the President protested the use of the word depression , Kahn promptly offered a substitute: banana .

Kahn will be remembered for more than his quick wit, however. Along with Charles Francis Adams, Jr., Louis D. Brandeis, and James M. Landis, he is the subject of a fascinating book by Thomas K. McCraw, a professor at the Harvard Business School with a special interest in government regulation of business.

Prophets of Regulation (Harvard University Press, 1984), the winner of the 1985 Pulitzer Prize in history, explores a century of regulation by focusing on four key figures. McCraw calls these people “prophets,” rather than “architects or innovators,” because the term expresses “the unusual combination each one represents of both theorizing about regulation and actually doing it. . . .”

Charles Francis Adams, Jr., the great-grandson of John Adams, the grandson of John Quincy Adams, and the brother of the historian Henry Adams, was not crippled by that great affliction— the family name. Of the four brothers in his generation, McCraw asserts, “it was Charles who made the most interesting attempt to weave the Adams tradition of public service into the harsh realities of the Gilded Age.”

As a young man, Adams tells us in his autobiography, he “fixed on the railroad system as the most developing force and largest field of the day, and determined to attach myself to it.” To break into the field, he used the one weapon every Adams commanded: his pen. In a series of brilliant articles he demonstrated a command of the economics of railroading that none of his contemporaries could match.

Railroads, Adams argued, were natural monopolies. It was idiotic to force them to compete, because if they were allowed to operate as monopolies, they were subject to economies of scale that made it possible to drive down costs. Massachusetts lawmakers who tried to enforce competition were making a giant mistake. They “saw only that a monopoly existed,” Adams wrote. “They failed wholly to realize that it was far easier and far cheaper to regulate than to destroy it.”

In 1869, at thirty-four, Adams was appointed to the new Massachusetts Board of Railroad Commissioners. That same year he published “the hardest piece of work I ever did”—a dazzling account of the battle for control of the Erie Railroad that raged among Daniel Drew, Jay Gould, Jim Fisk, and Cornelius Vanderbilt in 1868.

The Massachusetts Railroad Commission was the outstanding early example of the “sunshine” approach to regulation. As Adams wrote in 1879, “The Commissioners have no power except to recommend and report. Their only appeal is to publicity.” Adams did not add, but certainly knew, that the appeal to publicity could be a formidable weapon in a democracy.

Having left the Massachusetts commission in 1879, Adams became the president of the Union Pacific Railroad in 1884, only to be forced out by his old enemy Jay Gould in 1890. Adams was “the first modern regulator,” McCraw concludes, “and one of the best ever to serve on a state commission.” But in his old age he “watched helplessly from the sidelines as his beloved ‘public interest’ broke apart among dozens of quarreling economic and ethnic constituencies.”

With the establishment of the Interstate Commerce Commission in 1887, the primary responsibility for the regulation of business shifted from the states to the federal government. At about the same time, giant corporations emerged in many sectors of the economy. These developments set the stage for the second of McCraw’s prophets, Louis D. Brandeis.

Born in 1856, Brandeis graduated from the Harvard Law School at twenty with a record that remains unmatched to this day. He went on to have an extraordinary career, culminating in twenty-three years on the Supreme Court (1916-39). In light of Brandeis’s reputation, many readers will be startled to find McCraw arguing—persuasively, in my view—that “Brandeis offered regulatory solutions grounded on a set of economic assumptions that were fundamentally wrong.”

Brandeis spelled out those assumptions in “the longest and most memorable piece of muckraking he ever did,” a series of articles published in Harper’s Weekly in 1913 and reprinted as a book entitled Other People’s Money and How the Bankers Use It .

The title of one chapter, “A Curse of Bigness,” gives Brandeis’s economic philosophy in a nutshell. He believed that bigness in business was always bad. Today, McCraw points out, most business historians believe that bigness works well in a small number of “center” industries and that it cannot possibly work in a large number of “peripheral” industries. Brandeis never grasped this distinction. History itself has provided “a step-by-step demolition of the Brandeis brief against bigness.”