Good Robber Barons vs. Bad Robber Barons

Dan Henninger authored a fascinating column in the Wall Street Journal a few days ago comparing people who became rich honestly to those who used government favoritism. He warns that Obama's policies will encourage the latter version - meaning that smart entrepreneurs will seek wealth by gaming the political system. At best, this is a zero-sum game for the overall economy, and it is quite likely that it will reduce prosperity since labor and capital will be allocated based on political power rather than market forces. But there are two other reasons to reject Obama's industrial policy. First, political control is necessarily unjust and corrupt since political insiders will have an advantage. This is something that also should upset honest left wingers. As my Cato colleague Will Wilkinson sagely noted, "…the more power the government has to pick winners and losers, the more power rich people will have relative to poor people." Second, this system undermines support for genuine free markets because the average person begins to associate wealth with corrupt government handouts. This insight (sent to me by an American who fled Greece many years ago) helps explain why average people sometimes support punitive tax rates in hopes of clawing back some of the unearned wealth in the hands of insiders. The downside of that approach, of course, is that the honest and productive entrepreneur also suffers from those policies, thus undermining the economy's ability to generate earned wealth:

...a small classic by Hillsdale College historian Burton W. Folsom called "The Myth of the Robber Barons: A New Look at the Rise of Big Business in America" (Young America's Foundation). Prof. Folsom's core insight is to divide the men of that age into market entrepreneurs and political entrepreneurs. Market entrepreneurs like Rockefeller, Vanderbilt and Hill built businesses on product and price. Hill was the railroad magnate who finished his transcontinental line without a public land grant. Rockefeller took on and beat the world's dominant oil power at the time, Russia. Rockefeller innovated his way to energy primacy for the U.S. Political entrepreneurs, by contrast, made money back then by gaming the political system. Steamship builder Robert Fulton acquired a 30-year monopoly on Hudson River steamship traffic from, no surprise, the New York legislature. Cornelius Vanderbilt, with the slogan "New Jersey must be free," broke Fulton's government-granted monopoly. If the Obama model takes hold, we will enter the Golden Age of the Political Entrepreneur. The green jobs industry that sits at the center of the Obama master plan for the American future depends on public subsidies for wind and solar technologies plus taxes on carbon to suppress it as a competitor. Politically connected entrepreneurs will spend their energies running a mad labyrinth of bureaucracies, congressional committees and Beltway door openers. Our best market entrepreneurs, instead of exhausting themselves on their new ideas, will run to ground gaming Barack Obama's ideas. ...Political entrepreneurs create fewer jobs than do market entrepreneurs. We need new mass markets, really big markets of the sort Ford, Rockefeller and Carnegie created. Great employment markets are discoverable only by people who create opportunities or see them in the cracks of what already exists—a Federal Express or Wal-Mart.