This is the first part of a new series entitled “The Free Market Collection.” If you’ve ever wanted to better understand some of the main concepts of the Free Market then this is your chance.
You’d think that throwing extra cash at an entrepreneur would help them succeed, but that’s not the case when it’s the government doing the throwing.
In fact, competition is hurt when the government steps in to subsidize companies. This was clearly seen in the steamship industry during the 1800s. The American steamship industry was lagging behind the European industry, and politicians saw this as an issue that could be solved with government aid.
Imagine how much more competitive and innovative our steamship companies would be if they had a little financial help.
That was the thinking at the time. Invest in the steamship industry by giving them subsidies. However, this was not the result. Steamship companies failed to innovate and streamline their businesses because they knew they could always ask for more government aid.
In 1847 a man named Edward Collins persuaded Congress to grant him more than three million dollars to build a fleet of steamships, plus hundreds of thousands of dollars a year in subsidies.
As his steamship service grew, Collins discovered that his costs were greater, and revenues less, than expected. But rather than streamlining his business, the well-connected businessman persuaded Congress to grant him a larger subsidy… Each year, Collins would ask for just a bit more money to help him get on his feet, and Congress would comply. (Source)
In this case, Congress was propping up an inefficient company. They were encouraging waste, unproductivity, and stagnation. Not only was the company suffering, but so was the consumer (and the industry in general).
This is an example of the ineffectiveness of government assistance in the market. It stifles the process by which companies grow, succeed and thrive. It also puts the government in a position of picking winners and losers. This position makes an attractive environment for crony capitalism, which as you know, isn’t fun at all.
Wherever the government is involved in the Market, there will be businesses lobbying for political power. The buying of legislatures starts when the government interferes in the natural process of the Free Market.