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The Independent Institute
Commentary

The Rise of Big Business and the Growth of Government


Most people learn about the relation between the rise of big business and the growth of government in the form of what amounts to a morality play. In the most widely disseminated version, presented in nearly every American history textbook, the emergence of big business (playing the role of the devil) is said to have given rise to a variety of evils and abuses—monopoly power, pollution, exploitation of workers, and so forth. Matthew Josephson tells this story in rousing (if not scrupulously factual) style in his 1934 classic, The Robber Barons. The masses are said to have cried out for relief and to have pressed their political representatives to enact protective legislation. Thus emerged, most markedly during the Progressive, New Deal, and Great Society periods, a profusion of government programs, regulatory agencies, and direct government participation in economic life (divine intervention, as it were), which served to shield the public from the otherwise crushing weight of brutal laissez-faire capitalism.

A competing tale, popular among many libertarians and some left-radicals, presents the rise of big business as leading directly to satanic endeavors. This version maintains that the big businessmen, however virtuous they might have been at the outset, ran into trouble because of rampant competition among the emergent big firms. To suppress this irksome, profit-sapping market phenomenon, they used their wealth diabolically to influence or bribe lawmakers to create government programs, regulatory agencies, and so forth that, in effect, allowed them to wield the government’s coercive power in the service of propping up their cartels, suppressing competition, and maintaining excessive profits. The classic exposition of this interpretation is Gabriel Kolko’s The Triumph of Conservatism (1963).

Unfortunately, although these morality tales contains grains, or even big chunks, of truth, each leaves out a great deal of important, relevant evidence. In short, reality was much messier than either interpretation suggests. It is difficult to read deeply researched books such as Robert H. Wiebe’s Businessmen and Reform (1962), Morton Keller’s Affairs of State (1977), and Martin J. Sklar’s The Corporate Reconstruction of American Capitalism, 1890–1916 (1988) and cling to any simple interpretation of the relationship between the rise of big business and the growth of government.

Part of the difficulty arises from the vastness and complexity of the U.S. economy. A multitude of organized interest groups emerged to lobby the various levels of government. Although the federal government became increasingly weighty in the overall mix of interventions, the states and the large cities continued to play important roles—for example, such outright socialism as appeared in the United States arose primarily at the municipal level, especially for so-called public utilities, such as electricity and gas production, and local mass transit, such as streetcar service.

No serious scholar denies that businessmen played important parts in creating the interventionist state. “But who,” Wiebe asks, “are the businessmen? Sometimes they appear to be a handful of particularly successful and powerful men [Murray Rothbard emphasized especially the kingpins in the “Morgan ambit”]. At other times the community presumably includes everyone from the chairman of U.S. Steel to the corner grocer, without information on how, if at all, their thoughts and actions differ.” Wiebe is more impressed by the businessmen’s differences and rivalries than by their agreements. For example, the big New York bankers, notwithstanding their obvious clout, often had to contend with dissident bankers in major financial centers such as Chicago, Boston, Philadelphia, St. Louis, and San Francisco, who did not relish being overshadowed by the Wall Street titans—which is one reason (among several) why the Federal Reserve Act of 1913 created not a single central bank but twelve regional banks.

Wiebe concludes: “Among those prominent in the movements for a regulated economy were businessmen and farmers after greater profits, politicians in need of an issue, journalists in search of a story, a new class of economic and administrative specialists looking for ways to utilize their knowledge, and clergymen hoping to re-establish morality in industrial America.”

In substantial part, what made the big business (”trust”) question so politically salient in the late nineteenth and early twentieth centuries was not so much the increasing size of the leading firms as it was the emergence of a national (that is, interstate) market fostered by the development of new technologies of transportation and communication, especially the railroads (themselves described as “the first big business”) and the telegraph. When the scope of business had been local or at least predominantly intrastate for nearly all firms, government action in relation to business took place primarily on the local or state scene. As the national market came to characterize more and more businesses activities, established business-government relations became unstable and began to break down.

The giant corporations, which in many cases had become large in order to exploit new technologies and organizational structures that offered economies of scale and scope, entered increasingly into competition with the multitude of smaller firms serving previously fragmented local or regional markets. Firms threatened by the big interstate sellers sought protection by appealing to their local and state governments. For this reason, among others, local and state intrusions into market relations grew markedly in the late nineteenth century. The potential and actual mobility of firms, however, helped to contain these interventions, because companies pressed too hard simply left the jurisdiction.

At the same time, the big firms’ owners, harassed by dozens of state governments and their rapacious politicos, began to see the wisdom of federal regulation. Perhaps, they reasoned, they might stand a better chance of escaping from meddlesome, costly, and fluctuating state and local regulations if instead they dealt with a single, national, regulatory body. Such an agency might also be used to keep the big firms’ own interstate competition in check, thereby maintaining their returns.

As both small and big businessmen organized and pressed for favorable government interventions, other groups increasingly entered the fray, defensively if not offensively: Farm, labor, professional, and academic associations formed and sought expanded government measures. The nineteenth century’s dominant ideology, a distinctly American version of laissez faire, seemed increasingly unable to restrain this grasping for economic advantage via enlarged government power.

Because ideology and political movements develop reciprocally, the pervasive reactions to the rise of big business around the turn of the twentieth century gave rise not simply to a proliferation of newly organized interest groups seeking government protection of threatened positions; it also prompted intellectuals, both independents and “hired guns,” to develop new rationales for more active government. Thus Progressivism as ideology developed concurrently with Progressivism as politico-economic practice, each aspect reflecting the changing socioeconomic opportunities and hazards created by the rise of big business and its repercussions throughout the economy.

Reprinted with permission. © Copyright 2009, Foundation for Economic Education.


Robert Higgs is Senior Fellow in Political Economy at The Independent Institute and Editor at Large of the Institute’s quarterly journal The Independent Review. He received his Ph.D. in economics from Johns Hopkins University, and he has taught at the University of Washington, Lafayette College, Seattle University, and the University of Economics, Prague. He has been a visiting scholar at Oxford University and Stanford University, and a fellow for the Hoover Institution and the National Science Foundation. He is the author of many books, including Depression, War, and Cold War.

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