Those who ignore history, the adage goes, are doomed to repeat it. Unfortunately, the human tendency to hang on to our old mistakes as if they were precious heirlooms is particularly strong in the field of economics.
In a new book titled Empire Builders, economic historian Burton Folsom, Jr., until recently a senior fellow at the Mackinac Center for Public Policy, describes the lives of the entrepreneurs who turned Michigan into an industrial powerhouse. The experience of one of them, fur magnate John Jacob Astor, offers us a lesson in public policy failure that we in Canada have been slow to learn.
Astor, Folsom writes, was "the first U.S. entrepreneur to challenge a government-run business." In 1795, the American government, worried about the success of British fur traders to the north established the Office of Indian Affairs to head them off. It set up fur factories in the Northwest Territory and stocked them with goods to compete with the Brits and the numerous private American traders.
The Office of Indian Affairs was a flop from the beginning. "The factories", Folsom says, "were so poorly run that many Indians held them in contempt and refused to trade there." The posts were built close to forts, and they stocked hoes, plows and other farm implements in conformance to a policy of "benevolence and reform" that sought to assimilate the natives into America’s agrarian economy.
Astor, on the other hand, dispersed his American Fur Company agents throughout the territory. They worked out of log cabins stocked with guns, axes, kettles, blankets and other merchandise the natives actually wanted to buy. They "lived with the Indians, learned whom to trust, and bought and sold on the spot." Astor kept them keen with a merit system that paid them a share of the profits, while the government agents received a fixed salary that bore no relation to results.
The entrepreneur succeeded where the government failed because he respected his native suppliers as shrewd traders. He sold them quality merchandise on credit while the Office carried goods that were often substandard or weird, like Jew’s harps and Chinese dresses. Unlike the British, neither the Office nor Astor pushed the sale of liquor — albeit for different reasons. The government factories wanted to promote sobriety and industry among the Indians; Astor knew that "drunken trappers gathered no pelts."
By 1808, Astor had become the leading American fur exporter. So in 1818, after suffering years of losses and a steadily declining share of the trade, the Office of Indian Affairs did what comes naturally to bureaucrats in a bind: it petitioned Congress to ban private fur trading and create a monopoly. It argued, "Armies themselves would not be so effectual in regulating the native inhabitants as would a state of dependence on the Government for their commercial intercourse." All for their own good, of course. The effort eventually failed, but it was a near thing.
What’s this got to do with us? We did the same thing when the federal government and Manitoba set up the Freshwater Fish Marketing Corporation in 1969. The new government marketing and processing monopoly replaced the private companies and an extensive network of agents who had travelled throughout the North to buy from the natives. As of 1974, the fishermen had to send their catch to FFMC’S central processing facility in Winnipeg, and they faced one dictated price instead of a market that lined up supply with demand.
The result was the collapse of the northern fishery and 90% unemployment. The industry in the Manitoba’s southern lakes has done better, perhaps because a large portion of its catch still finds its way into the thriving black market. The price of monopoly has been devastating.
Poor management has always dogged FFMC.
When will we ever learn?