Conservative laissez-faire economists argue that an economy governed by private ownership and competition, untainted by government intervention, is the best way to run an economy. However, California State University economics professor Michael Perelman, in his penetrating “Railroading Economics,” demonstrates that in the United States, business and government long ago rejected the laissez-faire model.

In the late 19th century, intense competition, rapid technological innovation and falling prices led to economic downturns, bankruptcies, falling profits and wages, and widespread human suffering. This pattern characterized the railroad industry, for example, where wild expansion, fueled by cutthroat competition, led to chaos, overbuilding and bankruptcies.

In manufacturing, competition frequently resulted in prices falling below production costs. It also resulted in “overproduction,” a glut of unsold goods. As a result, some economists argued for protectionism, limits on competition and the formation of cartels and monopolies to impose order on the market. They identified competition “as a source of inefficiency.”

Early U.S. capitalists such as J.P. Morgan and Henry Ford also distrusted free-wheeling competition, believing it led to chaos. They set up monopolies and cartels to limit competition. Perelman says that a similar process occurred in countries like Japan and Germany.

But forming monopolies didn’t put an end to the business cycle, as the Great Depression of 1929 made plain. Perelman argues it was only the surge in economic demand and the increased role of government economic planning associated with World War II that pulled the capitalist economy out of its crisis in the 1930s.

In order to avoid sliding back into another depression in the post-war years, many business leaders lobbied for continued government economic planning and intervention in the economy. They ultimately won the day. Unbridled competition became a thing of the past.

Contrary to what mainstream laissez-faire economic theory says, what prevails in the U.S. is a form of regulated capitalism. “What prevents the economy from running off the rails every few decades is a combination of government regulation and anti-competitive behavior on the part of business,” says Perelman.

As a result of this contradiction, he wryly notes, mainstream economic theory is littered with abstract mathematical theories and technical jargon that do not reflect the real world. Moreover, he says, “[s]ucceeding as an economist requires one to write in such a way that even most economists are incapable of understanding.”

Conventional laissez-faire economics is divorced from reality, “a pseudo-science that stands in the way of human betterment.”

“Railroading Economics” is valuable not only for its insightful account of U.S. economic history and its critique of mainstream economic theory, but also for its analysis of the current U.S. economy.

Perelman argues that overpaid lawyers and investment bankers dominate the American corporate elite. Over the years, he says, they have wasted billions of dollars on corporate takeovers and shutting down productive plants instead of encouraging productive investments. Due to shareholders’ demands for high dividends, a short-term investment mentality dominates corporate managers, making long-term productive investments nearly impossible.

As a result, “increasingly fewer people in the U.S. perform work that results in useful goods and services,” and many U.S. corporations now function more like banks than producers of real goods. In fact, the huge stock market is a reflection of U.S. economic decline, as investors who see little to gain from productive investment turn to speculation.

Perelman foresees a bleak future for the U.S. if it continues on the same path.

Perelman has a clear, understandable writing style that makes the work accessible to all. “Railroading Economics” is an impressive critique of the mythology of the free market.

Railroading Economics: The Creation of the Free Market Mythology

By Michael Perelman

Monthly Review Press, 2006

Softcover, 238 pp., $20