January 13, 2016 12:25PM

Academics vs. Populism

It is an appalling story: A thoughtful academic uses his training and profession's tools to analyze a major, highly controversial public issue. He reaches an important conclusion sharply at odds with the populist, "politically correct" view. Dutifully, the professor reports his findings to other academics, policymakers, and the public. But instead of being applauded for his insights and the quality of his work, he is vilified by his peers, condemned by national politicians, and trashed by the press. As a result, he is forced to resign his professorship and abandon his academic career.

Is this the latest development in today's oppressive P.C. wars? The latest clash between "science" and powerful special interests?

Nope, it's the story of Hugo Meyer, a University of Chicago economics professor in the early 1900s. His sad tale is told by University of Pisa economist Nicola Giocoli in the latest issue of Cato's magazine, Regulation. Meyer is largely forgotten today, but his name and story should be known and respected by free-marketers and anyone who cherishes academic freedom and intellectual integrity.

Here's a brief summary: At the turn of the 20th century, the U.S. economy was dramatically changing as a result of a new technology: nationwide railroading. Though small railroads had existed in America for much of the previous century, westward expansion and the rebuilding of southern U.S. railways after the Civil War resulted in the standardization, interconnection, and expansion of the nation's rail network.

As a result, railroading firms would compete with each other vigorously over price for long-distance hauling because their networks provided different routes to move goods efficiently between major population centers. However, price competition for short-hauls over the same rail lines between smaller towns wasn't nearly as vigorous, as it was unlikely that two different railroads, with different routes, would efficiently serve the same two locales. The result was that short-distance hauls could be nearly as expensive as long-distance hauls, which greatly upset many people, including powerful politicians and other societal leaders.

Meyer examined those phenomena carefully, ultimately determining that there was nothing amiss in the high prices for short hauls.

Railroads bear two types of costs, he explained: operating costs (e.g., paying the engineer and fireman, buying the coal and water, etc.) and fixed costs (e.g., the cost of laying and maintaining the rails, rolling stock, and fixed assets). Because of the heavy competition on long hauls, those freight prices mainly covered just the routes' operating costs, while less competitive short-haul prices covered both those routes' operating costs and most (if not all) fixed costs.

This wasn't bad for short-haul customers, Meyer reasoned, because if it weren't for the long-haul revenues, railroads would provide less (and perhaps no) service to the short-haul towns. Thus, though the short-haul towns were not happy with their freight prices, they were nonetheless better-off because of this arrangement.

Meyer's reasoning would today be associated with the field of Law & Economics, which uses economic thinking to analyze laws and regulations. Today, this type of analysis is highly respected by economists, policymakers, and U.S. courts, and is heavily linked to the University of Chicago (though it has roots in other places as well). But it hadn't emerged as a discipline in Meyer's era; sadly, he was a man too far ahead of his time.

And, for that, he paid a steep price. As Giocoli describes, when Meyer presented his analysis at a 1905 American Economic Association conference, he was set upon by other economists; indeed, the AEA had shamefully engineered his paper session as a trap. When he testified on his work to policymakers in Washington, he was publicly accused of corruption by a powerful bureaucrat, Interstate Commerce Commissioner Judson Clements, and a U.S. senator, Jonathan P. Dolliver. And when a monograph of his work appeared the following year, he was dismissed by the Boston Evening Transcript (then a prominent daily newspaper) as "partisan and untrustworthy."

Meyer was disgraced. He resigned his position at Chicago and moved to Australia, where he continued his research on railroad economics but he never worked for a university again.

Back at Chicago, his former department head, James Laurence Laughlin, took to the pages of the Journal of Political Economy to lament what had befallen his colleague:

In some academic circles the necessity of appearing on good terms with the masses goes so far that only the mass-point-of-view is given recognition; and the presentation of the truth, if it happens to traverse the popular case, is regarded as something akin to consternation. ... It is not amiss to demand that measure of academic freedom that will permit a fair discussion of the rights of those who do not have the popular acclaim. It is going too far when a carefully reasoned argument which happens to support the contentions of the railways is treated as if necessarily the outcome of bribery by the money kings.

There is a happy ending for Meyer's analysis. Academic research in the latter half of the century buttressed his view that market competition was enough to produce fairly honest, publicly beneficial railroad pricing, and that government intervention harmed public welfare. The empirical evidence marshaled by that research was so compelling that Congress deregulated the railroads and even abolished the Interstate Commerce Commission. Apparently, not all federal agencies have eternal life.

But though his analysis has triumphed, Meyer's name and story have largely been forgotten. They shouldn't be. Hopefully, Giocoli's article will give Meyer the remembrance he deserves.