Railroad Land Grants: Economically Justified?
The American governments land grant policy and provision of subsidies to private railroad companies in the nineteenth century has been the subject of much discussion by historians and economists alike. However, few writers have examined the economic issues involved in the subsidies in detail, leading at times to the wrong conclusions. Lloyd J. Mercer, a Professor of Economics at the University of California (Santa Barbara) is one of the select few who have attempted to carry out an economic analysis of the land-grants policy in order to determine whether the policy was economically justified and socially beneficial. This paper summarizes the professors article Land Grants to American Railroads: Social Cost or Social Benefit (1969) by identifying the main thoughts of the author followed by a critical analysis of what he has suggested in the article.
Professor Mercer disagrees with the commonly held view of most historians that the land-grant policy was overly generous and the private individuals and companies who received the grants and subsidies made huge profits by selling the land, manipulating securities and exploiting the farmers. He is more in agreement with those who have argued that the land grants and subsidies were not very profitable but did provide sufficient attraction for the pioneers to venture into the railroad-building project.
The author then uses the internal rate of return (IRR)
method to calculate the real rates of return for two major railroad companies (Central Pacific and Union Pacific), with and without land grants, and the social rate of return.
The results of the computation show that there was a small difference of just 1.2 percentage points in the real rate of return to the railroad companies, with and without land-grants, while the social rate of return was substantially higher. The author thus concludes that the land-grant policy of the government, though not perfect, was correct.
In my opinion, although a useful addition to the literature available on the U.S. governments land grant policy to the railroads in the 19th century, Professor Mercers economic analysis of the issue suffers from a major drawback. It fails to recognize the fact that economics is not a precise science like other physical sciences such as physics or chemistry and most economic problems can and do have more than one solution. Similarly, there is no single right method of making an economic analysis since various economic theories, models and tools that are used to analyze a situation contain a number of variables, and simplifications. Hence the results of such economic models are by no means definitive. For example, the internal rate of return, the method used by Professor Mercer to determine the real rates of return to the private railroad companies and the social benefits of the construction of railroads, is just one of the several economic tools for making.