When Law and Economics Was a Dangerous Subject

At the turn of the 20th century, railroad regulation was hotly debated in the United States. railways were accused of abusing their monopolistic positions, particularly because of their use of rate discrimination—the charging of different rates for seemingly similar services. Public pressure for tighter regulation led to the 1906 Hepburn Act, which strengthened the regulatory powers of the Interstate Commerce Commission (ICC).

American economists were actively involved in this debate. While most of them belonged to the pro-regulation camp, the best economic analysis came from those who used the logic of modern law and economics to argue that most railroads’ practices, including rate discrimination, were rational, pro-efficiency behavior. However, as one of those economists, the University of Chicago’s Hugo Richard Meyer, would discover, arguing those ideas before they had gained broad scholarly acceptance could prove professionally costly.

This article uses Meyer’s sad tale to review the pre-1906 American debate on railroad rate regulation. It shows that a few economists had already embraced the gist of what would become law and economics, but also how the majority of the discipline, as well as legislators and public opinion, rejected this approach and, with it, what today’s observers would consider sound economic analysis.

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